Revenue wins big case; Service tax on outward freight - no cenvat credit; says Cestat
By TIOL News Service
NEW DELHI, APR 24, 2007 : THE dispute in the appeal is in regard to service tax paid on the freight incurred on the transportation of cement sold by the appellant. The sale is on FOR destination basis and freight is paid by the appellant. The appellant also pays the service tax in regard to the said freight. It claimed input service credit in respect of the service tax so paid. That claim was rejected by the Department.
Revenue authorities have taken the view that service tax credit is available only in respect of inward transportation (inputs) or outward transport of final products upto the place of removal. In the present case, since the goods were removed (upon payment of duty) for sale from the factory depots, revenue has taken the view that service tax paid on the cost of transportation from the factory/depots to the buyers' premises, would not be available as credit.
For ready reference, the definition may be seen
(1) '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 service 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"
The appellant’s counsel argued,
1. Under the general definition in Sl No.(ii) "any service used by the manufacturer in relation to clearance of final products from the place of removal" is eligible for input service credit.
2. Transportation of goods from the place of removal to the buyers premises remains covered by the expression "Clearance from the place of removal" and thus, credit is specifically provided for in respect of ser ice tax paid on transport to buyers.
3. It is also being contended that the mention of 'outward transportation upto the place of removal' in inclusion clause of the definition does not have any effect on the claim of the appellant as its claim is in terms of the main definition.
4. That an inclusion clause cannot restrict the scope of the main definition in the Statute.
5. that the inclusion clause makes the scope of input service credit broad by including a larger number of services which are only indirectly or remotely connected to manufacture, such as accounting, marketing, advertisement, sales promotion etc.
6. that the provision for input service credit in relation to clearance should also be allowed in its broadest scope . And the Revenue argued that
1. there is no basis for treating 'transportation' as part of 'clearance'.
2. It is being pointed out that transportation and clearance are entirely separate activities and one cannot take the place of other.
3. it is well settled that inclusions clause casts its shadhow on the main definition also and this warranted the joint consideration of the main definition and its inclusion clause.
4. the relief available under Cenvat Credit Rules is in regard to 'input' and that relief cannot under any circumstances, be made available in respect of a cost incurred on the final product after its removal from the factory/depot.
5. any relief allowed in regard to post clearance costs would be contrary to the provisions of Cenvat Credit Rules as well as of the provisions relating to the valuation of excisable goods (Section 4 of Central Excise Act).
6. section 4 of Central Excise Act makes it clear that excise levy cannot take in any cost beyond the point of removal of goods and therefore, input credit also cannot be in relation to any cost incurred after the removal of the goods.
After hearing both sides, Tribunal found Revenue’s arguments better for the reasons:-
1. Crucial point to be noted in regard to Cenvat Credit is that credit availability is in regard to 'inputs'.
2. The credit covers duty paid on input materials as well as tax paid on services, used in or in relation to the manufacture of the 'final product'.
3. Therefore, extending the credit beyond the point of duty paid removal of the final product would be contrary to the Scheme of Cenvat Credit Rules.
4. The interpretation sought to be placed by the appellant does not flow from the definition of input service.
5. The main clause in the definition states that the service in regard to which credit of tax is sought, should be used in or in relation to clearance of the final products from the place of removal.
6. A statute is to be read as a whole and words used interpreted taking into account the context in which they are used.
7. Definitions are to be looked at as a whole. Clauses of a definition are not to be read disjunctively.
8. In the present case, the statute deals with a tax on manufacture. The definition is in the context of relief in regard to duty/tax paid on input services. Post sale transport of manufactured goods is not an input in manufacture.
9. The two clauses in the definition take care to circumscribe input credit by stating that service used in relation to the clearance from the place of removal and service used for outward transportation upto the place of removal are to be treated as input service.
10. The first clause does not mention transport service in particular. The second clause restricts transport service credit upto the place of removal.
11. When these two clauses are read together, it becomes clear that transport service credit cannot go beyond transport upto the place of removal.
12. The two clauses, one dealing with general provision and another dealing with a specific item, are not to be read disjunctively as to bring about conflict and to defeat the laws scheme.
13. The purpose of interpretation is find harmony and reconciliation among the various provisions.
The Tribunal also referred to two decisions of the Tribunal holding that transport does not come within the scope of clearance or forwarding. But those judgements were in relation to C&F Agents service which clearly excluded transportation.
Tribunal also referred to the Supreme Court judgement in Bombay Tyre and Indian Oxygen cases. But both these cases pertain to Central Excise valuation and have no relevance to cenvat credit.
On these grounds, the Tribunal dismissed the party’s appeal. Based on this decision, the Tribunal has passed another order on the same grounds disallowing credit for outward courier service. See - 2007-TIOL-540-CESTAT-DEL
The Counsel for the assessee should have brought to the notice of the Hon'ble CESTAT the definition of "place of removal" while analyzing the availability of cenvat credit of service tax paid on the outward transportation from the "place of removal". The inclusive part of the definition in clause ii of Rule 2 (l) which defines "input service" is illustrates just that "it is inclusive".
The inclusive definition can be likened to an "appendix" in the human body. But unfortunately at times appendix becomes life threatening and this judgment in the hands of the Revenue authorities is just that "life threatening for assessees".
In fact there was no need to split hairs on whether the definition and the clauses therein have to be read disjuntively or not when whatever is stated in the rule is obvious. When this rule is examined harmoniously with the definition of "place of removal" it clearly makes a case for allowing cenvat credit of service tax paid on transportation of goods not only upto the place of removal but also from the place of removal.
An imaginative barrier cannot be imposed on availability or otherwise of credits of service tax paid on transportation for clearances from different places of removal when there is no such intention in the CEA or the CCR.
This judgment is certainly not the end of road on this issue. Lets hope this issue is agitated at the next level for a fair view. Until then swallow the notices from the Revenue on this issue.
Posted by santosh hatwar
Sub: One should go to higher level
During the reading of news, i found that revenue ha taken a base that "transportation" is different from "clearance". Can clearance be made without transportation?
Let us discuss both the words, as per Cambridge dictionary of Learners;
TRANSPORTATION means in relation to people & goods "When people or goods are moved from one place to another"
CLEARANCE means in relation to material & people " To remove or get rid of something or to move people or goods away from the place".
From the above definiton it is clear that clearance is the intention to remove the goods whereas Transportation is the way to move the goods. Both are complimentary to each other. Hence not separate activities.
Now let us read the definition of "Input service" which says
"Any service USED by the MANUFACTURE, directly or indirectly, in or in relation to the manufacture of final products and CLEARANCE of final products FROM the place of removal"
What services are used by the Manufacture for clearance of Finished godds Generally,
1. Manpower
2. Transportation means.
So clearance cannot be done without transportation.
Another point to note is the CESTAT assumption " Credit covers duty paid on input materials as well as tax paid on services, used in or in relation to the manufacture of the final product"
But the definiton contains the word clearance also and not only manufacture.
Lets see what comes in future.
Posted by Akash Ohri
Sub: Yet to be settteled
As happen every time, this is not the setteled position of the law. The only portion to be decided of the said judgmenet is, whether input and input services can be terated at par, specifically, when the input is restricted to be used in or inrelation to manfuacture final product, and not for clearance of final product, whereas it is so for the input service. It is also a point to be raised, while following the principle laid down, that the inclusive part does not restrict the parent provision, how it is justified to hold that the parent provision does not specifies the service "transportation", and hence not available ?
Time is the best remedy, and till then, ltigation stands winner.
- Mukesh Dhruve
Posted by Mukesh Dhruve
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