2025 (5) TMI 60 - AT - Central Excise

Appellant wins CENVAT credit for service tax on GTA services, fines not taxable under section 66E(e)

CESTAT NEW DELHI allowed the appeal, setting aside the Commissioner's order dated 30.09.2022. The Tribunal held that the appellant was entitled to CENVAT ... Admissibility of CENVAT credit of service tax paid on goods transport agency [GTA] services availed for outward transportation of goods from the factory gate/depot of the appellant to the premises of the customer under rule 2(1) of the 2004 Credit Rules - levy of service tax on “fine/penalties, retention money and liquidated damages”, against delayed completion of works or non-performance of contract under section 66E(e) of the Finance Act. Admissibility of CENVAT credit of service tax paid on GTA services - HELD THAT:- It is clear from the invoice dated 25.06.2016 that the appellant had not charged freight charges separately and they were included in the value for delivery of the goods to the premises of the buyers. The appellant, therefore, cleared the finished goods to the buyers on FOR destination basis. The agreement executed with JSW Steel Coated Products Ltd, when read with the Memorandum of Understanding, also shows that the delivery terms were on FOR basis. In such circumstances, the finding recorded by the Commissioner that no evidence was led by the appellant to establish that delivery was on FOR terms is clearly erroneous as all the relevant documents had been submitted by the appellant - the appellant was clearly entitled to avail CENVAT credit of service tax paid on GTA services for onward transportation of goods from the factory gate of the appellant to the premises of the customers. Demand of service tax on fines, penalties, retention money and liquidated damages - HELD THAT:- The issue is covered by a decision of this Tribunal in South Eastern Coalfields [2020 (12) TMI 912 - CESTAT NEW DELHI]. The Tribunal held that 'It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards “consideration” for “tolerating an act” leviable to service tax under section 66E(e) of the Finance Act.' Conclusion - i) Since the place of removal is the premises of the buyer, the appellant was clearly entitled to avail CENVAT credit of service tax paid on GTA services for onward transportation of goods from the factory gate of the appellant to the premises of the customers. ii) It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards 'consideration' for 'tolerating an act' leviable to service tax under section 66E(e) of the Finance Act. The impugned order dated 30.09.2022 passed by the Commissioner, therefore, deserves to be set aside and is set aside. The appeal is, accordingly, allowed. Two core legal issues were considered by the Appellate Tribunal in this appeal: (i) the admissibility of CENVAT credit on service tax paid for Goods Transport Agency (GTA) services used for outward transportation of goods from the factory gate or depot to the customer's premises under rule 2(1) of the CENVAT Credit Rules, 2004; and (ii) the validity of the demand for service tax on amounts collected as fines, penalties, retention money, and liquidated damages related to delayed completion or non-performance of contracts under section 66E(e) of the Finance Act, 1994.Issue 1: Admissibility of CENVAT Credit on GTA ServicesThe legal framework for this issue centered on the provisions of rule 2(1) of the CENVAT Credit Rules, 2004, which defines 'input service' and the scope of admissible credit, as well as relevant Supreme Court and Tribunal precedents interpreting the 'place of removal' and its impact on credit availability. The key precedents included the Supreme Court judgment in Commissioner of Central Excise and Service Tax vs. Ultra Tech Cement Ltd. and subsequent Larger Bench decisions of the Tribunal in The Ramco Cements Limited and Sweety Industries, which clarified that while Ultra Tech Cement addressed amendments to rule 2(1), it did not lay down principles for determining the 'place of removal' in the context of GTA service credit admissibility. These matters were left to be decided on facts.The Tribunal also referred to a Circular issued by the Central Board of Indirect Taxes and Customs dated 08.06.2018, which elucidated the general principles for determining the 'place of removal,' generally linking it to the 'point of sale,' and acknowledged the need to consider Supreme Court judgments for guidance.In the present case, the appellant sold goods on a Free on Road (FOR) destination basis, meaning the place of removal was the customer's premises, not the factory gate. This was supported by invoices and agreements, including a Memorandum of Understanding with a customer, establishing that freight charges were included in the value and delivery was to the buyer's premises. The Commissioner had erroneously found that the appellant failed to provide evidence of FOR terms, a finding contradicted by the documentary record.Applying the legal framework and precedents, the Tribunal concluded that since the place of removal was the premises of the buyer, the appellant was entitled to CENVAT credit on service tax paid on GTA services for transporting goods to the buyer's location. The Tribunal emphasized that the appellant's factual position aligned with the principles established in the cited judgments, and the department's contrary view was unsustainable.Issue 2: Demand of Service Tax on Fines, Penalties, Retention Money, and Liquidated DamagesThis issue required interpretation of section 66E(e) of the Finance Act, 1994, which defines certain declared services, including services involving agreements to refrain from an act, tolerate an act or situation, or to do an act, provided there is consideration flowing for such obligations. The definition of 'service' under section 65B(44) and the explanation of 'consideration' under section 67 were also pivotal.The Tribunal relied heavily on its prior decision in South Eastern Coalfields Ltd vs Commissioner of Central Excise & Service Tax, which analyzed the nature of penalties and liquidated damages in contractual contexts. The Tribunal reasoned that for a service to be taxable under section 66E(e), there must be a specific agreement where one party agrees, for consideration, to refrain from or tolerate an act or to perform an act. Crucially, the consideration must be for that obligation itself.In the present case, the amounts collected as fines, penalties, retention money, and liquidated damages arose from breach or non-performance of contracts and were not consideration for any agreed service. The contracts aimed at supply of goods and services, with penal clauses serving as safeguards to protect commercial interests rather than constituting taxable services. The Tribunal noted that the imposition of penalties was not the intention of the parties to create a service relationship but to enforce compliance. There was no flow of consideration for tolerating or refraining from an act as contemplated under section 66E(e).The Tribunal distinguished this from hypothetical scenarios where parties might agree, for consideration, to refrain from competitive acts, which could constitute taxable services. Since the appellant's agreements lacked any such specific obligations with corresponding consideration, the demand for service tax on these amounts was unsustainable.Additional ConsiderationsBecause the demand was not sustainable on merits, the Tribunal found it unnecessary to examine the appellant's contention regarding the invocation of the extended period of limitation for the demand. Similarly, issues relating to penalty and interest imposition were not addressed in detail given the substantive dismissal of the demand.Significant HoldingsThe Tribunal held that:'Since the place of removal is the premises of the buyer, the appellant was clearly entitled to avail CENVAT credit of service tax paid on GTA services for onward transportation of goods from the factory gate of the appellant to the premises of the customers.'Regarding the second issue, the Tribunal stated:'It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards 'consideration' for 'tolerating an act' leviable to service tax under section 66E(e) of the Finance Act.'These holdings affirm that CENVAT credit on GTA services is admissible when the place of removal is the buyer's premises under FOR terms, and that penalties, fines, retention money, and liquidated damages recovered due to contractual breaches do not constitute taxable services under section 66E(e) absent a specific agreement with consideration for refraining or tolerating acts.Consequently, the Tribunal set aside the impugned order, allowing the appeal and quashing the demands and penalties imposed by the Commissioner.