2009 (2) TMI 50 - HC - Service Tax

Taxpayer entitled to service tax credit for door-to-door transportation when seller bears freight and transit risk

HC held that the taxpayer was entitled to credit of service tax on transportation to the customer's doorstep where sales were FOR destination and the ... Input service - Cenvat credit - place of removal - binding nature of Board circulars - sale 'FOR destination' - transfer of property in goods - seller bearing risk of loss during transit - freight charges as integral part of price - service tax on freight - non-levy of interest where credit lawfully availedInput service - Cenvat credit - place of removal - sale 'FOR destination' - service tax on freight - freight charges as integral part of price - transfer of property in goods - seller bearing risk of loss during transit - binding nature of Board circulars - Transportation service up to the customer's doorstep in 'FOR destination' sales is an input service within the meaning of Rule 2(1) of the Cenvat Credit Rules, 2004, where the conditions in the Board's circular are satisfied. - HELD THAT: - The Court accepted that the definition of input service in Rule 2(1) includes outward transportation up to the place of removal. The Board's circular dated 23-8-2007, which is binding on the department, identifies three factual conditions for treating transportation up to destination as within the place of removal: (a) ownership and property in the goods remain with the seller until delivery at buyer's doorstep; (b) the seller bears the risk of loss or damage during transit; and (c) freight charges form an integral part of the price. Applying these criteria to the assessee's case, the Court found that the supplies were made FOR destination, service tax was paid on the freight, insurance was taken indicating the seller bore transit risk, and freight formed part of the price. Consequently the transportation service was used 'in or in relation to the manufacture of final products and clearance of final products from the place of removal' and the Cenvat credit claimed on service tax paid on such freight was lawfully admissible. [Paras 7, 8, 11, 12, 13]Answered in favour of the assessee: the freight transportation up to customer's doorstep in the facts before the Court qualifies as input service and Cenvat credit was lawfully availed.Non-levy of interest where credit lawfully availed - Cenvat credit - Whether interest ought to have been demanded from the assessee in respect of the Cenvat credit taken on the freight service tax. - HELD THAT: - Having held that the Cenvat credit on service tax paid for transportation up to destination was lawfully availed, the alleged contravention underpinning the demand for recovery and interest fell away. There was no irregular or unlawful availment of credit that would justify imposition of interest. [Paras 14]Answered in favour of the assessee: interest was not exigible.Final Conclusion: Both questions of law are answered against the revenue and in favour of the assessee: the service tax paid on freight for 'FOR destination' sales qualified as input service permitting Cenvat credit where the Board's conditions are satisfied, and no interest was leviable once the credit was lawfully availed. Issues Involved:1. Whether the service of transportation up to the customer's doorstep, in the case of 'FOR destination' sales where the entire cost of freight is paid and borne by the manufacturer, would be 'input service' within the meaning of Rule 2(1) of the CC RulesRs.2. Whether interest ought to have been demanded in the present caseRs.Issue-Wise Detailed Analysis:1. Definition of 'Input Service' and Transportation Costs:The primary issue revolves around whether transportation costs up to the customer's doorstep in 'FOR destination' sales qualify as 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004 (CC Rules). The assessee, a manufacturer of cement, argued that since it paid service tax on the freight charges for transporting goods to the customer's location, it should be entitled to Cenvat credit for that service tax. The Tribunal, however, ruled against the assessee, stating that extending the credit beyond the point of duty-paid removal of the final product would contradict the Cenvat Credit Rules' scheme. The Tribunal cited precedents, including judgments from the Supreme Court, to support its view that transportation does not fall within the scope of 'clearance' or 'forwarding' of goods.The High Court, however, sided with the assessee, emphasizing the inclusive definition of 'input service' in Rule 2(l)(ii) of the CC Rules, which includes services used in relation to the clearance of final products from the place of removal. The court referenced a CBEC circular clarifying that if the sale occurs at the destination point and the seller bears the risk and freight charges, the service tax paid on transportation to that point can be credited. The court concluded that the assessee fulfilled all conditions outlined in the circular, thus making the transportation cost an eligible 'input service.'2. Interest on Cenvat Credit:The second issue concerned whether interest should be demanded for the period during which the Cenvat credit was availed. Given that the High Court ruled in favor of the assessee on the first issue, it logically followed that there was no contravention of the law in availing the Cenvat credit. Consequently, the demand for interest was unwarranted. The court noted that since the credit was lawfully availed, there was no basis for demanding interest, thereby answering this question in favor of the assessee as well.Conclusion:Both substantive questions of law were answered in favor of the assessee and against the revenue. The court held that transportation costs up to the customer's doorstep in 'FOR destination' sales qualify as 'input service' under Rule 2(l) of the CC Rules, and no interest was warranted on the Cenvat credit availed. The judgment underscores the importance of adhering to circulars issued by the Central Board of Excise and Customs, which are binding on the revenue department.