Looking Beyond the Things: Outward Freight

Looking Beyond the Things: Outward Freight

Article Prepared By:

CA Pradeep Jain and

Siddharth Rutiya

Transport of Goods by Road services came into effect from 01.01.2005 and lead to great controversies among the industries as a whole. This service was introduced to include the Transportation services under the scope of Service tax levy. After the inclusion of such service under tax net and simultaneously, looking to the provisions of CENVAT credit Rules, 2004 litigations arose on many subjects including on the subject as to whether CENVAT of Outward freight will be allowed to the manufacture or not ? There are lot of judgements available on this issue. The larger bench has decided the issue in case of ABB Limited V. Commissioner of Central Excise and Service Tax, Bangalore [2009] 21 STT 77 (Bang. CESTAT) (LB)]. But the stay against the same has been awarded by Karnataka High Court. But Punjab and Haryana High Court has allowed the credit in case of Ambuja Cement Ltd. V. Union of India & Ors. [2009 (236) ELT 0431 (P&H)] following the Board circular no 97/6/2007-ST Dtd. 23.08.2007.

A lot has been written on this issue. The dispute is still not over. We are not writing on this issue in this article. We are seeing this whole issue from another angle. One of our clients approached us and told that he would not like to go into litigation and on the other side he does not want to lose this benefit. We should plan the things in such a way we should be benefited from the whole situation. This has inspired us to write this article.

Legal Provisions

Rule 2(l) of CENVAT Credit Rules, 2004 provides for the definition of “Input Service” as any service used by manufacturer and includes outward transportation upto the place of removal. The relevant portion of Section 2(l) is produced as under: -

(l) "input service" means any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal and includes ........... outward transportation upto the place of removal;

Section 4(3)(c) of Central Excise Act, 1944 provides for the definition of “Place of Removal” to mean either of the following: -

1. A factory or any other place or premises of production or manufacture of excisable goods; or

2. A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty; from where such goods are removed; or

3. A depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,

Hence a combined reading of the above two definitions makes the scope of CENVAT Credit narrower as regards to the CENVAT on Outward transportation services for a manufacturer, where he pays the service tax on outward transportation beyond the place of removal. This escorts to the path towards the tax planning in such a way that the cost to either parties i.e. manufacturer as well as the buyer of the final product, is minimized.

Various prospects and their plannings: -

We in this article have bifurcated the overall situation into two broad categories: -

I.) When CENVAT Credit is availed by the buyer of the Goods; and

II.) When CENVAT Credit is not availed by the buyer of the Goods.

I.) When CENVAT Credit is availed by the buyer of the Goods: -

In this situation we have categorized those buyers who after purchasing the goods from the principal manufacturer shall avail the CENVAT Credit. The various possible circumstances and possibilities of tax planning under them are as under: -

(A) When the Outward Freight is to be paid by the Buyer of the Goods: -

In this circumstance the liability to pay the Outward Freight is on the buyer of the goods as per the sale agreement or otherwise. As Rule 2(1)(d)(v) of Service Tax Rules, 1944 provides that the person liable for paying service tax is the person who pays or is liable to pay freight, then in such a circumstance the buyer of the goods will be pay the freight to the transporter as well as service tax. He will be allowed to avail the CENVAT of service tax paid on such Transportation services as these will account for inward transportation services for him. Relevant portion of Rule 2(1)(d)(v) of Service Tax Rules, 1944 is produced as under: -

“(v) in relation to taxable service provided by a goods transport agency, where the consignor or consignee of goods is,-

(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);

(b) any company formed or registered under the Companies Act, 1956 (1 of 1956);

(c) any corporation established by or under any law;

(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India;

(e) any co-operative society established by or under any law;

(f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder; or

(g) any body corporate established, or a partnership firm registered, by or under any law,

any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage;”

But this is most ideal situation and everyone knows it. The issue of outward freight arises only when the supplier of goods makes the payment to transport agency and also the service tax on the same.

(B) When the Outward Freight is charged, in the Excise Invoice, from the Buyer: -

In this circumstance the supplier manufacturer shall pay the outward freight and service tax on the outward freight. He should charge the same in the Excise Invoice from his buyer along with the service tax. In this option the tax burden on the manufacturer shall reduce as he will be charging the same from the buyer and there will simultaneously be no cost effect to the buyer also, as he would avail the CENVAT of such service tax on the basis of said Excise Invoice. The Excise invoice under Rule 11 of Central Excise Rules is a valid duty paying document as per Rule 9 of Cenvat Credit Rules.

However, the caution to be taken in this case is that the manufacturer should mention the Freight and Service tax thereon separately, in such a way that this is shown separately. For example the face of the invoice should contain as follows: -

Assessable value of Goods XX

Excise duty @ __ % X

Education Cess @ 2% X

Sec. & Higher Education Cess @ 1% X XX

___

Sub Total XX

Freight Charges XX

Service tax @ __% X

Education Cess @ 2% X

Sec. & Higher Education Cess @ 1% X XX

Grand Total XX

(C) When the Outward Freight is paid by the Manufacturer as an agent of Buyer: -

This is one more option where the service tax liability shifts to buyer of goods. In this circumstance the manufacturer shall pay the Freight amount of the outward freight as an agent of Buyer. For this purpose, he should have an agreement with the buyer that he is paying the freight to the transporter as an agent of buyer. The goods transport agency should write clearly in his consignment note that the liability to pay service tax is on consignee of the goods. Following this situation, although the freight shall be paid by the Supplier Manufacturer but the liability to pay service tax thereon shall be conferred upon the Buyer as per Rule 2(1) (d) (v) of Service Tax Rules, 1944. This is because Rule 2(1) (d) (v) provides that the liability to pay service tax is on “any person who pays or is liable to pay freight either himself or through his agent for the transportation”.

This is also one of the best methods wherein the liability to pay service tax is conferred on the buyer but the transportation charges are paid by the manufacturer himself. Now, as the buyer is operating under Cenvat Credit, he will get the credit of service tax paid on the basis of GAR-7 challan which is a specified document for taking credit.

II.) When CENVAT Credit is not availed by the buyer of the Goods: -

In this situation we have categorized those buyers who after purchasing the goods from the supplier manufacturer are not availing the CENVAT Credit because of varied reasons, including either the buyer is a SSI unit, or is covered under any area based exemption, or manufactures such goods which are totally exempt etc. The various possible circumstances and possibilities of tax planning under this category are as under: -

(A) When Outward Freight is charged in the Invoice and Excise duty is collected on it: -

As we know that the buyer of the goods is not availing CENVAT credit then we have an option wherein we can charge the freight in the Invoice and collect the duty of excise on the aggregate value including such freight. However, following this option the manufacturer shall have to concurrently fulfil three conditions in terms of the sale contract /agreement as per Circular no. 97/08/2007- ST, dt. 23/08/2007, which has also been upheld in the case of Ambuja Cement Ltd. by Punjab and Haryana High Court [2009 (14) S.T.R. 3 (P & H)], as under: -

(i) the ownership of goods and the property in the goods remained with the seller of the goods till the delivery of the goods in acceptable condition to the purchaser at his door step;

(ii) the seller bore the risk of loss of or damage to the goods during transit to the destination; and

(iii) the freight charges were an integral part of the price of the goods.

Under this situation the cost to the buyer will increase by the Excise duty amount paid on the Freight amount but consecutively the cost of service tax paid on the Freight will be avoided as it will be availed as CENVAT Credit by the manufacturer. But it is prone to litigation. We have come across a situation where the department has taken the help of general terms and conditions printed on invoice to disallow the credit. The condition written was “the liability of supplier of goods ceases when the goods are delivered to transporter”. In actual, all the damages and shortfall in goods were borne by the buyer only. But the department said that the general terms and conditions printed on invoice are clear and going against the board circular. Thus, this situation is prone to litigation and department can find ways to disallow the credit.

(B) When Service tax on Outward Freight is paid and borne by Manufacturer himself: -

Under this category the Outward Freight will be paid by the manufacturer and hence the service tax thereon shall also be paid by the manufacturer himself. This will lead to an overall cost burden of service tax paid on such freight as the manufacturer will not be able to avail the CENVAT Credit.

The excise duty is payable on transaction value defined under Section 4 of Central Excise Act. If the delivery of goods is at a place other than depot then the actual or average cost of transportation is not includible in transaction value. Now, to get the benefit, the outward transport charges should not be included in the transaction value of excisable goods. Thus, this is suggested that duty should be paid on sale value of goods excluding the transportation charges. These charges are shown in the invoice after charging Cenvat duty. As such, the excise duty will not be paid on the freight component.

Thus under this second situation where the buyer is not availing the CENVAT Credit the best option is the one wherein the Service tax on Outward Freight is paid and borne by Manufacturer himself as the tax burden on Freight is only 2.5% of Freight amount and in general the excise duty liability is around 8 %. Henceforth going for option B in this category the manufacturer will save around 5.5% of tax amount, which will reduce the cost to the buyer as well.

We have applied our mind and tried to do the tax planning on service tax liability on outward freight. We have tried to analysis the issue of cenvat credit on outward freight from different angle. We hope that this will be definitely help the manufacturers to take the benefit without going into litigation. But we are sure that the other options will also be available. Hence, we seek the comments from other authors also.

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Looking Beyond the Things: Outward Freight

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