EY Tax Alert. Executive summary

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1 16 March 2016 EY Tax Alert CESTAT allows credit of Service tax on transportation, treating the place where property in goods is transferred in terms of Sale of Goods Act - as Place of removal Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes the decision of the CESTAT 1 wherein concepts like place of removal, definition of input services (pre and post 11 July 2014), provisions of Central Excise, CENVAT Credit, Sale of Goods Act and CBEC Circulars have been discussed at length, for deciding CENVAT credit eligibility with respect to Service tax paid on transportation of goods to the port of export. CESTAT held that Service tax paid for availing such transportation services was eligible for CENVAT Credit in the hands of the manufacturer-exporter and refund of such credit was allowed since it could not be adjusted against output liability. [1] 2016-VIL-180-CESTAT-CHE-CE [batch of appeals]

2 Background and facts Appellant s contentions Appellants are manufacturers and exporter of goods. They cleared goods, from the place of removal i.e. factory, depot or any other place of removal as the case may be, and transported them to the port of export by paying Service tax on such transportation charges. Service tax so suffered was claimed as CENVAT credit by the appellants on the ground that transportation services so availed was an input service for manufacture of goods which are exported. Further, where such tax was not adjustable, refund under Rule 5 of CENVAT Credit Rules, 2004 (CENVAT Credit Rules) was claimed by them. Common issue arose in appeals of appellants before the CESTAT. CESTAT observed that if the following two questions were answered, it will serve the purpose of present appeals on a common issue and all other issues were to be left open for decision by the Adjudicating authorities, in the respective appeals. In this regard, the common questions are, as follows (i) Whether the goods manufactured and cleared at the factory gate, depot or any other place of removal [which is defined in Section 4(3) of Central Excise Act] and delivered at the port of export shall entitle the appellants to the CENVAT Credit of Service tax paid on transportation of such goods from any of the above places or such tax refundable under Rule 5 of CENVAT Credit Rules, wherever the CENVAT credit is not adjustable. (ii) Whether CENVAT Credit is admissible in respect of Service tax paid on transportation of the goods cleared from the places in question (i) above for delivery at the place of the buyer as per terms of the contract of sale between the parties prior to 1 April Drawing CESTAT s attention towards definition of 'input service' enacted in Rule 2(I) of CENVAT Credit Rules, prior to 1 April 2008 and post the said date it was contended that the transport service should be construed to have been provided upto the place of removal where transfer of property in goods takes place. Transportation service is taxed under reverse charge mechanism. Accordingly, Service tax was payable by appellants, being recipient of transport service. Reference was made to the definition of 'place of removal' as defined in Rule 2(qa) of CENVAT Credit Rules (w.e.f. 11 July 2014). The new definition of the term place of removal has not altered common law relating to sale. Appellants are thus entitled to get the CENVAT credit of Service tax paid on transportation services availed to deliver their goods at any place of delivery under terms of contract. Revenue contentions CENVAT credit cannot be granted or refund thereof cannot be made, when goods are delivered at the port of export or place of buyer. Transportation charges incurred are post clearance / post sale, and thus cannot be considered as 'input service'. CESTAT Ruling Before 11 July 2014, the meaning of the expressions from place of removal and upto place of removal were construed taking help of the provisions of Central Excise Act read with Rule2(I) of CENVAT Credit Rules. W.e.f. 11 July 2014, the expression of 'place of removal' has been defined in Rule 2(qa) of CENVAT Credit Rules.

3 The question as to what constitutes 'place of removal' can be answered with reference to Section 19 of Sale of Goods Act, which was as follows: 19. Property passes when intended to pass- "(1) Where there is a contract for sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer." Keeping in view the basic structure of the common law as to ownership of the goods, property and transferability, the CESTAT referred to Para 6 of CBEC Circular No. 999/6/2015-CX dated 28 February 2015 (Circular), wherein it was stated that, for exports, transfer of property can be said to have taken place at port where shipping bill is filed by manufacturer exporter and place of removal would be the port/icd/cfs. Accordingly, eligibility to CENVAT credit shall be determined. As per Para 3 of the Circular in case of domestic sale when the goods are delivered by the seller for transmission to buyer and does not possess the right of disposal, the property is said to be transferred to buyer as per Section 23 of the Sale of Goods Act. As per the Board Circular 988/12/2014- CX dated 20 October 2014 the place where sale takes place is the place of removal. goods is transferred from buyer to seller as decided by the CESTAT in case of Associated Strips Ltd. v. CCE 2 which was upheld by the Hon ble Supreme Court in M/s. Escorts JCB Ltd v. CCE 3. Further, as per the Board Circular No.97/8/2007-ST, dated 23 August 2007, the facts of individual case should be considered for deciding the place of removal. The phrase place of removal was not defined in CENVAT Credit Rules, so definition as contained in Section 4 of Central Excise Act should be considered for CENVAT Credit. Para 8.2 of Circular No.97/8/2007-ST, Para 3 of Circular No.988/12/2004-CX, and Circular No.999/6/2015-CX, follow the concept that when property in goods is transferred under the Sale of Goods Act, as is envisaged by Section 19 thereof, at that point only, removal of the goods from the control of the seller is said to have occurred. Seller parts his right at that point to buyer at that time and detaches himself from his right over the goods and his right accordingly, extinguishes. Thus, precisely, sale is an outcome of contract of sale of specific or ascertained goods. The property therein is transferred to the buyer at such time as the parties to the contract intend to do so. The codified provisions in the Sale of Goods Act, in the manner described above has been adopted by Board Circular No.999/6/2015-CX. Therefore, there should not be any ambiguity by the Adjudicating Authority to understand the concept of sale where that takes place and the intention of the parties entitling the seller of the goods to CENVAT credit of Service tax paid on transportation of the goods to the place of export or for delivery thereof at the place agreed between the parties. The aforesaid Circular clarified that the place of sale is where the property in 2 [2002 (143) ELT 131 (Tri-Del)] 3 [2002 (146) ELT 31]

4 Rule 2(r) of CENVAT Credit Rules 4 read with Rule 2(1)(d) 5 of Service Tax Rules explains mandate of Section 68(2) of the Finance Act and in substance, the service recipient of transportation is called the person liable to pay Service tax. Once Service tax is levied under Section 66 of the Finance Act it becomes eligible for CENVAT credit. Since interpretation of law was involved in all the cases and conduct of the appellants was not found to be questionable, CESTAT held that no penalty is to be imposed in any of the cases. Therefore, the Service tax paid in terms of the reverse charge mechanism under Section 68 of the Finance Act read with Section 19 of the Sale of Goods Act and the aforesaid circulars, becomes input service to fulfil contractual obligation. That does not disentitle the taxpayer to the CENVAT credit of the Service tax paid in respect of transport service availed to make delivery of goods at the destination which otherwise would make the rule of cascading effect otiose and export shall be taxable. That is not permitted. Even for this reason also the appellants are entitled to CENVAT credit. So far as export of goods are concerned, following the aforesaid rationale, the Service tax paid availing transportation service shall be admissible to CENVAT credit or refundable where it is not possible to set off against future liability. The decision in case of Western Agencies Pvt Ltd v. CCE 6 was relied upon, wherein it was held that, assessee was entitled to avail CENVAT credit in respect of transportation services to port and CHA services. Comments While CESTAT has mainly relied upon CBEC Circulars, wherein it is clarified that place of removal is the place where transfer of property in goods takes place, it has not taken note of the recent ruling of Apex Court in the case of Ispat Industries 7. The SC in Ispat case had held that the place of removal cannot be extended upto the buyer s premise. Though SC ruling addressed the issue of valuation under Central Excise, it will be necessary to analyse the implication of the interpretation of place of removal in the context of CENVAT Credit Rules, particularly in light of CBEC Circulars which are still in force, including the one issued as recent as in CESTAT directed the concerned Adjudicating Authority to dispose of the claim of the appellants on the issues of CENVAT credit granting fair opportunity of hearing and examining relevant evidence in each case; and following the aforesaid guidelines, it shall pass reasoned and speaking order. 4 R.2(r) Defines a provider of taxable service as including a person liable for paying Service tax 5 R. 2(1)(d) Defines a person liable for paying Service tax 6 [2011 (22) STR 305 (Tri. LB)] 7 [2015 (324) ELT 670 (SC)]

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