Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/013

07 October 2009

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

An assessee avails the services of Goods Transport Agency (GTA) for transporting inward freight as well as outward freight. The liability for paying service tax on GTA has been imposed on the service recipient in certain cases. The credit of service tax paid on GTA service will be available to the service recipient paying the service tax depends upon the inclusion of the service under the definition of “Input service”. As per the definition of “input service” credit is available on inward transportation of inputs or capital goods and outward transportation upto the place of removal. The interpretation of the words “outward transportation upto the place of removal” has lead to a lot of controversies. As per the department, the place of removal is to be considered upto the factory gate of the assessee and cenvat credit on outward transportation would not be available. However, the Central Board of Excise and Customs have issued a Circular by which the place of removal can be extended till the doorstep of the purchaser upon fulfillment of certain conditions. But the department has been denying credit. In the case under study, the High Court has tried to resolve the said issue.

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;

Relevant Extract from Board’s Circular No. 97/6/2007-ST, dated 23-08-07: -

"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 Ambuja Cement Ltd. v/s Union of India & Ors.

[2009 (091) RLT 0627 (P&H) = 2009 (236) ELT 0431 (P & H)]

Brief Facts of the Case: -

- Appellant-assessee were engaged in the business of manufacturing and selling of cement.

- The appellants claimed that when it supplies cement to its customers “FOR destination” they bear the freight in respect thereof upto the doorsteps of the Customers the destination point. They are also paying service tax on such freight.

- Accordingly, the appellants were taking cenvat credit of service tax paid by them on such outgoing freight.

- The Commissioner issued show cause notice to the appellant for recovery of cenvat credit taken of such service tax for the period from March, 2005 to January, 2006. Demand along with interest was confirmed.

- Appellant filed appeal against this decision before the Tribunal which was dismissed. It was held that the payment of service tax on the freight incurred by the assessee was not input service as per Rule 2(1) of the Cenvat Credit Rules, 2004. It was held that extending the credit beyond the point of duty paid removal of final product would be contrary to the scheme of Cenvat Credit Rules. It was held that transportation (freight) is an entirely different activity from manufacture remains settled by the judgments of Hon'ble Supreme Court in the cases of Bombay Tyre International [1983 (014) ELT 1896], Indian Oxygen Ltd. [1988 (036) ELT 723 SC] and Baroda Electric Meters [1997 (094) ELT 0013 (S.C.)].

- Aggrieved by the order of the Tribunal appellant has approached High Court.

Questions for Consideration: -

The substantive questions of law before the High Court were as under: -

1. Whether the service of transportation up to the customer's doorstep, in the case of "FOR destination" sales where the entire cost of freight is paid and borne by the manufacturer, would be "input service" within the meaning of Rule 2(1) of the CC Rules?

2. Whether interest ought to have been demanded in the present case?"

Judgment of the High Court: -

The High Court held as under: -

- The definition of “place of removal” given in Section 4 of the Central Excise Act, 1944 was relied upon and it was held 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.

- High Court referred to the Board Circular No. 97/6/2007-ST, dated 23-08-07 wherein it was contemplated that if certain conditions were complied with the sale can be said to have taken place at the destination point.

- Reliance was placed on judgments given in Paper Products Ltd. v. Commissioner of Central Excise [1999 (112) ELT 0765 (S.C.)], CCE v. Usha Martin Industries [1997 (094) ELT 0460 (S.C)] etc. to hold that “the circulars issued by the Board are binding and aims at adoption of uniform products. It was further held that the revenue is precluded from challenging the correctness of the circular even on the ground of the same being inconsistent with statutory provisions. It goes further to limit the right of the revenue to file an appeal against the correctness of the binding nature of the circular. Therefore, there is no escape from the conclusion that the circular is binding on the revenue.”

- High Court thus held that as per Board’s Circular No. 97/6/2007-ST, dated 23-08-07 the place of removal can be considered at the doorstep of the buyer.

- On merits of the case, High Court held that the appellant were fulfilling the first condition that ownership of the goods and property therein remained with the seller of the goods till delivery of the goods in acceptable condition to the purchaser at his door step. It was noticed that the supply of cement by the appellant to its customers was “FOR destination” and the freight in respect thereof was borne by the appellant upto the door step of the customer. The service tax on the freight charges was duly paid by the appellant.

- High Court further gave finding that for the transportation purposes insurance cover has also been taken by the appellant which shows that the ownership of the goods and the property in the goods has not been transferred to the seller till the delivery of the goods in acceptable condition to the purchaser at his door step. It was held that the second condition that the seller had to bear the risk of loss or damage to the goods during transit to the destination was also fulfilled.

- It was held that the appellants had also fulfilled the third prescribed condition that the freight charges were integral part of the excisable goods, as the delivery of the goods was "FOR destination' price.

- It was held that the first substantive question was answerable in favour of the appellant and therefore, there was no contravention and violation of any of the provisions of law and the credit had been lawfully availed. Therefore the allegation concerning not availing the service within the meaning of 'input service' and irregular availment of credit could not be sustained.

- It was further held that the question of payment of interest did not arise and the answer to the second question consequently would be against the revenue and in favour of the assessee.

Decision of the High Court: -

The substantive questions raised in appeal were answered in favour of the appellant. Impugned orders set aside. Appeal allowed in favour of appellant.

Comments & Conclusion: -

The High Court rightly held that if the conditions prescribed in the Board Circular No. 97/6/2007-ST, dated 23-08-07 were fulfilled, then the assessee will be eligible to take cenvat credit on outward transportation of goods upto the place of removal. If cenvat credit would not have been allowed, the assessee bearing the cost of transportation, paying service tax on the same would have borne the burden and remained in loss.

High Court also rightfully held that the Board Circulars are binding upon the Revenue Department. Otherwise, the Department would have denied the benefit to the assessee even when such benefit was granted by the Board.

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PJ/CASE STUDY/2009-10/013
07 October 2009

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