CESTAT allows input service credit for outward freight, sales commission, and retail outlet rent under Section 4(3)(c) and Rule 2(l)

CESTAT Chennai-AT allowed the appeal, ruling that the appellant was eligible for input service credit on three disputed services. The tribunal held that franchisee showrooms constituted "place of removal" under Section 4(3)(c) of Central Excise Act, 1944, making outward freight charges from factory to sales outlets eligible for credit. Sales commission paid to franchisees was allowable under Rule 2(l) of Cenvat Credit Rules, 2004, as it related to promotion and sale of dutiable goods. Rent paid for retail outlets qualified for credit as storage services up to place of removal, having nexus with manufacturing. The decision was supported by precedents and CBEC circulars.

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The core legal questions considered by the Tribunal in this appeal are:

i. Whether the appellant is eligible to avail input service credit on outward freight from the factory to sales outletsRs.

ii. Whether the input credit availed on sales commission paid to franchisees for marketing and selling the appellant's products is allowableRs.

iii. Whether the appellant is eligible to avail input service credit on service tax paid on rent for retail outlets (franchisee showrooms)Rs.

Issue-wise Detailed Analysis:

1. Eligibility of Input Service Credit on Outward Freight from Factory to Sales Outlets

The relevant legal framework includes Rule 2(l) of the Cenvat Credit Rules, 2004 (CCR), which defines "input service" as any service used by the manufacturer, directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal. The definition was amended effective 1 April 2008 to substitute "from the place of removal" with "up to the place of removal" for outward transportation services.

Precedents relied upon include the Larger Bench decision of the Tribunal in Ramco Cements Ltd., which emphasized the need to ascertain the 'place of removal' applying Supreme Court judgments in Emco Ltd. and Roofit Industries, the Karnataka High Court decision in Bharat Fritz Werner Ltd., and the CBIC Circular dated 8 June 2018, which clarified the 'place of removal' concept.

The appellant contended that goods were stock transferred to franchisee showrooms, from where they were sold to customers, hence the franchisee showroom should be considered the place of removal. The franchisee agreement confirmed that the goods remained the property of the appellant until sold, the franchisee acted as a custodian on consignment basis, the appellant bore transportation and insurance costs, and sales tax was paid by the appellant on sales effected at the franchisee premises.

The Tribunal analyzed these facts and held that the franchisee showroom qualifies as the place of removal under Section 4(3)(c) of the Central Excise Act, 1944, which includes premises of a consignment agent or any other place from where excisable goods are sold. Consequently, input credit on outward freight to these franchisee premises is eligible.

The Department's reliance on the Supreme Court decision in Ultra Tech Cement Ltd. was distinguished as that case concerned credit on transportation from the place of removal to the buyer's premises, whereas the present issue pertains to determining the place of removal itself. The Tribunal also referred to the CESTAT New Delhi decision in Cantabil Retail India Ltd., which held that services used up to the place of removal, including transportation to retail outlets, qualify as input services eligible for credit.

Thus, the Tribunal applied the law to facts, treating the franchisee showroom as the place of removal, and allowed the credit on outward freight accordingly.

2. Eligibility of Input Credit on Sales Commission Paid to Franchisees

Rule 2(l) CCR includes services used in relation to advertisement or sales promotion within the definition of input service. The appellant claimed credit on sales commission paid to franchisees who marketed and sold the products.

The appellant relied on CBEC Circular No. 943/04/2011 dated 29 April 2011, which clarifies that credit is admissible on services of sale of dutiable goods on commission basis. The Tribunal's decision in Ultratech Cement Ltd. supported this interpretation, holding there was no bar on credit for sales promotion services by way of sale on commission basis.

Further, the appellant relied on Notification No. 02/2016-CE(NT) dated 3 February 2016, which inserted an explanation in Rule 2(l) clarifying that sales promotion includes services by way of sale of dutiable goods on commission basis. The appellant argued this amendment was clarificatory and should be applied retrospectively, a position supported by Tribunal decisions in Essar Steel India Ltd. and Akash Optifibre, and upheld by the Calcutta High Court in Himadri Speciality Chemical Ltd.

The Tribunal accepted these submissions, holding that the appellant was eligible for input credit on sales commission paid to franchisees, applying the clarificatory amendment retrospectively and relying on the consistent judicial pronouncements.

3. Eligibility of Input Service Credit on Service Tax Paid on Rent for Retail Outlets

The appellant paid rent for franchisee showrooms where goods were stocked and sold. The question was whether service tax paid on such rent qualifies as input service credit.

Rule 2(l) CCR includes services used in relation to the factory or premises of the provider of output service, and the Tribunal noted that rent on immovable property used for business purposes is eligible if it has nexus with manufacture or clearance of goods.

Precedents include Tribunal decisions in Mark Exhaust Systems Ltd., Tally Solutions Pvt. Ltd., Navabharat Ventures Ltd., LG Electronics India Pvt. Ltd., and Cantabil Retail Ltd., which consistently held that rent paid for premises used in relation to storage or sale of excisable goods up to the place of removal qualifies for input service credit.

The Tribunal found that the rent paid by the appellant for franchisee showrooms was eligible for credit, as the showrooms were the place of removal and the rent had a direct nexus with clearance of goods.

Significant Holdings:

"The Franchisee showroom is the place of removal and therefore the credit availed on outward GTA services for movement of goods from the appellant's unit to Franchisee premises on stock transfer basis is eligible as it is for transportation of goods up to the place of removal."

"The appellant is eligible for Input Credit availed on sales commission paid to the franchisees in view of the clarification dated 29.04.2011 and the notification dated 03.02.2016 and above decisions holding that the benefit of the said amendment should be made available even for the previous periods."

"The Cenvat Credit on rent paid on immovable property in respect of retail outlets is eligible for Cenvat Credit."

Core principles established include:

• The place of removal is to be determined based on the facts and agreements, including consignment arrangements, and may be a location beyond the factory gate such as franchisee showrooms.
• Input service credit on outward transportation is admissible only up to the place of removal.
• Sales commission paid on sale of dutiable goods on commission basis qualifies as input service eligible for credit, supported by clarificatory amendments and consistent judicial decisions.
• Service tax paid on rent for premises used for storage or sale of excisable goods up to the place of removal is eligible for input credit.

Final determinations on each issue are:

i. Input service credit on outward freight from factory to franchisee sales outlets is allowed, as the franchisee showroom is the place of removal.

ii. Input credit on sales commission paid to franchisees for marketing and selling the products is allowed, based on the definition of input service and clarificatory circulars and notifications.

iii. Input service credit on service tax paid on rent for retail outlets is allowed, given the nexus with clearance of goods and place of removal.

Accordingly, the appeal is allowed with consequential benefits under law.

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