Service Tax Circular denying Credit on Outward Freight is not legally sustainable

RS Sharma Advocate

CBEC has jumped the gun too early by denying the Credit of service tax paid on transportation of outward freight to manufacturers by Circular No. 97 dated 23rd August 2007 without taking cognizance of CESTAT ruling dated 13th  August 2007 AIT-2007-308-CESTAT  which allows the Credit.

Gujarat Ambuja has become the most hated name for manufacturers and Consultants; not for losing the case in Tribunal but for not challenging the ruling of the Tribunal in High Court and thereby giving a weapon in the hands of CBEC to issue Circular No 97. 

The issue related to admissibility of Credit of service tax paid on outward fright has been clarified by CBEC vide Circular No 97 as under:

ISSUE: Up to what stage a manufacturer/consignor can take credit on the service tax paid on goods transport by road?

COMMENTS: This issue has been examined in great detail by the CESTAT in the case of M/s Gujarat Ambuja Cements Ltd. vs CCE, Ludhiana AIT-2007-151-CESTAT . In this case, CESTAT has made the following observations:-

 “the post sale transport of manufactured goods is not an input for the manufacturer/consignor. The two clauses in the definition of ‘input services’ take care to circumscribe input credit by stating that service used in relation to the clearance from the place of removal and service used for outward transportation upto 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 upto the place of removal. When these two clauses are read together, it becomes clear that transport service credit cannot go beyond transport upto the place of removal. The two clauses, the one dealing with general provision and other dealing with a specific item, are not to be read disjunctively so as to bring about conflict to defeat the laws’ scheme. The purpose of interpretation is to find harmony and reconciliation among the various provisions”.

                “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.

                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.”

But it is strange that Babus of CBEC neither sought the Opinion of Attorney General or Solicitor-General of India or even a Senior Advocate on the issue before issue of Circular dated 23 rd August 2007, nor took cognizance of CESTAT Ruling dated 13^th August 2007  AIT-2007-308-CESTAT which held as under:

 “A careful reading of the definition reveals that any service interalia used by the manufacturer in or in relation to clearance of final products from the place of removal is an 'Input Service'. In other words, the outward transportation of the final products from the factory is an 'Input Service' and outward transportation of the final product from the depot is an 'Input Service'. Once these services are defined as 'input Service', the credit cannot be denied. As regards the outward transportation of the final products from the factory to the depot is concerned, it is defined as 'Input Service' in view of the inclusive definition which reads as "outward transportation up to the place of removal". Once outward transportation upto the place of removal is defined as an 'Input Service' the credit has to be given. Therefore, what is to be understood and appreciated is the inclusive definition cannot limit the scope of 'Input Service' given in the first limb of the definition. It is made clear that the outward transportation from the factory to the depot is an 'Input Service' and an outward transportation from the factory and from the depot to the premises of the buyer is also an 'Input Service'. It follows that once it is an input service there cannot be any denial of the credit.”

“Hence, we do not agree with the interpretation of the Tribunal in the Gujarat Amubuja Case (supra). Since there is a difference in opinion between the two coordinate benches, the issue has to be resolved by referring the matter to a Larger Bench.

The issue to be decided is stated in the following manner.

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 (1) (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 the Gujarat Ambuja case cited supra?”

The abovesaid ruling of the Tribunal was pronounced on 13th  August 2007 and learned Departmental Representatives who are IRS Officers were present before the Bench. All important decisions of Tribunal are immediately conveyed to Chief Departmental Representative in Delhi and also to CBEC. Though Babus of North Block may claim that they were ignorant of such an important ruling till the issue of Service Tax Circular dated 23^rd August 2007; this itself gives a ground for challenging the Circular in High Court.

It is well-settled by several Apex Court rulings that though a Circular is binding on the Departmental Officers; neither a tax payer nor an assessee is bound by the Circular. There are already several precedents of CBDT and CBEC Circulars being quashed by High Courts.

Thus CBEC Circular is not law. A Tribunal Ruling is not law. Almost every day a Tribunal Ruling is set aside and quashed by the Supreme Court with the remarks “the Tribunal was in error”.   

What the Supreme Court pronounces is the law.

But one thing is certain. The hands of Advocates are going to be full as for the departmental officers; the dictate of CBEC is law and manufacturers are going to be hammered with demand notices which may number over 1 Lakh as most of the manufacturers were availing Credit of service tax paid on outward freight . But what will be the result?

One fine day Larger Bench Ruling or a High Court Ruling will come that the Credit of service tax paid on outward transportation of finished goods is admissible and CBEC Circular No 97 which has been issued solely relying on Gujarat Ambuja will be quashed. But it will be too late for manufacturers who will have to shell out Crores to the Advocates for handling the show cause notices. 

As defined by CENVAT Credit Rules; “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”

There is no ambiguity in the definition of input service that a service used by the manufacturer in relation to clearance of final products from the place of removal is an input service and thus eligible for credit. Hon’ble Tribunal was in error in even applying the rules of interpretation in its ruling in case of Gujarat Ambuja. The rules of interpretation come into play when there is any ambiguity in the law. When the law is clear; there is no need for rules of interpretation for denying the Credit. 

It would be a wise and face saving move for CBEC; if it requests Justice Abhichandani President of CESTAT for early hearing and decision by Larger Bench so that the issue may be settled without any further delay. Further, till the issue is finally settled; the abovesaid Clauses of the Circular No 97 denying the Credit should be kept in abeyance. But those who have been with the Central Excise Department for a long time still want to import the old concept of Central Excise where factory gate was Lakshman Rekha for deciding the value and are unable to digest the new set of rules. With no such distinction in the present rules as far as service tax credit is concerned; such mindset has become outdated. Even old hands in Industry have advised their management to refrain from availing Credit in such cases.

The best option available for manufacturers is to avail the Credit and not to utilize the said credit till the dust is finally settled on the issue. 

(The Writer is an Advocate and Consultant based in Delhi and is advising several MNCs and Indian Corporates on Service Tax, Central Excise, Customs, SEZ & FTP matters. He can be mailed at rssharma@gmail.com)

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