How to claim GST ITC on Goods lost during handling or manufacturing process, or by Evaporation or destroyed by testing
The Input tax credit system under the framework of the Goods and Service Tax Act allows businesses to set off tax on goods i.e. raw materials or input services against the future liabilities. In this article we will understand the effect of ITC on goods lost. The term goods lost in itself is a broader concept as we need to interpret how the goods were lost i.e whether there was lost during the handling or manufacturing process or by way of evaporation, or where they were destroyed during testing. Further, we will also understand if we can claim ITC on goods lost with the help of a very interesting 3 case laws on the above mentioned circumstances.
Impact of ITC on Goods lost during the handling or manufacturing process
Can ITC be claimed on the loss of goods during the handling or manufacturing process due to the very nature of manufacturing process. We will see this with another interesting case law of Union Of India And Ors vs Indian Aluminium Co. Ltd. And Anr.
Facts of the Case
Indian Aluminium Co. Ltd. And Anr is the Respondent and manufactures aluminium products such as aluminium sheets, aluminium shapes, aluminium angles etc. out of aluminium ingots. In the process of manufacture, at the stage of processing, dross and skimmings arise and accumulate in the furnace in the shape of ashes as a result of oxidisation of metal. These ashes are formed mainly during the melting down of aluminium ingots and, to some extent, during subsequent treatment and holding operation of molten baths in the furnace. Dross consists mostly of oxides, non-metallic material and other foreign material which separates or forms during melting and holding operations, and finally accumulates on the surface of the molten bath. It has to be removed. Skimmings are mostly thin oxide layers obtained by skimming a molten bath prior to metal transfer on casting. The skimming operation is essential to the manufacturing process. Dross and skimmings, according to the assessees, represent a process-loss or a melt- loss. Aluminium dross and skimmings contain a certain amount of metal from which they come. But they lack not only metal body but also metal strength, formability and character. Such dross and skimmings are, therefore, distinct from scrap which is a metal of as good a quality as the prime metal form which it arises.
All these appeals have been filed at the instance of the Union of India and the Collector of Central Excise. In all these appeals, the question of exigibility of such aluminium dross and skimmings to excise duty was raised.
Observation and findings:
The entire quantity of raw material, namely, duty-paid aluminium ingots procured by the assesses from outside was used in the manufacture of aluminium sheets. It is nobody’s case that the aluminium sheets which were manufactured by the assessees could have been manufactured out of a lesser quantity of aluminium ingots than what was actually used. In the process of manufacture, dross and skimmings had to be removed in order that aluminium sheets of the requisite quality could be manufactured. This does not mean that the entire quantity of aluminium ingots was not used for the manufacture of aluminium sheets. In the course of manufacture, a certain quantity of raw material may be lost because of the very nature of the process of manufacture or some small quantity of raw material may form part of wastage or ashes. This does not mean that the entire raw material was not used in the manufacture of finished excisable products. An exact mathematical equation between the quantity of raw material purchased and the raw material found in the finished product is not possible, and should not be looked for.
The ‘manufacturing loss’ forms part of the raw material ‘used’ in the manufacture though not reflected in the final product. The relief, as we understand the notification that has to be given to the manufacturer was in respect of the duty already paid on the raw material used in the manufacture of the final product. That is, the relief has to be given to the extent of the duty paid on the input material and not with reference to the quantity which ultimately forms part of the final product.”
Ruling and order
The court observed that an exact mathematical equation between the quantity of raw material purchased and the raw material found in the finished product is not possible, and should not be looked for. Therefore credits to these lost inputs cannot be denied.
Impact of ITC on Goods lost by Evaporation of certain inputs
Can credit be denied due to evaporation of certain inputs? Let us understand this with the help of a Case law CCE v BOC India Ltd. High court of Delhi.
Facts of the Case
The Appellant is a manufacturer of Oxygen, Nitrogen, Argon gases/liquids. They have a number of plants located at different places in country. In Jamshedpur, one factory is situated at Mona Road, Jamshedpur and at Burma Mines Long Torn area, Jamshedpur. The present appeal relates to Burma Mines factory. The Appellant is manufacturing Oxygen, Nitrogen and Argon in liquid form and the products are sold and supplied to the customer. In present case, the facility charges were being charged from the buyer on the agreed rates on monthly basis by a separate bill. These charges were charges only from those buyers who had required the appellant to provide the facilities. On the request of the buyers, the appellant was maintaining VISTs or pipelines. The appellant was also maintaining the upkeep of VISTs Pipelines and for that services and maintenance, the appellant was charging facility charges. Therefore, the facility charges are nothing to do with and were not in any way related to manufacture or sale of gases by the appellant.
Therefore, the charges cannot in any way be considered as a condition of sale for the goods. These charges were recovered by the assessee only from those buyers whose premises they had provided extra facility like pipeline system or VISTs. The supply of the gases and the supply of the facilities are two separate transactions. Once these transactions are treated separate, it cannot be contended that the rental or the facility charges paid by the buyer. The price charges from the buyers over the sale of goods did not depend upon and had nothing to do with the facility charges. The Central Excise Duty can be levied on manufacture of the goods. No Central Excise Duty can be levied on providing and maintenance of such facilities as indicated above.
Reason for Appeal
This appeal has been filed against the order dated 31st January, 2003 passed by the Commissioner of Central Excise, Jamshedpur. The Commissioner has confirmed the demand of Central Excise Duty of Rs. 3,96,30,288.68p. and Rs. 14,27,384/- and penalty of Rs. 14,27,384/. Out of the disputed demand, Central Excise duty of Rs. 3,96,30,288.68p. has already been paid by the appellant under protest.
Argument of Appellant
The facility charges had nothing to do with and were not in any way relevant to manufacture or sale of liquid/gases by the Appellant. the facility charges were charged only from those customers on whose factory the appellant had erected and was maintaining VIST or between whose factory and the appellant’s factory it had erected and was maintaining the pipeline. They are charging on the monthly basis by receiving a separate bill. They only charge from the buyers who had required the appellant to provide the said facility. No facility charges were being taken from other customer to whom no such facility were provided. The facility charges were not connected or related to sale or supply of the goods. The buyers were absolutely free to engage or not to engage the appellant for providing the case. He submits that the Commissioner has also relied on definition of transactional value. The facility charges are not payable by reason of or in connection with the sale. They are payable by the buyer even when there are no sales during the month to the buyer concerned. Therefore, he submits that there could be no scope to rely on the definition of transaction value for seeking to demand any Central Excise Duty on the said facility charges. The levy of penalty upon the appellant under the said provisions was and is fully illegal. Similarly, the direction of payment of interest under Section 11AB was also fully illegal. Therefore, he submits that the appeal may kindly be allowed with consequential relief to appellants.
Argument of the Respondent
The distribution facility at purchaser’s premises and the commitment by the BOC to maintain reserve capacity on purchaser’s premises are required to be carried out prior to the delivery of the goods to the buyer and the above activities are mandatory to provide the said goods to be sold to the respective purchasers. The provision of distribution facility by BOC are an integral part of the sale of the goods by BOC and have nexus with the manufacturer. The distribution facility on purchaser’s premises are not going to an expansion of the sale. The sale proceeds complete only after delivery of the goods to purchaser through distribution facility. These facilities are owned by BOC and are required to be carried out on prior to delivery of the goods on sale. Hence the facility charges related to these activities are realised from customers to enrich the value of goods up to point of delivery of the goods. These are collected over and above the sale price and are includible in the assessable value under Section 4 of Central Excise Act, 1944. He also supports the orders passed by the Commissioner of Central Excise, Jamshedpur. Therefore, he submits that the appeal may be rejected.
Observations and Findings
The fact that the facility charges have nothing to do with and are not in any way related to the sale of the goods has been accepted by the Central Excise Authority in the appellant’s own case at Mumbai, Chennai and Bangalore. The Commissioner of Central Excise, Mumbai-III in his order-in-original No. 02/YGP/7/2000, dated- 29-1-2000 has held that this charge, therefore, cannot in any way be considered as a condition to sale for goods. It is a discrete component related directly to the maintenance and installation of the facilities and has no nexus with the manufacture of gases. Similar view was taken by the Commissioner of Central Excise (Appeals), Chennai. In his order-in-appeal No. 666/6/(M-I), dated 24th October, 2001 and by the Additional Commissioner of Central Excise, Bangalore-III in his order No. Central Excise 19/2002, dated 31st July, 2002. The Department has accepted the order passed by the Commissioner of Central Excise, Mumbai-II and no appeal was preferred by the Department against the said orders. The Commissioner totally erred holding that the said facility charges relate to any predelivery activity. The stock lying in the VISTs, installed and erected at the buyers place is owned by the buyer and not the appellant. For the maintenance of the said facility, the appellant has to incur various expenses including overheads, salaries and emoluments of the engineers and technical staff depending upon the inflation rate. These aspects are not in any way related to the price charge for the sale of the goods. The contention of the Commissioner that the judgment of the Hon’ble Supreme Court in the appellant’s own case reported in 1988 (36) E.L.T. 730 as distinguishable tenable.
Further, The Delhi Bench of Tribunal in the case of Grasim Industries v. Commissioner of Central Excise, Indore has occasion to interpret the judgment in the light of amendment of Section 4 of the Central Excise Act and also in the light of Circular No. 81/2000-TRU, dated- 30th June, 2000 and Hon’ble Justice K.K. Usha, President has observed as under :
“We find merit in the contention raised by the appellant. The ratio of the decision in C.E.C. v. Indian Oxygen, referred above, would still be applicable in respect of the amendment brought to Section 4(1)(a). When examined the above decision, we find that the Supreme Court has treated the supply of gases and the supply of the cylinders has two separate transactions. Transaction in present case are identical in nature . If that is so, the supply of clorin and supply of tanker are to be treated as two separate transactions”.
It is clear from the above finding that the judgment rendered by the Hon’ble Supreme Court in the appellant’s case is still a good law and applicable in present case also. In present case, the said facility charges are not payable by reason or in connection with the sale, The said facility charges are payable by the buyer even when there are no sale during the month to buyer concerned. Therefore, there should be no scope to rely on the definition of transactional value for seeking any demand of Central Excise Duty on the facility charges.
Ruling and order
It can be concluded that the facility charges are not in any way related to or connected with the sale of gases. We find that the facility charges are payable at all times so long as the installations are being used by the customer irrespective of whether there is a supply of gas and irrespective of the quantity supplied. There is no difference in price of the product in respect of the goods supplied from whom facility charges are not being recovered. So we hold that facility charges need not be included in the assessable value.
The Delhi high court held that loss of nitrogen/ liquid argon due to evaporation cannot be considered as waste or refuse or even a by product arising during the manufacture of the final product. Evaporation is a natural consequence of the manufacturing activity carried out of the assesse, therefore credit cannot be denied.
Impact of ITC on Goods lost during Testing
How will there be an ITC impact on finished goods that are destroyed during testing, will the input tax credit be reversed? Let us see the impact of ITC with yet another very interesting case of the General Manger Ordnance Factory Bhandara- Authority of Advance Ruling Maharashtra.
Description in Brief:
Ordnance Factory Bhandara (OFBa) is a unit under the Ordnance Factories Description Board (OFB) functioning under the Department of Defence Production of Ministry of Defence, Government of India. The main business of OFBa is to manufacture propellants and commercial explosives for use by sister factories for production of finished products like arms and ammunitions that are ultimately supplied to Indian defence and military forces. Thus OFBa majorly acts as a feeder factory for goods such as explosives and propellants for its sister Ordnance Factories that use such goods for their production and manufacturing process.
Facts of the case
The applicant ahs submitted that they send samples of the finished goods, for quality testing, to proof establishment set up under the Ministry of Defence outside the factory where such samples are completely destroyed during the testing process.
Issues on which Advance Ruling is required
(i) Applicability of a notification issued under the provisions of this Act.
(ii) Admissibility of input tax credit paid or deemed to have been paid.
(iii) Determination of the liability to pay tax on any goods or services or both.
(iv) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of the term.
We will Focus on the Admissibility of the Input Tax Credit paid or deemed to have been paid.
Questions on which advance ruling is required
There were a number of other Issues raised in this case but we would specifically be dealing if,
Whether Input Tax credit is to be reversed on finished goods that are destroyed during testing?
Section 17 (5) (h) of the Central GST (CGST) Act 2017, reads that “input tax credit shall not be allowed in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or frees samples.
The bare analysis of this section makes it clear that this section has an overriding effect and it states that the ITC shall not be available in respect of goods lost, stolen, destroyed or written off.
The above provision however does not talk of the cases wherein the said inputs, capital goods or inputs services have already been utilized for further production of final products. In other words, the question of reversal will arise only if the inputs or capital goods are themselves lost, stolen or destroyed. If the finished goods are destroyed, lost or stolen then reversal should not be required. The definition of input and capital goods uses the phrase “ used or intended to be used in the course of furtherance of business”. Since this condition is to be checked at the time of admissibility of ITC and at that time goods lost, stolen or destroyed were intended to be used in the course furtherance of business, the ITC was legally availed.
It is to be noted here that once ITC is legitimately availed, it cannot be demanded back without a specific provision in this regard. There is no provision for demanding the ITC on inputs, capital goods and input services that have been used for manufacture of finished goods that are lost, stolen or damaged.
Ruling and Order
It is important to note here that the value of raw materials used in the sample goods so destroyed is included in the value of finished goods that are manufactured and thus included in the value of taxable goods supplied on which GST is levied by OFBa.
It is therefore concluded that once input are used in the manufacture of final products, which are then sent for testing purpose, then in such a case the said inputs cannot be considered to have been destroyed. Hence, No ITC to be reversed.