Cenvat credit of GTA service used in the outward transport of finished goods sold on FOR basis.

Case:- AARTI STEEL LTD. Versus COMMISSIONER OF CENTRAL EXCISE, LUDHIANA

Citation:-2013 (29) S.T.R. 494(Tri.- Del.)

Brief Facts:-The appellant are engaged in the manufactures of Alloys/Non- Alloys steel ingots / Billets/ Steel wire Rod etc. chargeable to Cenvat Excise Duty under Chapter 72 of the Central Excise Tariff. They avail the Cenvat credit of Central Excise Duty paid on inputs and capital goods and service tax paid on inputs services used in or in relation to the manufacture of their final products. The dispute in this case is as to whether the appellant are eligible for Cenvat credit of service tax paid on GTA service availed for outward transportation of during goods from the factory gate to the customer’s premises. The appellant Cenvat credit of Rs. 11, 17,026/- and Rs. 12,66,789/- respectively, in respect of outward freight for transportation of finished goods from factory gate to the nation basis and it is the customer’s premises which is the “place of removal”. The Department being of the view that GTA service availed for outward transportation for finished goods from the factory gate to customer’s premises is not covered by definition of “input service”, as given in Rule 2(l) to CENVAT credit Rules, 2004, issue two show cause notices for recovery of this credit along with interest and also of regarding the imposition of penalty. These show causes notice were adjudicated by Joint Commissioner/ Additional Commissioner vide orders dated 2-6-2006 & 2-3-2007 by which the CENVAT Credit demands as made by show cause notices were confirmed along with interest and besides this, penalties under Rule 15 of Cenvat credit Rules were also imposed on the appellant. On appeals being filed before the Commissioner (Appeals) against the orders of the joint Commissioner and Additional Commissioner, the CCE (Appeals) by two separate orders- in- appeal dismissed the appeals. The Commissioner (Appeal) in these orders held that in the case whether the transportation of the finished goods is arranged by the manufacturer on the customer’s request, the cost of which of reimbursed by the customer, the customer’s premises cannot be treated as the place of removal. Against these orders of the Commissioner (Appeals), these two appeals have been filed by the appellant.

Appellant Contentions:-The Appellant Contention is that the appellant sales were on FOR destination basis and, therefore, it is the customer's premises which have to be treated as the 'place of removal', that therefore, the transportation up to the customer's premises has to be treated as "transport up to the place of removal" and the same would be eligible for Cenvat credit, that Cenvat credit in respect of outward transportation is also admissible, in view of the judgment of Hon'ble Karnataka High Court in the case of Commissioner Central Excise and Service Tax ETU, Bangalore v. ABB Limited, reported in 2011 (23) S.T.R. 97 (Kar.) and also the judgment of Hon’ble Gujarat High Court in the case of Commissioner of Central Excise & Customs v. Furth Poly Wooven Pvt. Ltd., reported in 2012 (25) S.T.R. 4 (Guj.), that in these judgments, it has been held in clear terms that during the period prior to 1-3-2008, the goods transports service used for transportation of the finished goods from the factory up to the customer's premises would be eligible of Cenvat credit, that the ratio of these judgments of the High Court is squarely applicable to the facts of these cases and that in view of above submissions, the impugned orders-in-appeal passed by the Commissioner (Appeals) are not correct.

Respondent Contentions:-The Learned Respondent Counsel submitted and defended the impugned order by reiterating the findings of the Commissioner (Appeals) and pleaded that in accordance with the Board's Circular No. 97/6/2007-S.T., dated 23-8-2007, the customer's premises can be treated as 'place of removal' only when the sales are on FOR destination basis and for which the property in goods during transit must remain with the manufacturer-seller and the risk of loss of goods or damage to the goods during transit is of the manufacturer seller and the transportation cost is integral part of the value of the goods on which the duty has been paid, that relying upon this Circular of Board, Hon'ble Punjab & Haryana High Court in the case of Ambuja Cement Limited v. Union of India, reported in 2009 (236) E.L.T. 431 (P & H) = 2009 (14) S.T.R. 3 (P & H), held that Cenvat credit of service tax paid on outward freight up to the buyer's premises would be admissible when the sales are on FOR destination satisfying the criteria prescribed for the same in the Board's Circular 23-8-2007, that the above judgment of Hon'ble Punjab & Haryana High Court has been relied upon by Hon'ble Karnataka High Court in the case of CCE, Bangalore v. ABB Ltd. (supra), that in view of this the Cenvat credit of service tax paid on CFA service availed for outward transportation of finished goods from the factory gate to the customer's premises would be admissible only when the sales are on FOR basis in term of the criteria prescribed in the above mentioned Circular of the Board, that in these cases there is no evidence that the criteria for the sales being on FOR destination basis, as prescribed on the Board's Circular dated 23-8-2007 has been satisfied and that in view of this, there is no infirmity in the impugned orders.

Reasoning of Judgment:-We have considered the submissions from both the sides and perused the records. The main submission of the appellant is that their sales were on FOR destination basis and, therefore, it is the customer's premises which would be the place of removal and since during the period of dispute, transportation up to the place of removal was covered by the definition of 'inputs service', they would be entitled for the Cenvat credit of service tax paid on the GTA service availed for outward transportation of the finished goods up to the customer's premises. Since in these cases, the duty on the finished goods is at an ad valorem rate, the definition of 'place of removal' as given in Section 4 of the Central Excise Act, 1944, would be applicable and accordingly if the sales, of the goods take place at the customer's premises i.e. the sales are on FOR destination basis, the customer's premises would be the "place of removal", and in that case, the transportation of the finished goods upto customer's premises would be covered by the definition of 'input service'.

The Board's Circular No. 97/6/2007, dated 23-8-2007 prescribed the following three criteria for treating a sale transaction as on FOR destination basis:

(I) During the transit, the ownership of goods remains with the manufacturer-seller till the delivery of the goods in good condition to the buyer.

(II) During transit, the risk of the loss of goods or damage to the goods is of the manufacturer-seller.

(III) The transport charges up to the customer's premises are integral part of the value of the goods that is the value on which excise duty has been paid.

According to the above mentioned Circular of the Board if the sales satisfy the above criteria the same are to be treated as on FOR destination basis and in that case the customer's premises would be the "place of removal" and Cenvat credit of service tax paid on the GTA services availed for transit up to the customer's premises would be admissible.

Hon’ble Punjab & Haryana High Court in case of Ambuja Cement Ltd. v. Union of India (supra) relying upon the above circular of the Board has held that Cenvat credit of service tax paid on GTA services availed for outward transportation of the finished goods up to the buyer's premises would be admissible if the sales are on FOR destination basis, in term of the criteria prescribed for this, in the Board's Circular dated 23-8-2007. Though Hon'ble Karnataka High Court in its judgment in the case of CCE, Bangalore v. ABB Ltd. reported in 2011 (23) S.T.R. 97 (Kar.) cited by the learned counsel for the appellant, which is in respect of Revenue's appeal against Tribunal Larger Bench's judgment reported in 2009 (92) RLT 665 (CESTAT-LB) = 2009 (15) S.T.R. 23 (Tri.-LB). has held that Cenvat credit of service tax paid on GTA service availed for outward transportation of finished goods up to the customer's premises is admissible, a perusal of the Larger Bench's judgment and the judgment of Hon'ble Karnataka High Court would show that :-

(a) While the Larger Bench judgment had held that :-

(i) GTA service availed for outward transportation of finished goods from factory/depot to the customer's premises is also covered by term "activities relating to business" in the definition of "input service"; and

(ii)The Cenvat credit in respect of GTA service availed for outward transportation of finished goods would be admissible even if the value thereof is not part of the value of finished goods subjected to excise duty, as the interpretation of the expression 'input service' cannot fluctuate with the change in the definition of "value" in Section 4 of the Central Excise Act; none of the above findings have been approved by Hon'ble Karnataka High Court.

In para 31 of the judgment Hon'ble High Court has specifically held that expression - "activities relating to business" in the inclusive part of the definition of input service does not cover, outward transportation from the factory. In this judgment, Hon'ble High Court in Para 23 of the judgment after framing the question "The question is up to what stage after manufacturing of the product, the "service" rendered in transporting the finished goods from the place of removal up to the place of delivery, constitutes "input service" as defined under the Cenvat Credit Rules, 2004, has -
(in Para 29 of the judgment held that when the sales are on FOR destination basis, satisfying the criteria prescribed in this regard in the Board's Circular dated 23-8-2007, the transportation from the factory to the customer's premises would fall within the phrase -
"Clearance of the final products from the place of removal" and, therefore, the assessee would be entitled to Cenvat Credit in respect of the same; and

(b)in Para 30 of the judgment, after observing that since the definition of 'input service', contains both the words - 'means' and "includes", and not "means and includes", the portion of the definition to which the words "means" applies has to be construed restrictively, as it is exhaustive and the inclusive portion of the definition has to be construed liberally, has held that the inclusive portion of the definition prescribes an outer limit for outward transportation which is up to the "place of removal".

Thus, the ratio of the judgment of Hon'ble Karnataka High Court in the case of CCE v. ABB Ltd., (supra), is - that while the expression "Service in relation to clearance of final products from the place of removal" in the 'main definition, to which the word "means" applies includes the transportation of final products from the factory, this expression has to be given a restrictive meaning and the outer limit of the meaning of this expression is outward transportation up to the place of removal.

A corollary to this would be that when the sale of the goods chargeable to duty at an ad valorem rate on value determined under section 4, is on FOR destination basis, the customer's premises would be the 'place of removal' and in that case, GTA service availed for transportation of the finished goods up to the customer's premises would be the input service' eligible for Cenvat credit. Thus, the ratio of the judgment of Hon'ble Karnataka High Court in the case of C.C.E. v. ABB Ltd., (Supra), is the same as the ratio of Hon'ble Punjab & Haryana Court in the case of Gujarat Ambuja Cement (supra), and the ratio of both of judgments is that the Cenvat credit of services tax on GTA service availed for outward transportation of finished goods up to the customer's premises would be admissible only when the sales are on FOR destination basis and duty at ad valorem rate has been paid on the FOR destination price. In this regard, observations of the Hon'ble Karnataka High Court in Para 15 & 16 of its judgment in case of ABB Ltd. (supra), are worth noting –

"However, the opening words of sub-heading (3) read as under :-"For the purpose of this, section."

Therefore, though the expression "place of removal" is defined under section 4(3) of the Central Excise Act, 1944, its application is to be confined as is clear from the opening word of sub-section (3) for the purpose of section 4 only".

Thus for the purpose of Rule 2(1) of the\ Cenvat Credit Rules, the customer's/buyer's premises are to be treated as the 'place of removal' only when -

(a) sales are on FOR destination basis in term of the criteria prescribed in this regard in Board's Circular dated 23-8-2007; and

(b) the goods attract duty at ad valorem rate on value determined under Section 4.

In the impugned orders neither any findings have been given on the appellant's plea that their sales are on FOR destination basis nor the Board's Circular No. 97/6/2007-S.T., dated 23-8-2007 and the judgments of Hon'ble Punjab & Haryana High Court in case of Ambuja Cement Ltd. (supra), which is the jurisdictional High Court have been discussed. The impugned orders, therefore, are set aside and these matters are remanded to CCE (Appeals) for de novo decision. Appeal disposed off.

Decision:- Appeal allowed by way of remand.

Comment:-The analogy drawn from this case is that credit of service tax paid on GTA service with respect to outward freight is admissible if the conditions specified in the Board’s Circular are satisfied i.e., ownership and risk remains with the seller till the goods are delivered to the customer premises and the freight forms part of the assessable value for the purpose of excise duty.

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PJ/Case Laws/2012-13/1519

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