Whether Goods Transport Agency (GTA) services availed for transportation of goods from the place of removal to buyer’s premises will be considered as input service within the ambit of Rule 2(l) of the Cenvat Credit Rules, 2004 (the Credit Rules)?
Facts & Background:
During the period from January, 2010 to June 2010, M/s. Ultratech Cement Limited (“the Respondent”) availed Cenvat credit of Service tax paid on outward transportation of goods through a transport agency from their premises to the customer’s premises. According to the Revenue, the transport agency service used by the Respondent for transportation of their final product from their premises to customer’s premises cannot be considered to have been used directly or indirectly in relation to clearance of goods from the factory viz., place of removal in terms of Rule 2(I) of the Credit Rules and as such cannot be considered as input service to avail Cenvat credit.
Accordingly, a show cause notice dated February 3, 2011 was issued to the Respondent alleging wrong availment of Cenvat credit of Service tax amounting to Rs. 25,66,131/- paid on outward transportation of goods from factory to customer’s premises, along with interest and penalty. Later on, the Adjudicating Authority upheld the demand holding that once the final product are cleared from the factory premises, extending the credit beyond the point of clearance of final product is not permissible under the Credit Rules.
On filing appeal before the Ld. Commissioner (Appeals), matter was decided in favour of the Respondent. The Commissioner (Appeals) allowed the appeal and held that the Respondent is eligible for availment of credit on GTA services on the outward freight from factory to customer’s premises as per the Board’s Circular 97/8/2007 dated August 23, 2007 (“the Board Circular”). Later on when the Department’s appeal at CESTAT and High Court were dismissed, the Revenue filed an appeal to the Hon’ble Supreme Court.
Observation of the Hon’ble Supreme Court:
On thread bare analysis of definition of ‘input service’ contained in Rule 2(l) of the Credit Rules, the Hon’ble Supreme Court observed as under:
- Definition of ‘input service’ makes it clear that only those services are included in Input services, which are used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products ‘upto the place of removal’.
- The original definition of ‘input service’ contained in Rule 2(l) of the Credit Rules used the expression ‘from the place of removal’. Thus, services used by the manufacturer for clearance of final products ‘from the place of removal’ to the warehouse or customer’s place etc., was exigible for Cenvat credit as decided in the case of Commissioner of Central Excise Belgaum Vs. M/s Vasavadatta Cements Ltd. [Civil Appeal No. 11710 of 2016].
- Vide amendment carried out in the Credit Rules w.e.f March 1, 2008, the word ‘from’ was replaced by the word ‘upto’, which has changed the entire scenario. The benefit which was admissible even beyond the place of removal now gets terminated at the place of removal and doors to the Cenvat credit of input tax paid gets closed at that place. It becomes clear from the bare reading of this amended Rule, which applies to the period in question that the GTA service used for the purpose of outward transportation of goods, i.e. from the factory to customer’s premises, is not covered within the ambit of Rule2(l) of the Credit Rules.
- It was observed that the Adjudicating Authority was right in interpreting Rule 2(l) of the Credit Rules in the following manner:
- The two clauses in the definition of ‘input service’ 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 services credit cannot go beyond transport upto the place of removal.
- Extending the credit beyond the point of removal of the final product on payment of duty would be contrary to the scheme of the Credit Rules. Transportation is totally different activity from manufacture and this position remains settled by the judgment of Hon’ble Supreme Court in the cases of Bombay Tyre International [1983 (14) ELT], Indian Oxygen Ltd. [1988 (36) ELT 723 SC] and Baroda Electric Meters [1997 (94) ELT 13 SC].
- The Board Circular dated August 23, 2007 was issued in clarification of the definition of ‘input service’ as existed on that date i.e. it is related to un-amended definition. Further, the issue was examined after keeping in mind judgments of CESTAT in Gujarat Ambuja Cement Ltd. and M/s. Ultratech Cement Ltd., which, obviously, dealt with un-amended Rule 2(l) of the Credit Rules.
- Therefore, the Board Circular cannot be applied after amendment in the definition of ‘input service’. Now, the definition of ‘place of removal’ and the conditions which are to be satisfied have to be in the context of ‘upto’ the place of removal. It is this amendment which has made the entire difference. That aspect is not dealt with in the Board circular, nor could it be.If such a circular is made applicable even in respect of post amendment cases, it would be violative of Rule 2(l) of the Credit Rules and such a situation cannot be countenanced.
On the basis of the above discussion and observations, the Hon’ble Supreme Court held that Cenvat credit on GTA services availed for transport of goods from the place of removal to buyer’s premises was not admissible to the Respondent. Accordingly, the Revenue’s appeal was allowed by restoring the Order-in-Original.
This is indeed a game changer judgment for the entire trade, as the Hon’ble Supreme Court has unsettled the matter by holding that no Cenvat credit will be allowed to the manufacturer in respect of GTA services availed on outward transportation of goods from the place of removal to buyer’s premises post April 1, 2008 (Changes brought in definition of input service vide Notification No. 10/2008 – CE (NT) dated March 1, 2008).
However, it is to be noted here that few of the manufacturers sell the final product to the dealers/ customers on Free on Road (“FOR”) destination basis which can be substantiated from the terms and conditions of agreement/ purchase order between the manufacturers and the dealers/ customers. In terms of agreement, the manufacturers are required to arrange for transportation and delivery of the goods at the dealer’s/ customer’s premises. The price charged by the manufacturer is inclusive of freight and nothing is charged separately on account of freight towards transportation of final product. Further all the risk associated with the products during transportation from the factory/ depots to dealer’s/ customer’s premises is fully borne by the manufacturers and hence, transit insurance for the products is the responsibility of the manufacturers. If the above judgment is applied in case of FOR sales, then also Cenvat credit will not be allowed to manufacturers.
But, the CBEC earlier vide Circular No. 988/12/2014-CX dated October 20, 2014 had clarified that ‘the place where property in goods passes on to the buyer’ is relevant to determine ‘place of removal’. Now, can we really say that place of removal is factory premises in case of FOR destination sales?
Nonetheless, the recent decision of the Hon’ble Supreme Court will act as precedent for deciding pending litigations of pre-GST era on the matter of availability of Cenvat credit on outward transportation services. Fortunately, the GST regime will not see such litigations to the extent it allows input tax credit on all input services used in the course or furtherance of business except the negative list items as specified in terms of Section 17(5) of the CGST Act, 2017.
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