Will Cenvat credit will be allowed to a service provider/receiver in respect of freight outward in relation to dispatch of goods from factory to depot or market?
The Cenvat Credit Rules 2004, define input service. According to Rule 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;
In Gujarat Ambuja Cements Ltd vs CCE, Ludhiana (2007 8 STT 122 (Cestat, New Delhi), applying rule of contextual interpretation and harmonious interpretation, it has been held that in case of Cenvat credit, credit availability is in regard to “inputs”.
The credit covers duty paid on input materials as well as tax paid on device, used in or in relation to the manufacture of the ‘manufacture of the ‘final product’.
Therefore, extending the credit beyond the point of duty paid removal of the final product would be contrary to the scheme of the Rules.
The main clause in the definition of input service states that the service in regard to which credit of tax is sought, should be used in or in relation to clearance of the final products from the place of removal.
Further, transportation (freight) is an entirely different activity from manufacture.
Similarly, in the Ultratech Cements Ltd vs CCE Bhavnagar 2007-TOIL-429-CESTAT-AHM case, it was held that after the final products are cleared from the place of removal, there will be no scope of subsequent use of service to be treated as input. The above observations and views explain the scope of the relevant provisions clearly, correctly and in accordance with the legal provisions.
In conclusion, a manufacturer/consignor can take credit on the service tax paid on outward transport of goods up to the place of removal and not beyond that.
The definition given by rule 2(1) is in the context of relief in regard to duty/tax paid on input service. Post-sale transport of manufactured goods is not an input in manufacture. The two clauses in the definition take care to circumscribe input credit by stating that service used in relation to the clearance from the input credit by stating that service used for outward transportation up to the place of removal are to be treated as input service .
The first clause does not mention transport service in particular. The second clause restricts transport service credit up to the place of removal. When these two clauses are read together, it would become clear that transport service credit cannot go beyond transport up to the place of removal. The two clauses, one dealing with general provision and another with a specific item, are not to be read disjunctively as to bring about conflict and to defeat the laws/scheme.
It also observed that “crucial point to be noted in regard to Cenvat Credit is that credit availability is in regard to ‘inputs’. The credit covers duty paid on input materials as well as tax paid on service used in or in relation to the manufacture of the ‘final product’.
Therefore, extending the credit beyond the point of duty paid removal of the final product would be contrary to the Scheme of Cenvat Credit Rules.” A similar view was taken in the India Cements case by the Tribunal.
Recently, the CBEC in Circular No. 97 dated August 23, 2007, clarified that for a manufacturer/consignor, the eligibility to get credit of the service tax paid on transportation during removal of excisable goods would depend on 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.
In view of above, it can be said that Cenvat credit in the instant case may not be allowed.
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