Whether not getting goods insured makes the manufacturer ineligible for availing service tax credit on outward freight?

PJ/Case Law/2013-14/2101

Case:-LUMAX AUTOMOTIVES SYSTEMS LTD. Vs C.C.E., DELHI-IV

Citation:- 2013 (32) S.T.R. 526 (Tri. - Del.)

Brief facts:- The appellant were manufacturers of automobile parts. The dispute in this case was as to whether during 2006-2007 they would be eligible for Cenvat credit of service tax paid on godown rental and on outward freight for transportation of the finished goods upto the customer’s premises. The appellant had rented a godown outside the factory for storing the inputs as well as the finished goods and availed Cenvat credit of Rs. 22,860/- of service tax paid on godown rent. The Cenvat credit availed in respect of outward freight upto the customer’s premises was Rs. 9,47,550/-. The appellant’s stand had been that all their sales were on FOR destination basis satisfying the criteria prescribed in this regard in the Board’s Circular No. 97/8/2007-S.T., dated 23-8-2007 and, hence, it was the customer’s premises which was the place of removal and, hence, all the services availed upto the place of removal would be eligible for Cenvat credit. The department being of the view that the appellant’s sales were not on FOR destination basis and the customer’s premises cannot be treated as the place of removal, as they do not satisfy the criteria prescribed in this regard in the Board’s Circular dated 23-8-2007, issued a show cause notice dated 5-4-2009 for denying the above-mentioned Cenvat credit, its recovery along with interest and also imposition of penalty. The above show cause notice was adjudicated by the Additional Commissioner vide order-in-original dated 3-2-2010 by which the Additional Commissioner confirmed the above-mentioned Cenvat credit demand invoking extended period under proviso to Section 11A(1), along with interest and beside this, imposed penalty of equal amount on the appellant. On appeal to Commissioner (Appeals), this order of the Additional Commissioner was upheld vide order-in-appeal dated 30-9-2010, against which this appeal had been filed.

Appellant’s contentions:- The learned Counsel for the appellant pleaded that all the sales of the appellant during the period of dispute were on FOR destination basis satisfying the criteria prescribed in this regard under Board Circular dated 23-8-2007 which was clear from the fact that the invoices themselves show that the sales were on FOR destination basis. The delivery was at the customer’s premises and the price includes the freight charges, the appellant had paid excise duty on FOR price which includes freight. He further contented that just because the appellant did not insure the goods during transit and, as such, there were no insurance charges, it could not be inferred that the appellant had not borne the risk of damage to the goods or loss of goods during transit. When customer’s premises was to be treated as the place of removal, not only the outward freight upto the customer’s premises, but also the service of renting of godown would be covered by the definition of input service as the godown had been used for storage of inputs as well as finished goods prior to their sale. According to him in any case the demand was time barred as the show cause notice had been issued after expiry of the normal limitation period and show cause notice did not even invoke the proviso to Section 11A(1) and that in view of the above, the impugned order was not correct.

Respondent’s contentions:- The learned Departmental Representative, defended the impugned order by reiterating the findings of the Commissioner (Appeals). He contended that appellant’s sales were not on FOR destination basis and the customer’s premises could not be treated as the place of removal, as they do not satisfy the criteria prescribed in this regard in the Board’s Circular dated 23-8-2007.

Reasoning of judgment:- After hearing both the sides Hon’ble judge was of the view that the godown had admittedly been rented for storage of raw material as well as finished goods and, as such, the renting of godown would be eligible for Cenvat credit, if it was the customer premises, which was the place of removal. The appellant’s plea was that all their sales during the period of dispute were on FOR destination basis, satisfying the criteria in this regard prescribed and the Board Circular dated 23-8-2007, inasmuch as the freight was integral part of the price of the goods and excise duty had been paid on this price which included the freight.
The criteria for treating sale as FOR destination sale, as prescribed in the Board Circular dated 23-8-2007 is that -
(a)        The ownership of the goods during transit remains with the supplier-manufacturer;
(b)        During transit the risk of loss of goods or damage to the goods is of the supplier-manufacturer; and
(c)        Element of freight upto the customer’s premises is integral part of the price of the goods.
If the above conditions were satisfied, the sales were to be treated as on FOR destination basis, taking place at the customer’s premises and it was the customer’s premises, which would be the place of removal.
In the case concerned, from the findings of the Commissioner (Appeals) in para 6 of the order, it was seen that the department accepted that the appellant had paid Central Excise duty on the FOR destination price i.e. the factory gate price plus freight charges. According to the department the sales were not on FOR destination basis as in the invoices, there was no reference to the insurance charges. In the view of Hon’ble Judge it was just because the appellant did not insure the goods during transit, it cannot be inferred that the risk of loss of goods, or damage to the goods during transit was not of the appellant, when the invoices mentions that the sales were on FOR destination basis and duty had been paid on the price which includes the freight charges. In view of these facts, he was of the view that it was the customer’s premises which had to be treated as the place of removal and the appellant would be eligible for Cenvat credit of the service tax paid on outward freight and as such this Cenvat credit had been wrongly denied.
As regards, the Cenvat credit in respect of godown rental, since this service had been availed prior to removal of the goods inasmuch as the place of removal was the customer’s premises, the appellant would be eligible for Cenvat credit for this service, more so, when this service had also been availed for storage of the raw material. In view of this, it was held that the impugned order was not correct.
In view of the above findings, the impugned order was set aside and the appeal was allowed.

Decision:- Appeal allowed.

Comment:-The analogy drawn from the case is that just because the goods are not insured by the supplier does not violates any criteria of FOR destination as the risk of loss of goods or damage to the goods is of the supplier/manufacturer no matter whether the goods are insured or not. Accordingly, the customer’s premises could be rightly said to be the place of removal and the assessee cannot be denied for availing Cenvat credit of service tax paid on outward freight for transportation of the finished goods upto the customer’s premises.

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PJ/Case Law/2013-14/2101

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