Supreme Court clarifies Cenvat Credit on Goods Transport Agency Services: Commissioner of Central Excise vs. Ultra Tech Cement Ltd. (2018)

Date of the Judgment: February 1, 2018
Citation: [2018] INSC 72
Judges: A.K. Sikri, J. and Ashok Bhushan, J.
Can a manufacturer claim Cenvat credit on service tax paid for transporting goods from their factory to the customer’s premises? The Supreme Court addressed this question, focusing on the interpretation of ‘input service’ under the Cenvat Credit Rules, 2004, and the crucial amendment that changed the scope of credit eligibility. This case clarifies that Cenvat credit for outward transportation is limited to the “place of removal” and does not extend to the customer’s premises. The judgment was delivered by a bench comprising Justice A.K. Sikri and Justice Ashok Bhushan.

Case Background

M/s. Ultra Tech Cement Ltd. (referred to as ‘the assessee’) is engaged in the packing and clearing of cement. They receive finished cement from their parent unit on a stock transfer basis and sell it in bulk and packed bags. The assessee availed Cenvat credit on service tax paid for the outward transportation of goods from their factory to the customer’s premises during January 2010 to June 2010. The Revenue (Commissioner of Central Excise) contested this, arguing that the transport service was not an ‘input service’ as defined under Rule 2(l) of the Cenvat Credit Rules, 2004, because it was not directly or indirectly related to the clearance of goods from the factory.

The Revenue issued a show cause notice on February 3, 2011, demanding the recovery of the Cenvat credit amounting to Rs. 25,66,131/- along with interest and penalties. The assessee contested the notice, but the Adjudicating Authority ruled against them.

Timeline

Course of Proceedings

The Adjudicating Authority initially ruled against the assessee, stating that Cenvat credit could not be extended beyond the point of clearance of the final product from the factory. They also noted that the assessee had not provided sufficient evidence to meet the conditions outlined in a CBEC circular regarding the ‘place of removal’.

The Commissioner (Appeals) overturned this decision, allowing the assessee’s appeal. They held that the assessee was indeed eligible for the Cenvat credit based on the Board’s Circular dated August 23, 2007. The Revenue then appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which also rejected their appeal. The High Court of Karnataka dismissed the Revenue’s further appeal, leading to the current appeal before the Supreme Court.

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. The relevant part of the rule states:

“2(l) “input service” means any service:-
(i) Used by a provider of taxable service for providing an output services; 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 upto 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 Supreme Court highlighted that the original definition of ‘input service’ used the expression ‘from the place of removal.’ However, an amendment in 2008 replaced ‘from’ with ‘upto,’ significantly altering the scope of Cenvat credit. This amendment restricted the credit to services used up to the place of removal, effectively terminating the benefit at that point.

The Court also referred to Section 4 of the Central Excise Act, 1944, which defines “place of removal” as:

“(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 argued that the Goods Transport Agency service used for transporting goods from the factory to the customer’s premises does not fall within the definition of ‘input service’ under Rule 2(l)(ii) of the Cenvat Credit Rules, 2004, as amended. They contended that the credit is admissible only up to the ‘place of removal’ and not beyond. The Revenue also stated that the CBEC circular dated August 23, 2007, was applicable to the unamended rules and not to the amended ones.

The assessee argued that the Board’s Circular dated August 23, 2007, clarified the definition of ‘place of removal.’ They contended that since the ownership of goods remained with them until delivery at the customer’s doorstep, the risk of loss was borne by them during transit, and the freight charges were part of the price, the place of removal should be considered the customer’s premises. Therefore, they were eligible for Cenvat credit on the transportation service.

The innovativeness of the assessee’s argument lies in their attempt to extend the definition of “place of removal” to the customer’s premises by relying on the conditions outlined in the CBEC circular, thereby trying to avail the Cenvat credit.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the assessee was entitled to Cenvat credit on Goods Transport Agency service availed for the transportation of goods from the place of removal to the buyer’s premises.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court considered the following authorities:

The Court also considered the following 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 following table demonstrates how the Court treated the submissions made by the parties:

The following table demonstrates how the Court viewed the authorities:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the amendment to Rule 2(l) of the Cenvat Credit Rules, 2004, which replaced “from” with “upto”. This change clearly indicated that the Cenvat credit for outward transportation is limited to the place of removal. The Court emphasized that the CBEC circular dated August 23, 2007, was based on the unamended rule and could not override the explicit language of the amended rule. The Court also stressed that transportation is a distinct activity from manufacturing and that extending the credit beyond the place of removal would be contrary to the scheme of the Cenvat Credit Rules.

The Court rejected the assessee’s argument that the ‘place of removal’ should be extended to the customer’s premises, stating that the CBEC circular could not override the amended rule. The Court emphasized that the definition of ‘input service’ should be read as a whole, and the credit cannot be extended beyond the place of removal.

The Court stated:

“The two clauses in the definition of ‘input services’ 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 Court further clarified:

“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.”

The Court also observed:

“Transportation is an entirely different activity from manufacture and this position remains settled by the judgment of Honorable Supreme Court in the cases of Bombay Tyre International 1983 (14) ELT, Indian Oxygen Ltd. 1988 (36) ELT 723 SC and Baroda Electric Meters 1997 (94) ELT 13 SC.”

There were no dissenting opinions.

Key Takeaways

• Cenvat credit on Goods Transport Agency service for outward transportation is limited to the ‘place of removal’.
• The amendment in 2008 to Rule 2(l) of the Cenvat Credit Rules, 2004, replaced “from” with “upto,” restricting the credit.
• CBEC circulars based on unamended rules cannot override the explicit language of amended rules.
• Transportation is a distinct activity from manufacturing, and credit cannot be extended beyond the place of removal.

Directions

The Supreme Court allowed the appeal, set aside the High Court’s judgment, and restored the Order-in-Original dated August 22, 2011, of the Assessing Officer.

Development of Law

The ratio decidendi of this case is that the Cenvat credit on Goods Transport Agency service for outward transportation is limited to the ‘place of removal’ as defined under Section 4 of the Central Excise Act, 1944, and as per the amended Rule 2(l) of the Cenvat Credit Rules, 2004. This judgment clarifies the scope of the Cenvat credit, overturning previous interpretations that allowed credit beyond the place of removal.

Conclusion

The Supreme Court’s judgment in Commissioner of Central Excise vs. Ultra Tech Cement Ltd. clarifies that Cenvat credit for outward transportation is limited to the ‘place of removal’ and does not extend to the customer’s premises. The 2008 amendment to the Cenvat Credit Rules, 2004, is crucial in this determination. This ruling provides clarity on the scope of Cenvat credit and establishes that the credit cannot be extended beyond the place of removal.