GST UPDATE ON CREDIT REVERSAL ON BY-PRODUCT PART-2:- 83/2020-21

GST UPDATE ON CREDIT REVERSAL ON BY-PRODUCT PART-2:-

In our GST Update No. 81/2020-21, we have discussed the ruling pronounced in the case of M/s Indo Prosoya Foods (P.) Ltd. by appellate authority for advance ruling,wherein it was held that input tax credit attributable to supply of de-oiled rice bran cake which is exempted is to be reversed by the appellant in terms of section 17(2) of CGST Act, 2017. In our update, we had mentioned that in our opinion, if the assessee is able to prove that the product generated during the manufacturing process is a by-product, then such product, even if exempted should not require any credit reversal. In this update, we wish to discuss the reasoning behind our opinion.

The AAAR in the case of M/s Indo Prosoya Foods (P.) Ltd. had rejected the contention of the appellant that de-oiled rice bran emerges unintentionally during the course of their main manufacturing activity of rice bran and should be considered as waste product. The AAAR had concluded that since the appellant had installed desolventising plant and bagging unit for unintended product. It was held that application of desolventising process and performing chemical tests on the by-product is essential for its marketability and so the contention that the said de-oiled rice bran is unintended product was rejected. Hence, we may conclude that if the by-product is subjected to further process before selling it in the market, it cannot be considered that the assessee did not intend to manufacture such by-product. However, there are situations wherein the by-product emerges during the course of manufacture of finished products and no further processing is done on such by-product. In such a situation, even if the by-product is exempted, there should not be any requirement to reverse input tax credit.

To illustrate-If an assessee is engaged in supplying processed groundnuts by removing their shells. The main product of the assessee is supply of groundnuts after removing their shell. The shell obtained during the process is to be considered as waste and is not liable for credit reversal. However, if the shells are crushed and compressed so as to use as ignition material and are sold by the assessee, then according to the view taken by AAAR, it would be treated as exempted supplies liable for credit reversal which is not proper. This is for the reason that the assessee never intended to manufacture shells and the process of crushing and selling it as ignition material is only effective utilisation of waste material arising during the course of manufacturing activity.

When no input tax credit is required to be reversed on evaporation loss, material used in production but resulted in defective finished goods etc. then requiring assessee to reverse input tax credit on emergence of unintended by-product, which is exempted, is not justifiable.

It is worth mentioning that the AAAR had also commented on the judicial precedence of the decisions rendered under repealed laws. It was held that the precedence value of principles laid down in decisions of higher judicial forum are not lost merely on change of law. Consequently, in our opinion, the decision given by the Supreme Court in the case of COMMISSIONER VERSUS BALRAMPUR CHINI MILLS LTD. [2015 (320) E.L.T. A258(S.C.)] wherein it was held that bagasse is not final product but waste and so is not liable for credit reversal should be considered while deciding the issue of credit reversal in the GST era with respect to unintended by-products emerging during the course of manufacture of finished goods. In our opinion, unintended by-products emerging during the course of manufacture partakes the character of waste and so there should not be any requirement of credit reversal on them.

This is solely for educational purpose.

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GST UPDATE ON CREDIT REVERSAL ON BY-PRODUCT PART-2:- 83/2020-21

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