Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

The Goods Transport Agency service has always remained surrounded by controversies. There has been a lot of litigation on the issue whether credit is available on outward transportation of goods upto place of removal, if the place of removal is the doorstep of the buyer or depot. However, this issue was settled by Board circular and decision by the High Court of Punjab & Haryana in the case of Ambuja Cement. But the Larger bench decision of the Tribunal on this issue is equally important. In the case under study, the issue referred to the Larger Bench was that whether ‘outward transportation upto place of removal’ or ‘outward transportation from the place of removal’ can be treated as input service in termed of Rule 2 (l) of the Cenvat Credit Rules, 2004 and Cenvat credit can be availed on the same.

Relevant Legal Provisions: -

Rule 2(l) of the CENVAT Credit Rules, 2004

2 (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 from 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;”

ABB Ltd v/s Commissioner of Central Excise & Service Tax, Bangalore

{[2009] 21 STT 77 (Bang. –CESTAT) (LB)}

Question for Consideration: -

The issue referred to the Larger Bench is as under: -

“Whether the services availed by a manufacturer for outward transportation of final products from the place of removal should be treated as an ‘Input Service’ in terms of Rule 2(l)(ii) of CENVAT Credit Rules, 2004 and thereby enabling the manufacturer to take credit of the service tax paid on the value of such services? or whether ‘Input service’ should be limited only to outward transportation upto the place of removal in terms of the inclusive definition as held in Gujarat Ambuja Cements Ltd. v. CCE {[2007] 8 STT 122 (New Delhi - CESTAT)}.”

Revenue’s Contentions: -

Ø Revenue contended that since outward transportation is specifically mentioned in the inclusive clause of the definition, credit for outward transportation cannot be allowed with reference to any other limb or category of the definition of input service which is general in nature.

Ø According to the revenue, the inclusive clause in specifically limiting the credit for outward transportation upto the place of removal, has a bearing on the interpretation of the means clause and therefore, the expression ‘service relating to clearance from the place of removal’ cannot cover outward transportation.

Ø It was further contended that since the cost of outward transportation does not form part of the transaction value of the manufactured goods as defined in Section 4 of the Central Excise Act, 1944, any service tax paid for the outward transportation of goods from place of removal cannot be allowed as credit to the manufacturer, although, the question of denial of credit does not arise if the cost of freight is included in the transaction value.

Ø It was further contended that CENVAT credit cannot be allowed for services if the value thereof does not form part of value subjected to excise duty.

Ø Revenue relied upon the judgment of the Gujarat Ambuja Cements Ltd. to support its contentions. They also relied upon the judgment of India-Japan Lighting (P) Ltd v/s CCE {[2007] 11 STT 498 (Chennai-CESTAT)}.

Order of the Larger Bench: -

The Larger Bench of the Tribunal held as under: -

v The Larger Bench considered the definition of input services given in Rule 2 (l) and held that the said definition can be divided into following categories insofar as the manufacturers are concerned: -

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

(b) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(c) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,

(d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

(e) Services used in relation to activities relating to business and outward transportation upto the place of removal.

It was held that each of the above limbs of the above definition is an independent benefit/concession. If an assessee can satisfy any one of the above, then credit on input service would be admissible even if the assessee does not satisfy the other limbs.

v The Larger Bench held the expression ‘activities relating to business’ admittedly covers transportation upto the customers place and, therefore, credit cannot be denied by relying on specific coverage of outward transportation upto the place of removal in the inclusive clause. Reliance was placed on the judgments given in the cases of Kerala State Co-operative Marketing Federation Ltd. v. CIT {[1998] 5 SCC 48}, Share Medical Care v. Union of India [2007 (209) ELT 321], HCL Ltd. v. Collector of Customs [2001 (130) ELT 405], CCE v. Indian Petro Chemicals [1997 (92) ELT 13 (SC)].

v The Larger Bench noted that transportation of goods to customer’s premises is an activity relating to business. It is an integral part of the business of a manufacturer to transport and deliver goods manufactured. If services like advertising, market and research which are undertaken to attract a customer to buy goods of a manufacturer are eligible to credit, services which ensure physical availability of goods to the customer, i.e., services for transportation should also be eligible to credit.

v The Larger Bench held that the Revenue’s contention that “inclusive clause in specifically limiting the credit for outward transportation upto the place of removal, has a bearing on the interpretation of the means clause and therefore, the expression ‘service relating to clearance from the place of removal’ cannot cover outward transportation” is not tenable in the light of Apex Court decision given in Regional Director v. High Land Coffee Works {[1991] 3 SCC 617}. It was held in this decision that the word ‘include’ is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not restriction. Reliance has also been placed on the judgment of CCE v. GTC Industries Ltd. {[2008] 17 STT 63 (Mum. - CESTAT)} wherein similar view has been taken.

v The Larger Bench held that the use of the expression ‘outward transportation’ in the inclusive clause of the definition is by way of abundant caution so as to avoid any dispute being raised on the ‘means clause’ (which refers to clearance from the place of removal), that transportation upto the place of removal is not available as credit.

Transportation within a factory would be covered by the inclusive clause. However, where depot is a place of removal, freight from depot to customer’s premises would be covered by the means clause by the expression ‘service used directly or indirectly or in relation to clearance of final products from place of removal’.

Similarly, where the factory is the place of removal freight from factory to customers premises would be covered by the term “service used directly or indirectly, in relation to clearance from place of removal”.

v The Larger Bench further held that for admissibility to credit for outward transportation there is no requirement that the cost of freight should enter into the transaction value of the manufactured goods. In other words, credit is not to be automatically disallowed in those cases where the freight cost does not form part of the transaction value. Reliance was placed on the judgment of All India federation of Tax Practitioners v. Union of India {[2007] 10 STT 166 (SC)}.

v The Larger Bench held that the issue in dispute in the present case is not one of valuation of excisable goods in terms of section 4 of the Central Excise Act, 1944 or under the Central Excise Valuation Rules but admissibility of CENVAT credit of service tax on GTA service. The two issues, namely, ‘valuation’ and ‘CENVAT credit’ are independent of each other and have no relevance to each other as clarified by the Board’s Circular No. 137/3/2006-CX dated 02.02.2006.

v It was further held that Revenue’s contention that “CENVAT credit cannot be allowed for services if the value thereof does not form part of value subjected to excise duty” is clearly against the fundamental concept laid down by the Supreme Court in All India Federation of Tax Practitioners’ case that service tax and excise duty are consumption taxes to be borne by the consumer and, therefore, if credit is denied on transportation service, the levy of service tax on transportation will become a tax on business rather than being a consumption tax. The said contention is also against the guidelines issued by the Organisation for Economic Co-operation and Development (OECD) relating to International VAT/GST.

v The Larger Bench also held that there is an additional reason for holding that CENVAT credit is admissible on services even if the value thereof is not part of the value subjected to duty. This is because the interpretation of the expression ‘input services’ cannot fluctuate with the change in the definition of ‘value’ in Section 4 of the Central Excise Act and cannot vary depending on whether the goods are levied to duty under Section 4A of the Central Excise Act or tariff value under Section 3(2) of the Central Excise Act or the product attract specific rate of duty.

v It was further held that the Gujarat Ambuja Cements Ltd case relied upon by the revenue, was decided by relying upon the decision of Apex Court in Reserve Bank of India’s case and it was held that the inclusive clause casts its shadow on the main definition also. The Tribunal had also relied upon the judgments given in the case of E.V. Mathai & Co. v. CCE {[2007] 7 STT 189 (Bang. - CESTAT)} and Bhagyanagar Services v. CCE {[2007] 6 STT 460 (Bang.-CESTAT)} to hold that transportation is different from clearance.

The Larger Bench held that in the RBI case, the Apex Court was not interpreting a ‘means and includes’ definition and, therefore the above decision will not apply to the interpretation of the definition of ‘input services’ in the CENVAT Credit Rules, 2004. The decisions in E.V. Mathai & Co.’s case and Bhagyanagar Services’ case dealt with the interpretation of the definition of ‘Clearing and forwarding services’ contained in the relevant clause of the Finance Act, 1994 and it was held that service by a forwarding agent will not cover the service of transportation of goods. This interpretation of the definition of the ‘Clearing and Forwarding Service’ is not relevant for the interpretation of the definition of ‘input services’ under the CENVAT Credit Rules, 2004.

v It was further held that the judgment in the case of India-Japan Lighting (P) Ltd v/s CCE {[2007] 11 STT 498 (Chennai-CESTAT)} which was relied upon by the Revenue was dealing with issue of interpretation of the ‘means’ clause and not the ‘Includes’ clause. It also did not consider the expression ‘activity relating to business’ and, therefore, this decision is not relevant for the purpose of determining the issue in the instant case.

v The Larger Bench further noted that the decision given in Gujarat Ambuja Cements Ltd’s case was overruled by the High Court of Punjab & Haryana in its decision given in Ambuja Cements Ltd. v. Union of India {[2009] 20 STT 182}. In this decision the Board Circular No. 97/8/2007 dated 23.08.2007 was approved.

v Thus, the Larger Bench of the Tribunal held that the definition of ‘input services’ has to be interpreted in the light of the requirements of business and it cannot be read restrictively so as to confine only upto the factory or upto the depot of manufacturers.

v In the end, the Larger Bench answered the reference by holding that the services availed by a manufacturer for outward transportation of final products from the place of removal should be treated as an input service in terms of Rule 2(l)(ii) of the Cenvat Credit Rules, 2004 and thereby enabling the manufacturer to take credit of the service tax paid on the value of such services.

Decision of the Larger Bench: -

Reference answered in favour of the appellant-assessee.

Comments & Conclusion: -

The Larger Bench rightly held that the outward transportation of final product from the place of removal is to be treated as input service in terms of Rule 2(l)(ii) of the Cenvat Credit Rules, 2004. Thus, the manufacturer can take Cenvat credit of the service tax paid on such service. The second and more important issue decided by the Larger bench is that there is no need to include the cost of transportation in value of excisable goods. The credit will be allowed even when the outward freight is not considered in the value of final goods. This analogy is totally against the Board circular which clearly says that the cost of outward transportation should be included in transaction value on which duty is paid. The Punjab and Haryana decision also says so while relying on the Board circular. But the Larger bench decision has opined that even if the same is not included in valuation of final product then also the credit will be allowed. As such, the Larger bench decision is important from this angle.

However, the latest news is that the departmental appeal against this decision in Karnataka High Court has been accepted and stay has been granted to department. So, fate of this decision is to be seen.

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PJ/CASE STUDY/2009-10/022
14 December 2009

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PJ/CASE STUDY/2009-10/022 14 December 2009

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PJ/CASE STUDY/2009-10/022
14 December 2009