GST UPDATE ON REVERSAL IN CASE OF EXEMPTED BY PRODUCTS UNDER RULE 42 81/2020-21

Rule 42 prescribes a formula for computing the amount of credit attributable to exempted supply. Broadly, as per the said Rule, in respect of the inputs and input services which are used exclusively for making the exempted supplies, credit is not available. There may be certain inputs/input services which are used for making taxable as well as exempted supplies.
As per Rule 42(2) of CGST Rules, the amount of common credit reversed on monthly basis during the year is required to be calculated finally for the financial year before filing GSTR 3B of the month of September of the following financial year.
Recently, in case of Indo Prosoya Foods (P.) Ltd., AAAR-UTTAR PRADESH ruled that Input/Credit attributable to the supply of de-oiled rice bran cake (exempted supply) is to be reversed by the appellant in terms of Section 17(2) of the CGST Act, 2017. GST @ 18% is payable on supply of de-oiled mahua cake with consequent allowing of input credit in terms of Section 16 of the CGST Act, 2017.
The Applicant purchases Mahua oil cake/Rice Bran for extraction of oil through solvent extraction process in which oil is primary product and De-oiled Mahua Cake/De-oiled Rice Bran is obtained. Mahua oil cake/Rice Bran is fed to solvent Extraction Plant for extraction of oil through Hexane. During the process of the oil extraction, a huge quantity of de-oiled cake is also produced (almost to the 65%-70% of the raw material).
The applicant filed application to know i) Whether mahua de-oiled cake/de-oiled rice bran, being used as an ingredient of cattle feed, poultry feed and other animal feeds is ‘waste generated’ during the solvent extraction process and ii) Whether the applicant is eligible to get entire tax input credit of GST paid on purchase of mahua oil cake/rice bran used in the manufacture of solvent extracted oil.
The applicant has submitted that the de-oiled cake is a waste and a mere technological necessity. The ‘Waste’ generated during the manufacturing process cannot be treated as ‘supply’ in light of judicial pronouncements since it is mere technological necessity. The provisions of Section 17 and more specifically sub-section (2) of CGST Act, 2017 are inapplicable. Entire Input Credit should be allowed since the whole of it is being used in the manufacture of solvent extract oil.

However, authority said that two equally and completely commercially viable products emerge during manufacturing process of solvent extraction viz. oil and de-oiled cake. Both these products are sold by a company with equal emphasis and both are commercially lucrative to solvent extractor. After oil is extracted from pellets, manufacturing process does not end at that point. In fact, pellets from which oil has been extracted further undergo desolventising process i.e. separation of normal-Hexane from De-oiled bran subsequent to which de-oiled bran is chemically tested for their oil and silica content to meet clients’ specifications and finally it is sent to the bagging section for packing into branded unit packaging. It is unimaginable that investment into a desolventising plant and bagging unit will be made for a product which is allegedly ‘unintended’ or ‘mere technical necessity’. De-oiled cake is a very much intended product inasmuch as it may affect overall financial health of company, since it is a major revenue yielding commodity for oil extractor. Thus, through an elaborate process, chemical testing and packing, de-oiled cakes are finally manufactured and made marketable.
AAAR Relied upon the Judgment of Hon’ble Supreme Court, in case of Commissioner of Central Excise v. Goyal Proteins Ltd. [2017 (355) E.L.T. A27 (SC)] and State of Karnatka v. M.K. Agro Tech (P.) Ltd. [2017] 86 taxmann.com 123/64 GST 19.
Definition of ‘Supply’ leaves no ambiguity that anything that is sold with or without consideration is supply. Having settled issue of sale of de-oiled cake being supply, it can be concluded that Section 17(2) of the GST Act, 2017 is very much applicable.

In our opinion, if the assessee successfully convinces that the product generated during the manufacturing process is a byproduct, then such product if exempted does not classify for the purpose of reversal as per Rule 42 and Section 17(2) of the Act. The assessee dealing with such case is advised to submit a full proof report of the generation process of the exempted product with the certification of required authority to escape from reversing common credit. However, the government should issue a clarification determining the method of reversal in case of exempted by products to avoid future litigations.

This is solely for educational purpose.

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GST UPDATE ON REVERSAL IN CASE OF EXEMPTED BY PRODUCTS UNDER RULE 42 81/2020-21

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