Credit of Service Tax paid on Outward Freight is admissible

RS Sharma Advocate
      Larger Bench of CESTAT vide AIT-2009-226-CESTAT has affirmed my views that CENVAT Credit of Service Tax paid on Outward Freight is admissible for the period of dispute.

Larger Bench while deciding bunch of cases has ruled that the definition of “input services” has to be interpreted in the light of the requirements of business and it cannot be read restrictively so as to confine only up to the factory or up to the depot of manufacturers and thus the services availed by a manufacturer for outward transportation of final products from the place of removal should be treated as an input service in terms of Rule 2(l)(ii) of the CENVAT Credit Rules, 2004 and thereby enabling the manufacturer to take credit of the service tax paid on the value of such services.

The issue referred to the larger Bench viz., “whether the services availed by a manufacturer for outward transportation of final products from the place of removal should be treated as an ‘Input Service' in terms of Rule 2(l) (ii) of CENVAT Credit Rules, 2004 and thereby enabling the manufacturer to take credit of the service tax paid on the value of such services?

or whether ‘Input service' should be limited only to outward transportation up to the place of removal in terms of the inclusive definition as held in the Gujarat Ambuja case cited supra?”

Rule 2(l) of the CENVAT Credit Rules, 2004 reads as under:-

“input service” means any service-

(ii)   Used by a provider of taxable service for providing on output service; or

(iii)  Used by the manufacturer, whether directly or indirectly, in or in relation 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;”

Larger Bench held that “for admissibility to credit for outward transportation there is no requirement that the cost of freight should enter into the transaction value of the manufactured goods. According to the department, since the cost of outward transportation does not form part of the transaction value of the manufactured goods as defined in Section 4 of the Central Excise Act, 1944, any service tax paid for the outward transportation of goods from place of removal cannot be allowed as credit to the manufacturer, although, the question of denial of credit does not arise if the cost of freight is included in the transaction value. However this stand is not tenable. In other words, credit is not to be automatically disallowed in those cases where the freight cost does not form part of the transaction value.

The issue in dispute in the present case is not one of valuation of excisable goods in terms of Section 4 of the Central Excise Act, 1944 or under the Central Excise Valuation Rules but admissibility of CENVAT credit of service tax on GTA service. The two issues, namely, “valuation’' and “CENVAT credit'’ are independent of each other and have no relevance to each other as clarified by the Board's Circular No.137/3/2006-CX dated 02.02.2006. As per the Board Circular No.97/8/2007 dated 23.08.2007, there may be situations where a manufacturer/consignor may claim that the sale has taken place at the destination point because in terms of the sale contract/agreement (i) the ownership of goods and property in the goods remained with the seller of the goods till the delivery thereof 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 and in such cases, the credit of service tax paid on the transportation upto such place of sale would be admissible if it can be established by the claimant of such credit that the sale and transfer of property in goods (in terms of the definition under Section 2 of the Central Excise Act, 1944 as also in terms of the provisions under the Sale of Goods Act, 1930) occurred at the said place.

The submission of the Revenue that CENVAT credit cannot be allowed for services if the value thereof does not form part of value subjected to excise duty is clearly against the fundamental concept laid down by the Supreme Court in the All India Federation of Tax Practitioners case and the DECO guidelines.

There is an additional reason for holding that CENVAT credit is admissible on services even if the value thereof is not part of the value subjected to duty. This is because the interpretation of the expression “input services” cannot fluctuate with the change in the definition of “value” in Section 4 of the Central Excise Act and cannot vary depending on whether the goods are levied to duty under Section 4A of the Central Excise Act or tariff value under Section 3 (2) of the Central Excise Act or the product attract specific rate of duty.

Larger Bench also noted that the Gujarat Ambuja Cements decision of the Tribunal has been overruled by the Hon'ble Punjab & Haryana High Court AIT-2009-95-HC

However, vide the Central Excise Non-Tariff Budget Notification No. 10/2008  dated 1st March 2008 the definition of the Input service has been amended as follows:-

The relevant part of the notification is reproduced here below :

       “2.   In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 2,-

              (i) in clause (l), for the words “clearance of final products from the place of removal”,

               the words “clearance of final products, upto the place of removal,” shall be substituted;”

Time-limit for availing CENVAT Credit:

Though Rule 4 of CENVAT Credit provides that CENVAT Credit may be taken immediately after receipt of inputs in the factory; in case of “input service” it provides as under:

“The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.”

Thus there is no time–limit prescribed under CENVAT Credit Rules for availing credit of “input service” and the credit for past period (i.e. up to 1.3.2008) can still be availed by the manufacturers.

Moreover, even after 1^st March 2008 if the place of delivery is the “place of removal” for a manufacturer; he is still entitled to avail CENVAT Credit of Service Tax paid on Outward Freight as it is covered within the ambit of the definition “ up to the place of removal” under CENVAT Credit Rules.

(Writer is an Advocate based in Delhi and is advising several MNCs, PSUs and Indian Corporates on service tax, excise and customs issues. He can be mailed at rssharma@gmail.com)

(Click here for full text of Ruling AIT-2009-226-CESTAT)

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