Supreme Court Allows CENVAT Credit on Transportation of Goods up to First Destination: Commissioner of Central Excise Belgaum vs. Vasavadatta Cements Ltd. (2018)

Date of the Judgment: 17 January 2018

Citation: (2018) INSC 19

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

Can a manufacturer claim CENVAT credit on transportation costs of goods from the factory to their depot or customer’s place? The Supreme Court addressed this question, interpreting the definition of “input service” under the CENVAT Credit Rules, 2004. The core issue revolved around whether the transportation of goods from the place of removal to the first point of destination qualifies as an “input service” and, therefore, eligible for CENVAT credit. The Supreme Court, in this case, upheld the decision of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) and the Karnataka High Court, allowing CENVAT credit for transportation costs up to the first point of destination. The judgment was delivered by a two-judge bench comprising Justice A.K. Sikri and Justice Ashok Bhushan.

Case Background

The case involves multiple appeals filed by the Central Excise Department against various assessees. The dispute centers around the interpretation of “input service” as defined in Rule 2(l) of the CENVAT Credit Rules, 2004, specifically concerning the eligibility of CENVAT credit on Goods Transport Agency (GTA) services. The assessees had claimed CENVAT credit on the transportation costs of their final products from the place of removal (i.e., the factory) to either their depots or directly to the customer’s premises. This claim was for the first leg of transportation from the factory. The Revenue Department contested this, arguing that such transportation costs should not be considered as part of “input service”.

Timeline

Course of Proceedings

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) had allowed the assessees’ claim for CENVAT credit on GTA services for transporting goods from the place of removal to their depots or buyers’ premises. The lead judgment was given by the CESTAT in the case of Commissioner of Central Excise & S.T Unit Bangalore vs. M/s. ABB Limited. The Karnataka High Court upheld this decision. The Central Excise Department then appealed to the Supreme Court, challenging the interpretation of “input service” as given by the CESTAT and the High Court.

Legal Framework

The core of the dispute lies in the interpretation of Rule 2(l) of the CENVAT Credit Rules, 2004, specifically the definition of “input service”. The relevant portion of the rule, prior to the amendment on 01.04.2008, reads:

“(I)“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 upto the place of removal;”

The CESTAT interpreted this rule in two parts: the first part defining “input service” using the word “means,” which is exhaustive, and the second part using the word “includes,” which is extensive. The court focused on the first part, specifically the phrase “clearance of final products from the place of removal.” The issue was whether this phrase included transportation of goods up to the first point of destination, such as a depot or customer’s premises.

Arguments

The Central Excise Department argued that the term “from the place of removal” should be interpreted narrowly, limiting the CENVAT credit only to the point of removal and not beyond. They contended that the transportation of goods to depots or customers’ premises is a separate activity and not an integral part of the manufacturing process or clearance from the place of removal. The Department’s argument was that the term “from the place of removal” should be interpreted strictly and not extended to cover transportation up to the depot or customer’s premises.

The assessees, on the other hand, contended that the phrase “clearance of final products from the place of removal” should include the transportation of goods up to the first point of destination, be it a depot or the customer’s premises. They argued that transportation is a necessary part of the clearance process and that denying CENVAT credit on such transportation costs would be illogical. The assessees’ argument was that transportation is an essential part of the clearance process and should be included in the definition of input service. They also pointed out that the subsequent amendment to the rule, replacing “from” with “upto,” clarified the legislative intent to include transportation up to the first point of destination before the amendment.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the transportation of goods from the place of removal to the first point of destination (depot or customer’s premises) qualifies as an “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004, for the period prior to 01.04.2008.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The Court also considered the amendment to Rule 2(l) of the CENVAT Credit Rules, 2004, effective from 01.04.2008, where the phrase “from the place of removal” was substituted by “upto the place of removal.” This amendment was used to support the interpretation that, prior to the amendment, the phrase “from the place of removal” included transportation up to the first point of destination.

Judgment

Authorities Viewed by the Court:

✓ The CESTAT’s decision in Commissioner of Central Excise & S.T Unit Bangalore vs. M/s. ABB Limited* and the Karnataka High Court’s judgment upholding it were followed by the Supreme Court. The Supreme Court agreed with the interpretation that the phrase “clearance of final products from the place of removal” includes transportation up to the first point of destination.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the phrase “clearance of final products from the place of removal” in the context of the CENVAT Credit Rules, 2004. The Court emphasized that the word “from” in this context implies that the service is availed for the purpose of clearance of final products from the place of removal till it reaches its destination. The court also considered the subsequent amendment to the rule, replacing “from” with “upto,” as a clarification of the legislative intent, which supported the interpretation that transportation up to the first point of destination was included before the amendment. The court also reasoned that the definition of ‘input service’ should be interpreted to include all those services which are necessary for the clearance of final products and transportation is one of them.

The Supreme Court’s reasoning was based on a contextual interpretation of the legal provisions, considering the practical aspects of manufacturing and clearance of goods. The court rejected a narrow interpretation of the phrase “from the place of removal” and opted for a more inclusive interpretation that aligns with the intent of the CENVAT Credit Rules.

The Court quoted the High Court’s observation that:

“Therefore, services received or rendered by the manufacturer from the place of removal till it reaches its destination falls within the definition of input service.”

The Court also noted that:

“The exhaustive portion of the definition of ‘input service’ deals with service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. It also includes clearance of final products from the place of removal.”

Further the court also observed that:

“Therefore, tax paid on the transportation of the final product from the place of removal upto the first point, whether it is depot or the customer, has to be allowed.”

Key Takeaways

• Manufacturers can claim CENVAT credit on transportation costs of final products from the place of removal up to the first point of destination (depot or customer’s premises) for the period prior to 01.04.2008.
• The phrase “clearance of final products from the place of removal” includes transportation up to the first point of destination.
• The amendment to Rule 2(l) of the CENVAT Credit Rules, 2004, effective from 01.04.2008, clarified the legislative intent by substituting “from” with “upto,” limiting the credit to the place of removal.

Directions

The Supreme Court dismissed the appeals filed by the Central Excise Department and allowed the appeals filed by the assessees.

Development of Law

The Supreme Court’s judgment clarifies the scope of “input service” under the CENVAT Credit Rules, 2004, for the period prior to 01.04.2008. The ratio decidendi of the case is that the phrase “clearance of final products from the place of removal” includes transportation up to the first point of destination. This interpretation provides clarity on the eligibility of CENVAT credit for transportation costs during that period. The judgment also highlights the significance of legislative intent and the contextual interpretation of legal provisions.

Conclusion

The Supreme Court’s judgment in Commissioner of Central Excise Belgaum vs. M/s. Vasavadatta Cements Ltd. settles the dispute regarding the eligibility of CENVAT credit on transportation costs for the period prior to 01.04.2008. The Court held that the phrase “clearance of final products from the place of removal” includes transportation up to the first point of destination, allowing manufacturers to claim CENVAT credit on such costs. This decision provides clarity on the interpretation of “input service” under the CENVAT Credit Rules, 2004, and its implications for manufacturers.

Category

Parent Category: Central Excise Law
Child Category: CENVAT Credit Rules, 2004
Child Category: Input Service
Child Category: Place of Removal
Child Category: Transportation Costs
Parent Category: CENVAT Credit Rules, 2004
Child Category: Rule 2(l), CENVAT Credit Rules, 2004

FAQ

Q: What is CENVAT credit?
A: CENVAT credit is a mechanism that allows manufacturers to claim credit for the excise duty paid on inputs used in the manufacture of final products. This credit can be used to offset the excise duty payable on the final products.

Q: What was the dispute about in this case?
A: The dispute was about whether manufacturers could claim CENVAT credit on the transportation costs of final products from the factory to their depots or customer’s premises for the period prior to 01.04.2008.

Q: What did the Supreme Court decide?
A: The Supreme Court decided that the phrase “clearance of final products from the place of removal” includes transportation up to the first point of destination. Therefore, manufacturers can claim CENVAT credit on such transportation costs for the period prior to 01.04.2008.

Q: What does “place of removal” mean?
A: “Place of removal” refers to the factory or the place where the final products are manufactured.

Q: What was the effect of the amendment on 01.04.2008?
A: The amendment substituted “from the place of removal” with “upto the place of removal.” This means that after 01.04.2008, CENVAT credit is available only up to the place of removal, not beyond.