Availability of credit on Outward transportation of goods

PJ/Case Study/2010-11/26

Case Study

Prepared By:

Sukhvinder Kaur LLB [FYIC]

And CA Rajani Thanvi

Introduction:

Because of the intrinsic ambiguity in the definition of Input service the Cenvat Credit for Service Tax paid on Goods Transport Service has always been the matter of discussion and litigation. Whether credit is allowable on the above mentioned services? The answer of this question has been varied as the interpretation of courts changed with the notifications and circulars. Under the Cenvat Credit Rules, 2004 the services provided in or in relation to manufacture of final products and clearances of final products upto the place of removal have been defined as input service. In the inclusive part of the definition services have been mentioned which are provided beyond the place of removal. The Outward transportation service upto the place of removal has been provided to be an input service. Generally, the place of removal is the gate of the factory premises. However, in case the place of removal is not the factory gate of the manufacturer but is the door step of the buyer, whether credit of service tax paid on the said outward transportation service will be available and whether such service provided beyond the factory gate will be input service? These were the issues raised in the case under study.

Relevant Legal Provisions:

Rule 2 (l) of the Cenvat Credit Rules, 2004: -

(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 services used in relation to setting up, modernization, 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;

Para 8.2 of Circular No. 97/8/2007-ST dated 23.08.07: -

8.2 In this connection, the phrase ‘place of removal’ needs determination taking into account the facts of an individual case and the applicable provisions. The phrase ‘place of removal’ has not been defined in CENVAT Credit Rules. In terms of sub-rule (t) of rule 2 of the said rules, if any words or expressions are used in the CENVAT Credit Rules, 2004 and are not defined therein but are defined in the Central Excise Act, 1944 or the Finance Act, 1994, they shall have the same meaning for the CENVAT Credit Rules as assigned to them in those Acts. The phrase ‘place of removal’ is defined under section 4 of the Central Excise Act, 1944. It states that,-

“place of removal” means-

(i) a factory or any other place or premises of production or manufacture of the excisable goods ;

(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be stored without payment of duty ;

(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 the factory; from where such goods are removed.”

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.

M/s Iscon Surgicals v/s Deputy Commissioner, Jodhpur

[Order-in-Appeal No. 309(CB)CE/JPR-II/2010, dated 04.08.2010]

Brief Facts:

- Appellant is engaged in the manufacture of Disposable Syringe/needles falling under heading 901800. Appellant has availed cenvat credit on outward transportation of goods (cargo services) from the factory gate to buyer’s premises during the period of 2005-06, 2006-07 & 2007-2008.

- Department issued show cause notice denying the credit taken on outward transportation and imposing penalty.

- The Adjudicating Authority disallowed the credit on the ground that the place of removal was factory gate. Recovery of cenvat credit taken under Rule 14 of the CCR, 2004 readwith proviso to Section 11A (1) and 11AB of the CEA, 1944 was ordered. Equal penalty was imposed and interest was demanded under Rule 15(4) of CCR, 2004 r/w Section 11AC of CEA, 1944.

- Against this order, the appellant filed appeal before the Commissioner (Appeal).

Appellant’s Contentions:

¨ Appellant submitted that the credit on outward freight cannot be denied simply by contending that the said service cannot be covered under the definition of input services. Inclusion of services viz. sales promotion, advertisement and the like in the input services even if these have no relation to manufacture indicates the intention of the government to provide maximum benefit to the assessee. Inclusion of the said services like that of sales promotion, advertisement etc in the definition of input services; which have no direct correlation with the manufacture makes it further clear that there is no concept of including charges incurred up to the factory gate as it is there in Excise law, therefore they have rightfully taken the credit of Service Tax paid on aforesaid services.

¨ Appellant submitted that the sale and transfer of property in goods occurred at the door step of the purchaser in terms of Board Circular No. 97/8/2007-ST dated 23.08.07. Appellant submitted sample invoices which indicated that the purchaser has made payment only in respect of such goods that were received by the purchaser in acceptable condition and the loss of goods in transit was borne by the appellant himself. All the risk associated with the transportation of goods to the purchaser’s place was that of the appellant. The appellant had insured the goods which clearly indicate that the sale would complete only on accepting the goods by the purchaser.

¨ Appellant had also furnished the copy of agreement with the purchaser in which it was clearly mentioned that the appellant would provide free delivery to the purchaser thereby meaning that the risk and property of the goods till they reach to the buyer’s place in the acceptable condition remains with the appellant.

¨ The appellant submitted that in the impugned order it was wrongly held that the terms and conditions contained in the invoices showed that the place of removal is factory gate therefore post removal services cannot be made admissible as per Board Circular No. 97/8/2007-ST dated 23.08.07. It was submitted that terms and conditions contained in the invoices were standard conditions which were printed on all of their sales invoices and so these conditions should not have been taken as the sole basis for denying the credit on outward freight.

¨ It was submitted that the outward freight should not be considered as post removal expenses because the property in goods is transferred at the buyer’s place. The transportation charges are integral part of their sale price and are inclusive in it i.e. duty has been paid on the total assessable value including freight and that the said freight has not been recovered from the purchaser in any manner which can be verified from the account statement of the appellant.

¨ It was submitted that from their Account statement it was clear that no freight amount has been recovered from the purchaser in any manner. Moreover, there are instances that have been highlighted in the documents submitted whereby the purchaser has even deducted petty amount paid to the transporter in any respect by him from the amount payable to the appellant.

¨ It was submitted that they were fulfilling all the conditions prescribed in Board Circular and therefore the same was squarely applicable to them. Merely mentioning of standard conditions cannot nullify the fact that the liability of the goods was on the appellants till the door step of buyer and therefore, the outward transportation charges incurred by them are to be treated as input service availed by them and therefore, Cenvat credit is admissible to them.

¨ Appellant further submitted that appellant had not appointed the transporter as his agent but the appellant had only acted on behalf of the buyer and goods were handed over to the transporter for onward transmission to the buyer. The property in goods has been transferred at the buyer’s place and not at the factory gate of the appellant. When the appellant is receiving payment in respect of only those goods that have reached the purchaser’s place in acceptable condition, then how can the contention that property in goods has taken place at the factory gate of the appellant stand correct. This clearly indicates that the loss in transit is borne by the appellant himself and that actual place of removal of goods is that at the buyer’s place and hence the credit of service tax on such transportation charges cannot be said to be post removal expenses.

¨ Appellant further contended that the property was transferred at the customer’s place. The rate contract clearly mentioning ‘free delivery at the consignee’s place’ was already submitted. It was submitted that it is a very well established fact that contract between the parties is the strongest evidence to prove the terms and conditions of the sale. When the contract specifying free delivery to be made at the purchaser’s place is being submitted then there remains no scope for ambiguity as regards at what stage ownership of goods is being transferred.

¨ Further, it was submitted that in the impugned order it was held that for the exported goods the factory gate clearances are to be treated as transaction value and accordingly factory gate is required to be treated as place of removal. Therefore the Cenvat credit of service tax on outward transport of goods and other charges beyond the factory gate are not admissible as the same did not qualify in the definition of input services. In this regard, the appellant submitted that the goods under question are not exported goods and if it all it is presumed for a while that such goods are exported goods, in that case also transaction value shall be deemed to be FOB value which includes expenses from factory till the port and so in that case also outward freight would be admissible for credit purposes.

¨ With regard to imposition of penalty on the ground that the appellant had deliberately suppressed the facts with intend to evade payment of duty on the basis of judgment given in Grey Nodules Precicast P. Ltd v/s CCE, Ahmedabad-II [2009 (236) ELT 54 (T)], the appellant submitted that they have acted bonafide by taking Cenvat credit on outward freight relying on the clarification issued by the Board via Circular no. 97/8/2007-S.T., dated 23-8-2007. Moreover, the above cited case cannot be said to be applicable in the appellant’s case as in this case developing charges were charged from the customers by issuing separate invoices by the petitioner without intimating the same to the Revenue on which duty was payable while in appellant’s case, there was no suppression as the invoices on which credit was taken were produced during the audit. Moreover, no separate invoices have been issued for collecting freight from the customers and freight charges have been incurred by the appellant. The fact that no amount in any manner has been collected by the appellant from its customers can be verified by the account statement submitted in annexure to reply to SCN. Further, the freight amount is included in the assessable value on which duty has been already paid.

¨ The appellant submit that they have acted under bona fide belief that they are entitled to take Cenvat credit and have accordingly taken so. Therefore, they are not liable to any penal action.

Issue Involved:

The issue involved in this case was that,

Whether the outward transportation of goods service received by the appellant-manufacturer would fall under the category of input service when the place of removal was the door step of the purchaser? Whether cenvat credit will be admissible on the Outward GTA?

Decision of the Commissioner (Appeal):

Ø The Commissioner (Appeal) perused the definition of “input service” under the Cenvat Credit Rules, 2004 and gave finding that by the inclusion clause of Rule 2(l) of CCR, 2004 the Government had expanded the eligibility of cenvat credit on various input services to the manufacture. In terms of inclusion clause of input service, the service used in relation to activities relating to business and used in outward transportation of goods upto the place of removal is covered as input service.

Ø The Commissioner (Appeal) further held that as to what will be the place of removal has been clarified by the Board vide its Circular No. 97/8/2007-ST dated 23.08.2007. From this Circular it was clear that in case of domestic sale in FOR destination basis where manufacturer has to deliver the goods to the buyer at his destination and the price includes the transportation charges from factory to destination, the service tax paid on transportation charges from factory to the place of delivery would be covered under the definition of input service.

Ø The Commissioner (Appeal) observed that in the present case, as per rate contract (valid from 1.10.2006 to 30.09.2007) goods were sold FOR basis, freight paid up basis and destination was Chennai, Kolkata and Jodhpur. Further as per rate contract (valid from 1.10.2007 to 30.09.2008) goods were sold as free delivery to consignees other than North Eastern states only. In the invoices furnished by the appellant, the transportation charges and insurance were not shown separately. This clearly indicated that transportation charges and insurance charges were born by the appellant and were included in assessable value.

Ø It was further held that there is force in the contention of the appellant that the terms and conditions mentioned in the invoices of the appellant were standard conditions which were printed on all of their sales invoices and so these conditions should not be taken as the sole basis for denying the credit on outward freight.

Ø The Commissioner (Appeal) further held that judgment given in the case of Ambuja Cements Ltd [2009 (236) ELT 431 (P & H)] was squarely applicable in the case of appellant which is binding on the department also. In that case the High Court had held Outward transportation service will be an input service if all the three conditions prescribed in the Board Circular No. 97/6/2007-ST dated 23.08.2007 were fulfilled.

Ø Further reliance was placed on the decision of the Bombay High Court in the case of Coca Cola India Pvt Ltd [2009 (15) STR 657] wherein it was held that “any input service that forms part of value of final product should be eligible for cenvat credit”.

Ø In the end the Commissioner (Appeal) held that in the present case there is no doubt that goods have been sold on FOR destination basis and assessable value includes transportation charges from factory to buyers premises therefore service tax paid on the said service should be admissible as input service. Following the afore-mentioned judgments and the Board Circular, it was held that the appellant is entitled for cenvat credit of service tax paid transportation charges of goods from the factory gate to buyers premises under Cenvat Credit Rules, 2004. Demand of cenvat credit availed was held to be not sustainable.

Ø Consequently, it was held that as the demand is not sustainable on merit, the question of interest and penalty does not arise as held by the Apex Court in HMM Ltd [1995 (76) ELT 497 (SC)]. Impugned order demanding interest and imposing penalty set aside.

Order of the Commissioner (Appeal):

Impugned order set aside. Appeal allowed.

Conclusion:

The Commissioner (Appeal) correctly held that credit will be available to the appellant-manufacturer on the outward transportation service used by him till the door step of the buyer which was the place of removal of goods. When the three conditions prescribed in the Board Circular No. 97/6/2007-ST were satisfied, the credit of service tax was available to the assessee. It will give relief to the frustrated assessees who have proved their bona fides while availing the credit on the outward transportation of goods.

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M.RAM KUMAR on 23 October, 2010 wrote:

A very relevant analysis by your team. Service tax input service credit can be taken only if the assessee can prove the conditions as per Cir. 96/2007. All concerned may note this case law to avoid any denials by the department. Thanks to PJ team. By, M.RAM KUMAR, BANGALORE

S.L.Bansal on 18 October, 2010 wrote:

It is a good effort of your team

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PJ/CASE STUDY/2010-11/26
16 October 2010

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PJ/CASE STUDY/2010-11/26
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