We are engaged in Raw Cotton Ginning Pressing and Cotton Seed oil mill factory. We buy Raw Cotton From farmers and are required to pay RCM. The output Products are cotton bales - Taxable @5% and Cotton Seed (i.e by product) @5%. After crushing the seed output products are oil taxable @5% and Cotton seed oil cake ( cattle feed) - Tax free. Now the question is, are we people liable to do reversal of RCM ITC . People are having different opinion. It is said that we are not liable to do reversal. Please clarify this matter Raw Cotton Ginning Pressing and Cotton Seed oil mill factory are under same registration.

Reply—Under Rule 42(1) the input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the  manner prescribed. 

In our opinion, taxpayer is required to reverse the ITC on inputs which are being used commonly in taxable and tax free goods. RCM ITC is also to be treated in the same way.