Dear Experts,
In case of scrutiny of GST by the assessing officer, he has reversed ITC of material purchased on the basis of breakage of product during the processing for decoration on the ground that exporters are entitled get refund onlly on material exported, Can he reverse ITC for breakage?
Thanks
| The officer's reversal is legally questionable and can be challenged. Here is the position: 1. Section 17(5) of CGST Act lists specific cases where ITC is blocked. Breakage during processing is NOT specifically listed as a blocked credit. 2. Rule 43 / Rule 42: ITC reversal under these rules applies to inputs used for exempt supplies or non-business purposes — breakage during a business manufacturing/processing activity does not qualify as exempt use. 3. CBIC Clarification: Normal wastage/breakage during manufacturing or processing is treated as part of the production process and ITC on such inputs is not required to be reversed. This is an accepted trade practice. 4. Export Refund Linkage: The officer's argument that refund is only on 'exported goods' is also not the correct basis for ITC reversal. Under Rule 89 of CGST Rules, refund of accumulated ITC for exporters is based on the formula (Turnover of zero-rated supply / Adjusted total turnover) × Net ITC — the breakage material cost is already embedded in the formula and does not need separate reversal. 5. Action: File a reply to the scrutiny notice citing Section 16 (eligibility of ITC), non-applicability of Section 17(5), and challenge the reversal. Quote relevant AAR/court decisions if available. Attach your production records showing breakage is normal and within industry norms. |
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