Availability of Cenvat Credit on Freight Outward Upto Place Of Removal

Now, the question – is weather CENVAT Credit on freight outward upto place of removal is admissible to the manufacturers of excisable goods in India? CENVAT Credit scheme is available to manufacturers of excisable goods which are falling under Central Excise Tariff Act, 1985. Now, according to erstwhile MODVAT scheme of 2002 now, CENVAT Credit Rule, 2004 which allows manufacturers to take credit on Inputs, Capital goods and Input services.

Indian Lagislature has given wider benefit to the manufacturers to taken credit on inputs, capital goods and input services used in manufacturing process for every taxpayer in India. According to CENVAT Credit Rules, 2004 credit on input services is available for not only for services used at pre-manufacturing stage but on post manufacturing also. As per Rule 2(l) of CENVAT Credit Rules, 2004 Credit on service tax paid on outward transportation upto place of removal is available to the manufacturer. For this purpose, relevant definition is reproduced below:

“Rule 2(l) – “Input Service” means any service, –

(i.)                used by a provider of output service for providing an output service; or

(ii.)              used by a manufacturer, weather directly or indirectly, in or in relation to manufacture of final products and clearance of final products upto place of removal,

and includes services used in relation to modernization, renovation and repairs of factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto place of removal, procurement of inputs, accounting auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto place of removal;”

On perusal of the above definition it is crystal clear that credit on freight outward upto place of removal is available to the manufacturers. But now question arises as to what/where should be the ‘place of removal’ for the manufacturer, weather it should be factory gate or upto the destination of the customers, as this has not been defined in the CENVAT Credit Rules, 2004. ‘Place of Removal’ has been defined under section 4(C) of Central Excise Act, 1944 as under:

“(C) “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 deposited without payment of duty;

(iii)             a depot, premises of 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 clear from the above definition of place of removal can be factory or any other place or depot, premises of consignment agent or any other place or premises from where the goods are to be sold which clearly includes customers premises or depot from where the goods are sold. As the place of removal is not defined in CENVAT Credit Rules, 2004 but Rule 2(t) of CCR, 2004 says that words and expressions used in these rules and not defined but defined in the Excise Act or Finance Act shall have the meanings respectively assigned to them in those acts.

The Circular No. 97/8/2007 dated 23.08.2007 dwells in detail on the issue of upto what stage a manufacturer/consignor is eligible to taken credit on service tax paid on freight outwards by road upto place of removal on FOR basis. This issue has been examined in length in the case of Gujarat Ambuja Cement Ltd. Vs CCE, Ludhaina and in the case of Ultratech Cement Ltd. Vs CCE, Bhavnagar. The said circular proceeds to clarify that the eligibility for the manufacturer to take credit on service tax paid on outward transportation would depend upon the above definition of place of removal as per Central Excise Act, 1944. However the circular states that,

“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.

However, analyses of each above point are attempted below:

Point No. 1: the ownership of the goods and the property in the goods remained with the seller till the goods were finally delivered to the seller and that too in a acceptable condition at the door steps/warehouse/godown of the customer. The expression of sale has been defined in section 2(h) of Central Excise Act 1944 as sale and purchase means any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deffered payment or other valuable consideration. This implies that property in the goods changes with every change in possession of goods. This in addition also implies that unless the possession is made over to the purchaser or his agent, the seller remains the owner of the goods.

Point No. 2: the seller bore the risk of damage or loss of goods during transit to the destination of the purchaser. For this purpose the seller has to take a comprehensive transit insurance policy so that risk at the event of damage or loss can be minimised. Any party purchasing insurance however, have sufficient interest in the goods in question as the damage ot loss in transit has to borne by him. The seller has the sufficient interest as he retains the title of the goods. Even if the title passes on to buyer the seller who has the security interest in the goods still has an insurable interest and can insure the goods. Every business who sells the goods usually maintains adequate insurance cover on all the goods sold atleast until it is assured that the buyer will pay for the goods.

Point No. 3: In goods transport agency service transport of goods by road, it has been provided in law that person who pays freight or who’s liability is to pay freight is liable to pay service tax as well if the consignor or consignee falls in category such as a factory, a company, a corporation, a society, a cooperative society, a registered dealer of excisable goods, a body corporate or a partnership firm. If the GTA pays the service tax on freight credit of service tax paid is always available and can utilize credit against the payment of duty. The price of goods negotiated by the parties becomes the transaction value on which duty (CENVAT) has been paid. If the freight amount is separately shown ad is included in value on which duty has been paid by the manufacturer than credit on duty is automatically available. Therefore, freight charges on goods become integral part of price of goods.

Therefore, in the light of the above discussion it appears that the admissibility of credit of service tax on tax paid on services of GTA upto place of removal is not as simple as it appears and cannot be discussed in full length in the present article. There are plethora of issues which need to be given full consideration before final answers on this issue can be obtained.

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Ajit Singh Butalia,

Assistant Manager – Indirect Taxation,

Triveni Engineering And Industries Limited.