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Saturday, February 3, 2018

corporate law - whether it can be treated as ‘input service’ - The assessee during the period from January, 2010 to June, 2010 availed Cenvat Credit of service tax paid on outward transportation of goods through a transport agency from their premises to the customer’s premises = Cenvat Credit is permissible in respect of ‘input service’ and the Circular relates to the unamended regime. Therefore, it cannot be applied after amendment in the definition of ‘input service’ which brought about a total change. Now, the definition of ‘place of removal’ and the conditions which are to be satisfied have to be in the context of ‘upto’ the place of removal. It is this amendment which has made the entire difference. That aspect is not dealt with in the said Board’s circular, nor it could be. = apex court held that Cenvat Credit on goods transport agency service availed for transport of goods from place of removal to buyer’s premises was not admissible to the respondent. Accordingly, this appeal is allowed, judgment of the High Court is set aside and the Order-in-Original dated August 22, 2011 of the Assessing Officer is restored.

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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 11261 OF 2016
COMMISSIONER OF CENTRAL EXCISE
SERVICE TAX .....APPELLANT(S)
VERSUS
ULTRA TECH CEMENT LTD. .....RESPONDENT(S)
J U D G M E N T
A.K. SIKRI, J.
The core issue involved in the present case is with regard to the
admissibility or otherwise of the Cenvat Credit on Goods Transport
Agency service availed for transport of goods from the place of removal
to buyer’s premises. This issue has arisen in the following factual
background:
The respondent M/s. Ultratech Cement Ltd. (hereinafter referred to
as the ‘assessee’) is involved in packing and clearing/forwarding of
cement classifiable under Chapter sub heading 25232910 of Central
Excise Tariff Act, 1985, with Central Excise Registration No.
AAACL6442LEM014. The assessee is also availing the benefit of
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Cenvat Credit facility under the Cenvat Credit Rules, 2004 (‘Rules, 2004’
for short). The assesseeherein gets finished goods (cement) from its
parent unit on stock transfer basis and sells the same in bulk form and
packed bags. The assessee during the period from January, 2010 to
June, 2010 availed Cenvat Credit of service tax paid on outward
transportation of goods through a transport agency from their premises
to the customer’s premises. According to the appellant/Revenue, the
transport agency service used by the assessee for transportation of their
final product from their premises to customers premises cannot be
considered to have been used directly or indirectly in relation to
clearance of goods from the factory viz., place of removal in terms of
Rule 2(l) of the Rules and as such cannot be considered as input service
to avail Cenvat credit.
Accordingly, the Office of the Commissioner of Central Excise:
Bangalore II Commissionerate issued show cause notice dated February
3, 2011 to the assessee inter alia stating that on scrutiny of ER-1 return
submitted by the assessee for the period January, 2010 to June, 2010, it
was noticed that the assessee have wrongly availed the Cenvat Credit of
Service Tax paid on outward transportation of goods from the factory to
the Customer’s premises, inasmuch as the Goods Transport Agency
Service used for the purpose of outward transportation of the goods
from factory to customer’s premises is not input service within the ambit
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of Rule 2(l)(ii) of the Rules, 2004. It was further mentioned that the total
Cenvat Credit claimed was in the sum of Rs. 25,66,131/- and the
assessee was called upon to show cause as to why the said amount be
not recovered and penalty be not imposed. The assessee submitted its
reply to the show cause notice contesting the position contained therein.
2) After hearing, the Adjudicating Authority passed Order-in-Original dated
August 22, 2011 holding that once the final products are cleared from
the factory premises, extending the credit beyond the point of clearance
of final product is not permissible under Cenvat Credit Rules and post
clearance use of services in transport of manufactured goods cannot be
input service for the manufacture of final product. Further, the
Adjudicating Authority held that CBEC vide its Circular No. 97/8/2007-ST
dated August 23, 2007 has clarified the definition of place of removal.
With respect to fulfillment of requirement of Circular dated August 23,
2007, it was held that the assessee has not produced any documentary
evidence to prove that conditions laid down vide Circular dated August
23, 2007 has been fulfilled. Accordingly, the Adjudicating Authority
passed the order as under:
“(i) Demanding the irregular Cenvat credit availed on
outward transportation of goods amounting to
Rs.25,66,131/- under Rule 14 of Cenvat Credit Rules, 2004
read with Section 11A of Central Excise Act, 1944;
(ii) Demanding interest under Rule 14 of Cenvat Credit
Rules, 2004 read with Section 11AB of Central Excise Act,
1944 read with Section 75 of the Finance Act, 1994;
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(iii) Did not order for initiation of action under Rule 15(1) of
Cenvat Credit Rules, 2004 read with Rule 25 of Central
Excise Rules, 2002;
(iv) Imposed penalty of Rs.25,66,131/- under Rule 15(3) of
Cenvat Credit Rules, 2004;
(v) Imposed penalty of Rs.1,00,000/- under Rule 25 of
Central Excise Rules, 2002.”
3) Aggrieved by the Order-in-Original No. 24/2011 dated August 22, 2011,
respondent/assessee preferred an appeal before Commissioner
(Appeals). The Commissioner (Appeals) vide Order-in-Appeal No.
57/2012-CE dated March 15, 2012 allowed the appeal and set aside the
Order-in-Original holding that assessee is eligible for availment of
service tax paid on GTA service on the outward freight from the factory
to the customers’ premises as per the Board’s Circular
97/8/2007-Service Tax dated August 23, 2007. It was now the turn of
the Revenue to feel aggrieved by the order. Accordingly, appeal was
filed before the Customs, Excise and Service Tax Appellate Tribunal
(CESTAT) by the Revenue which was rejected vide judgment dated May
1, 2015. Further appeal to the High Court preferred by the assessee
has met the same fate as the said appeal has been dismissed by the
High Court of Karnataka vide its judgment dated June 29, 2016, which is
the subject matter of the present appeal.
4) As mentioned above, the assessee is involved in packing and clearing of
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cement. It is supposed to pay the service tax on the aforesaid services.
At the same time, it is entitled to avail the benefit of Cenvat Credit in
respect of any input service tax paid. In the instant case, input service
tax was also paid on the outward transportation of the goods from
factory to the customer’s premises of which the assessee claimed the
credit. The question is as to whether it can be treated as ‘input service’.
5) ‘Input service’ is defined in Rule 2(l) of the Rules, 2004 which reads as
under:
“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;”
6) It is an admitted position that the instant case does not fall in sub-clause
(i) and the issue is to be decided on the application of sub-clause (ii).
Reading of the aforesaid provision makes it clear that those services are
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included which are 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’.
7) It may be relevant to point out here that the original definition of ‘input
service’ contained in Rule 2(l) of the Rules, 2004 used the expression
‘from the place of removal’. As per the said definition, service used by
the manufacturer of clearance of final products ‘from the place of
removal’ to the warehouse or customer’s place etc., was exigible for
Cenvat Credit. This stands finally decided in Civil Appeal No. 11710 of
2016 (Commissioner of Central Excise Belgaum v. M/s.
Vasavadatta Cements Ltd.) vide judgment dated January 17, 2018.
However, vide amendment carried out in the aforesaid Rules in the year
2008, which became effective from March 1, 2008, the word ‘from’ is
replaced by the word ‘upto’. Thus, it is only ‘upto the place of removal’
that service is treated as input service. This amendment has changed
the entire scenario. The benefit which was admissible even beyond the
place of removal now gets terminated at the place of removal and doors
to the cenvat credit of input tax paid gets closed at that place. This
credit cannot travel therefrom. It becomes clear from the bare reading of
this amended Rule, which applies to the period in question that the
Goods Transport Agency service used for the purpose of outward
transportation of goods, i.e. from the factory to customer’s premises, is
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not covered within the ambit of Rule 2(l)(i) of Rules, 2004. Whereas the
word ‘from’ is the indicator of starting point, the expression ‘upto’
signifies the terminating point, putting an end to the transport journey.
We, therefore, find that the Adjudicating Authority was right in
interpreting Rule 2(l) in the following manner:
“… The input service has been defined to mean any service
used by the manufacturer whether directly or indirectly and
also includes, interalia, services used in relation to inward
transportation of inputs or export goods and outward
transportation upto the place of removal. 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 first clause does not mention
transport service in particular. The second clause restricts
transport service credit upto the place of removal. When
these two clauses are read together, it becomes clear that
transport services credit cannot go beyond transport upto
the place of removal. The two clauses, the one dealing with
general provision and other dealing with a specific item, are
not to be read disjunctively so as to bring about conflict to
defeat the laws’ scheme. The purpose of interpretation is to
find harmony and reconciliation among the various
provisions.
15. Credit availability is in regard to ‘inputs’. The credit
covers duty paid on input materials as well as tax paid on
services, used in or in relation to the manufacture of the
‘final product’. The final products, manufactured by the
assessee in their factory premises and once the final
products are fully manufactured and cleared from the factory
premises, the question of utilization of service does not arise
as such services cannot be considered as used in relation to
the manufacture of the final product. Therefore, extending
the credit beyond the point of removal of the final product on
payment of duty would be contrary to the scheme of Cenvat
Credit Rules. 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 definition of input services
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should be read as a whole and should not be fragmented in
order to avail ineligible credit. Once the clearances have
taken place, the question of granting input service stage
credit does not arise. 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. The post removal transport of
manufactured goods is not an input for the manufacturer.
Similarly, in the case of M/s. Ultratech Cements Ltd. v. CCE,
Bhatnagar 2007 (6) STR 364 (Tri), it was held that after the
final products are cleared from the place of removal, there
will be no scope of subsequent use of service to be treated
as input. The above observations and views explain the
scope of relevant provisions clearly, correctly and in
accordance with the legal provisions.”
8) The aforesaid order of the Adjudicating Authority was upset by the
Commissioner (Appeals) principally on the ground that the Board in its
Circular dated August 23, 2007 had clarified the definition of ‘place of
removal’ and the three conditions contained therein stood satisfied
insofar as the case of the respondent is concerned, i.e. (i) regarding
ownership of the goods till the delivery of the goods at the purchaser’s
door step; (ii) seller bearing the risk of or loss or damage to the goods
during transit to the destination and; (iii) freight charges to be integral
part of the price of the goods. This approach of the Commissioner
(Appeals) has been approved by the CESTAT as well as by the High
Court. This was the main argument advanced by the learned counsel
for the respondent supporting the judgment of the High Court.
9) We are afraid that the aforesaid approach of the Courts below is clearly
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untenable for the following reasons:
10) In the first instance, it needs to be kept in mind that Board’s
Circular dated August 23, 2007 was issued in clarification of the
definition of ‘input service’ as existed on that date i.e. it related to
unamended definition. Relevant portion of the said circular is as under:
“ISSUE: Up to what stage a manufacturer/consignor can
take credit on the service tax paid on goods transport by
road?
COMMENTS: This issue has been examined in great detail
by the CESTAT in the case of M/s Gujarat Ambuja
Cements Ltd. vs CCE, Ludhiana [2007 (6) STR 249 Tri-D].
In this case, CESTAT has made the following
observations:-
“the post sale transport of manufactured goods is not an
input for the manufacturer/consignor. 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 first clause does not mention transport
service in particular. The second clause restricts transport
service credit upto the place of removal. When these two
clauses are read together, it becomes clear that transport
service credit cannot go beyond transport upto the place of
removal. The two clauses, the one dealing with general
provision and other dealing with a specific item, are not to be
read disjunctively so as to bring about conflict to defeat the
laws’ scheme. The purpose of interpretation is to find
harmony and reconciliation among the various provisions”.
Similarly, in the case of M/s Ultratech Cements Ltd vs CCE
Bhavnagar 2007-TOIL-429-CESTAT-AHM, it was held that
after the final products are cleared from the place of
removal, there will be no scope of subsequent use of service
to be treated as input. The above observations and views
explain the scope of the relevant provisions clearly, correctly
and in accordance with the legal provisions. In conclusion, a
manufacturer / consignor can take credit on the service tax
paid on outward transport of goods up to the place of
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removal and not beyond that.
8.2 In this connection, the phrase ‘place of removal’ needs
determination taking into account the facts of an individual
case and the applicable provisions. The phrase ‘place of
removal’ has not been defined in CENVAT Credit Rules. In
terms of sub-rule (t) of rule 2 of the said rules, if any words
or expressions are used in the CENVAT Credit Rules, 2004
and are not defined therein but are defined in the Central
Excise Act, 1944 or the Finance Act, 1994, they shall have
the same meaning for the CENVAT Credit Rules as
assigned to them in those Acts. The phrase ‘place of
removal’ is defined under section 4 of the Central Excise Act,
1944. It states that,-
“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.”
It is, therefore, clear that for a manufacturer /consignor,
the eligibility to avail credit of the service tax paid on the
transportation during removal of excisable goods
would depend upon the place of removal as per the
definition. In case of a factory gate sale, sale from a
non-duty paid warehouse, or from a duty paid depot (from
where the excisable goods are sold, after their clearance
from the factory), the determination of the ‘place of removal’
does not pose much problem. However, there may be
situations where the manufacturer /consignor may claim that
the sale has taken place at the destination point because in
terms of the sale contract /agreement (i) the ownership of
goods and the property in the goods remained with the
seller of the goods till the delivery of the goods in acceptable
condition to the purchaser at his door step; (ii) the seller
bore the risk of loss of or damage to the goods during transit
to the destination; and (iii) the freight charges were an
integral part of the price of goods. In such cases, the credit
of the service tax paid on the transportation up to such place
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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 (in terms of the definition as under section
2 of the Central Excise Act, 1944 as also in terms of the
provisions under the Sale of Goods Act, 1930) occurred at
the said place.”
11) As can be seen from the reading of the aforesaid portion of the
circular, the issue was examined after keeping in mind judgments of
CESTAT in Gujarat Ambuja Cement Ltd. and M/s. Ultratech Cement
Ltd. Those judgments, obviously, dealt with unamended Rule 2(l) of
Rules, 2004. The three conditions which were mentioned explaining the
‘place of removal’ as defined under Section 4 of the Act, there is no
quarrel upto this stage. However, the important aspect of the matter is
that Cenvat Credit is permissible in respect of ‘input service’ and the
Circular relates to the unamended regime. Therefore, it cannot be
applied after amendment in the definition of ‘input service’ which brought
about a total change. Now, the definition of ‘place of removal’ and the
conditions which are to be satisfied have to be in the context of ‘upto’ the
place of removal. It is this amendment which has made the entire
difference. That aspect is not dealt with in the said Board’s circular, nor
it could be.
12) Secondly, if such a circular is made applicable even in respect of
post amendment cases, it would be violative of Rule 2(l) of Rules, 2004
and such a situation cannot be countenanced.
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13) The upshot of the aforesaid discussion would be to hold that
Cenvat Credit on goods transport agency service availed for transport of
goods from place of removal to buyer’s premises was not admissible to
the respondent. Accordingly, this appeal is allowed, judgment of the
High Court is set aside and the Order-in-Original dated August 22, 2011
of the Assessing Officer is restored.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
FEBRUARY 01, 2018.

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