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ITC Reversal Requirements Under Rule 42 for exempt by products, Goods and Services Tax - GST |
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ITC Reversal Requirements Under Rule 42 for exempt by products |
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Is ITC reversal under Rule 42 required if the Company has ITC related to the manufacturing process, where the ultimate result of such manufacturing is taxable products, but there are by-products that are exempt under GST? Specifically, is the Company required to reverse common ITC in relation to the turnover of exempt sales of these by-products? Posts / Replies Showing Replies 1 to 10 of 10 Records Page: 1
Yes. In terms of Section 17[2] of the CGST Act, you need to restrict/reverse ITC to the extent of exempt supplies, irrespective by-products. Since, no output tax is payable on the supply of by-product, being exempt goods, the input tax credit in such cases is partially admissible to the extent of taxable supplies.
CBIC Circular No. 41/15/2018-GST dated 26th March 2018 clarifies that when inputs/input services are used for both taxable and exempt supplies, reversal is necessary.
Yes, ITC (Input Tax Credit) reversal under Rule 42 of the CGST Rules is required in your case. As per Section 17(2) of the CGST Act, when inputs or input services are used for making both taxable and exempt supplies, the credit must be restricted to the portion attributable to taxable supplies. Since the by-products generated in your manufacturing process are exempt under GST and no output tax is paid on them, they are treated as exempt supplies, even if they are unintended outcomes. The CBIC Circular No. 41/15/2018-GST dated 26th March 2018 confirms this position. It clarifies that in cases where common inputs or input services are used to produce both taxable goods (main product) and exempt goods (like by-products), the taxpayer must calculate and reverse the proportionate ITC related to exempt supplies. Therefore, your company must reverse ITC proportionately under Rule 42 for the exempt turnover from by-products.
Bye-product is also a final product. Reversal of ITC is required as advised by both Experts.
Under the CENVAT credit regime there are decisions which have held that by product is incidental and not manufactured and so no ITC reversal required even if exempt. Though this view looks difficult under GST as GST is on supply. So reversal would be required. However, you need to reverse common credit.
Whether bye-product is final product or not ? It depends upon case to case/commodity to commodity.
Dear Sir ji The hon'ble Supreme Court has settled this issue under the Sales Tax & VAT regime. Bye-product is always a residuary product. However such bye-product can be potentially used as main raw-material by another industry as well. So bye-product cannot be given the character of being final product.
Sh.Sadanand Bulbule Ji, Sir, Your views are welcome. I learn a lot from you and all other experts who contribute to Discussion Forum. In order to gain more knowledge on the issue, I am posting here two case laws. 1999 (113) E.L.T. 689 (Tribunal) IN THE CEGAT, COURT NO. III, NEW DELHI [LARGER BENCH] S/Shri G.A. Brahma Deva, Member (J), Lajja Ram, Member (T), A.C.C. Unni, Member (J), S.S. Kang, Member (J) and V.K. Agrawal, Member (T) COLLECTOR OF C. EX., AHMEDABAD Versus KETI CHEMICALS Misc. Order No. 52/99-C, dated 2-7-1999 in Appeal Nos. E/1653, 1674 & 1814/91-C Spent sulphuric acid emerging as a by-product in the process of manufacture of another product to be considered as having emerged as a result of process of manufacture - Hence spent sulphuric acid is a manufactured product - It is sold and finds use in the manufacture of fertilizers - Once it is a by-product in the form of waste/residue it has to suffer duty - Sections 2(d), 2(f) and 3 of Central Excise Act, 1944. - Once a product emerges as a by-product in the process of manufacture of another product it can certainly be not claimed that it has not emerged as a result of process of manufacture. According to Concise Oxford Dictionary, By-product is incidental or secondary product of manufacture, etc. Once it is a by-product in the form of waste/residue it has to suffer duty of excise. Accordingly the duty is leviable on spent sulphuric acid. [1995 (77) E.L.T. 268 (S.C.) distinguished, 1993 (63) E.L.T. 251 (Tribunal) followed, 1988 (37) E.L.T. 418 (Tribunal) distinguished, 1996 (81) E.L.T. 381 (Tribunal) followed, 1998 (103) E.L.T. 243 (Tribunal) and 1998 (103) E.L.T. 105 (Tribunal) dissented]. [para 8] Modvat - Input - Sulphuric acid - Spent sulphuric acid emerging as a by-product in the course of manufacture of final product - Modvat credit not deniable once sulphuric acid is used in or in relation to manufacture of final product even if it is not fully assimilated in the final product - As sulphuric acid has been put to use, assessee eligible to avail Modvat credit of duty paid on the entire quantity of sulphuric acid so used - Rule 57A of Central Excise Rules, 1944. - It is not the case of the Revenue that sulphuric acid has not been used in or in relation to the manufacture of the final goods. As the sulphuric acid has been put to use, the manufacturers are eligible to avail of Modvat credit of the duty paid on the entire quantity of sulphuric acid so used. [ 1993 (68) E.L.T. 42 (All.) relied on]. [para 11] Spent sulphuric acid being a separate chemically defined compound or separate chemical element classifiable under Heading 28.07 of Central Excise Tariff Act, 1985 and not under Heading 38.23 ibid. - It has not been contended that spent sulphuric acid is not a separate chemically defined compound or separate chemical element. Further the Heading 28.07 does not give any indication by itself or by any Note to Section/Chapter of the Tariff that sulphuric acid of only a particular range of concentration is covered by the Heading. The Explanatory Notes of HSN merely states that commercial sulphuric acid contains between 77 and 100% H2SO4; that Notes nowhere mentions that sulphuric acid containing less than 77% H2SO4 will not be regarded as sulphuric acid. It does not flow from the Explanatory Notes that sulphuric acids of other concentrations are not covered by Heading 28.07. According to Concise Encyclopaedia of Chemical Technology by Kirk-Othemer, sulphuric acid is by the largest volume chemical commodity produced and is sold or used commercially in a number of different concentration including 78 wt% (60° Be), 93 wt% (65.7° Be), 96 wt% (66° Be) 98-99 wt% 100 wt%. Moreover Note 1(a) to Chapter 38 of Central Excise Tariff excludes the separate chemically defined elements or compounds from the said chapter. [1993 (63) E.L.T. 251 (Tribunal) dissented]. [para 10]. 2002 (146) E.L.T. 485 (S.C.) IN THE SUPREME COURT OF INDIA N. Santosh Hegde and B.P. Singh, JJ. COLLECTOR OF C. EX., AHMEDABAD Versus NIRMA CHEMICAL WORKS LTD. Civil Appeal Nos. 9915-9917 of 1995, decided on 14-11-2002 Spent sulphuric acid classifiable under Heading 28.07 of Central Excise Tariff Act, 1985 and not under Heading 38.23 ibid. [1999 (113) E.L.T. 689 (Tribunal-LB) endorsed]. CASE CITED Collector v. Keti Chemicals — 1999 (113) E.L.T. 689 (Tribunal) — Endorsed.................... [Para 1]
REPRESENTED BY : Shri B.K. Prasad, Advocate, for the Appellant. Shri D. Dave, Sr. Advocate and Ms. Meenakshi Arora, Advocate, for the Respondent. [Order]. - The only question involved in this appeal pertains to the classification of Spent sulphuric acid which the Tribunal by the impugned order has held to fall under Heading 38.23 whereas it is the contention of the Revenue that the same falls under Heading 28.07. Mr. D. Dave, learned Senior Counsel appearing for the respondent fairly concedes that in view of the Larger Bench judgment of the Tribunal in Collector of Central Excise, Ahmedabad v. Keti Chemicals, 1999 (113) E.L.T. 689 (Tribunal) this issue is now settled and the said Spent sulphuric acid also falls under Heading 28.07 with which view respondent has no quarrel. Recording this statement of the learned Senior Counsel, we set aside the impugned order of the Tribunal and hold that Spent sulphuric acid is to be classified under Heading 28.07 of the Tariff Item. The appeals are allowed accordingly. ______
Sh.Sadanand Bulbule Ji, Sir, Your views are welcome. I learn a lot from you and all other experts who contribute to Discussion Forum. In order to gain more knowledge on the issue, I am posting here two case laws. 1999 (113) E.L.T. 689 (Tribunal) IN THE CEGAT, COURT NO. III, NEW DELHI [LARGER BENCH] S/Shri G.A. Brahma Deva, Member (J), Lajja Ram, Member (T), A.C.C. Unni, Member (J), S.S. Kang, Member (J) and V.K. Agrawal, Member (T) COLLECTOR OF C. EX., AHMEDABAD Versus KETI CHEMICALS Misc. Order No. 52/99-C, dated 2-7-1999 in Appeal Nos. E/1653, 1674 & 1814/91-C Spent sulphuric acid emerging as a by-product in the process of manufacture of another product to be considered as having emerged as a result of process of manufacture - Hence spent sulphuric acid is a manufactured product - It is sold and finds use in the manufacture of fertilizers - Once it is a by-product in the form of waste/residue it has to suffer duty - Sections 2(d), 2(f) and 3 of Central Excise Act, 1944. - Once a product emerges as a by-product in the process of manufacture of another product it can certainly be not claimed that it has not emerged as a result of process of manufacture. According to Concise Oxford Dictionary, By-product is incidental or secondary product of manufacture, etc. Once it is a by-product in the form of waste/residue it has to suffer duty of excise. Accordingly the duty is leviable on spent sulphuric acid. [1995 (77) E.L.T. 268 (S.C.) distinguished, 1993 (63) E.L.T. 251 (Tribunal) followed, 1988 (37) E.L.T. 418 (Tribunal) distinguished, 1996 (81) E.L.T. 381 (Tribunal) followed, 1998 (103) E.L.T. 243 (Tribunal) and 1998 (103) E.L.T. 105 (Tribunal) dissented]. [para 8] Modvat - Input - Sulphuric acid - Spent sulphuric acid emerging as a by-product in the course of manufacture of final product - Modvat credit not deniable once sulphuric acid is used in or in relation to manufacture of final product even if it is not fully assimilated in the final product - As sulphuric acid has been put to use, assessee eligible to avail Modvat credit of duty paid on the entire quantity of sulphuric acid so used - Rule 57A of Central Excise Rules, 1944. - It is not the case of the Revenue that sulphuric acid has not been used in or in relation to the manufacture of the final goods. As the sulphuric acid has been put to use, the manufacturers are eligible to avail of Modvat credit of the duty paid on the entire quantity of sulphuric acid so used. [ 1993 (68) E.L.T. 42 (All.) relied on]. [para 11] Spent sulphuric acid being a separate chemically defined compound or separate chemical element classifiable under Heading 28.07 of Central Excise Tariff Act, 1985 and not under Heading 38.23 ibid. - It has not been contended that spent sulphuric acid is not a separate chemically defined compound or separate chemical element. Further the Heading 28.07 does not give any indication by itself or by any Note to Section/Chapter of the Tariff that sulphuric acid of only a particular range of concentration is covered by the Heading. The Explanatory Notes of HSN merely states that commercial sulphuric acid contains between 77 and 100% H2SO4; that Notes nowhere mentions that sulphuric acid containing less than 77% H2SO4 will not be regarded as sulphuric acid. It does not flow from the Explanatory Notes that sulphuric acids of other concentrations are not covered by Heading 28.07. According to Concise Encyclopaedia of Chemical Technology by Kirk-Othemer, sulphuric acid is by the largest volume chemical commodity produced and is sold or used commercially in a number of different concentration including 78 wt% (60° Be), 93 wt% (65.7° Be), 96 wt% (66° Be) 98-99 wt% 100 wt%. Moreover Note 1(a) to Chapter 38 of Central Excise Tariff excludes the separate chemically defined elements or compounds from the said chapter. [1993 (63) E.L.T. 251 (Tribunal) dissented]. [para 10]. 2002 (146) E.L.T. 485 (S.C.) IN THE SUPREME COURT OF INDIA N. Santosh Hegde and B.P. Singh, JJ. COLLECTOR OF C. EX., AHMEDABAD Versus NIRMA CHEMICAL WORKS LTD. Civil Appeal Nos. 9915-9917 of 1995, decided on 14-11-2002 Spent sulphuric acid classifiable under Heading 28.07 of Central Excise Tariff Act, 1985 and not under Heading 38.23 ibid. [1999 (113) E.L.T. 689 (Tribunal-LB) endorsed]. CASE CITED Collector v. Keti Chemicals — 1999 (113) E.L.T. 689 (Tribunal) — Endorsed.................... [Para 1]
REPRESENTED BY : Shri B.K. Prasad, Advocate, for the Appellant. Shri D. Dave, Sr. Advocate and Ms. Meenakshi Arora, Advocate, for the Respondent. [Order]. - The only question involved in this appeal pertains to the classification of Spent sulphuric acid which the Tribunal by the impugned order has held to fall under Heading 38.23 whereas it is the contention of the Revenue that the same falls under Heading 28.07. Mr. D. Dave, learned Senior Counsel appearing for the respondent fairly concedes that in view of the Larger Bench judgment of the Tribunal in Collector of Central Excise, Ahmedabad v. Keti Chemicals, 1999 (113) E.L.T. 689 (Tribunal) this issue is now settled and the said Spent sulphuric acid also falls under Heading 28.07 with which view respondent has no quarrel. Recording this statement of the learned Senior Counsel, we set aside the impugned order of the Tribunal and hold that Spent sulphuric acid is to be classified under Heading 28.07 of the Tariff Item. The appeals are allowed accordingly. ______
Dear Sir, Also worth reading for discussion sake
Section 2 Definitions Central Excise Act [(f) “manufacture” includes any process, - (i) incidental or ancillary to the completion of a manufactured product; (ii) which is specified in relation to any goods in the Section or Chapter notes of [the Fourth Schedule] as amounting to [manufacture; or] [(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,] and the word “manufacturer” shall be construed accordingly and shall include not only a person w Page: 1 |
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