By TIOL News Service

NEW DELHI, JULY 20, 2015: THE applicants are a subsidiary of Gujarat State Petronet Limited, which is a Government Company and are before the Authority for Advance Rulings.

The Applicant proposes to engage itself in rendering taxable service in the nature of transport of gas through pipelines. They intend to avail the benefit of CENVAT credit in respect of the 'capital goods' and utilize the same for discharging their output service tax liability. Applicant proposes to adopt engineering, procurement and construction ("EPC") model for laying gas transmission pipelines.

Essentially for the purposes of laying pipeline, the applicant would be required to procure steel pipes and valves and further would have to get the pipes and valves installed and commissioned along the identified routes so as to connect the source to the destination. In this regard, applicant would grant various turnkey contracts ("EPC Contracts") involving supply of pipes and valves as well as installation and commissioning of the said pipes and valves to bring into existence a pipeline connecting the source to the destination.

Under the EPC Contracts, the applicant will procure the pipes and valves from the EPC Contractors, under a "Bill to ship to" arrangement whereby, the pipes and valves purchased by EPC contractors from the manufacturers would be directly shipped by such manufacturers to the applicant's project site (with applicant as consignee) under the cover of appropriate statutory documents/invoice. Further, it would be specifically provided in terms of the EPC Contracts that the ownership of such pipes and valves would pass to the applicant from the EPC Contractor(s) ex-works at the manufacturer's factory. Thus, the pipes and valves for the pipeline would be owned and received by the applicant at the site as pipes and valves itself. The manufacturer would dispatch the pipes and valves to the applicant under a manufacturer's invoice as mandated under Rule 11 of the CER, 2002. Upon receipt of the pipes and valves at the project site, the applicant would issue the same to the EPC Contractors free of cost (on bailment) for laying the pipeline along the identified route. The receipt of the pipes and valves and the issuance thereof to the EPC Contractors would be evidenced by appropriate documentation. The applicant would use the pipes and valves so received under the EPC Contracts for transport of gas through pipelines thereby using the pipes and valves for rendering taxable output service.

The EPC Contractors would charge separately for the supply of goods like pipes and valves from the applicant. In fact, separate invoices would be raised by the EPC Contractors for the sale of pipes and valves and provision of construction/ erection, installation and commissioning services for the laying of the pipelines. In respect of provision of services for erection and commissioning of pipelines, the EPC Contractors would qualify their services as "works contract services" and discharge service tax accordingly.

As per the Explanation 2 to Rule 2A of Service Tax (Determination of Value) Rules, 2006, applicant submits that restriction on credit availment is on the provider of taxable service viz., the EPC Contractors and no restriction on availment of credit has been prescribed for service recipients like the applicant; that accordingly, he would be eligible for credit under this option. Further, they are not availing any exemption on condition of non-availability of "credit of duty paid on any input or capital goods or of service tax paid on input service", therefore, there is no warrant to invoke the Explanation to Rule 3(7) of CCR, to deny credit of capital goods to the applicant; that thus, the provisions of Valuation Rules as above cannot be used to restrict credit availment by the applicant.

Suffice to say that the applicant has sought advance ruling on the following question:

The Revenue representative inter alia relied on the Bombay High Court decision in Bharti Airtel Ltd. vs. Commissioner of Central Excise - 2014-TIOL-1452-HC-MUM-ST to support his submission that pipes etc. gets transformed into pipeline systems, which in-turn gets embedded to earth, they become immovable property and, therefore, cannot be goods and, therefore, CENVAT credit cannot be extended on pipes and valves. Support is also drawn from the CBECs.37B order dated 15.01.2002 to submit that pipes and fittings no longer remain capital goods but after their erection along-with certain other structures and civil works become pipeline system.

To this submission, the applicant relied upon the LB decision in Spenta International Ltd. Vs Commissioner of Central Excise, Thane - 2007-TIOL-1089-CESTAT-MUM-LB, wherein it was held that credit eligibility is to be determined with reference to the date of receipt of capital goods.

The AAR held - In the instant case, pipes etc. (capital goods) are used by EPC contractors for providing construction / erection, installation and commissioning services. Therefore, in present case, capital goods (pipes and valves) are to be used for providing output service and it is not relevant whether these goods provide such service by being embedded to the earth. Therefore, we agree with the applicant that the relevant date to determine whether an item qualifies to be 'capital goods' is the time of its receipt and not subsequent date.

Revenue representative also raised the issue that the documents under which the applicant proposes to avail Cenvat credit are not the proper documents under Rule 9 of CCR, 2004. Backing is taken of the Board Circular No. 96/7/95-CX dated 13.02.1995 which clarified that credit is admissible even if the goods are sent directly to the user's premises and invoice is issued by a Registered Dealer; however, the said Circular is of no avail to the applicant, as EPC contractors are not registered dealers.

The applicant adverted to the CBEC Circular No. 96/7/95-CX dated 13.02.1995 read with Circular No. 218/52/96-CX dated 04.06.1996 which permits such movement of goods and also referred to Notification No. 8/2015-Central Excise (NT) dated 1.3.2015 by which Rule 11 of CER, 2002 has been amended and a proviso has been added mandating that "if the goods are directly sent to any person on the direction of the registered dealer, the invoice shall also contain the details of the registered dealer as the buyer and the person as the consignee, and that person shall take CENVAT credit on the basis of the registered dealer's invoice" and that they undertake to follow the procedure.

The AAR made the following observations -

++ The transfer of property would happen in the pipes from the manufacturer to the EPC contractors but possession of the pipes would be directly transferred to the applicant (since pipes and valves would be directly consigned to the applicant from the manufacture's premises). Also, there would be no transfer of possession of property in pipes and valves from EPC contractors to the applicant at the project sites, since the applicant would receive the pipes and valves as owners and then issue them on bailment to the EPC contractor for a specific purpose of providing services to bring into existence a pipeline. Therefore, the contention of Revenue that when pipes and valves are transferred from manufacturer to the applicant, applicant would get possession of pipes and valves from the manufacturer but same is not for consideration and thus, there would be no "sale" in terms of Section 2 (h) of Central Excise Act, 1944, - is factually incorrect.

++ It can be concluded that EPC contractor, who pays for the goods to the manufacturer, may direct said goods to be delivered at applicant's site, without it coming to the premises of EPC contractor and he (EPC contractor) need not be a "registered dealer" with the Central Excise. However, applicant cannot take Cenvat Credit of Central Excise duty paid on pipes and valves on the basis of invoice issued by "intermediary dealer", until and unless, this intermediary dealer is a "registered dealer". Therefore, the contention that the applicant is eligible to Cenvat credit of Central Excise duty paid by the manufacturer on pipes and valves on the basis of documents issued by "intermediary dealer", would be as per Central Excise Rules read with Cenvat Credit Rules, only when said "intermediary dealer" is a "registered dealer".

Conclusion by AAR: The applicants i.e. M/s GSPL India Transco Limited and M/s GSPL India Gasnet Limited are eligible to avail Cenvat Credit of excise duty that would be paid on the pipes and valves procured from the manufacturer against the applicant's output service tax liability for services in the nature of transport of gas through pipeline, provided, invoice for said Cenvat Credit of Central Excise duty on pipes & valves, is issued by "registered dealer".

In passing: Also see 2015-TIOL-02-ARA-ST. In the context of notification 8/2015-CX(NT) dated 01.03.2015, the CBEC had vide Circular 1003/10/2015-CX dated 05.05.2015, paragraph 5 clarified inter alia -

(iii) Where a un-registered dealer negotiates sale of an entire consignment from a manufacturer or a registered importer and orders direct transport of goods to the consignee, credit can be availed by the consignee on the basis of invoice issued by the manufacturer or the registered importer. As the dealer is not registered, there is no question of issuing any Cenvatable invoice by him. Such dealers as in the past can continue to be un-registered.

(See 2015-TIOL-03-ARA-ST)