Cenvat Credit on Port charges and Other post-removal services

PJ/Case Study/2010-11/23

Case Study

Prepared By:

Sukhvinder Kaur LLB [FYIC]

And Mayank Palgauta

Introduction:

As per Cenvat Credit Rules, 2004, an assessee can avail the cenvat credit of inputs, input services and capital goods used by him in or in relation to the manufacture of his finished goods or in providing the output services. As to what will be the input, capital goods and input services on which credit is admissible has been defined under the Rules. The definition of input services under Rule 2 (l) provides that all the services upto the place of removal will constitute as input services. Normally the place of removal is the factory gate of the manufacturer. However, if the place of removal is not factory gate but at the doorstep of the buyer or in case of export of goods, the port of export and all the expenses are borne by the assessee-manufacturer, then can he be eligible to avail cenvat credit on the port charges and other services availed for sending the goods to port of export? It is well saying that “Cenvat Credit = Cash Coins” for an assessee in Excise and Service Tax Law but whether it is so happened, this issue has been discussed in the case under study herein.

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 Lucid Colloids Ltd v/s Assistant Commissioner, Jodhpur

[Order-in-Appeal No. 286 (CB) CE/JPR-II/2010, dated 05.08.2010]

Brief Facts:

- Appellant are engaged in the manufacture of Guar Gum Powder falling under heading 13023230 of the First Schedule to the Central Excise Act, 1985.

- During Audit, the Audit party observed that the appellant had availed cenvat credit of service tax paid on port services and other post removal services during the period May 2006 to Sept. 2006.

- Revenue Department contended that these services did not fall under the definition of input service and therefore, credit was not available to them. Show Cause Notice was issued to the appellant for recovery of amount availed as cenvat credit on the said services.

- The Adjudicating Authority denied the cenvat credit of service tax on the ground that the said services were post removal services therefore not covered under the definition of the input services. Demand with interest under Rule 14 of the CCR, 2004 read with Section 11A and Section 11AB of the Central Excise Act, 1944 was confirmed against the appellant and equal penalty under Rule 15 of Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994.

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

Appellant’s Contentions:

Before the Commissioner (Appeal), the appellant raised the following contentions:

¨ Appellant contended that the impugned order had wrongly observed that the decision in NHK Spring (India) Ltd [2006 (204) ELT 189 (CA)] is not sustainable as it is reversed by the hon’ble Delhi Tribunal and this decision is reported at 2007 (7) STR 63 (T-Delhi). In this regard, it was submitted that this latest decision of NHK Springs is given by relying on the decision of M/s Gujarat Ambuja Cements Ltd. vs CCE, Ludhiyana [2007 (6) STR 249 (Tribunal)]. This decision has been disagreed in the case of India Cements Ltd. vs Commissioner of C. Ex., Tirupati [2007 (8) STR 43 (Tri.-Bang.)].

¨ Accordingly, it was submitted that the issue was sub-judicial and is being referred to the larger bench. Since the aforesaid order of M/s India Cement has reversed the decision of M/s NHK Spring (India) Ltd. as cited by the learned Assistant Commissioner, the contention of the impugned order is not sustainable.

¨ Appellant relied upon the judgment given by the Larger Bench of the Tribunal in the case of ABB Limited [2009 (015) STR 0023 (Tri-LB)] wherein it was held that the credit of service tax paid on outward freight is available as Cenvat credit. Following the same analogy, it was contended that Cenvat credit on outward expenses is also allowable.

¨ It was contended that the sale was based on FOB value i.e. the expenses upto the port has to be paid by them. Thus, the appellant-manufacturer had paid the outward freight as well as port charges and therefore, the credit of service tax paid on the same was available to them. In this regard the reliance was placed on Board Circular no. 97/8/2007-ST wherein it was clarified that if the agreement is for FOR destination then the credit of service tax paid on outward transportation is admissible to us.

¨ Appellant also relied upon the judgment of the High Court of Punjab and Haryana in the case of Gujarat Ambuja [2009 (236) ELT 431] wherein the credit on outward freight was allowed. Following the same analogy, it was contended that Cenvat credit was also available to the appellant.

¨ Appellant further contended that the cenvat credit on CHA services was allowed by the Tribunal in a number of cases. Reliance was accordingly, placed on the judgment given in the case of CCE, Rajkot vs. M/s Rolex Rings Pvt. Ltd. [2008 (230) ELT 569 (Tri-Ahm.)] wherein it was held as under:

“Cenvat/Modvat - Input service - CHA and surveyor’s services - Business activities - Exporters continue to remain owner of goods in question till same are exported - Since place of removal of goods in export is port area, services availed by exporter till port area are input services inasmuch as same are related to business activities - Admittedly, CHA and surveyor’s services relate to export business, hence credit of duty paid on such services is admissible to exporters - C.B.E.C. Circular No. 91/8/2007-S.T., dated 23-8-2007. [para 4]”

¨ Similarly, in the case of Commissioner of C. Ex., Rajkot vs Adani Pharmachem P. Ltd. [2008 (12) S.T.R. 593 (Tri. - Ahmd.)] it was held as under:

Cenvat credit of Service tax - Input service - Custom House Agent service - Place of removal - Goods sold on FOB/CIF basis and Service tax paid for CHA services rendered, not disputed - Input service includes services rendered for outward transportation up to place of removal, all Service tax paid to facilitate goods to reach place of removal has to be eligible for benefit of Cenvat credit - Impugned CHA services required to facilitate clearance of final products from place of removal i.e. load port - Credit eligible - Rule 2(l) of Cenvat Credit Rules, 2004. [para 3]

¨ On the basis of these judgments it was contended that in these judgments Cenvat Credit has been allowed on the post removal expenses. The analogy on which the credit is allowed is that the value of post removal expenses is considered while determining the F.O.B. value of the export goods. The facts and circumstances of these decisions are same as in the case of appellant and are therefore applicable to them.

¨ Appellant further contended that the credit is allowed on the port charges and other expenses incurred after their removal from factory. The word ‘place of removal’ is defined in Section 4(3) (c) (iii) of Central Excise Act, 1944 as under-

“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”.

As such, place of removal is not always the factory gate, if the sale takes place at some other place, ‘place of removal’ will be that other place. In case of export, the sale takes place at the port, as such, in this case, the place of removal will be the port. This is also in affirmation with Section 5 of the Central Sales Tax Act which says that in the case of export and import, the sale or purchase of goods shall be deemed to take place in the following manner:-

“when is a sale or purchase of goods said to take place in the course of import or export- (A) a sale or purchase of goods shall be deemed to take place in the course of export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the Customs frontiers of India.”

This means, in respect of export goods, place of removal is the place where the documents are presented to the Customs officers for export and not the factory gate. In this regard reliance was placed on M/S Kuntal Granite Ltd. v/s Commissioner of C. Excise, Banglore [2007 (215) E.L.T 515 (Tri. Bang)] from where it is clear that in case of export, the place of removal is the port. As such, applying the ratio of this decision, it can be concluded that the FOB value of the goods is inclusive of all the expenses incurred till port.

¨ Further, reliance was placed on the order-in appeal no. 152 (KKG) CE/JPR-II/2010 wherein the Commissioner (Appeal) had allowed cenvat credit on post removal expenditure of CHA service.

¨ It was pointed out that the demand is not solely related to port charges but includes various other services. This fact was pointed out to the Revenue and it was accepted by them. Even then they have raised the demand for all the charges. This contention was raised before the Adjudicating Authority but was not considered by it and therefore, has passed a non speaking order. In this regard, reliance was placed on Wipro Computers Ltd. vs Commissioner of Customs, Chennai [2001 (135) ELT 450 (Tri.-Chennai)] wherein it was held that the order passed without considering the submissions of the aggrieved is not viable and is liable to be withdrawn.

¨ With regard to imposition of penalty, the appellant contended that penalty was not warranted as they had acted under bona fide belief. In this regard reliance was placed on the judgment given in the cases of Sri Krishna Alloys vs Commissioner of Central Excise, Salem [2006 (200) ELT 158 (Tri.-Chennai)] and Asha Pavro Electronics Pvt. Ltd. vs. Commr. Of C. Ex., Mumbai-III [2002 (143) ELT 543 (Tri.-Mumbai)].

¨ It was also contended that appellant had not suppressed any facts from the Revenue department and they genuinely believed that credit on port services was available to them. Therefore, when there was no fraud, collusion or willful suppression on the part of the appellant, imposition of penalty on them is not sustainable.

Issue Involved:

The issue involved in this case was that

Whether the credit of service tax paid on Port services and other post removal services is admissible to the appellant as “input services” in terms of Cenvat Credit Rules, 2004?

Decision of the Commissioner (Appeal):

Ø The Commissioner (Appeal) perused the definition of “input service” under Cenvat Credit Rules, 2004 and on facts held that there is no dispute that the service tax has been paid on the port services. There is no dispute that in terms of inclusion clause of input service, services used in relation to activities relating to business and used as port services in export goods upto the place of removal is covered as input service.

Ø The Commissioner (Appeal) then held that the only thing to be ascertained is ‘what is the place of removal’ in this case. For this, the clarification issued by Board vide Circular No. 97/8/2007-ST dated 23.08.2007 was held to be relevant and Para 8.2 of the said Circular was perused.

Ø The Commissioner (Appeal) accordingly held that it is clear from Para 8.2 that for a manufacturer/consignor, the eligibility to avail credit of the service tax paid on the services such as port services would depend upon the place of removal as per the definition.

Ø The Commissioner (Appeal) further found that 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 born 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 services such as port services would be admissible if it can be established by the claimant of such credit that the sale and 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.”

Ø The Commissioner (Appeal) further held that from the above discussion it becomes clear that in case where the export is on FOB basis, the appellant continue to remain owner of the goods in question till the same are exported from port of export, the place of removal shall be the load port only as the manufacturer has to deliver the goods to the buyer at least upto the load port and the FOB price included the export expenses incurred for clearance of the goods at the port of export.

Ø It was further held that the Tribunal in the case of M/s Kuntal Granite Ltd had held that place of removal in case of export is load port. Further, in the case of M/s Adani Pharmachem P. Ltd it was held that since CHA services are required to facilitate clearances of final product from the place of removal i.e. load port, the same is eligible for input service credit under Rule 2 (l) of CCR, 2004.

Ø Further, it was held that in the case of M/s Rolex Rings P. Ltd reliance was placed on Board Circular No. 91/8/2007-ST dated 23.08.2007 and it was held that all services availed by the exporter till the port area are required to be considered as input service in as much as same are clearly relating to business activities, which are specifically covered by the definition of input service. Since in this case there was no doubt that FOB value on which duty is paid would include service tax paid on export expenses and therefore service tax on port services would be admissible as input service.

Ø Thus, the Commissioner (Appeal) relying upon all the judgments cited above held that cenvat credit of service tax paid on Port services and other post removal services upto port of export is admissible under Cenvat Credit Rules, 2004.

Ø It was also held that since the demand is held to be unsustainable on merit, there is no question of interest and penalty as held by the Apex Court in M/s HMM Ltd [1995 (76) ELT 497 (SC)]. Impugned order set aside.

Order of the Commissioner(Appeal):

Appeal allowed.

Conclusion:

The Commissioner (Appeal) rightly held that the cenvat credit of service tax paid on the port charges and other post removal expenses was admissible to the appellant-assessee when he had borne all the expenses till the uploading of export goods at the loading port and the ‘place of removal’ was not the factory gate but the port of export. When an assessee-manufacturer has borne the expenses then he cannot be placed at a disadvantageous position.

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PJ/CASE STUDY/2010-11/23
25 September 2010

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PJ/CASE STUDY/2010-11/23
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