Any loss in the process of Manufacture cannot be equated to clause 17(5)(h) of the GST Act: Madras HC

Writ Petition filed before the High Court of Madras under Article 226 of the Constitution of India praying to issue Writ of Certiorari calling for the records relating to the order in GSTIN:33AALCA9425HIZL/2017-18 dated 29.11.2019 passed by the respondent and quash the same as without authority of law, contrary to law and to settled law and violative of principles of natural justice.

As far as W.P.Nos.2885, 2888, and 2890 of 2020 are concerned, the legal issue arises whether a reversal of Input Tax Credit (ITC) is contemplated in relation to loss arising from the manufacturing process.

Facts

• 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 the 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 17(5)(h) of the GST Act.

Observations and Findings

The Bench, noticing that some amount of consumption of the input was inevitable in the manufacturing process, held that cenvat credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product.

To say that what is contained in the finished product is only a quantity of all the inputs of the same weight as that of the finished product would presuppose that all manufacturing processes would never have an inherent loss in the process of manufacture. The expression ‘inputs of such finished product’, ‘contained in finished products’ cannot be looked at theoretically with its semantics. It has to be understood in the context of what a manufacturing process is. If there is no dispute about the fact that every manufacturing process would automatically 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.’

Judgment

Madras HC 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).