Cenvat Credit of Input Services up to Place of Removal: Whether Circular dated 20.10.2014 and 28.02.2015 ultra vires provisions of Cenvat Credit Rules’ 2004?
CBEC vide Circular No. 988/12/2014-CX dated 20.10.2014 intimated insertion of definition of Place of Removal as Rule 2(qa) of CCR’2004 and referring old Circulars- 37B ORDER No. 59/1/2003-CX dated 03.03.2003 and para 8.2 of Circular No. 97/8/2007dated 23.08.2007, judgments in case of Associated Strips Ltd Vs CCE , New Delhi [2002 (143) ELT 131 ( Tri-Del )] and M/s. Escorts JCB Limited v. CCE, New Delhi [2002 (146) E.L.T. 31 (S.C.) ] and clarified that the place of removal is the place where sale has taken place i.e. the place where the transfer in property of goods takes place from the seller to the buyer in term of provisions of Central Excise Act, 1944 read with provisions of the Sale of Goods Act, 1930.
The same view is reiterated in Circular No. 999/6/2015-CX dated 28.02.2015 and in terms of Section 23 and 39 of Sale of Goods Act, 1930, it is further clarified that in the case of clearance of goods for export by manufacturer exporter, he files shipping bill, handed over goods to the shipping line and after Let Export Order is issued, it is the responsibility of the shipping line to ship the goods to the foreign buyer with the exporter having no control over the goods. In such a situation, transfer of property can be said to have taken place at the port where the shipping bill is filed by the manufacturer exporter and place of removal would be this Port/ICD/CFS and eligibility of CENVAT Credit shall be determined accordingly.
It is to state that Cenvat Credit can be availed in terms of Cenvat Credit Rules’2004 only, which itself don’t speak about transfer in property of goods nor about Sale of Goods Act, 1930, then how concept of transfer in property of goods and provisions of Sale of Goods Act, 1930, are relevant in deciding availability of Cenvat Credit? Hence the issue needs to be understood in light of relevant provisions of CCR’2004.
History of Cenvat Credit for Input service:
What is Cenvat Credit: Excise Central Excise and Service Tax both are Value Added Indirect Taxes achieved by granting credit of input tax or duties to manufacturer / service provider through Cenvat Credit Scheme. Cenvat Credit scheme is a mechanism to avoid cascading effect of double taxation and only legislation is empower to decide how and up to what extent relief to be given/expand/restrict. The Cenvat credit scheme operates through Cenvat Credit Rules, 2004 (hereinafter refereed to as “CCR”).
Service Tax is being levied since 11.07.1994 but no credit was available upto 15.08.2002. From 16.08.2002 to 14.05.2003, credit of for service tax paid on input services falling in same category was available to Service Providers. From 15.05.2003 to 09.09.2004, Credit for service tax paid on all input services used for providing out put services was available to Service Providers. Since 10.09.2004, Cenvat Credit for service tax paid on all input services as defined as “input services” in CCR’2004 was made available to Service Providers as well to Manufacturers. However, Cenvat Credit for services used but not covered in definition of “input services” is not be eligible. This show that though value and service tax was suffered by the service providers and manufacturers and costing thereof was already covered in service provided or goods manufactured but criteria of availability of Cenvat Credit was changed time to time in terms of Cenvat Credit Rules.
Understanding Definition of “Input Service”: The said Definition given in Rule 2(l) of the Cenvat Credit Rules’2004 , as on 31.03.2011, is reproduced below. (For the sake of brevity only relevant portion is reproduced)
“Input Service” means any service,-
i. used by a provider of output 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, +(up to) the place of removal, (Main part)
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 up to 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, security, #(business exhibition, legal services), inward transportation of inputs or capital goods and outward transportation up to the place of removal; (Inclusive part)
# but excludes services….(Excluding part)
[ + substituted for words “from” since 01.04.08, * deleted since 01.04.11, # added since 01.04.11]
From the definition, it is it appears that definition contain three parts i.e. main, inclusive and excluding parts of services and if service is covered in main or inclusive part but if falls under excluding part, the same is not eligible for credit.
The term “Place of Removal’ is used in main part as “Clearance up to place of removal” and in inclusive part as “transportation/storage up to Place of Removal”. As per departmental terminology, clearance means removal of goods on payment of duties (or claiming exemption) from factory followed by subsequent removal under Invoice. Even in case of clearance of goods from factory to warehouse or depot etc., the said goods is declared as cleared from factory in periodical Returns. Even when the goods is sold and/or removed from depot, in terms of Rule 4(3)(cc), “time of removal” shall be deemed to be the time at which such goods are cleared from the factory.
Thus, main part covers input services used up to factory gate and inclusive part covers specific services received in or out side factory also but services transportation/storage used up to Place of Removal not related with clearance and hence here Place of Removal is not limited to factory gate but can be decided as per Section 4(3)(c)(iii) of CEA’1944 in terms of Rule 2(t) of CER’2004 and from 11.07.2014, in terms of Rule 2(qa) of CCR’2004. Definition of Place of Removal is reproduced as under.
2(qa) of CCR’2004: “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 deposited 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;
Place of Removal and Place of Sale are different and Distinct Terms:
From the definition of “Place of Removal”, it is evident that place of removal may be (i)factory, (ii)ware house or (iii) a depot or other place from where the excisable goods are to be sold after their clearance from the factory and from (all three alternative places) where such goods are removed ( for delivery to effect sale- not mentioned but it is implied). Here the words “where such goods are removed” indicate that the goods are being “removed” and but not “delivered”.
There is no confusion for the places mentioned at sub-clause (i) and (ii) but provisions of sub-clause (iii) which is relevant and required to be studied. Here the place referred is “from where the excisable goods are to be sold” and “from where such goods are removed” and not “from where the excisable goods are delivered” i.e. it is not always the place where sale is effected and property of goods is transferred. Considering the meaning given in online dictionary http://dictionary.reference.com/browse/sold & http://www.thefreedictionary.com/sold , “Sold” is the simple past tense and past participle of “Sale” and “Sell” means keep or offer for sale, to promote sales, to make sale or offer for sale to, to offer something for sale, to deal in, to be offered for sale at the price indicate (followed by at or for)., to persuade or induce (someone) to buy something, to engage in selling something , an act or method of selling etc.
Thus, for sub-clause (iii), meaning of “from where the excisable goods are to be sold” is not the place where goods are delivered and sale is effected and property in goods is passed in to the buyer.
Another most significant part is the last line after all the three type of places mentioned in sub-clause (i) to (iii) i.e. “from where such goods are removed” which is connected with all the three alternative of place of removal. This clearly indicates that place of removal is not the place of delivery where sale is effected but the goods be sold from there and to be removed for further delivery to effect sale at another destination or at the same place. However, for some case, it is possible that if buyer takes delivery from that place, property of goods passed on to buyer at that place and some time F.O.R. basis sell is made for buyer’s destination and delivered there. But in all cases place of sell is always the place where toe goods is being stored and to be sold and not all the places of delivery to buyer.
The same view is confirmed from the Rule 5 of Central Excise Valuation
(Determination Of Price Of Excisable Goods) Rules, 2000 which is meant for valuation of excisable goods sold in the circumstances specified in Section 4(1)(a) of CEA, except the circumstances in which the excisable goods are sold for delivery at a place other than the place of removal. This indicate that Place of sale and delivery is different and distinct than Place of removal. Also in case of Amalgamations Repco Ltd Vs. CCE, Chennai [2013 (31) S.T.R. 370 (Tri. - Chennai)] it is held that Place of removal cannot be stretched to cover actual place of delivery. Meaning of “Place of removal” is limited to factory gate, warehouse, depot or any other place where goods is stored , sold and further removed to effect sale but can not be each and every place of delivery of Customer place in case of F.O.R. sale.
The same view is confirmed by judgment in case of Vesuvious India Ltd. Vs. CCE, Kolkata-VI [2014 (34) S.T.R. 26 (Cal.)], the Hon’ble Kolkata High Court held that,
“Cenvat credit - Input service - Service Tax paid for outward transportation of goods upto the point of delivery to the customer - Outward transportation charges or taxes paid in regard thereto claimable only with regard to transports made from one place of removal to another place of removal and not to destination - C.B.E. & C. Circular No. 97/8/2007-S.T., dated 23-8-2007 does not provide for the allowance for all cases, made relaxation in some cases having factual background - Rule 2(l)(ii) of Cenvat Credit Rules, 2004. - By the amendment made w.e.f. 1-4-2008 substituting the word “from” by the word “upto” all that has been done to clarify the issue. Neither the services rendered to the customer for the purpose of delivering the goods at the destination was covered by the definition of input service prior to 1-4-2008, nor is the same covered after 1-4-2008. [paras 5, 13]”
Place of Removal for Export : Now, let us examine the aspect for the Export. It is well aware that transportation of export goods up to Port/Airport/ICD/CFS/LCS from where export take place is already exempted vide Notification 31/2012-ST as amended.
As per Notification 41/2012-ST, meant for refund of input service used for export, Specified service means taxable services that have been used beyond the place of removal. Once for a while, if we consider place of removal where property of the goods is transferred, place of removal should be Port/ICD/CFS or Vessel in terms of Section 23 & 39 of Sale of Goods Act, 1930. Now let us think for both the cases.
For the case of export on FOB terms, all the expenses are born by the exporter till goods is handed over to career/transporter i.e. loaded on Vessel, covered in sale proceed but beyond that point i.e. Vessel, there is no service for use in Export. So, Notification 41/2012-ST is not worthy.
Even for export by manufacturer exporter, once for a while considering Place of Removal as Port/ICD/CFS/LCS, in terms of clarification given in Circular dated 28.02.2015, it is necessary to ascertain the exact which place is covered in terms “Up to Place of Removal” for availment of Cenvat credit of input service.
Meaning of “Up to”: As per http://www.yourdictionary.com/up-to “Up to” is defined as doing, involved with, until or adequate etc. In general terms, meaning of Upto (up to) is “to” but not covers “at or in”. An example of up to used as an adverb is in the sentence "Add all the items up to the next to last item," which means that all items except the last two items should be added together. Let us see another example, if local authority declare that electricity line (or say drinking water/drainage line) will be laid up to any society, it is clear that the same will be up to entrance of society and not beyond that and necessary line within society must be laid down by the society. In case it is decided that line will be laid up to your home, it is but natural that within premises of home, line must be laid by resident. Accordingly, the phrase “Up to Place of Removal” covers distances till goods reach Port but not covers “Area of Port” itself.
Hence, even on considering this clarification given in circular dated 28.02.2015, any service received in the Port Area like Custom House Agent Service, Cargo Handling, C&F Agent, Warehousing, Renting of immovable property, Cleaning Service, Manpower Supply/Stevedoring, and many more services received and used in the Port area can not be considered as “input service”.
Intention of law: We may think, if intention of law making authority was to allow Cenvat credit till the place where “Sale” is effected i.e. where property of goods pass on to buyer, there was no need to mention the phrase “Place of Removal” in definition of Input service given in Rule 2(l) of CCR’2004 and to define “Place of Removal” in Rule 4(3)( c) of CEA’1944 and Rule 2(qa) of CCR’2004. Otherwise the phrase ““Place of Removal” would to be substituted by phrase “Place of Sale” which would suffice the purpose and also when “Place of Removal” is already defined, the last line “from where such goods are removed” would be ““from where property of goods is passed on to buyer”. But the same not adopted as the intention of law making authority is clear to restrict the place up to factory, warehouse, depot or any other declared place of storage of goods from where the goods is being stored and to be sold and further removed for delivery to effect sale.
Even, we think for a while that if Authority, by making suitable change in Rule, make the “Place of Removal” as “Place of Delivery”, only Storage and outward Transportation up to place of removal is covered in inclusive part of definition of “Input Service” and hence various services being received at ports, i.e. Custom House Agent Service, Cargo Handling, C&F Agent, Warehousing, Renting of immovable property, Cleaning Service, Manpower Supply/Stevedoring, and many more services which are not covered main part of definition of “input service” as being received beyond factory gate and also not covered in specific services mentioned inclusive part of definition of “input service” and therefore not eligible for Cenvat Credit.
Difference between Rule and Circular: Law is to be interpreted strictly considering significance of all the words, signs, coma, brackets etc. to ascertain the exact meaning of the law. Rule are made under the provisions of parent law and shall be within the parent act as well as the constitution whereas Circular is only a departmental instructions clarifying the provision of law when it is necessary. Thus Circular can not go beyond the provisions of law and expand or curtail the provisions of law.
Non relevancy of Circulars and judgments: Thus, it is appears that, both the circulars are issued on the basis of old circulars and some judgments which are not significant with the present law. The judgments of Associated Strips Ltd Vs CCE , New Delhi [2002 (143) ELT 131 ( Tri-Del )], M/s. Escorts JCB Limited v. CCE, New Delhi [2002 (146) E.L.T. 31 (S.C.) ] and circular 37B ORDER No. 59/1/2003-CX dated 03.03.2003 and judgment of Prabhat Zarda Factory Limited Vs. CCE [ 2000(119)ELT191(T-LB)] ( not referred in both subject Circulars but referred in old circular dated 03.03.2003) are for valuation aspect and not for Cenvat Credit.
Also, some judgments M/s Gujarat Ambuja Cements Ltd. vs CCE, Ludhiana [2007 (006) STR 0249 Tri-D] and Ultratech Cements Ltd vs CCE Bhavnagar [2007-TOIL-429-CESTAT-AHM] as referred in Circular dated 23.08.2007 state that credit that transport service credit cannot go beyond transport upto the place of removal but don’t held that place of removal would be place where property in goods is passed on to buyer. However, in some cases, due to words “up to the place of removal” till 31.03.2008 and phrases “activities relating to business, such as” till 31.03.2011, some judgments were given in favour of the assessee and hence the same are replaced/deleted from definition of “input service” from 01.04.2008 and 01.04.2011 and have no relevance/significance now.
Understanding: Considering above discussion, it appears that, Place of removal can not be place of delivery where sale is effected and property in goods is passed on, but limited to factory, warehouse, a depot or other place where goods is stored for sell and Cenvat credit can be availed in terms of “input credit” up to that place only. Accordingly clarification as given in Circular No. 988/12/2014-CX dated 20.10.2014 and Circular No. 999/6/2015-CX dated 28.02.2015 need to be re-examined, further clarified or reviewed by the competent authority in the interest of Govt. revenue and to avoid non-fruitful litigation with trade. In it is decided to review Cenvat Provisions and allow Cenvat Credit up to Place of Delivery, it is to be ensured that in any case both area i.e. (i) area for which Cenvat Credit may be taken and (ii) area for which rebate of service may be claimed, should not be overlapped.
Note: This is my personal views expressed based on available information/Act/Rule/Notification/Judgments etc. and shared to mitigate litigation and for smooth tax administration between trade and department. The same can not be final views. Learned Experts/Trade/Officers are requested to check-up with latest provisions and to offer their Valuable guidance/views/ comment in