Satisfaction of 3 conditions necessary for claiming outward freight credit.

Case:-LAFARGE INDIA LTD Vs COMMISSIONER OF CENTRAL EXCISE, RAIPUR

Citation:-2014-TIOL-1720-HC-CHHATTISGARH-CX

Brief Facts:-This tax appeal is against the order dated 04.01.2011 of the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (the Tribunal) partly upholding the order of the Adjudicating Officer (the AO) so far as it reverses the Cenvat credit of service tax paid on Goods Transport Agency Service (the GTA-service) by Lafarge India Limited (the Assessee) for the period from January 2005 to October, 2007.

The appeal was admitted on 10.08.2011 on two questions however, the main question involved in this appeal is as follows:

'In case of sale at the destination, is the assessee entitled to claim Cenvat credit of the service tax paid on the GTA-service even though it was not integral part of the price of goods.'

The Assessee manufactures cement and clinker and it supplied the goods to different entities on freight on road (FOR) basis during the relevant period. According to the Assessee, it continued to be owner of the goods till delivery and the sale of the goods took place at the destination. The amount paid for the GTA-service was not included in the price of the goods; and it was not integral part of the price of the goods. It was separately paid but the Assessee claimed Cenvat credit on the service tax paid.

A show cause notice dated 11.07.2008 was issued to the Assessee, asking it to show cause as to why the Cenvat credit claimed on the service tax on the GTA-service be not reversed. The Assessee filed its reply on 04.11.2008. However, the AO, by his order dated 19.02.2009, reversed the Cenvat credit to the extent of Rs. 5,57,224.00, charged interest on the amount, and imposed penalty of Rs. 10,000.00.

Aggrieved by the aforesaid order, the Assessee filed an appeal before the Tribunal. It was partly allowed on 04.01.2011. The reversal of the Cenvat credit alongwith interest charged was upheld however, the penalty was set aside. Hence, the present appeal.This appeal was admitted on 10.08.2011 on the following two questions of law:

(1) Whether in the facts and circumstances of the case the appellant was entitled to claim Cenvat Credit of the service tax paid on Goods Transport Agency service for delivering the goods to the customers' premises on a true & proper construction of Cenvat Credit Rules, 2004 and the Circular No. 97/8/2007-ST dated 23.08.2007?

(2) Whether in the facts and circumstances of the case the learned Tribunal committed error in law in relying the case of Gujarat Ambuja Cements which formed the basis of the order-in-original dated 19th February 2009 and the same has been set-aside by the Hon'ble Punjab & Haryana High Court in the case of Ambuja Cements Ltd. reported in (236 ELT 431)?

Nevertheless, the counsel for the parties agree that the first question is the only one question involved in the case and it is the same as we have framed in opening paragraph of the judgement, though it is differently worded.

Appellant’s Contention:-The counsel for the Assessee relies on some decisions (see below) and the circular number 97/8/2007-ST dated 23.08.2007 (the Circular) and submits that:

- The goods were booked on freight on road (FOR) basis and the ownership of the Assessee continued till the place of destination;

- In the facts and circumstances of the case, the GTA-service taken by the Assessee for transporting the goods upto destination is, an input service; and

- The Assessee is entitled to claim cenvat credit for the same.

Respondent’s Contention:-The counsel for the Central Excise Department (the Department) submits that:

(i) The goods were manufactured in the Assessee's factory. They were transported by the different GTAs to their destination. It is an output service and the Cenvat credit cannot be taken for the same;

(ii) In case ownership over the goods continued with the Assessee till destination or it is an input service then the cenvat credit can only be claimed if the value of the service was added in the value of the goods or it was integral part of the price of the goods;

(iii) ln the present case, value of the GTA-service was not integral part of the price of the goods; and the cenvat credit cannot be claimed.

Reasoning of Judgment:-The Central Excise Rules, 1944 (the Excise Rules) were framed under the Central Excise Act, 1944 (the Act). A scheme was introduced on 01.03.1986 under Rule 57A to 57J by which the MODVAT credit for the excise duty already paid on the input could be availed.

The Supreme Court in Ichalkaranji Machine Centre Pvt. Ltd. v. Collector of Central Excise, Pune {2004 (174) ELT 417 (SC) = 2004-TIOL-102-SC-CX-LB}has explained the principle behindModvat credit by observing,'Modvat is basically a duty collecting procedure, which aims at allowing relief to a manufacture on the duty element borne by him in respect of the inputs used by him. It... entitled a manufacturer to take instant credit of the central excise duty paid on the inputs used by him in the manufacture of the finished product, provided that the input and the finished product were excisable commodities and fell under any of the specified chapters in the tariff schedule.

Section 3 of the Act is the charging section. It is titled as 'Duties specified in the Schedule to the Central Excise Tariff Act, 1985 to be levied'. In the year 2000, the Parliament provided a better and more comprehensive scheme renaming 'modvat credit to 'cenvat credit'. Section3 was amended and duty of excise was called as Central Value Added Tax or the Cenvat under section 3(1)(a) of the Act.

The Central Government initially framed the Cenvat Credit Rules in the year 2002 and thereafter, they were replaced by the Cenvat Credit Rules 2004 (the Cenvat-Rules). They follow the same principle as the MODVAT credit but are better and improved version of the two.

Input Service

Rule 2(l) of the Cenvat-Rules (see Appendix-I) defines the word 'input service'. For the relevant period, it defined the input service to mean, any service used by manufacturer in relation to the manufacture of final products and clearance of final products from the place of removal.

Rule 2(t) of the Cenvat-Rules provides that the words and expressions used in these rules and not defined, but defined in the Excise Act or the Finance Act shall have the meaning assigned to them in those Acts.

Rule 3 of the Cenvat-Rules (see Appendix-ll) explains, when a manufacturer can claim cenvat credit. Rule 3(1)(ix) provides that cenvat credit can be taken for the service tax leviable under section 66 of the Finance Act, which is paid on any input service received by the manufacturer of final product or by the provider of output service.

Place of Removal

Section 4 of the Act is titled as 'Valuation of excisable goods for purpose of charging of duty of excise'. Though, section 4(3)(c) defines the word 'place of removal' for purpose of that section but in absence of its meaning for other sections, it would be applicable unless it is otherwise provided.
In section 4(3)(c), 'Place of removal (see Appendix-III) means-... a depot, premises, ... r any other place ... from where the excisable goods are to be sold after their clearance from the factory.'

If under the terms of the contract, the sale takes place at the destination then that place may be the place of removal and service tax paid on the GTA-service for transporting the goods upto destination might be available for taking cenvat credit.

Not Entitled

Nevertheless, the fundamental principle of cenvat credit is to avoid double taxation i.e. cenvat credit may be taken only of those inputs, whose price was added in the price of the goods or was included towards the price of the goods and not otherwise. It is also clear from the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (the Valuation Rules).

Rule 5 of the Valuation Rules (see Appendix-IV) provides that the value of the excisable goods shall be deemed to be transaction value excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods but, explanation-2 to Rule 5 of the Valuation Rules provides that in case of the cost of the transportation from the factory to the place of removal, where the factory is not the place of removal, shall not be excluded for the purposes of determining the value of the excisable goods.

In the present case, the Assessee has not treated the GTA-services of transporting goods to the destination as a part of the input service. In case it had so treated then it should have added this value in the price of the goods or in the valuation for calculating duty.

The Assessee has not included the amount paid for the GTA-service in the price of the goods. It has not chosen it to be a part of the price and as such, the Assessee was not entitled to claim Cenvat credit for the same. There is no illegality in the order of the Tribunal. This is also clear from the Circular.

Not Entitled Under The Circular As Well

The relevant part of this Circular is Appendix-V. It explains that the eligibility to claim credit of the service tax paid on the transportation during removal of excisable goods depends upon the place of removal and the determination of the place of removal does not raise any problem in case of factory gate sale but the problem arises, when the sale takes place at the destination point because of the contract between the parties.

In case the sale takes place at the destination, then the Circular envisages three conditions to be satisfied before cenvat credit can be claimed on the service tax for the GTA service for transporting the goods to the destination:

- 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;

- The seller bore the risk of loss of or damage to the goods during transit to the destination; and

-The freight charges were an integral part of the price of goods.

The decisions cited by the counsel for the Assessee show that so far as transportation of the goods on FOR basis is concerned, the ownership of the goods continues upto the place of destination and this would be treated as an input service. So is the case here and the first two conditions were satisfied. But question is, whether the third condition was satisfied or not.

The third condition stipulates that the service tax paid on the transportation up to such place of sale would be admissible only if the assessee establishes that the freight charges were integral part of the price of the goods transported.

In the present case, the Tribunal has recorded a finding that the freight charges were not the integral part of the price of the goods so the Circular does not support the submissions of the counsel for the Assessee. Our conclusions are as follows:

(a) In case of sale at the place of destination, an assessee is only entitled to claim cenvat credit on service tax paid for the Goods Transportation Agency service provided amount paid was integral part of the price of the" goods;

(b) In this case, the amount paid for the GTA service was not integral part of the price of the goods; and

(c) The Assessee was not entitled to claim cenvat credit of the service tax paid;

(d) The question is answered in favour of the Department and against the Assessee.

The tax case has no merit. It is dismissed.

Sd/-
Yatindra Singh
Chief Justice
Sd/-
Prashant Kumar Mishra
Judge

Appendix-I

The relevant part of rule 2(l) of the Cenvat Credit Rules, 2004, applicable for the relevant period is as follows:

(xi) Cenvat Credit Rules, 2004

RULE 2. Definitions-In these rules, unless the context otherwise requires,...

(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 from the place of removal,

and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Appendix-ll

The relevant part of rule 3 of the Cenvat Credit Rules, 2004 is as follows:

Rule 3. CENVAT Credit.-(1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of - ...

(ix) the service tax leviable under section 66 of the Finance Act; paid on - ...

any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86-Central Excise, dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004.

Explanation - For the removal of doubts it is clarified that the manufacturer of the final products and the provider of output service shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the Customs Tariff Act.

Appendix-III

The relevant part of section 4(3)(c) of the Central Excise Act, 1944 is as follows:...

4. Valuation of excisable goods for purpose of charging of duty of excise.-(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall-
(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of goods are not related and the price is the sole consideration for the sale, be the transaction value;
...

(3) For the purposes of this section, -

(c) "place of removal " means -

[(iii) 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, factory;]"
from where such goods are removed;

...

Appendix-IV

The relevant part of rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 is as follows:

RULE 5. Where any excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except the circumstances in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods shall be deemed to be the transaction value, excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods.

Explanation 1. - "Cost of transportation" includes-

(i) the actual cost of transportation; and

(ii) in case where freight is averaged, the cost of transportation calculated in accordance with generally accepted principles of costing.

Explanation 2. - For removal of doubts, it is clarified that the cost of transportation from the factory to the place of removal, where the factory is not the place of removal, shall not be excluded for the purposes of determining the value of the excisable goods.

Appendix-V

The relevant part of Circular Number 97/8/2007-ST is as under:

It is, therefore, clear that for a manufacturer /consignor, the eligibility to avail credit of the service tax paid on the transportation during removal of excisable goods would depend upon the place of removal as per the definition. In case of a factory gate sale, sale from a non-duty paid warehouse, or from a duty paid depot (from where the excisable goods are sold, after their clearance from the factory), the determination of the 'place of removal' does not pose much problem. However, there may be situations where the manufacturer /consignor may claim that the sale has taken place at the destination point because in terms of the sale contract / agreement (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 goods. In such cases, the credit of the service tax paid on the transportation up to such place of sale would be admissible if it can be established by the claimant of such credit that the sale and the transfer of property in goods (in terms of the definition as under section 2 of the Central Excise Act, 1944 as also in terms of the provisions under the Sale of Goods Act, 1930) occurred at the said place.

Decision:- Appeal dismissed.

Comment:- The essence of the case is that as the assessee has not included the amount paid for GTA service in the price of goods, it has not chosen it to be a part of the price and as such, the assessee was not entitled to claim Cenvat credit. In case of sale at the place of destination, an assessee is only entitled to claim cenvat credit on service tax paid for the Goods Transportation Agency service provided amount paid was integral part of the price of the goods. In the present case, the Tribunal has recorded a finding that the freight charges were not the integral part of the price of the goods and so the credit was held as inadmissible.

Prepared by:- Monika Tak

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