Credit of service tax on Outward Transportation of goods

PJ/CASE STUDY/2010-11/18

CASE STUDY

Prepared By:

CA Pradeep Jain,

Parag Ghate, B. Com and

Sukhvinder Kaur, LLB [FYIC]

Introduction:

GTA and controversy are two best friends that walk hand in hand. If the issue is about credit on GTA till we talk of inward freight the credit is admissible. But when the issue arises of the outward freight the matter of litigation lightens up. In the case under study, the issue involved was whether the outward transportation can be said to be an input service of a manufacturer, when the place of removal is not the factory gate but the premises of the buyer? When the sale is FOR destination and freight and insurance of goods in transit is borne by the manufacturer, will the assessee be eligible for credit of its outward transportation.

Relevant Legal Provisions:

v 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;

v 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 manufacture of Disposable Syringe/needles falling under Chapter heading 901800.

- Appellant availed Cenvat credit on outward transportation of goods (cargo services) from factory gate to buyer’s premises for the period 2005-06, 2006-07 and 2007-08.

- Revenue issued show cause notice denying the credit. The Adjudicating Authority disallowed the credit on the ground that place of removal was factory gate and no cenvat credit of service tax paid beyond factory gate is admissible as these services have been received after the removal of goods from the place of removal which is the factory gate. Accordingly, recovery of cenvat credit taken with interest was ordered and penalty under Section 11AC was imposed.

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

Appellants Contentions:

¨ Appellant contended that the fact that the services like that of sales promotion, advertisement etc were included in the definition of ‘input services’, even if these services have no relation to manufacture, indicates the intention of the government to provide maximum benefit to the assessee. Case relied for the same was of CCE Mumbai-V Vs. M/s GTC Industries Ltd. [2008- TIOL-1634-CESTAT-MUM-LB]

¨ It was submitted that the sale and the 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. To prove the same, appellant has relied upon sample of few 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. It was submitted that all the risk associated with the transportation of goods to the purchaser’s place was that of the appellant. Further, the appellant had insured the goods which clearly indicate that the sale would complete only on accepting the goods by the purchaser. Appellant has also relied upon the agreement entered with the buyer wherein 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.

¨ Appellant submitted 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. They did not indicate the fact that the place of removal is factory gate.

¨ Further, it has been clarified above 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 appellant also submits that 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 already submitted. It can be seen from the account statement 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. Further, it has been clarified that the risk remained with the appellant till the goods reached the buyer. The appellant have done the insurance of the goods and the sales were on FOR basis. Therefore the said Board Circular is squarely applicable to them.

¨ The appellant contended that they 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. 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.

¨ It was further relied upon the rate contract clearly mentioning ‘free delivery at the consignee’s place’. It was contended 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.

¨ 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. Reliance was also placed on the order passed in case of M/s Dinesh Enterprises, Jodhpur, vide OIO No. 259-265(DK) CE/JPR-II/2009 dated 27.03.2009 wherein it was held that for the purposes of rebate claim, correct assessable value will be FOB value and all the expenditures incurred upto the port would not be deductible.

¨ 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. The judgment given in Grey Nodules Precicast P. Ltd v/s CCE, Ahmedabad-II [2009 (236) ELT 54 (T)] relied upon by the Deputy Commissioner cannot be said to be applicable in their case as in that 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.

¨ Case of ABB Ltd. Vs. CCE & ST, Bangalore [2009-TIOL—830-CESTAT-BANG-LB] was relied upon which said that even if assessable value do not include freight charges, then too credit of outward transportation is allowed.

Issue Involved:

The issue to be decided was:

Whether credit of service tax paid on outward transportation of goods from factory to buyers premises is admissible to the appellants as “input services” in terms of Cenvat Credit Rules, 2004?

Reasoning of the Commissioner (Appeal):

Ø The Commissioner (Appeal) perused the definition of “input services” under Cenvat Credit Rules, 2004 and held that by the inclusion clause of Rule 2 (l) of Cenvat Credit Rules, 2004 the Government has expanded the eligibility of cenvat credit on various input services to the manufacture. Accordingly, it was held that in terms of inclusion clause of input service, 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 relied upon the Para 8.2 of Circular No. 97/8/2007-ST dated 23.08.2007 and held that from it is 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) considered the rate contract and found that goods were sold FOR basis, freight paid up basis that the goods were sold as free delivery to consignees. The invoices submitted by the appellant were also considered and it observed that transportation charges and insurance were not shown separately which clearly showed that transportation charges and insurance charges were born by the appellant and were included in assessable value.

Ø The Commissioner (Appeal) found force in appellant’s contention that the terms and conditions mentioned in the invoices if the appellant were standard conditions which were printed on all 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 the judgment given in the case of Ambuja Cements Ltd [2009 ELT 431 (P&H)] was squarely applicable in the instant case. Further reliance was placed on 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 Accordingly, it was held that since the goods were sold on FOR destination basis and assessable value included transportation charges from factory to buyer’s premises, therefore service tax paid on the said service was admissible as input service. Appellant were entitled for cenvat credit of service tax paid on transportation charges of goods from factory gate to buyers premises under CCR, 2004. Demand of service tax was not sustainable.

Ø With regard to levy of interest and imposition of penalty it was held that as the demand was not sustainable, question of interest and penalty do not arise. Reliance was placed on HMM Ltd [1995 (76) ELT 497 (SC)].

Decision of the Commissioner (Appeal):

Impugned order-in-original demanding cenvat credit, interest and imposing penalty set aside. Appeal allowed.

Conclusion:

Considering the cases and the factual position of law the Commissioner rightly held that in terms of Circular No. 97/08/2007-ST, the service of outward transportation (GTA) was input service for the manufacturer and the place of removal was not the factory gate but was the doorstep of the buyer. So the credit of outward transportation was allowed to the appellant.

********

Comments

PJ/CASE STUDY/2010-11/18
26 August 2010

Post a Comment

Query

Comments

PJ/CASE STUDY/2010-11/18 26 August 2010

Post a Comment

Query

PJ/CASE STUDY/2010-11/18
26 August 2010