Service Tax is an enigma. It has shown to the government that you can tax the largest sector of the economy without having a codified law. It has shown to the tax administrators that it is better to tax without a law as law reduces your discretion. The only sufferer is tax assessee- but in any case, law or no law, they are there to suffer. The administration of Service Tax show ad-hocism at its zenith. In this ad hocism the method of collecting Service Tax on Goods Transport Operator is high point in enforcing uncertainty- I have heard uncertainty of law is the greatest cruelty. The service tax administrator has forgot this cliché.
Article 265 of the Constitution said that no tax shall be levied or collected save by authority of law. No person can argue that service tax is being collected without authority of law- after all there are various clauses of Finance Act of various years authorizing levy and collection of service tax. So what if these clauses are not clear-Article 265 didn’t refer to clear law. So what if these clauses are not certain- Article 265 did not refer to certain law. Thus I am sure that administration of service tax is not at all violating any word of the Article 265 of the Constitution. And spirit of any law is or was never important to the tax administrators.
And then I found an article written by a learned tax administrator in this esteemed journal (GTA-Liability to pay Service Tax and Credit thereon, 2006 (2) STR J147]. The learned author argued that liability to pay service tax is not the only criterion to avail credit. I cannot agree more. But I differ from him on various counts. This paper is an attempt to examine the legal provision (howsoever uncertain they are) with respect to Cenvat Credit on service tax paid on outward freight service- that is freight on transportation of goods after clearance from factory gate, after the place of removal, after the Central Excise duty has been paid.
I agree with the learned author that liability to pay a tax and taking credit of that particular payment of tax are two different things. They are governed by different provisions of law. You may pay a tax but you will not get any credit- like taxes paid on high speed diesel. You may not pay the tax but you may get credit- we can still remember various form of deemed credit available to the assessees. Off course payment of tax may be a criterion to allow credit and in general it is a criterion.
Credit of service tax is availed under Cenvat Credit Rules, 2004. Thus we have to examine these Rules to ascertain whether credit of service tax paid on outward freight is available to the manufacturer or not. Rule 3(ix) of the Cenvat Credit Rules, 2004, reads as,
RULE 3. CENVAT credit.— (1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of –
(ix) the service tax leviable under section 66 of the Finance Act;
paid on –
(ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,
Thus a manufacture of final product shall be allowed to take credit of service tax paid on any “input service”.
Input service has been defined as,
2(l). “input service” means any service, -?
(i) used by a provider of taxable service for providing an output service, or
(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 services 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;
Thus input service means any service 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 factory. Thereafter the term includes come. We will take the meaning of the term “includes” later.
The definition clearly says that input service means service used in or in relation to, directly or indirectly in clearance of product from the place or removal. Thus outward freight is clearly included in the definition of input service, as relates directly to the clearance of final products from the place of removal.
It may further be noted that when outward freight is included in the transaction value, there is no reason to deny service tax paid on outward freight, as outward freight is to be paid by the manufacture and he is paying Central Excise duty on a transaction value which includes freight and service tax on freight. I don’t think any reasonable tax administrator will take a different view.
There may be situations when freight is being paid by the buyer of goods, but due to the fact that the assessee is manufacturer of goods he is required to pay the service tax as per Notification 35/2005 of the service tax. It may be noted that such payment of service tax is not due to the fact that the assessee is paying for the freight but it is simply due to the fact that the assessee is a manufacturer and hence falls in the said notification. Thus the payment of service tax in this case relates directly to the manufacture of goods and indirectly as the status of the assessee as manufacturer. In view of this the service tax paid on such service is covered in the definition of the input service and such amount can be availed as Cenvat Credit.
The ambit of this definition cannot be restricted by any term used after the term “includes”. It is an inclusive definition. The word includes is a phrase of extension and not of restrictive definition. Include is used in interpretation clauses in order to enlarge the meaning of the words or the phrases used in the definition. In State v. Montello Salt [98 Pac. 549], the court held that it is a well known rule of interpretation that the word “includes” is used as a word of enlargement and ordinarily implies that something else has been given beyond the general language which precedes it. In Taj Mahal Hotel v. CIT [AIR 1969 A.P. 84], the court held that where the term include is used in interpretation clauses then the words or phrases occurring in the body of the statute must be construed as comprehending, not only such things as they signify according to their nature and import but also those things which the interpretation clause declares they shall include. The Supreme Court confirmed the view in case of CIT v. Taj Mahal Hotel [1971 (82) ITR 44 (SC)], and held that include conveys wider meaning. It gives wider meaning to the words or the phrases used in the statute. It is usually used in interpretation clause in order to enlarge the meaning of the words in the statute.
Now, let us read the definition once again. It says,
2 (l). “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 ………………………outward transportation upto the place of removal;
The main part of the definition, Rule 2(l)(ii) says that the service should be used in relation to manufacture and in clearance of final product. For clearance of final product part, the definition is clear, but it is not clear with respect to outward transportation of the final products upto the place of removal. These particular things are being included in the definition of input service by using the term includes outward transportation upto the place of removal. Reading both the clauses together, the term input service means not only services used for clearance of final products from the place of removal but also includes services used in transporting final products upto the place of removal.
The other issue which may come up is the definition of input service with respect to transportation of inputs as such, transportation of inputs to job worker and return thereof, transportation of inputs or capital goods for repair, reconditioning etc. These services are very directly related to the manufacturing process and as such they are covered in the definition and so Cenvat Credit can be availed for service tax paid on availing these services.
This interpretation is also supported by the purposive interpretation of exemption beneficial piece of legislation. The purpose of Cenvat Credit rule is to give credit of Central Excise duty and Service tax paid to the manufacturer or output service provider so that the cascading effect of the taxes may be avoided. Thus the Cenvat Credit Rules should be interpreted in such a manner so as to give effect to the purpose of these Rules. An interpretation which defeats this very purpose of these rules are impermissioble in law. Hon’ble Supreme Court held in case of Oblum Electricals Industries v. CC [1997 (94) ELT 449 (SC)], wherein the Court held that,
“A perusal of Notification No. 116/88-Cus. shows that the object and purpose of the said notification is to encourage exports by granting exemption from customs duty on materials that are required to be imported for the purpose of manufacture of the resultant products or for replenishment of the material used in the manufacture of the resultant products, or both or for export as mandatory spares along with the resultant products………………..”
Purposive interpretation of beneficial piece of legislation has been settled by a catena of judgments. Five Member Bench of the Hon’ble Tribunal held the same view in case of Precast Engineering v. CCE [2000 (118) ELT 288].
When we apply this test to the definition of “input services”, in the Cenvat Credit Rules we find that if credit of service tax paid by the manufacturer on outward of transportation of final product is not given, such tax will become a part of his cost and will leads to cascading effect of taxes. Thus the terms used in the definition should be given their natural meaning so as the purpose of the rules be achieved. A restrictive interpretation not only cut the natural meaning of the terms used, which is impermissible in law, but also results in defeating the very purpose of the rules.
In view of this it is very clear that service tax paid on all transportation like, inward transportation of inputs, transportation of inputs for job work etc. and service tax paid on transportation of final products are cenvatable under the Cenvat Credit Rules 2004.
(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 protected] , Web: www.rajeshkumar.co.in