Credit on input service – Outward freight – Gujarat Ambuja disagreed with – referred to Larger Bench

BANGALORE, AUG 30, 2007 : THE Delhi Bench of the Tribunal had in Gujarat Ambuja case held that outward freight is not input service. We had carried many comments and articles on the issue. Now the Bangalore Bench has taken a different view.

The question before the Tribunal was whether Service Tax paid on outward transport of goods can be taken credit as input service. The issue is too well known for any detailed elaboration. Straight to what the Tribunal had to say; In a lucid and analytical dissection matching mathematical precision, the Tribunal observed.

1. The first limb of the definition of ‘Input Service’ defines the ‘Input Service’ as any service used by the manufacture in or in relation not only to the manufacture of final products but also to clearance of final products from the place of removal.

2. The place of removal can be either factory or depot. So it is very clear that Rule 2 (1) (ii) covers the services which is in dispute. When the place of removal is factory, the Service Tax paid on the goods transport services availed by the manufacturer from the factory up to to the destination of the buyer is definitely included.

3. Similarly, when the depot is the place of removal, the Service Tax paid on the goods transport services availed by the manufacturer is entitled for credit.

4. Now coming to the second limb of the definition of Rule 2 (1) (ii) which includes many items of services. When we examine it carefully, it is seen that the ‘Input Service’ includes inward transportation of inputs or capital goods with which we are not concerned now and outward transportation upto the place of removal.

5. Revenue interprets the above words to mean that the manufacturer can take credit of outward transportation only upto the place of removal forgetting or ignoring the first limb of the definition of ‘Input Service’ in Rule 2 (1) (ii).

6. Both the limbs of the definition of ‘Input Service’ have to be harmoniously interpreted. For interpreting the provisions harmoniously, we should be very clear as to what is meant by ‘Inward transportation” and what is meant by “outward transportation” .

7. Now this outward transportation is a service used by the manufacturer in relation to clearance of the final products from the place of removal. This cannot be denied. This is a factual thing. Therefore, in terms of Rule 2 (1) (ii) [First limb], this service becomes an ‘Input Service’. So long as this is an input service, the appellant is entitled for the credit on the tax paid on the input service.

8. Let us take another case where the depot becomes the place of removal. In that case, the outward transportation from the depot to the premises of the buyer becomes a service used by the manufacturer in relation to clearance of final products from the place of removal. In such circumstances, this service viz., the ‘outward transportation’ from the place of removal becomes an ‘Input Service’ as far as the manufacturer is concerned. Once it is an ‘input service’, then automatically, the appellant is entitled for the credits.

9. When the depot is the place of removal that is actually before the removal of the final products from the depot, the goods are brought from the factory to the depot, as far as the factory is concerned, these removals from the factory to the depot becomes is an ‘outward transportation’ . This outward transportation i.e. the outward transportation from the factory to the depot which is the place of removal should also be included as ‘Input Service’ because if the outward transportation which actually relates to the clearance of final products from the place of removal is an ‘Input Service’ as per the first limb of the definition of ‘Input Service’.

10. Therefore, there is no reason why the outward transportation from the factory to the depot should not be qualified for being ‘Input Service.’

11. In order to provide for treating the outward transportation from factory to depot as an ‘Input Service’, the same has been incorporated in the inclusive definition. In other words, the outward transportation from the factory to the place of removal which is depot has been specifically included in the inclusive definition and in the main definition the outward transportation from the factory or depot which are both places of removal to the destination of the buyer is included.

12. Alternatively, there is absolutely no conflict between the main definition and the inclusive definition of ‘Input Service’. This is the way the definition of ‘Input Service’ as given in Rule 2 (1) (ii) has to be interpreted.

The Tribunal summed up with A careful reading of the definition reveals that any service inter alia 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 upto 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.

(The issue is really that simple – How could we manage to complicate it so badly?)

So the Bench did not agree with the decision in the Gujarat Ambuja case and referred the matter to a Larger Bench.