The issue of whether or not input tax credits are available under the relevant provisions on service taxes paid on outward transportation has long been a contentious one under service tax law. The underlying provisions themselves have undergone changes over time, in order to limit the benefit to specific situations. However, a recent decision of the Tribunal appears to have the effect of allowing the benefit even to situations other than those covered above. It must be however noted that this decision is beneficial to the assessee in that it upholds the benefit of input tax credits in such other situations as well.
To fully appreciate the issue, it is important to understand the underlying provisions both before and after the changes referred to above. The definition of ‘input service’ in the provisions, prior to the amendment, insofar as they relate to transportation read as follows:- ‘input service means any service……………used by the manufacturer, whether directly or indirectly, 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 outward transportation up to the place of removal. With effect from April 1, 2008, the expression ‘clearance of final products from the place of removal’, as occurring above, was changed to ‘clearance of final products up to the place of removal’.
The other relevant provision is the definition of ‘place of removal’ which occurs in Section 4 of the Central Excise Act and which reads as follows: — “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 stored without payment of duty a 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.”
Before coming to the recent decision of the Tribunal, it will be useful to note certain earlier decisions on the subject. In Gujarat Ambuja Cements Ltd Vs CCEX (2007-TIOL-539), the Tribunal had importantly held that the post sale transportation of manufactured goods could not be an input service for the manufacturer. It held that the definition of ‘input service’ was so worded that credit was only available on transport services up to the place of removal and not beyond.
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The Tribunal held that the two clauses of the definition which had application to transportation were to be read together and not disjunctively and therefore only transportation costs up to the place of removal would be eligible for credits. Similarly, the Tribunal in Ultratech Cements Ltd. Vs. C.C.EX. (2007-TIOL-429) held that input tax credits would only be admissible on outward transportation of goods up to the place of removal and not beyond.
The ratio of these decisions has since been explicitly incorporated in the amended provisions by replacing the expression ‘clearance of final products from the place of removal’ with the expression ‘clearance of final products up to the place of removal’, thereby removing any doubt as to what is allowed as credit.
However, the interesting point is that the aspect of sale of goods appears to have been brought in and read into the definition of place of removal in the case of Ambuja Cements when in fact this condition is not present in the definition of place of removal as extracted above. In other words, in Gujarat Ambuja, the Tribunal did hold that post sale transport of manufactured goods is not an input in manufacture, although its final conclusion did not turn on this aspect.
Following this decision, the Central Board of Excise and Customs, vide its Circular No. 97/6/2007-ST, dated 23/08/2007, in regard to certain procedural issues in service tax, held that in an ex-factory removal situation where the manufacturer claimed that the sale of goods had taken place at the destination point, in terms of the sales contract or agreement, and hence ownership and property in the manufactured goods remained with the seller during the transportation of goods until delivery to the purchaser at destination, credits were admissible on the transportation costs up to the place of sale i.e. the destination of the purchaser.
Coming to the recent decision, in Datafield India Pvt Ltd. Vs C.C.EX. (2009-TIOL-33), the Tribunal has held that in a situation where goods were removed from the factory to the customer but no sale had taken place since the commercial terms were ‘FOR Destination’, it followed that the transportation charges incurred by the manufacturer for transportation of goods from the factory to the premises of the purchaser would be admissible for input tax credits.
The Tribunal took note of the above Circular and held that in the light of the Circular, there was no ambiguity with regard to the eligibility to input tax credits on the aforesaid transportation costs and thus upheld the claim of the appellants. The interesting point to be noted is that the aforesaid definition of ‘place of removal’, insofar as it relates to the factory of manufacture, does not incorporate any provisions predicating the sale of goods therefrom.
It is only that part of the definition which refers to depots or premises of the consignment agent etc. that the reference to sale is incorporated. Consequently, the reading of the definition of ‘place of removal’ as to require a sale to happen with regard to ex factory removals appears to be without basis in law. It is true that the Tribunal in Gujarat Ambuja did, in passing, state that post sale expenses would not be admissible for input tax credits.
The Board appears to have placed reliance on this part of the decision in order to hold that input tax credits would be admissible if the manufacturer/assessee were to demonstrate that no sale took place with regard to such ex factory removals to customers and that such sales took place only at the destination of such customers.
It appears that the ratio of this decision in Datafield would have application even with regard to the present provisions since the definition of ‘place of removal’ remains as before. Consequently, even though the benefit of input tax credit is restricted on transportation costs incurred up to the ‘place of removal’, nevertheless if the customer’s premises were to be construed as the place of removal in terms of the aforesaid decision, the benefit of input credit tax would continue to be applicable in situations where sales took place on ex factory removals on a ‘FOR Destination’ basis.
It will be very useful if the Board were to clarify that this is indeed the case and hence the benefit would accrue to the assessee in such situations.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers
pwctls.nd@in.pwc.com