DECEMBER 12, 2014

By Nirav S Karia, CA & Chaitanya Bhatt, CA

THE interpretation of the much debated term "place of removal" of goods has once again been dealt with by the Central Board of Excise and Customs through the recent Circular no. 988/12/2014-CX dated 20.10.2014, in view of the introduction of the definition of the said term in CENVAT Credit Rules, 2004.

The Board in the aforesaid circular has clarified that the term "place of removal" as appearing in the definition of input service would be determined in terms of the newly inserted definition of "place of removal" under the CENVAT Credit Rules, 2004.The Board further clarifies that the place where the sale i.e. transfer of property in goods takes place would be treated as the place of removal of goods.

A brief history that led to the advent of the above Circular would be of relevance here. The availment of CENVAT credit of service tax paid on post manufacturing activities (especially transportation and insurance of goods) has always been the subject matter of dispute between the manufacturer-assessees and the department over the past few years. This is for the reason that the interpretation of the term "place of removal" up to which CENVAT credit could be availed by the manufacturer-assessees was itself under dispute. Further, the term "place of removal" appearing in Rule 2(l) of CENVAT Credit Rules defining input service was not defined under the CENVAT Credit Rules, 2004 prior to 11.7.2014.

Relevant portion of Rule 2(l) of CENVAT Credit Rules as it stands now reads as under:

""input service" means any service, -

(i) used by a provider of output service for providing an output service; or

(ii) used by a 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,

and includes services used in relation to modernisation,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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal ….;"

Prior to 1.4.2008 the clause (ii) of the 'means' portion of the definition of input service covered services used by the manufacturer from the place of removal whereas the inclusive portion of the definition covered services in relation to GTA upto place of removal.

The Board in Circular no. 97/8/2007 dated 23.08.2007 (which has also been referred to in the Circular dated 20.10.2014) however clarified that for the purpose of availing CENVAT credit on outward transportation of goods, the buyer's premises would be treated as the place of removal if the following three conditions were cumulatively satisfied by the manufacturer-seller:

(i) the ownership of goods and the property in the goods remained with the seller of the goods till the delivery of the goods in acceptable condition to the purchaser at his door step;

(ii) the seller bore the risk of loss of or damage to the goods during transit to the destination; and

(iii) the freight charges were an integral part of the price of goods.

In view of the above, notwithstanding the contractual terms entered into between the parties, quite a number of manufacturers of goods availed the CENVAT credit of service tax paid on outward transportation of goods and transit insurance once they satisfied the above three conditions contained in the Circular dated 23.08.2007.

However, w.e.f.11.07.2014, the term "place of removal" has been specifically defined under the CENVAT Credit Rules, 2004 following which the Board has issued the present Circular dated 20.10.2014. Further, the Board in the present Circular has placed reliance on the decisions of the Hon'ble Tribunal in the case of Associated Strips Ltd. Vs. CCE, New Delhi - 2002-TIOL-437-CESTAT-DEL which was upheld by the Hon'ble Supreme Court in the case of M/s. Escorts JCB Ltd. Vs. CCE, New Delhi - 2002-TIOL-05-SC-CX for the purpose of determining place of removal.

In the case of Associated Strips Ltd. (supra), the appellants supplied finished goods to their customers on an ex-works basis. Further, the tenders for supply of goods also indicated that the freight, transit insurance etc. would be separately payable.

In spite of the aforesaid terms between the parties, the department sought to include the value of freight, transit insurance etc. in the assessable value of finished goods on the ground that since the responsibility for transportation, insurance and delivery of goods vested with the appellants, the place of removal amounted to customers' premises. In other words, the department was of the view that the sale of goods took place at the buyers' premises.

The Tribunal, however, rejected the above contention of the department and held that the deciding factor as to what is the place of removal would have to be determined in terms of the provisions of the Sale of Goods Act, 1930 and the intention of the parties. The Tribunal in this regard, particularly placed reliance on Section 19, 23 and 39 of the Sale of Goods Act, 1930.

Section 19(1) of the Sale of Goods Act provides that the property in respect of specific or ascertained goods shall be transferred to the buyer at such time as the parties to the contract intended it to be transferred. Section 19(2) of the Act provides that the intention of the parties shall be determined on the basis of:

(i) The terms of the contract;

(ii) The conduct of the parties; and

(iii) The circumstances of the case

Section 19(3) further provides that the rules contained in Section 20 to 24 of the Act shall be relevant for ascertaining the intention of the parties, "unless a different intention" appears between the parties.

Sections 20 to 24 of the Act contain provisions with respect to specific goods, unascertained goods and goods on sale or approval basis to determine as to when the property in the said goods would pass from the seller to the buyer.

Further, Section 39 of the Act inter alia provides that delivery of the goods to a carrier, pursuant to a contract of sale, for the purpose of transmission to the buyer, is prima facie deemed to be a delivery of the goods to the buyer.

It, therefore, appears that pursuant to issuance of the Circular dated 20.10.2014, the earlier conditions no. (ii) and (iii) contained in Circular dated 23.08.2007 have now become diluted and the condition no. (i) ( which is line with the present circular) now stands as a lone pillar to help determine the fact as to what would be the place of removal. In fact, the Board in the Circular has clarified that the fact as to who bears the costs of transportation or insurance, risks during transit of goods, inclusion of transportation costs in the value of goods etc. would no longer be relevant to determine the place of removal of goods.

Consequently, it would be now difficult to contend that the manufacturer-assessee would be eligible for availing the CENVAT credit of service tax paid on transit insurance and outward transportation for delivery of goods up to the buyer's premises only because he was liable to bear the risk of loss, costs of transportation etc.

It is also pertinent to note that only the terms of the contract between the parties would not be relevant to determine the intention of the parties as to where the transfer of property takes place. It is vital that in terms of Section 19 of the Sale of Goods Act, the "conduct of the parties" as well as the "circumstances of the case" should additionally support the contractual terms entered into between the parties. Any contradiction between the contractual terms and the conduct of the parties would lead the courts to determine the place of removal in terms of the default provisions of the Sale of Goods Act only.

Going further, it would also be pertinent to refer to cases where the manufacturer-assessee exports the final goods to various overseas buyers.The courts in a number of cases have held that the port from where export takes place would be the "place of removal" However, pursuant to issuance of the present Circular, can the department contend to the contrary and propose to deny the CENVAT credit of service tax on various services availed by the manufacturer-assessee up to the port for export of goods? Similar question may arise in the context of rebate of Service Tax under Notification No. 41/2012-ST dated 29.6.2012 which provides for rebate of Service Tax paid on specified services which have been used beyond the place of removal for export of goods.

A further twist in the tale emerges in case of those manufacturer-assessees who pay excise duty at specified rates under Section 3 or on the basis of Maximum Retail Price (MRP) on the goods under Section 4A of the Central Excise Act, 1944. The issue relating to availability of credit on GTA services in case of the aforesaid manufacturer-assessees was also a subject matter of dispute.

In this regard, it would be pertinent to refer to the case of Ultratech Cement Ltd. vs. CCE, Raipur reported at - 2014-TIOL-478-CESTAT-DEL. In that case, the assessee manufactured cement and paid excise duty at specified rates underSection 3 of the Act. The assessee availed the CENVAT credit of service tax paid on outward transportation up to the buyer's premises. The department was of the view that in case where the excise duty is charged on the specified rate, then the place of removal is the gate of the factory. The CESTAT agreeing with the aforesaid view held that place of removal as defined under Section 4 of the Central Excise Act, 1944 would be relevant for the purpose of deciding the place of removal even in case of those manufacturer-assessees who pay excise duty at specified rates or on MRP.

However the High Court of Chhattisgarh in the case of Ultratech Cement Ltd. vs. CCE, Raipur - 2014-TIOL-1437-HC-CHHATTISGARH-CX reversed the decision of Delhi CESTAT.The Hon'ble High Court remanded the matter back to the original adjudicating authority and inter alia held that there is no provision in the Act or in the Rules or in any circular issued by the Board of Central Excise and Customs, New Delhi to hold that in case the duty is charged on the specified rate, then the place of removal will be factory gate as a presumption in law. The High Court further held that the place of removal in such cases would be decided on the facts and circumstances of each case.

The High Court was thus of the view that unlike the definition of "place of removal" which was contained in Section 4 of the Central Excise Act, 1944 specifically for the purpose of that Section, there was no specific section or rule that defined "place of removal" for the purpose of goods which were assessed at specified rates.

The aforesaid ratio would squarely apply even in cases where the goods are assessed at MRP value under Section 4A of the Act. In such a case, the assessee could have very well taken a stand that where goods are assessed at MRP value, in the absence of any specific provision to the effect, the place of removalis the buyer's premises on account of the fact that he is bearing the risk of loss of goods in transit, transportation costs etc. and he should therefore be allowed to avail the credit on outward transportation etc.

However, pursuant to specific insertion of the term "place of removal" in the CENVAT Credit Rules, 2004 in Budget 2014 and the consequent issuance of the present Circular dated 20.10.2014, will the above stand (in cases where goods are assessed at specified rates or at MRP value) yet hold good? Can it further be said that the present Circular was in fact, issued to overcome the decision of the Hon'ble High Court in the case of Ultratech Cement (supra)?

Going by the nature, intent and spirit of the Circular, it is but clear that the above questions would be answered solely in terms of the contracts/agreements entered into between the parties i.e. the intention of the parties only would be relevant for deciding the place of removal.

It would,therefore,now be upon the parties to decide the terms of the contract in an absolute, crystal clear and transparent manner in order to determine as to when the transfer of property in goods would take place and what would be the place of removal. Further, documents such as Lorry Receipts, Railway Receipts, insurance policy etc.would have to unambiguously support the contractual terms entered into between the parties.

For instance, where the parties intend that the place of removal of goods would be the customers' premises and the goods are handed over to the transporter for delivery to the buyer, the terms of the contract, the conduct of the parties, documents as well as the seller's arrangement with the transporter ought to indicate that the seller has the ownership and right to appropriate or re-direct the delivery of goods to another or that the seller has the right to call back for return of the goods during transit.

In the wake of the above, it is hoped that the chaos, confusion and ambiguities pertaining to "place of removal" and availment of CENVAT credit on outward transportation will be cleared and the issue will get settled..

(The Authors are Senior Associates in M/s. Lakshmi Kumaran & Sridharan & the views expressed are strictly personal.)