No credit of Service Tax on outward freight - landmark order from Tribunal
Are you paying for outward freight and Service Tax thereon on for clearance from your factory? If so, stop this practice, for you will not get credit. You can ask the consignee to pay the freight and if he is a manufacturer, he will get credit on the Service Tax paid on freight, for him, it is inward transport! The trade lost a major case in the Tribunal.
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
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 there is 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 Department 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 Department 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 depot 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, Department 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!
But the Tribunal was not impressed. In a recent case which we are carrying today, the Tribunal held that cenvat credit of the Service Tax paid on outward transport cannot be allowed holding that:-
++ extending the credit beyond the point of duty paid removal of the final product would be contrary to the Scheme of Cenvat Credit Rules.
++ 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.
++ Definitions are to be looked at as a whole. Clauses of a definition are not to be read disjunctively.
++ 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.
++ The first clause does not mention transport service in particular. The second clause restricts transport service credit upto the place of removal.
++ When these two clauses are read together, it becomes clear that transport service credit cannot go beyond transport upto the place of removal.
++ 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.
But is there a conflict? What can be the services used for clearance, if not transport? Service Tax on the fee paid to an auditor is included as input service. Is it not a service after removal of goods?
In any case, even the Tribunal is ready to allow the credit for transport up to the place of removal. Now what is this place of removal? As per the definition in Section 4 of the Central Excise Act,
(c) "place of removal" means.
i. a factory or any other place or premises of production or manufacture of the excisable goods;
ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
iii. depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory;
from where such goods are removed;
So any place from where the goods are sold after their removal from the factory is the place of removal. And as per the CESTAT order transport up to the place of removal is allowed as credit. Maybe these facts were not brought to the notice of the Hon’ble Tribunal.
Not everything is lost. The issue has to be taken to a Larger Bench/High Court/Supreme Court.
See more details of this case in our Breaking News today.