Supreme Court allows Cenvat Credit on Outward Transportation: Commissioner of Customs vs. Andhra Sugars Ltd. (2018)

Introduction

Date of the Judgment: February 5, 2018

Citation: (2018) INSC 120

Judges: A.K. Sikri, J. and Ashok Bhushan, J.

Can a manufacturer claim Cenvat credit for service tax paid on transporting goods to the customer’s doorstep? The Supreme Court of India recently addressed this question, focusing on the interpretation of “input service” under the Cenvat Credit Rules, 2004. The core issue revolved around whether the definition of ‘input service’ includes services used for outward transportation of goods to the purchaser’s premises, or if it is limited to the ‘place of removal’.

The Supreme Court bench, comprising Justices A.K. Sikri and Ashok Bhushan, delivered the judgment, with Justice A.K. Sikri authoring the opinion.

Case Background

M/s. Andhra Sugars Ltd. (the respondent) manufactures sugar, molasses, and inorganic chemicals at various units. They availed Cenvat credit on inputs, capital goods, and input services to pay their duty. The Revenue Department noticed that in December 2007, the respondent had taken credit for service tax paid on transportation charges up to the customers’ locations. The Revenue considered this inadmissible, leading to a show cause notice on November 3, 2008, demanding the Cenvat Credit of Rs. 3,87,763 along with interest and penalty.

The Assistant Commissioner, Eluru Division, confirmed the demands on January 9, 2009. The respondent appealed to the Commissioner (Appeals), Guntur, who set aside the order on December 2, 2011. The Revenue then appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore.

Timeline

Course of Proceedings

The CESTAT dismissed the Revenue’s appeal on August 14, 2013, citing the High Court of Karnataka’s decision in Commissioner of Central Excise and Service Tax, Bangalore v. ABB Ltd., Vadodara. The CESTAT also noted that the Revenue should not have filed the appeal due to the low amount involved, as per the CBEC Circular dated August 17, 2011. The Revenue then appealed to the High Court, which dismissed the appeal on July 16, 2014, stating that an identical issue had been previously dismissed in another case.

Legal Framework

The core of the dispute lies in the interpretation of “input service” as defined in Rule 2(l) of the Cenvat Credit Rules, 2004, which was in effect before April 1, 2008. The definition is as follows:

“Input Service” means any service-
(i) Used by a provider of taxable service for providing an output service; or
(ii)Used by the manufacturer, whether directly or indirectly, 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 setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation from the place of removal;

The judgment also refers to the definition of ‘place of removal’ under Section 4 of the Central Excise Act, 1944:

‘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;
(iii) 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.”

Arguments

The Revenue Department argued that outward transportation from the factory to the customer’s premises could not be considered an input service. They contended that the customer’s premises is not a recognized ‘place of removal’ under the Central Excise Act, 1944. Therefore, the service tax paid on transportation beyond the ‘place of removal’ should not be eligible for Cenvat credit.

The respondent argued that the definition of ‘input service’ includes services used by the manufacturer for the clearance of final products ‘from the place of removal’. They contended that the outward transportation from the factory, which is the ‘place of removal’, is an input service and eligible for Cenvat credit.

The Supreme Court also considered the Central Board of Excise and Customs (CBEC) Circular No. 97/8/2007-ST dated August 23, 2007. This circular clarified the definition of ‘input service’ and outlined conditions for determining the ‘place of removal’. These conditions are:

• Ownership of the goods remains with the seller until delivery at the purchaser’s doorstep.
• The seller bears the risk of loss or damage during transit.
• Freight charges are an integral part of the price of the goods.

The respondent argued that the conditions laid down in the circular were satisfied in their case.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the expression ‘input service’ as defined in Rule 2(l) of the Cenvat Credit Rules, 2004, in the context of a service provider, would also include services which are used in or in relation to providing taxation output services described in the definition and the outward transportation to the purchaser would be treated as beyond the ‘place of removal’.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Cases:

• Commissioner of Central Excise and Service Tax, Bangalore v. ABB Ltd., Vadodara [2011 (23) STR 97 (Kar)] – High Court of Karnataka.
• Commissioner of Central Excise Belgaum v. M/s. Vasavadatta Cements Ltd. (Civil Appeal No. 11710 of 2016) – Supreme Court of India.
• M/s Gujarat Ambuja Cements Ltd. vs CCE, Ludhiana [2007 (6) STR 249 Tri-D] – CESTAT.
• M/s Ultratech Cements Ltd vs CCE Bhavnagar 2007-TOIL-429-CESTAT-AHM – CESTAT.

Legal Provisions:

• Rule 2(l) of the Cenvat Credit Rules, 2004 – Definition of ‘input service’.
• Section 4 of the Central Excise Act, 1944 – Definition of ‘place of removal’.

Judgment

The Court considered the following authorities:

• Commissioner of Central Excise and Service Tax, Bangalore v. ABB Ltd., Vadodara [2011 (23) STR 97 (Kar)]* – The High Court of Karnataka’s decision was followed, which supported the view that outward transportation from the place of removal is an input service.
• Commissioner of Central Excise Belgaum v. M/s. Vasavadatta Cements Ltd. (Civil Appeal No. 11710 of 2016)* – The Supreme Court’s decision in this case was followed, which had already decided the issue in favor of the assessee.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by a harmonious interpretation of the definition of ‘input service’ and the concept of ‘place of removal’. The court emphasized that the definition of ‘input service’ includes services used for the clearance of final products from the place of removal and that the place of removal can be the factory itself. It also considered that the CBEC circular supported the view that if the sale contract includes delivery at the customer’s doorstep, then the transportation up to that point can be considered part of the input service.

The Court’s reasoning was primarily based on the interpretation of the legal provisions and the circulars issued by the CBEC. The factual aspects of the case, such as the nature of the sale contract, played a secondary role in the decision-making process.

The court reasoned that if the place of removal is the factory, then outward transportation from the factory is an input service. The court also relied on the CBEC circular which clarified that if the sale contract includes delivery at the customer’s doorstep, then the transportation up to that point can be considered part of the input service.

The court rejected the interpretation of the Revenue Department which would have nullified the effect of the word ‘from’ the place of removal appearing in the definition of ‘input service’.

The Supreme Court stated, “Once it is accepted that place of removal is the factory premises of the assessee, outward transportation ‘from the said place’ would clearly amount to input service.”

The Supreme Court further stated, “That place can be warehouse of the manufacturer or it can be customer’s place if from the place of removal the goods are directly dispatched to the place of the customer. One such outbound transportation from the place of removal gets covered by the definition of input service.”

The Court also stated, “If we accept the contention of the Department, it would nullify the effect of the word ‘from’ the place of removal appearing in the aforesaid definition.”

Key Takeaways

• Manufacturers can claim Cenvat credit on service tax paid for outward transportation of goods from their factory to the customer’s premises, provided the factory is considered the ‘place of removal’.
• The definition of ‘input service’ includes transportation from the ‘place of removal’, which can be the factory itself.
• The conditions laid down in the CBEC Circular dated August 23, 2007, regarding ownership, risk, and freight charges, must be satisfied to claim the credit.

This judgment clarifies the scope of ‘input service’ and provides relief to manufacturers by allowing them to claim credit on transportation costs, which will reduce their overall tax burden.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There is no specific amendment analysis in the judgment.

Development of Law

The ratio decidendi of this case is that the definition of ‘input service’ under Rule 2(l) of the Cenvat Credit Rules, 2004 includes the service tax paid on outward transportation of goods from the factory, if the factory is the place of removal. This clarifies the scope of ‘input service’ and allows manufacturers to claim Cenvat credit on transportation costs from the factory to the customer’s premises, provided the conditions laid down in the CBEC circular are met. There is no change in previous positions of law, but the judgment clarifies the existing position.

Conclusion

The Supreme Court dismissed the appeals filed by the Revenue Department, holding that the definition of ‘input service’ includes service tax paid on outward transportation from the factory, as long as the factory is considered the ‘place of removal’. This judgment provides clarity on the interpretation of ‘input service’ and allows manufacturers to claim Cenvat credit on transportation costs, reducing their tax burden.