Hiregange Academy

Resolved Unresolved Issues in -Reversal, Transfer, Restriction in ITC [

Analysis of  Landmark Decision  ofpast as well as  under GST]

-CA Roopa Nayak CA Shilpi Jain

16/07/20199

Coverage

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‘in respect of’ – how far can it be stretched?

When credit eligibility to be seen

Subsequent reversal

End use theory

Loss v Lost

Write off

P&M- used for making outward supply

‘in respect of’

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(i)

Relevance 17(5) Notwithstanding anything contained in sub-section (1) ofsection 16 and subsection (1) of section 18, input tax credit shall notbe available in respect of the following.. (Section 17(5))(a) motor vehicles ………..(b) the following supply of goods or services or both-

food and beverages,……….(h) goods lost, stolen, destroyed, written off or disposed of by way ofgift or free samples

‘in respect of’ (contd.)

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Supreme Court in Union of India (UOI) and Anr. Vs. Vijay Chand Jain (1977)2 SCC 405 ruled that the expression "in respect of" admits of a wideconnotation and has been used in the sense of "being connected with". The Orissa, Madras, Patna, Allahabad and Delhi High Courts alsointerpreted the phrase "in respect of" as a comprehensive expression to beconstrued in the widest sense and as having a wide connotation andcompass. The Canadian Supreme Court in Nowegijick v. The Queen [1983] 1 SCR 29explains that "in respect of" are words of widest possible scope andimport such meaning as "in relation to", "with reference to", or "inconnection with" is probably widest of any expression intended to conveysome connection between two related subject matters .

‘in respect of’ (Contd.)

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The words "in respect of" admit of a wide connotation; LordGreene M.R. in Cuperd's Trustees v. Inland Revenue Commissioner,C) calls them colourless words. "it cannot be said to have a precise legal meaning. Fowler'sModern English Usage' does it justice by recommending that it beused as seldom as possible". (New Zealand Court of Appeal in -Phonographic Performances (NZ) Ltd. v. Lion Breweries Ltd.-(1980) PSR 383 (1979). (Garner).

‘in respect of’ (Contd.)

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4. Tolaram Relumal v State of Bombay, AIR 1954 SC 496Provision examined" If any landlord either himself or through any person acting or purporting to act on hisbehalf receives any fine, premium or other like sum or deposit or any consideration,other than the standard rent..." in respect of the grant, renewal or continuance of a lease of any premises suchlandlord or person shall be punished “ SC heldlease never came into existence……. If the Legislature intended to make receipts - other than the standard rent in respect ofthe lease or an agreement of lease of the premises, such landlord or person shall bepunished “ …..section 18(1) are penal in nature and - penal statutes that if two possible andreasonable constructions can be put - the Court must lean towards that constructionwhich exempts the subject from penalty not to stretch the meaning of an expressionused by the Legislature in order to carry out the intention of the Legislature

‘in respect of’ (Contd.)

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Referring to certain House of Lords and Privy Council judgments,the Supreme Court observed: “The expression has received a wideinterpretation, having regard to the object of the provisions and thesetting in which the said words appeared. State of Madras v Swasthik Tobacco Factory, 1966 (17) STC 316(SC). -Deduction could be claimed for duty paid in respect of goodssold.

“The object of the concession is presumably to avoid payment of taxin respect of the same goods…… This concession could have norelevance if the goods subjected to excise duty were different fromthe goods sold.”

‘in respect of’ (Contd.)

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 AnalysisNeed to look at the object and ‘in respect of’ be read as ‘on’?Legislative intent evident from the statement of objects and reasons.

Northern Caterers’ decision (1978) 4 SCC 36 & 1980 AIR 674 and Andhra High Courtin the case of “Durga Bhavan And Others vs The Deputy Commercial Tax 1981 47STC 104 AP

Food – goods; food consumed at restaurant – service

So may not cover restaurant services.Outdoor catering, motor vehiclesGoods destroyed, etc. – may not cover credit on inputs

When credit eligibility to be seen

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When should the eligibility to credit be seenSpenta International Ltd. v. Commissioner — 2007 (216) E.L.T. 133 (Tribunal-LB)- CG related Grasim Industries V CCE 2005 (179) E.L.T. A38 (S.C.)] – date of receipt, and notinstallation, relevant. Tractor & Farm Equipment Ltd. Vs. Commr. Of C.Ex., Madurai II 2015(320) E.L.T.357 (Mad.), which was delivered w.r.t. rules 57A to 57J of the erstwhileCentral Excise Rules,

no co-relation between the raw material and the final product is required…..there need not be co-relation between the input and the goods cleared and as aresult, validly taken credit need not be reversed.

When credit eligibility to be seen (contd.)

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4. Collector Of Central Excise, Pune Versus Dai Ichi Karkaria Ltd. 1999 (112) E.L.T.353 (S.C.)  “It is clear from these Rules, as we read them, that a manufacturerobtains credit for the excise duty paid on raw material to be used by him in theproduction of an excisable product immediately…………….. There is no provision inthe Rules which provides for a reversal of the credit by the excise authorities exceptwhere it has been illegally or irregularly taken,…….. The credit is, therefore,indefeasible. It should also be noted that there is no co-relation of the raw materialand the final product; that is to say, it is not as if credit can be taken only on a finalproduct that is manufactured out of the particular raw material to which the creditis related. The credit may be taken against the excise duty on a final productmanufactured on the very day that it becomes available” Setting of rule 42– credit involve in a tax period

Subsequent reversal

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Section 17(5) says credit will not be available….. It is not a reversal provision but a blockingprovision. It does not override section 17(1) or 17(2) Chambers 20th Century Dictionary the word 'Available' means 'that one may avail oneself;'accessible'; 'within reach'; 'obtainable’.In Black's Law Dictionary the word 'Available' means 'suitable'; 'usable'; 'having sufficient forceof efficacy'; 'effectual’. Credit validly taken – provision required for reversals

Grasim Industries Versus Commissioner Of Central Excise, Indore 2007 (208) E.L.T. 336 (Tri.- LB) Approved in 2015 (322) E.L.T. 209 (Mad.)

Reading of rules under which remission is granted in respect of goods which were lost ordestroyed by natural cause or by natural accident, does not provide any condition regardingreversal of credit taken in respect of inputs used on such goods,

Subsequent reversal (Contd)

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2.

Commissioner of C. Ex., Navi Mumbai versus Hindalco Industries Ltd. 2011(272) E.L.T. 161 (Bom.) and In Commissioner of Central Excise v. IndianPetrochemicals Corporation Limited, 2008 (226) E.L.T. 339 a Division Bench ofthis Court had noted that the Tribunal in a long line of judgments had taken theview that where the goods have been shown as written off goods, the benefit isavailable. In the present case, as already noted earlier, the period to which thedispute relates is prior to the insertion of sub-rules (5B) and (5C) in Rule 3.

Subsequent reversal (Contd)

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a.b.

Provision under old lawRule 3(5) of the CCR - Subsequent removal of inputs / CG as such the recipient shall pay anamount equal to the credit availed in respect of such inputs or capital goods.

Rule 3(5B) - if the value of any input or capital goods before being put to use on whichCENVAT credit has been taken is written off fully or where any provision to write off fully hasbeen made in the books of account, then the manufacturer or service provider is required topay an amount equivalent to the cenvat credit taken in respect of the said input or capitalgoods.Rule 3(5C), where on any goods manufactured or produced by an assessee, the payment ofduty is ordered to be remitted under Rule 21 of the Central Excise Rules, 2002, the cenvatcredit taken on the inputs used in the manufacture or production of the said goods shall bereversed.

Comparison with GST provisionsSection 18(4) of the Act (extracted as Annexure 14), provides that where any person who hasavailed ITC :

Opts to pay tax under composition scheme u/s 10 of the Act, orWhere the goods and services supplied by the registered person becomes fully exempt

Then such person shall pay an amount

Subsequent reversal (Contd)

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Say FG subsequently destroyed/written off/given away as gift. Can be challenged as a legally availed credit (vested right) at the time of purchaserequiring to be paid can be equated as a form of levy. A 265 – no tax can be levied without authority of law. S 17(5) overriding 16(1) – so if intended to use for taxable supplies– sufficient totake credit. Redundancy of any entry of s 17(5) – write off? Will see in further slides

End use theory

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For credit eligibility end use of the procurements to be seenEscort v. CCEx. [2004(171) ELT 145 (SC)] - Thus in cases where intermediateproduct comes into existence, even though no duty has been chargeable to Nilrate of duty, credit would still be allowed so long as duty is paid on the finalproduct. Sterlite Industries (I) Ltd. vs Commissioner Of Central Excise 2005 (183) ELT 353Tri Mumbai affirmed by Bom HC in 2009 244 ELT A89

Thus even though intermediate product was manufactured (taxable event) creditwas eligible.

End use theory (contd.)

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Under GST as well-ITC attributable to inputs and input services intended to be used exclusively foreffecting exempt supplies ……ITC attributable to inputs and input services intended to be used exclusively foreffecting supplies other than exempt……It has to be supply.

Sale of part of a business – it is not a supply – not a business. So no reversal ofcredit required if it is for the betterment of the continuance of the business of theassessee which is relating to taxable supplies.Other examples could be – electricity generated for captive consumption, etc.However, residential dwelling let out to employee – supply – ITC eligibility? – canabove analogy be taken to see the end objective of the expense incurred.

Loss vs Lost

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Credit eligible if used or intended to be used for business section 16(1) & section17 and rules credit eligible in respect of goods/services intended to be used forother than exclusive exempt supplies. Earlier regime credit eligible if used in or in relation to manufacture. Section 17(5) does not override sub-section 1 & 2. Meaning of Loss v Lost Black's Law Dictionary and The East And West Steamship ... vs S. K. Ramalingam Chettiar 1960 AIR 1058 – similar meaning words

Loss vs Lost (Contd)

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Credit is eligible as it is used in the manufacture – Multimetals Ltd. v ACCE 57 ELT 209 SCSo far as the manufacturer is concerned he has used copper and copper alloys ofa particular quantity in the manufacture of pipes and tubes. The ‘manufacturingloss’ forms part of the raw material “used” in the manufacture though notreflected in the final product. Commissioner v. I.P.F. Vikram India Ltd. - 2003 (153) E.L.T. A303 (S.C.)

Where process of repacking the bulk detergent powder into small containersamounts to manufacture, credit on inputs gone in waste during the process ofmanufacture not deniable.

Loss vs Lost (Contd)

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Similar cases in place allowing credit in respect ofLoss due to evaporation (CCE v BOC (India) 2008 223 ELT 33 (Guj HC DB)),Loss during handling of materials (CCE v Hindustan Zinc 2015 307 ELT 273(AP HC DB))Normal loss in transit (UoI Bhilwara Spinning 2008 222 ELT 362 (Raj HC DB).Credit available if inputs are damaged during manufacture but is notadmissible if inputs are destroyed prior to being used in manufacture - TimexWatches Ltd. Versus CCE Meerut 2002 (141) E.L.T. 152 (Tri. - Del.)

Tribunal decisions holding that inputs lost or destroyed in stores before issue toproduction – credit not eligible. GST- used for business. Receipt and business use. Normal or other loss before orafter issue for production?

Write off

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Rule 3(5B) CCRIf the value of any, -(i) input, or(ii) capital goods before being put to use,on which Cenvat credit has been taken is written off fully or where any provision towrite off fully has been made in the books of account, then the manufacturer orservice provider, as the case may be, shall pay an amount equivalent to the Cenvatcredit taken in respect of the said input or capital goods :Provided that if the said input or capital goods is subsequently used in themanufacture of final products or the provision of taxable services, themanufacturer or output service provider, as the case may be, shall be entitled totake the credit of the amount equivalent to the Cenvat credit paid earlier subject tothe other provisions of these rules.

Write off

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Prior to insertion of above rule 2014 (300) E.L.T. 347 (Guj.)versus Ingersoll Rand(India) Ltd. 2014 (300) E.L.T. 347 (Guj.)

We are of the opinion that the reduction of the value of such spares (inputs) forincome-tax purpose, cannot be equated with writing off of the physical stock. ……….If under such accounting principles, the assessee is entitled to diminish the valueof a certain stock held over a period longer than the specified period, the same hasno correlation with the availability of physical stock insofar as the manufacturingactivity is concerned.

Dai Ichi Karkaria Ltd.We are here really concerned with credit that has been validly taken, and its benefitis available to the manufacturer without any limitation in time or otherwise unlessthe manufacturer itself chooses not to use the raw material in its excisableproduct.”

Write off (Contd.)

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Federal Mogul Automotive Products (I) P. Ltd. Versus Commr. Of C. Ex., Jaipur2007 (212) E.L.T. 158 (Tri. - Del.)

……only a revaluation of inputs. Otherwise they are being used for manufacture.Revaluation of assets, in no way, affects Modvat credit taken on them. Increase inthe value fetches no additional credit. Similarly, reduction in value, does notdiminish the quantum of credit already taken. Quantum of credit available is fixed i.e. equivalent to the specified duties paid.

Commissioner of c. Ex., Chandigarh-I Versus Punjab Steels 2010 (260) E.L.T.521 (P & H)

Rule 3(5) of the Rules only talks about the Cenvat credit taken on inputs or capitalgoods. It does not refer to the Cenvat on input service.

Write off (Contd.)

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So mere write off in the books will not warrant reversal of credit unless they arerendered not fit for usage and only if there are provisions in place for subsequentreversals. In case we assume reversal required for FG write off then where is the mechanismto calculate? - Lally Automobiles Pvt. Ltd. Versus Commissioner(Adjudication), C. Ex. 2018 (17) G.S.T.L. 422 (Del.) – affirmed 2019 (24) G.S.T.L. J115 (S.C.) So does this mean that the provision to the extent of credit blocked for write off isredundant?

P&M- used for making outward supply

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CCE v. Jawahar Mills, reported in 2001 (132) E.L.T. 3if used for producing, or processing of any goods, or for bringing about any changein any substance, for the manufacture of final product, would be ‘capital goods’,……….. Then moulds and dies, generating sets, and weigh etc. has also been heldto be eligible for Modvat credit, even if they are not used for producing the finalproduct, or used for process of any product, for the manufacture of final product,or used for bringing about any change in any substance, for the manufacture offinal product. The only requirement is, that the same should be used in the factoryof the manufacturer, thus, it was held, that the language is to be interpreted veryliberally.

P&M- used for making outward supply (contd)

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JK Cottons SPG. & WVG Mills Co. Ltd v. Sales Tax Officer, Kanpur, reported in 1997(91) E.L.T. 34 SCuse of electrical equipments, like lighting, electrical humidifiers, exhaust fan etc.were also taken to be necessary equipment, to effectively carry on themanufacturing process. Where any particular process is so integrally connected with the ultimateproduction of goods that but for that process, manufacture or processing of goodswould be commercially inexpedient, goods required in that process would, in ourjudgment, fall within the expression “in the manufacture of goods.” Sanitizing tunnel used in the office of an infra company?

THANK YOUTHANK YOU

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roopa@hiregange.comshilpijain@hiregange.com