By TIOL News Service

KOLKATA, DEC 17, 2013: THE CESTAT Larger Bench in ABB Ltd & Ors - (2009-TIOL-830-CESTAT-BANG-LB) held that the definition of 'input service' has to be interpreted in the light of the requirements of business and it cannot be read restrictively so as to confine it only upto the factory or upto the depot of manufacturers, thereby allowing CENVAT Credit of service tax paid on ‘outward transportation from the place of removal'.

Such a decision did not go down well with the Revenue and, therefore, they filed an appeal before the Karnataka High Court.

Much to the relief of all the assessees, the Karnataka High Court delivered a historic judgment upholding the legality of the CESTAT Larger Bench judgment upto the period 31.03.2008.

The High Court after extensively referring to the various provisions of CCR, 2004, the Valuation Rules, 2000, section 4 of CEA, 1944,the judgment of Punjab and Haryana High Court in Ambuja Cements Ltd vs. Union of India & Ors - (2009-TIOL-110-HC-P&H-ST) and the amendment made in the definition of input service viz. rule 2(l) of CCR, 2004 w.e.f 01.04.2008 inter alia held -

"…the Central Government thought it fit to amend the provision from 1.4.2008 by substituting the word 'upto' in place of 'from', in Clause (ii) of Rule 2(1) making the intention clear i.e. whether it is an inward transportation of input of capital goods or clearance of final products upto the place of removal, any service rendered and service tax paid would fall within the definition of 'input service'. Therefore, it is clear that till such amendment made effective from 1.4.2008 notwithstanding the clarification issued by the Central Government by way of their circular, transportation charges incurred by the manufacturer for 'clearance of final products from the place of removal' was included in the definition of input service…."

Inasmuch as the High Court held - (2011-TIOL-395-HC-KAR-ST) that though the ultimate order passed by the Larger Bench did not suffer from any infirmity, the reasoning assigned by it in coming to such a conclusion was erroneous. The High Court made it clear that this interpretation is valid till 01.04.2008 only.

In the present case, the CESTAT had dismissed the appeal preferred by the Revenue by following the judgment in the case of   ABB Limited & Ors, - (2011-TIOL-395-HC-KAR-ST), holding that service tax paid by the manufacturer for outward transportation of the goods upto the point of delivery to the customer is claimable as an input service under the CENVAT Rules.

So, the Revenue had filed an appeal before the Calcutta High Court. The appellant placed reliance on the Karnataka High Court decision.

The High Court observed -

"The aforesaid reasoning, we are sorry to say, has not appealed to us. ‘Input service' as defined in Rule 2(l)(ii) does not include the expenses with regard to post-manufacturing stage except for the purpose of transportation of goods from one place of removal to another place of removal. It is, however, true that relaxation in that regard was made by the Circular issued by the Board on 23rd August, 2007. When the Board has made the relaxation, the assessee is entitled to take the benefit thereof. But, we are not prepared to accept that effect of the Circular would be to amend the Rules. Rules remain what they were. On the basis of the Circular issued by the Board, it cannot be said that under the Rules, ‘input service' includes the transportation service made available to the customer for the purpose of delivering the goods at the destination. The finding, "Therefore, if the service tax is paid on transportation charges, in such cases, it fell within the phrase "clearance of final products from the place of removal" and, therefore, the assessee was entitled to CENVAT credit.", is erroneous in any event because even the Circular issued by the Board on 23rd August, 2007 does not provide for the allowance as widely as indicated in the judgement of the Karnataka High Court quoted above. The Board in its Circular has made the relaxation in some cases having the factual background as indicated therein. On that basis it cannot be said that because in some cases the outward transportation charges or the service tax payable thereon is claimable as input service, in all cases such benefit may be available."

The High Court also held that the decision of the Gujarat High Court in Parth Poly Wooven Pvt. Ltd. - (2011-TIOL-891-HC-AHM-ST) cannot be accepted.

While noting that there were more reasons for not accepting the orders passed by the Karnataka High Court, the High Court inter alia observed -

"By the amendment made with effect from 1st April, 2008 substituting the word "from" by the word "upto" all that has been done is to clarify the issue. Neither the services rendered to the customer for the purpose of delivering the goods at the destination was covered by the definition of input service prior to 1st April, 2008, nor is the same covered after 1st April, 2008. If the definition provided in Section 2(l)(ii) is read as a whole, it would appear that outward transportation charges or taxes paid in regard thereto is claimable only with regard to those transports which were made from one place of removal to another place of removal."

In fine, the High Court held that the judgment rendered by the Tribunal cannot be sustained and, therefore, the same was set aside.

The respondent prayed for stay of operation of the judgment for six weeks and this prayer was allowed by the High Court.

In passing: Ve.su.vi.us (n) - an active volcano in SW Italy, near Naples. Its eruption destroyed the ancient cities of Pompeii & Herculaneum A.D 79.

(See 2013-TIOL-1038-HC-KOL-ST)