No requirement to reverse ITC under Section 17(5)(h) of CGST Act in case of loss of consumption of input which is inherent to manufacturing loss

Decision of Hon’ble Madras High Court (Hon’ble Single Judge Bench) in the case of M/s ARS Steels & Alloy International Pvt. Ltd. v. The State Tax Officer, (Batch of writ petitions led by W.P. No. 2885 of 2021)
There is no requirement to reverse input tax credit (under Section 17(5)(h) of CGST Act), in cases of loss of consumption of input which is inherent to manufacturing loss.
Facts of the case:
To quote the facts germane to the case:
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 17(5)(h) of the GST Act.
The impugned assessment orders reject a portion of ITC claimed, invoking the provisions  of clause (h) extracted above.
Section 17(5)(h) of the CGST Act is germane to the instant matter, and the Hon’ble Court traced the legislative history of the said provision. To quote Section 17(5)(h):

Apportionment of credit and blocked credits.
17.(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:-


(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
The Hon’ble Court observed that the erstwhile Tamil Nadu VAT Act, 2006 contained an equivalent provision in Section 19 thereof. Clause (i) of Sub-section (9) thereof provided inter-alia that no input tax credit shall be available to a registered dealer for tax paid at the time of purchase of goods, if such- goods are not sold because of any theft, loss or destruction, for any reason, including natural calamity. It was further provided in the same clause, that if a dealer has already availed input tax credit against purchase of such goods, there shall be reversal of tax credit. Clause (ii) of sub-section (9) of Section 19 further provided that input tax credit shall not be available in case inputs are destroyed in fire accident or lost while in storage even before use in the manufacture of final products or inputs are damaged in transit or destroyed at some intermediary stage of manufacture.
The Hon’ble Court, having discussed the legislative history, observed that the prescription contained in Section 19 is echoed in the provisions of Section 17 of the GST Act, and held at Para 10 of the judgment that in the considered view of the Court, the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h) above.
While arriving at the aforesaid conclusion, the Hon’ble Court reasoned as under:
1. That the situations as set out above in clause (h) indicate loss of inputs that are quantifiable, and involve external factors or compulsions.
2. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself.
Relied upon Decision of Hon’ble DB of Hon’ble Madras High Court in pre-GST regime, in Rupa & Co. v. CESTAT, Chennai (2015) 324 ELT 295
3. The Hon’ble Court relied on the decision of the Hon’ble Division Bench of the Hon’ble Madras High Court in the pre-GST regime, in Rupa & Co. v. CESTAT, Chennai (2015) 324 ELT 295, wherein the Hon’ble Court had held that some amount of consumption of the input was inevitable in the manufacturing process, and that cenvat credit should be granted on the original amount of input notwithstanding that the entire amount of input would not figure in the finished product.
4. The facts in the said case, were as under:
In that case, a certain amount of input had been utilised by the assessee, whereas  the  input  in the finished product  was  marginally less.   The department
proceeded  to  reverse  the  cenvat  credit  on  the  difference  between  the  original quantity of input and the input in the finished product.
5. In the said decision, the Hon’ble DB had given a contextual interpretation to the expression, “inputs of such finished product” and “contained in finished product”, and observed that the said expressions cannot be looked at theoretically with its semantics.
6. It was observed that this have 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 loss such as evaporation, creation of by-products, etc., the total quantity of inputs that went into the making of finished product represents the inputs of such products in entirety.
In view of the above, the Hon’ble Single Judge Bench of the Hon’ble Court held as under:
“15. In the light of the discussion as above, I am of the view 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).”

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