Service Tax on Goods Transport - yet another hornet's nest - no credit on outward transport?
Will the Board clarify?
It is unfortunate that even in the eleventh month of tax regime on goods transport, there is no clarity and for every confusion, it is the unfortunate assessee who has the pay the price.
The latest missive is from the Hyderabad III Commissioner who has issued an Alert Circular No. 1/2005-06. Extracts from his Alert Circular.
Sub:- Central Excise – Wrong availment of Cenvat credit of Service Tax paid on the transportation of finished goods beyond the place of removal – Reg.
However, as per clause (l) of Rule 2 of the said rules, the manufacturers are eligible to take credit of Service Tax paid on the freight amount paid for “inward transportation of inputs or capital goods and outward transportation upto the place of removal”
.
It has come to the notice that the manufacturers under your jurisdiction have been availing Cenvat credit of Service Tax paid on the transportation of their finished goods beyond the place of removal. To make it clear, when the sale or delivery of the finished goods takes place at factory gate, even though by virtue of the mutual understanding or agreement with the consignee, the payment of freight is made by the manufacturer and the payment of Service Tax is also made by them on such freight amount, credit of such Service Tax is not available to the manufacturers in terms of the above referred clause.
You are hereby directed to verify the availment of Cenvat credit of Service Tax paid on transportation of goods by road, by the manufacturer of excisable goods under your jurisdiction and initiate appropriate action to recover the irregular credit, if any, taken by such manufacturers
Though DDT has discussed the issue earlier, as the Commissioner's alert notice is sure to spread and cause tremendous litigation, we are constrained to highlight the matter again.
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. Let us see an example.
A manufacturer has a factory in Chennai. He has a depot in Bangalore. He has a customer in Delhi to whom he delivers the goods at his cost. He pays Service Tax for the transport of his goods from Chennai to Bangalore and from Chennai to Delhi. Sometimes his Bangalore Depot also sells goods at Delhi and he pays Service Tax on the transport. Now what is his credit eligibility?
1. On the Transport of goods from his factory in Chennai to his depot in Bangalore - Here the Commissioner has no problem as the inclusive definition of input service covers outward transportation up to the place of removal. So credit allowed.
2. On the transport of his goods to the customer in Delhi. Here the Commissioner will allow credit only if Delhi is the place of removal. But even if Chennai is the place of removal credit should be allowed as the main meaning of input service covers "clearance of final products from the place of removal"
3. On the transport of goods from the depot to the customer in Delhi. The Commissioner will not allow credit as it is clearance from the place of removal. But the law says that clearance from the place of removal is allowed.
Why should the law mention both clearances from the place of removal and up to the place of removal? Please note that "up to the place of removal" is covered under the inclusive category of the definition while "from the place of removal" is in the main part of the definition. For a moment assume that transport of goods up to the place of removal is not covered as input service. Then in the above example, transport charges from the dept in Bangalore will be covered but the charges up to Bangalore will not be allowed. This would lead to a ridiculous situation. It is to avoid this gap that transportation up to the place of removal was included in the definition.
But unfortunately, in the field, different interpretations are being given to a clear law. I heard a Commissioner telling a meeting that law should be constructed harmoniously and so he would allow the included part and not the main part of the definition, because logically moving out of goods cannot be an input service!
For a better understanding of the issue, let us have a look at another definition in the Cenvat Credit Rules - Rule 2(d)
(d) "exempted goods" means excisable goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to "Nil" rate of duty;
Will the department take the main definition or the inclusive one or both? If only the inclusive definition is taken, exempted means only those goods which are chargeable to nil duty, but if they are exempted by a notification, they are not considered as exempted!
DDT spoke to the Commissioner concerned who very patiently explained that clearance from the place of removal cannot be considered as input service.
How long should this confusion continue? Before this wild fire spreads, can we expect a clarification from the Board? Or should we wait for another round of litigation?