Credit of Service Tax paid on outward freight not admissible to manufacturer

AIT News Network

NEW DELHI. Input service credit in respect of the service tax paid on the freight incurred on the transportation of finished goods sold is not admissible to a manufacturer as ruled by the Tribunal vide a recent ruling AIT-2007-151-CESTAT.Though the ruling may not sustain in High Court; many manufacturers have already discontinued the practice of availing Credit and keeping their fingers crossed awaiting the law on the issue to be finally settled.

T H E   F A C T S:

The dispute in the appeal was in regard to service tax paid on the freight incurred on the transportation of final products sold by the appellant. The sale was on FOR destination basis and freight was paid by the appellant. The appellant also paid the service tax in regard to the said freight. It claimed input service credit in respect of the service tax so paid. That claim was rejected by the Commissioner of Central Excise.

The Revenue took the view that service tax credit is available only in respect of inward transportation (inputs) or outward transport of final products upto the place of removal. In the present case, since the goods were removed (upon payment of duty) for sale from the factory depots, revenue took the view that service tax paid on the cost of transportation from the factory/depots to the buyers' premises, would not be available as credit.

The definition of input service under CENVAT Rules is as under:

2(1) 'input service' means any service, -

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 service 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" (emphasis added) 

T H E   R U L I N G:

·          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 services, 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.

·          The interpretation sought to be placed by the appellant does not flow from the definition of input service. The main clause in the definition 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." The learned SDR has brought to our notice the decisions of this Tribunal to the effect that transport does not come within the scope of clearance or forwarding. Further, that transportation (freight) is an entirely different activity from manufacture remains settled by the judgments of Hon'ble Supreme Court.

·          The interpretation convassed by the appellant is also contrary to the rule on the subject contained in the judgment of Hon'ble Supreme Court in the Reserve Bank case. A statute is to be read as a whole and words used interpreted taking into account the context in which they are used. Definitions are to be looked at as a whole. Clauses of a definition are not to be read disjunctively. In the present case, the statute deals with a tax on manufacture. The definition is in the context of relief in regard to duty/tax paid on input services. 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 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, one dealing with general provision and another dealing with a specific item, are not to be read disjunctively as to bring about conflict and to defeat the law’s scheme. The purpose of interpretation is to find harmony and reconciliation among the various provisions

 ( Click here for full text of ruling AIT-2007-151-CESTAT)