No reversal of ITC due to loss during the manufacturing process


No reversal of ITC due to loss during the manufacturing process



Madras HC in the case of ARS Steels & Alloy International Pvt. Ltd. Vs State Tax Officer (Madras High Court) has recently held that no Reversal of ITC in Respect of Loss of Inputs During a Manufacturing Process is required under section 17(5)(h) of CGST Act. It has held that the reversal of ITC involving Section 17(5)(h) by the revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h).

The copy of the judgement is as under:

ARS Steels & Alloy International Pvt. Ltd.

State Tax Officer (Madras High Court) 

Appeal Number : W.P. Nos. 2885, 2888, 2890,3930, 3936 and 3933 of 2020 and WMP Nos. 3341, 3345, 3336, 4664, 4656 and 4661 of 2020 

Order Dated 24/06/2021


This batch of Writ Petitions relates to two sets of assessment orders passed in the case of two assessees under the provisions of Goods and Services Tax Act, 2017 (in short ‘GST Act’) for the periods 2017-18, 2018-19 and 2019-20. They are disposed by way of this common order, since the legal issue that arises in these cases is one and the same.

  1. In W.P.No.3936 of 2020, it is argued by Mr.Joseph Prabakar, learned counsel for the petitioner that an additional issue is raised in regard to stock reconciliation. The admitted position as far as this issue is concerned is that the vehicle movement register correlating to the vehicle gate passes issued, have been specifically sought for by the authorities but not produced at the time of assessment. Though the learned counsel for the petitioner states that the details have produced before this Court, learned counsel for the respondent would point out that this issue is factual in nature and as such, it would be better that the petitioner approach the appellate authority by way of a statutory appeal.
  2. I agree, Since the evidences in support of the petitioner’s stand have been produced only at this stage, it would be appropriate that this issue should be dealt with by the departmental authorities at the first instance. The petitioner is permitted to file a statutory appeal as regards this issue within a period of four weeks (4) from today.
  3. As far as W.P.Nos.2885, 2888 and 2890 of 2020 are concerned, Mr.Mudimannan, learned counsel for the petitioner submits that apart from the legal issue raised in these Writ Petitions, statutory appeals have been filed with regard to the other issues.
  4. This order is thus confined to a decision on the legal issue as to whether a reversal of Input Tax Credit (ITC) is contemplated in relation to loss arising from manufacturing process.
  5. The petitioners are engaged in the manufacture of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The impugned orders seek to reverse a portion of the ITC claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of Section 1 7(5)(h) of the GST Act.
  6. As regards the Legislative history of this provision, the erstwhile Tamil Nadu Value Added Tax Act, 2006 (in short ‘TNVAT Act’) contained an equivalent provision in Section 19 thereof, which deals with various situations arising from the grant and reversal of ITC. Section 19 (1) grants eligibility to ITC of the amount of tax paid under the TNVAT Act by a registered dealer. It sets out situations where such ITC shall be denied as well.
  7. The provisions of Section 19, as relevant for the issue dealt with in these matters, are extracted below:
  8. Input tax credit .-

(1) There shall be input tax credit of the amount of tax paid Omitted[or Payable] under this Act, by the registered dealer to the seller on his purchases of taxable goods specified in the First Schedule :

Provided that the registered dealer, who claims input tax credit, shall establish that the tax due On purchase of goods has actually been paid in the manner prescribed by the registered dealer who sold such goods and that the goods have actually been delivered Provided further that the tax deferred under section 32 shall be deemed to have been paid under this Act for the purpose of this sub-section.

(8) No input tax credit shall be allowed to any registered dealer in respect of any goods purchased by him for sale but given away by him by way of free sample or gift or goods consumed for personal use.

(9) No input tax credit shall be available to a registered dealer for tax paid Omitted[or Payable] at the time of purchase of goods, if such-

(i) goods are not sold because of any theft, loss or destruction, for any reason, including natural calamity. If a dealer has already availed input tax credit against purchase of such goods, there shall be reversal of tax credit; or

(ii) inputs destroyed in fire accident or lost while in storage even before use in the manufacture of final products; or

(iii) inputs damaged in transit or destroyed at some intermediary stage of manufacture.

  1. The prescription in Section 19 is echoed in the provisions of Section 17 of the GST Act. Section 17 (1) to (4) set out the entitlement of the assessee to ITC. Sub-section (5) and its sub-clauses provide for situations where ITC claimed shall be restricted and read as follows:
  2. Apportionment of credit and blocked credits.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. Explanation.–– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;