8.1     With effect from 10.9.2004, CENVAT Credit across goods and services has been allowed. In this regard the manner of availing credit and the procedure to be followed is prescribed in the CENVAT Credit Rules, 2004 (herein after called ‘the Credit Rules’). This circular deals with only certain commonly raised issues relating to certain provisions of these rules that relate to service tax credit, namely, (a) those pertaining to credit of service tax paid on taxable service i.e. ‘transportation of goods by road’; and (b) eligibility to avail credit on service tax paid on mobile phones. The following are the issues have been examined in this circular,-

(a)ISSUE: Whether a manufacturer or taxable service provider having credit balance in his account can utilize that credit for payment of service tax on goods transport by road, as a consignor or as a consignee?

COMMENTS : In terms of rule 3 (4) of the Rules CENVAT credit can be utilized for the following payment of ,-

(a) any duty of excise payable on any final product;

(b) any amount payable while removing (i) inputs as such or in partially processed form or (ii) capital goods as such;

(c) any amount payable on duty-paid goods, when such goods are brought back to a factory and subsequently remove after carrying processes, not amounting to manufacture (rule 16 (2) of the Central Excise Rules);

(d) service tax on any output service

In terms of the Credit Rules, ‘output service’ means any taxable service provided by the provider of taxable service, to service receiver. Further, the definition of ‘provider of taxable service’ includes a person liable for paying service tax. Therefore, reading the two definitions in conjunction, it is clear that to form ‘output service’, taxable service has to be actually provided by the ‘provider of taxable service’. Even if due to a legal fiction, a consignor or a consignee becomes ‘a person liable to pay service tax’ (and consequently a ‘provider of taxable service’), it cannot be said that they have actually provided any taxable service. The service provided by a Goods Transport Agent (GTA) for which the consignor or the consignee are made liable to pay service tax, does not become an ‘output service’ for such consignor or the consignee. Therefore, the service tax payable by the consignor or consignee on transportation of goods by road cannot be paid through credit accumulated by such consigner or consignee. Accordingly, the  consigner and consignee has to be pay tax in cash on goods transport by road service.

(b)ISSUE ; Whether a consignee can take the credit of the amount paid as service tax either by himself (as consignee), or by the consignor or by the Goods Transport Agency?

COMMENTS: As per Rule 3 of the CENVAT Rules, 2004, CENVAT Credit of, inter alia, service tax leviable and paid on any ‘input services’ can be taken. The rule does not distinguish as to who (i.e. the GTA, the consignor or the consignee himself) has paid the aforesaid tax. The only conditions required to be satisfied is that the consignee must be a manufacturer of excisable goods or a provider of taxable service and the service must be in the nature of ‘input service’ for such activity. In case of inward transportation of inputs or capital goods, such service (being specifically mentioned under the definition of ‘input service’) would qualify to be called as ‘input service’  and thus the service tax paid (by any of the persons mentioned above) on it would be eligible as credit to the receiver if  he is either a manufacturer of excisable goods or a provider of taxable service.

(c) 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 cases of M/s Gujarat Ambuja Cements Ltd. vs CCE, Ludhiana [2007 (006)STR 0249 Tri-D],. In this case CESTAT has held as follows,

 “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, one dealing with general provision and other dealing with a specific item, are not to be read disjunctively as to bring about conflict to defeat the laws scheme. The purpose of interpretation is to find harmony and reconciliation among the various provisions”.

In conclusion a manufacturer / consignor can take credit on the service tax paid on out ward transport of goods up to the place of removal and not beyond that.

8.2             A related question that requires further elaboration is the place, which should be treated as ‘place of removal’ for the aforesaid purposes.  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 used in the CENVAT Credit Rules and are not defined therein but are defined in the Central Excise Act or the Finance Act, 1944, 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 to a manufacturer/consignor the eligibility for availment of credit on the service tax paid on the transportation, the factual situation (whether a factory gate sale, sale from a non-duty paid warehouse, depot sale or sale from any other place or premises from where the excisable goods are to be sold after their clearance from the factory) would determine the extent of such eligibility. In this regard, in the case of CCE, Indore Vs NHK Springs Ltd, the CESTAT[ order No. 907/8, dated 26.4.2007] has observed,

‘The definition of “place of removal” has expanded by virtue of Section 4 of Central Excise Act, 1944, beyond the factory premises to other place or premises wherein the goods are permitted to be deposited without payment of duty, from where the goods are removed, and also 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 view of the expanded meaning of the expression 'place of removal', outward transportation upto the place of removal has been recognized as 'input service'.

For illustration if the goods are first sold at the factory gate or depot and then the transportation is being undertaken for delivery of the goods at the destination. In such cases, the factory /depot would become the ‘place of removal’ and any transportation thereafter would be transportation beyond such ‘place of removal’. As such no credit would be admissible on such outward freight. However, there are situations, where by way of the terms of contract a sale is in the nature of destination sales. In such cases, the ownership of the goods rests with the seller of the goods till the delivery of the goods to the purchaser at his door step. The seller not only bears the freight for such transportation but also suffers the risk of loss of or damage to the goods during transit to the destination. The terms of the contract for sale also makes it clear that the property in the goods would stand transferred upto the purchasers only when such goods are delivered in acceptable condition to the purchasers, and the purchasers accept such delivery. Obviously in such a case the doorstep of the purchaser is the ‘place of removal’ within the meaning of section 4(3) (c) of the Act as the goods are being sold at such place after their clearance from the factory. Therefore, the credit of service tax paid on outward transportation up to such place of removal would be clearly admissible as credit to the manufacturer of any excisable goods, if its sale takes place in above manner.

8.3    A doubt has also been raised regarding admissibility of CENVAT credit on service tax paid in respect of mobile phones. In the Service Tax Credit Rules, 2002, it was prescribed that credit of service tax was admissible only on telephone connection installed in the business premises. A clarification to this effect was also issued vide circular No. 59/8/2003-ST dated 20.6.2003, in the context of the Service Tax Credit Rules, 2002. However, in the CENVAT Credit Rules, 2004 no such conditions have been prescribed. Therefore, w.e.f. 10.9.2004, credit of service tax paid in respect of mobile telephone service is admissible, provided the mobile phone is used for providing out put service or used in or in relation to manufacture of finished goods.