In the recent ruling of High Court of Madras : ARS Steels & Alloy International Pvt. Ltd. v. State Tax Officer (2021) 35 J.K.Jain’s GST & VR 12, it was held that;
“The situations as set out in S.17(5)(h), CGST Act, 2017 indicate loss of inputs that are quantifiable, and involve external factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. It has to be understood in the context of a manufacturing process, which result in some kind of a loss such as evaporation, creation of by-products, etc. The total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety.
Held that the reversal of ITC involving S.17(5)(h) by the revenue, in cases of loss by consumption of input, proportionate to the loss of the input, which is inherent to manufacturing loss is misconceived & such loss is not contemplated/covered by the situations adumbrated u/s 17(5)(h).”
The ratio decidedi of the above judgment is centered around;
i) Loss of inputs that are quantifiable and
ii) Loss of inputs involve external factors or compulsions, i.e., A loss
is inherent to the process of manufacture itself, such as evaporation, creation of by-products, etc.
In the case of Union of India & Ors. v. Hindustan Zinc Ltd. and Ors. (2014) 21 J.K.Jain’s Vat Reporter (SC), full ITC was allowed on the entire raw material used for manufacture of final product irrespective of tax free bye-product produced as a result of technological necessity.
Such loss of Inputs is not contemplated/covered by the situations adumbrated u/s 17(5)(h), GST Act. As such, no Proportionate ITC reversal is needed for Loss of Inputs in the Manufacturing Process.
Per Rule 42, GST Rules also supports the above Ratio decidendi, where while calculating ITC, in the Formula for deductions (T2), the word “exclusively” is used before the words “effecting exempt supplies”.
For further details, refer magazine (2022) 37 J.K.Jain’s GST & VR, page R-3