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Cenvat Credit with respect to service tax paid on transportation of final products
20 Janua...
Taxpayer’s contentions


As per Rule 2(l) of Cenvat Credit Rules, 2004, which
defines the term ‘input services’, Cenvat C...


Therefore, when the duty on the finished goods is
chargeable at ad-valorem rate on value determined
under Section 4, on...
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Cenvat Credit with respect to service tax paid on transportation of final products

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The issue of up to what stage a manufacturer can take credit on the service tax paid on goods transport by road is a subject matter of litigation in various decisions. That is, whether Cenvat Credit can be claimed with respect to service tax paid on the transportation of goods upto the factory gate or upto depot, upto the premises of the consignment agent or upto the place of delivery i.e., premises of the customer?

In this regard, in a recent decision, the Customs Excise & Service Tax Appellate Tribunal has held that, where the duty is chargeable at specific rates or at the value determined under Section 4A and not at ad-valorem rates under Section 4, the definition of ‘place of removal’ as given in Section 4(3)(c) of the Central Excise Act, 1944 would not be applicable and as such the ‘place of removal’ will be the factory gate. Therefore, in such cases, Cenvat Credit cannot be availed with respect to service tax paid on transportation of final products beyond the factory gate.

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Cenvat Credit with respect to service tax paid on transportation of final products

  1. 1. KPMG FLASH NEWS KPMG IN INDIA Cenvat Credit with respect to service tax paid on transportation of final products 20 January 2014 Background Recently, the Customs Excise & Service Tax Appellate Tribunal (CESTAT) in the case of Ultratech Cement 1 Limited (the taxpayer) has held that, where duty is chargeable at specific rates or at the value determined under Section 4A, and not at ad-valorem rates under Section 4 of the Central Excise Act, 1944, the definition of ‘place of removal’ as given in Section 4(3)(c) would not be applicable and as such the ‘place of removal’ will be the factory gate. Therefore, in such cases, Cenvat Credit cannot be availed with respect to service tax paid on transportation of final products beyond the factory gate. The goods are transported to depots from where the same are sold to customers, and in some cases goods are also directly shipped from the factory gate to the premises of the customers. The taxpayer has availed Cenvat Credit of service tax paid on: Facts of the case  Transportation of goods from depot to customers’  Transportation of goods from factory gate to customers’ premises  Transportation of goods from factory gate to depot premises. In this case, the taxpayers are manufacturers of cement and cement clinker, chargeable to central excise duty. With respect to some of the final products, the excise duty is chargeable at specific rates and not on at ad-valorem rates (i.e., under Section 4 Central Excise Act, 1944). _________________ 1 Ultratech Cement Limited v. CCE [TS-248-Tribunal-2013-EXC] The central excise authorities have denied the Cenvat Credit, on the grounds that, in case the final products are chargeable to excise duty at specific rates and not at ad-valorem rates (i.e., under Section 4), the ‘factory gate’ is the ‘place of removal’ and transportation of goods beyond the factory gate is not eligible for the benefit of Cenvat Credit. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2. Taxpayer’s contentions  As per Rule 2(l) of Cenvat Credit Rules, 2004, which defines the term ‘input services’, Cenvat Credit may be claimed with respect to service tax paid on transportation used for clearance of final products upto 2 the place of removal .  However, the term ‘place of removal’ is not defined under the Cenvat Credit Rules, 2004. In this regard, as per Rule 2(t) of the Cenvat Credit Rules, 2004, words and expressions used in these rules, and not defined but defined in the Excise Act or the Finance Act, shall have the meanings respectively assigned to them in those Acts.  The term ‘place of removal’ is defined under Section 4(3) of the Central Excise Act, 1944, to include 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.  In this regard, the Boards Circular No. 97/6/07-ST, dated 23 August 2007 clarifies that, where the manufacturer claims that the sale has taken place at the destination point, ie., sales on Free on Road (FOR) basis, the credit of the service tax paid on the transportation up to such place of sale would be admissible if it can be established by the claimant of such credit that the sale and the transfer of property in goods occurred at the said place.  Therefore, as the sales of the taxpayer to their customers are on FOR destination basis, it is the customers’ premises which is the ‘place of removal’ and hence in terms of Boards Circular No. 97/6/07-ST dated 23 August 2007, the Cenvat Credit of service tax paid on the GTA Service availed up to the customers’ premises would be admissible.  In the case of Gujrat Ambuja Cement Limited , the Punjab and Haryana High Court has held that, Cenvat Credit of service tax paid on outward transportation of finished goods up to the customers’ premises would be admissible when the sales are on FOR destination basis. In this regard the Punjab & Haryana High Court relied upon Boards Circular 97/6/07-ST dated 23 August 2007 observing the same is binding on the department.  4 In case of LG Electronics Limited , the CESTAT has held that, in terms of the Boards Circular No. 137/3/06- Ex dated 20 July 2006, Cenvat Credit of service tax paid on the GTA Service availed for transportation of finished goods from the factory/depot to the customers’ premises would be admissible when the sales are on FOR destination basis, irrespective of whether the duty on the final product is chargeable at specific rate or at ad-valorem rate (under Section 4) or on the value determined under Section 4A of the Central Excise Act, 1944. Ruling of CESTAT  In terms of Boards Circular No. 97/6/07-ST dated 23 August 07, in case the sales are on FOR destination basis, it is the customers’ premises which is the ‘place of removal’ and accordingly Cenvat Credit in respect of outward freight from the factory gate/depot to the customers’ premises would be eligible.  The term ‘place of removal’ is defined under Section 4(3) of the Central Excise Act, 1944. The question arises as to whether the definition of place of removal in Section 4(3)(c) which is for the purpose of the said Section, can be adopted for the purpose of Cenvat Credit Rules,2004 by invoking Rules 2(t) of these Rules.  According to Rule 2 (t) of Cenvat Credit Rules, 2004, words and expression used in these Rules and not defined, but defined in the Excise Act or the Finance Act shall have meanings respectively assigned to them in these Acts. There is no definition of place of removal in Cenvat Credit Rules, 2004. However, the term ‘place of removal’ is defined under Section 4(3) of the Central Excise Act, 1944.  From the opening words of Section 4(3), it is clear that the definitions of various terms given in this sub-section are for the purpose of this section only. Therefore, in case the goods are chargeable to duty at specific rates and not at advalorem rates (under Section 4), the ‘place of removal’ as defined under Section 4(3) is not relevant. 3 ______________ 2 With effect from 1 April 2008, the expression ‘clearance of final products, upto the place of removal’ has been replaced with the expression ‘clearance of final products from the place of removal’ 3 Gujrat Ambuja Cement Limited [2009] (236) ELT-431 (P&H) ______________ 4 LG Electronics Limited [2010] (19) STR (Tri. Del) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3.  Therefore, when the duty on the finished goods is chargeable at ad-valorem rate on value determined under Section 4, only then the definition of place of removal as given in Section 4(3) can be adopted for the purpose of Cenvat Credit Rules, 2004 and in other cases the natural meaning of the expression place on removal i.e., the place of removal from which the duty on the goods is liable to be paid i.e., the factory gate, would have to be adopted.  The Boards Circular No.137/3/06-CX-4 dated 2 February 2006, clarifying that the definition of place of removal as given in Section 4(3) is to be adopted for the purpose of Cenvat Credit Rules, 2004 even in cases when the final products are chargeable to duty at a specific rate on at ad-valorem rate on value determined under Section 4A, is contrary to the provisions of law.  Further, in the case of ABB Limited , the Karnataka High Court has held that, in cases where the rate of duty is specific or on the value determined under Section 4A or Section 3(2), the place of removal would be the factory gate.  Therefore, in case the goods are chargeable to duty at specific rates and not at ad-valorem rates (under Section 4), the ‘place of removal’ as defined under Section 4(3) is not relevant, and accordingly Cenvat Credit in respect of outward freight from factory gate to the customers’ premises would not be admissible, irrespective of whether the sales are on FOR destination basis or otherwise. 5 Our comments The issue of up to what stage a manufacturer can take credit on the service tax paid on goods transport by road is a subject matter of litigation in various decisions. That is, whether Cenvat Credit can be claimed with respect to service tax paid on the transportation of goods upto the factory gate or upto depot, upto the premises of the consignment agent or upto the place of delivery i.e., premises of the customer? The issue is further complicated when duty is chargeable at specific rates or at values determined under Section 4A and not at ad-valorem values determined under Section 4. In this regard, as per this decision, in case the goods are chargeable to duty at specific rates or at values determined under Section 4A, and not at ad-valorem rates (under Section 4), Cenvat Credit in respect of outward freight from factory gate to the customers’ premises would not be admissible, irrespective of whether the sales are on FOR destination basis or otherwise. _______________ 5 CCE v. ABB Limited [2011] (23) STR-97 (Kar) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. 4. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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