Firstly let us take the issue. It relates to the concept of transit sales. Say for example, “X” purchase goods from a manufacturer and sell to say “Y”. The goods are directly dispatched to “Y”, and “X” is an intermediate person. The question is whether “Y” is a first stage dealer? It is possible that “X” sells it to “A”, who sells it to “B”, who in turns sells it to “C”, who later sells to “Y” and goods are directly dispatched to the “Y” from the manufacture’s premises. In other words when there are more than one, say 5 intermediate persons before the goods are dispatched to “Y”. The issue is again the same, “whether the “Y” is a first stage dealer?” The invoice clearly shows that these persons are the purchaser from the manufacturer.
A first stage dealer has been defined in the Rule 2(ij) of the Cenvat Credit Rules, 2004[earlier Rule 2(f)] as,
“first stage dealer” means a dealer, who purchases the goods directly from, –
(i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or
It is clear from the definition that anybody who purchases the goods directly from the manufacturer under the cover of an invoice issued within the meaning of the Central Excise Rules is a first stage dealer.
Purchase or Sale has been defined under Section 2(h) of the Central Excise Act,1944 as
“sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;”
It may be noted that sale or purchase under Central Excise means transfer of possession. It doesn’t refer to sale or purchase within the meaning of the Sale of Goods Act. In this particular case the possession is being directly transferred to “Y” from the manufacturer. Hence “Y” is the purchaser from the manufacturer within the meaning of Section 2(h) of the Central Excise Act. And since “Y” is Purchasing (transfer of possession) the goods directly from the manufacturer under cover of Rule 11 invoice, he is a first stage dealer within the meaning of the Rule 2(ij) of the Cenvat Credit Rules.
The contrary contention that “X”, the intermediate person is a first stage dealer is erroneous and based on misunderstanding of law. Since possession has never been transferred to “X”, he has never purchased the goods within the meaning of Section 2(h) of the Central Excise Act, 1944 and as such he is not a dealer at all. It may be noted that to become a dealer, either first stage or second stage, purchase (transfer of possession) is a must. A person who never got the possession of goods cannot be treated as purchaser of goods in the Central Excise.
The CBEC Circulars No. 96/7/95-CX., dated 13-02-1995, 137/48/95-CX., dated 18-7-1995, Circular No. 218/52/96-CX, dated 4-6-1996, Pune Commissionerate Trade Notice No. 76/95 dated 20-07-1995, Vadodara Commissionerate Trade Notice No. 8/95 dated 27-1-95 etc. deals with this question and provides some of the guidelines related to the issue. All these circulars and trade notices reflect correctly the law laid down under the Central Excise Act, however they are not explicit with respect to the legal basis of the stand taken. This may be a cause of the confusion prevailing in the field formations.
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The concept of transit sale was explained by the Board in Circular No. 96/7/95 dated 13-2-95 where in it explained that,
“1. A registered person places an order on a manufacturer for supply and delivery of goods directly to a consumer and the goods are accordingly transported from the manufacturer’s premises to the user’s premises without being brought to the registered person’s premises. In such a situation manufacturer will issue an invoice under Rule 52A. This invoice under Rule 52A will contain, in addition to the prescribed details including the consignee’s name and address, mentioned therein, the registered person’s name and address, on account of whose instructions the goods have been despatched. The consignee in this case will be the end user. In such a situation the registered person’s invoice is not required for availment of Modvat credit. The duplicate copy of the manufacturer’s invoice under Rule 52A will serve as cover for transport and for availment of Modvat by the end user.”
It is clear from this para that “Y”, the consignee has taken Cenvat Credit on the strength of the manufacturer’s invoice and hence he is the first stage dealer.
Reference may also be made to Board’s Circular No. 218/52/96-CX, dated 4-6-1996 vide file no. 267/72/96-CX.8 wherein the CBEC explained that when goods are received to a consignee directly from the manufacturer, even when the invoice shows some other person as buyer, cenvat credit on such invoice is permissible. In this case no other invoice under Rule 57G is required. In fact the intermediate person need not to be registered as dealer of Central Excise. Thus even when name of any intermediate person is mentioned on the invoice, the consignee is eligible to take cenvat credit on the strength of manufacturer invoice. Thus “Y”, the consignee has taken credit on the strength of the manufacturer invoice and for that reason he is a first stage dealer.
In fact an intermediate person “X” or “A” etc., even if registered with Central Excise, is not allowed to issue any cenvatable invoice if the goods are not received by them. If the goods are sent directly to the consignee premises, even if the intermediate person is registered he cannot issue a cenvatable invoice. This point is very clear from the Pune Commissionerate Trade Totice No. 76/95 dated 20-07-1995. Similarly Vadodara Commissionerate Trade Notice No. 8/95 dated 27-1-95 makes it very clear that in cases of such sales invoice issued under Rule 52A (manufacturer’s invoice) “only” will be a valid document for taking credit. The use of term only makes it very clear that the intermediate person cannot issue a modvatable invoice on such sales and even if he issues such invoices credit cannot be taken on such invoices. Thus when the intermediate persons “X”, “A” etc. cannot issue a cenvatable invoice on this sale, or even if he issues no credit can be taken on such invoice, the contention that the intermediate person is a first stage dealer is wholly non-sustainable in law.
There are numerous judgments of the Hon’ble Tribunal on which such Cenvat Credit has been allowed to the assessee to the consignee on the strength of the manufacturer invoice when names of intermediate person/s were mentioned on the invoice. Some of the important judgments on this point are:
1. Inder Poly Fabs (P) Ltd. v. CCE [1998 (99) ELT 420].
2. Mahadev Industries v. CCE [2000 (115) ELT 452].
3. Malawa Cotton v. CCE [2002 (144) ELT 645]
Credit is allowed even when intermediate person is not registered with Central Excise as held in cases of Stadmed (P) Ltd. v. CCE [1998 (102) ELT 466] and Dr. Curies Labs Ltd. v. CCE [1999 (112) ELT 539].
It may further be noted that the intermediate person need not be authorized dealer of the manufacturer to avail credit on the manufacturer’s invoice as held in CCE v. Uttam Industries [1997 (89) ELT 87] and in CCE v. Beekay Engineering [2001 (129) ELT 543].
It is clear from these legal authorities that in case of such transit sales:
1. Credit can be taken on the basis of manufacture’s invoice only.
2. The intermediate person cannot issue any cenvatable invoice.
3. The intermediate person is not required to be registered with Central Excise.
Thus the intermediate person is not treated as a Central Excise dealer in such cases of transit sales and hence “X” is not a Central Excise dealer in this case of transit sales. It follows that “Y”, to whom possession has been directly transferred from the manufacturer, is a first stage dealer.
The judgment delivered in case of Aditya Trading Co. vs. CCE [2003 (152) ELT 103], is not applicable in this case for various reasons. Firstly it was not an issue that whether the consignee is a first stage dealer or not. Secondly, the decisions would have been same even if the Tribunal has decided otherwise the issue. Since the issue was not affecting the decision directly, this point was not contested by the parties in that case. The decision on this point was not necessary to decide the “facts in issue” in that case. Hence the observations of the Tribunal, in this case is not applicable in the present circumstances and cannot be a binding precedence.
(Views expressed are personal views of the author.)
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on email@example.com