Input tax credit on transportation costs

Budget 2008 incorporates a proposal to amend the relevant rules with effect from 1st April, 2008 in order to limit the credit of service taxes paid in relation to certain expenditures, primarily on transportation, pertaining to clearances of final products by a manufacturer.

The intention behind this amendment is to put an end to the uncertainty surrounding the eligibility to input tax credit of the service tax paid on such transportation, as a result of differing Tribunal decisions on the point.

In order to appreciate the matter at hand, it is pertinent to analyse the definition of 'input services' which holds that such services inter alia mean any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearances of final products from the place of removal.

There is a subsequent part of this definition, which is an inclusive one and which contains one service related to outward transportation up to the place of removal. The problem arose in relation to the meaning of the expression service in relation to clearances of final products from the place of removal.

In the first decision on the point, in Gujarat Ambuja Cements Ltd vs CCE (2007-TIOL-539), the Tribunal held that service taxes paid on the costs of transportation of goods from the factory of manufacture and from the depots to the premises of the customers would not be available as input tax credits.

The Tribunal held that the expression clearances of final products from the place of removal could only mean that the expenses must relate to the 'clearances as such and could not extend to transportation beyond the place of removal'. The Tribunal also held that it was only the second clause, forming part of the inclusive definition, that expressly extended the benefit to transportation.

On a holistic view, the Tribunal disallowed input tax credit on transportation beyond the place of removal. Following this decision, the Tribunal similarly held in two others cases. The decision in India of Japan Lighting Pvt Ltd vs CCE (2007 (8) STR 124) is an authoritative one and interprets the definition of 'input services' in an inclusive and harmonious manner and not in the disjunctive manner as argued by the assessees.

However, in another case in India Cements Ltd vs CCE (2007 (8) STR 43), the Tribunal did not agree with the decision in Gujarat Ambuja Cements (supra) and held that outward transportation from the place of removal up to the buyer's premises would be admissible as credit as it was a service in relation to clearances of final products from the place of removal. Accordingly, the Tribunal referred the matter to the Larger Bench for a final decision.

It is during the pendency of this Larger Bench decision that the Government has proposed the amendment in the rules in order to hold that input service would now mean any service in relation to clearances of final products up to the place of removal.

Accordingly, both the first part of the definition of input service as well as the inclusive part of the definition limit the benefit of input taxes on transportation up to the place of removal.

This would mean that in relation to transportation costs incurred on clearances of final products from the place of removal i.e. clearances from the factory or clearances from the depots, no benefit of tax credits would be available. What would continue to be available would be the tax in relation to transportation of finished products from the factory of manufacture to the depots.

To summarise, the primary transportation costs, as well as the secondary transportation costs, incurred on clearances of final products up to the customers' premises, will no longer qualify for input tax credits, and what would qualify would be the primary transportation in relation to clearance of final products from the factory to the depots.

Since these amendments would come into effect from 1st April, the decision of the Larger Bench, which is as yet awaited, will continue to be of relevance for the period prior to the aforesaid amendment i.e. up to March 31 this year.

In an interesting development, the Tribunal, in a very recent decision in Metro Shoes Pvt Ltd vs CCE (2008-TIOL-417), has held that the definition of place of removal would also extend to the showroom of a manufacturer from where the goods are sold, subsequent to their clearances from the factory of manufacture.

The author is Leader, Indirect Tax Practices, PwC. Views expressed are his own.

pwctls.nd@in.pwc.com