Supreme Court Denies Cenvat Credit for Outward Transportation Beyond Place of Removal

Petitioner Name: Commissioner of Central Excise, Service TaxRespondent Name: UltraTech Cement Ltd.Judgment By: Justice A.K. Sikri, Justice Ashok BhushanJudgment Date: 01-02-2018

The Supreme Court of India, in its judgment in Commissioner of Central Excise, Service Tax vs. UltraTech Cement Ltd., addressed a significant issue regarding the eligibility of Cenvat Credit for Goods Transport Agency (GTA) service availed for transporting goods beyond the place of removal. The ruling reaffirmed that Cenvat Credit is only applicable for services used up to the place of removal and not beyond, following the 2008 amendment to Rule 2(l) of the Cenvat Credit Rules, 2004.

Background of the Case

UltraTech Cement Ltd., the respondent in this case, is engaged in manufacturing and selling cement. During the period from January 2010 to June 2010, the company availed Cenvat Credit for service tax paid on outward transportation of cement from its factory to the customer’s premises. However, the Revenue Department objected to this practice, arguing that Cenvat Credit is only available for transportation services up to the place of removal, not beyond.

The case progressed through the following stages:

The Commissioner of Central Excise, Bangalore II, issued a show cause notice on February 3, 2011, demanding reversal of ₹25,66,131 claimed as Cenvat Credit.
The Adjudicating Authority, in its order dated August 22, 2011, ruled against UltraTech Cement Ltd., holding that Cenvat Credit is not permissible beyond the place of removal.
The Commissioner (Appeals) reversed this decision on March 15, 2012, allowing the credit, based on the CBEC Circular No. 97/8/2007-ST, dated August 23, 2007.
The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) upheld the Commissioner’s ruling in favor of UltraTech Cement Ltd.
The Revenue Department then appealed to the High Court of Karnataka, which dismissed the appeal on June 29, 2016.
Finally, the matter reached the Supreme Court of India.

Key Legal Issues Considered

Whether transportation costs incurred beyond the factory or warehouse qualify as ‘input service’ under Rule 2(l) of the Cenvat Credit Rules, 2004.
Whether the 2008 amendment to the definition of ‘input service’ limits Cenvat Credit to services used up to the place of removal.
Whether UltraTech Cement Ltd. was entitled to claim Cenvat Credit on service tax paid for transportation to the customer’s premises.

Arguments by the Appellant (Revenue Department)

The 2008 amendment to Rule 2(l) replaced the word ‘from’ with ‘up to’ in the phrase ‘place of removal,’ clearly limiting Cenvat Credit to transportation up to the place of removal.
UltraTech Cement Ltd. claimed Cenvat Credit on GTA services beyond the place of removal, which is not permissible.
The CBEC Circular No. 97/8/2007-ST, which allowed credit beyond the factory gate, applied only to cases before the 2008 amendment.
The decisions of the lower courts and tribunals were erroneous as they failed to consider the change in law.

Arguments by the Respondent (UltraTech Cement Ltd.)

The company followed the CBEC Circular No. 97/8/2007-ST, which clarified that Cenvat Credit is available for transportation beyond the place of removal if freight charges were included in the price.
The company retained ownership of goods until delivery to the customer, making transportation costs an essential part of the sale.
Past precedents allowed Cenvat Credit for outward transportation costs, and the company had structured its pricing accordingly.

Supreme Court’s Observations

The Supreme Court examined the definition of ‘input service’ under Rule 2(l) of the Cenvat Credit Rules, 2004, and its amendment in 2008. The Court noted:

“Prior to March 1, 2008, the definition of ‘input service’ covered services used for clearance of final products ‘from the place of removal.’ However, after the amendment, it is limited to ‘up to the place of removal.’”

Addressing the reliance on the CBEC Circular, the Court clarified:

“The Board’s Circular dated August 23, 2007, pertains to the pre-amendment scenario. After the amendment, the definition of ‘place of removal’ must be interpreted strictly as ‘up to’ and not beyond.”

Final Judgment and Directions

The Supreme Court allowed the appeal filed by the Revenue Department.
The Court set aside the orders of the High Court, CESTAT, and Commissioner (Appeals), ruling in favor of the Revenue.
It was held that UltraTech Cement Ltd. is not entitled to claim Cenvat Credit on service tax paid for outward transportation beyond the place of removal.
The original order of the Adjudicating Authority, dated August 22, 2011, demanding reversal of ₹25,66,131 was restored.

Implications of the Judgment

This ruling has far-reaching implications for businesses and taxation laws in India:

Strict Interpretation of ‘Place of Removal’: The judgment affirms that Cenvat Credit is limited to services used up to the place of removal.
Companies Must Reassess Tax Credit Claims: Businesses that previously claimed Cenvat Credit for outward transportation beyond the factory gate must now revise their claims.
Limited Reliance on CBEC Circulars: The decision clarifies that CBEC Circulars do not override statutory amendments.
Potential Revenue Gains for the Government: The ruling prevents companies from using service tax credits on transportation beyond permissible limits.

Conclusion

The Supreme Court’s decision in this case reinforces the principle that tax benefits must be strictly interpreted in line with statutory amendments. By restricting Cenvat Credit for outward transportation beyond the place of removal, the Court has provided clarity to businesses and tax authorities alike. Companies must now ensure compliance with this interpretation to avoid penalties and reversals of tax credits in the future.

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