Service Tax paid on transport of finished goods – Is credit available?
DDT 99 - 20 04 2005, asked a question,
Is a consignor factory (manufacturing excisable goods) paying Service Tax on goods transported to the customer’s premises eligible for taking credit on the Service Tax paid by him?
While many netizens offered their points of view, quite a few insisted that we answer the query as it was a real live problem. It appears that Commissioner of Central Excise Mumbai-IV had given a clarification :
“Manufacturer cannot avail CENVAT in respect of service tax paid on outward freight incurred on clearance of his final products from the factory.”
As per Rule 3 of the CENVAT Credit Rules, 2004 a manufacturer can take credit on the service tax paid on any input service received by the manufacturer. Input service has been defined as any service
(i) used by a provider of taxable service for providing an output service or
(ii) used by a manufacturer in or in relation to the manufacture of final products and clearance of final products from the place of removal.
and includes services used in relation to XXXXXXXXXXX, outward transportation up to the place of removal.
Based on the above definition let’s examine whether a manufacturer is eligible for taking credit of the service tax on the outward freight incurred for clearing his finished products.
This manufacturer is not an output service provider and therefore he is clearly out of Clause (i) above.
But Clause (ii) above includes services used for clearance of final products from the place of removal as well as transportation up to the place of removal. This means that a manufacturer of excisable goods is eligible to take credit of the service tax paid on transport of his finished goods as the transport of finished goods is clearly covered under the definition of input service, though it may not logically look like an input service. But law is often beyond logic.
In fact the manufacturer is eligible for credit not only of the service tax paid for transport of his goods from the factory to a depot but is also eligible for the credit of the service tax paid for transport of the goods from the depot.
This would in effect mean that virtually a manufacturer of excisable goods will not be paying any service tax as whatever tax he has paid on the transport of inputs into his factory or clearance of final products from his factory or depot can be taken as credit. So all that a manufacturer has to do is to maintain two sets of accounts, but pay no tax in effect. Why can’t he be simply exempted?