Tender Rejection: Panorama Electronics Faces GST ITC Disallowance

GST Disallowance, Input Tax implications may arise in scenarios where taxpayers, such as Panorama Electronics Pvt. Ltd, are involved in complex supply chains and manufacturing activities, highlighting the need for clarity on what constitutes "manufacturing" for the purpose of availing MSME benefits. The recent ruling by the Calcutta High Court sheds light on this matter, emphasizing the distinction between manufacturing and mere assembly of purchased parts, which has significant implications for businesses claiming Micro, Small, and Medium Enterprises (MSME) benefits.

Key Facts

• The Calcutta High Court ruled that merely assembling purchased parts does not amount to manufacturing for the purpose of availing MSME benefits.
• The writ petition was filed by Panorama Electronics Pvt. Ltd., which had sought relief against the rejection of its bid in a railway tender for video surveillance systems.
• The tender required the supply and installation of IP-based Video Surveillance Systems in LHB coaches, published in September 2025.
• Panorama participated as a system integrator but did not deposit the Earnest Money Deposit (EMD), claiming MSME exemption.
• The authorities rejected the bid on January 16, 2026, stating that Panorama was not a manufacturer but an authorized dealer.
• Relevant precedents cited include Principal Commissioner of Income Tax v. Jeevan Diesels & Electricals (2018) and Candela Engineering Corporation v. Corporation of Trissur (2020).

Statutory Context & Tax Analysis

The Income Tax Act, 1961, and the Goods and Services Tax (GST) Act, 2017, contain provisions related to the taxation of businesses, including those claiming MSME benefits. Section 16 of the GST Act deals with the eligibility and conditions for taking input tax credit, which is crucial for understanding the GST implications of the court’s ruling. The concept of "manufacturing" is key in determining the applicability of MSME benefits, and the court’s decision provides clarity on this aspect. The GST Act defines "manufacture" in relation to goods as the process of producing or fabricating goods, which implies a transformation of inputs into a distinct and new product. The court’s ruling that assembling purchased parts does not constitute manufacturing highlights the importance of understanding the nuances of the GST Act and the Income Tax Act in relation to MSME benefits.

The MSME Act, 2006, provides for the promotion and development of micro, small, and medium enterprises, including the provision of benefits such as exemption from depositing the Earnest Money Deposit (EMD) in tenders. However, the court’s decision suggests that these benefits are not applicable to businesses that merely assemble purchased parts, as they do not meet the definition of "manufacturing" under the relevant statutes. The GST Council’s decisions and notifications, such as those related to the GST rates and input tax credit, also play a crucial role in determining the tax implications of the court’s ruling.

Client Impact & Compliance Procedure

The court’s ruling has significant implications for businesses claiming MSME benefits, particularly those involved in assembly or system integration activities. To avoid disallowance of input tax credit and ensure compliance with the GST Act and the MSME Act, businesses should carefully review their operations and determine whether they meet the definition of "manufacturing" under the relevant statutes. The following steps can be taken:

1. Review Business Operations: Assess the business’s activities to determine whether they constitute "manufacturing" under the GST Act and the MSME Act.
2. Maintain Records: Maintain accurate and detailed records of business operations, including documentation of the production process, to support claims of manufacturing activities.
3. File Necessary Forms: Ensure timely filing of necessary forms, such as GST returns (GSTR-3B and GSTR-1) and MSME registration forms, to avoid penalties and disallowance of input tax credit.
4. Claim Input Tax Credit: Claim input tax credit only on eligible inputs, and ensure that the business meets the conditions specified in Section 16 of the GST Act.
5. Seek Professional Advice: Consult with tax professionals to ensure compliance with the GST Act, the MSME Act, and other relevant statutes, and to address any specific queries or concerns regarding the court’s ruling.

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