Whether service tax paid on outward freight transportation is available as

Cenvat Credit to the Manufacturer of Excisable Goods?

Introduction:
Cenvat credit Scheme is a credit available to the manufacturer of excisable
goods which are falling under the Central Excise Tariff Act. The
manufacturer is entitled to take Cenvat Credit only on the excisable
goods which are falling under the Central Excise Tariff Act. According
to the Modvat /presently Cenvat Credit Rules, 2002, 2004 the Cenvat
Credit is available only on the inputs, capital goods and Input Services.
It is the law of the country that a tax payer, who can avail the Cenvat credit
on the inputs, Capital goods and input services which are used in the
manufacturing processes. The Legislature of our country has given wider
benefit to the tax payers to take credit on the manufacturing processes.
According to the Cenvat Credit Rules, 2004, the manufacturer has to first
satisfy the following conditions:
i) That only the inputs/ capital goods, input services are eligible for Cenvat
Credit;
ii) The above inputs/ capital goods, input services should be utilized/used in
or in relation to the manufacture either directly or indirectly.
At the outset, let us examine the definition of the Input Services as per
Rule 2(l) of Cenvat Credit Rules, 2004. The relevant rule reads as follows:
Rule 2(l) - Input Services means any service (i)used by a provider of taxable service for providing an output service; or
(ii)used by the manufacturer, whether directly or indirectly in or in
relation to the manufacture of final products and clearance of final products
from the place of removal,
and includes services used in relation to setting up, modernization,
renovation or repairs of a factory, premises of provider of output service or
an office relating to such factory or premises, advertisement or sales
promotion, market research, storage up to the place of removal, procurement

of inputs, activities relating to business, such as accounting, auditing,

financing, recruitment and qualitative control, coaching and training,
computer networking, credit rating, share registry and security, inward
transportation of inputs or capital goods and outward transportation upto
the place of removal.
Now it is necessary that the courts should examine the issue which is now in
the doorstep of High courts and Karnataka High court has granted a stay
in the Larger Bench of the CESTAT (Tribunal) decision in the case of
Commissioner of Central Excise & Service Tax, Large Tax payer Vs.
M/s. ABB Limited. On the basis of which the CESTST, Chennai has
maintained status quo in 44 cases on the same issue. The issue raised
very grasp in the country as it involves more than hundred crores of
rupees revenue.
The Larger Bench of the CESTAT, Bangalore while deciding the issue in
favour of the assessee has come to the conclusion that the definition of input
service can be divided into five categories namely,
(i) Services used by the manufacturer whether directly or indirectly, in or in
relation to the manufacture of final products;
(ii) Services used by the manufacturer whether directly or indirectly, in or in
relation to clearance of final products from the place of removal;
(iii) Services used in relation setting up, modernization, repair renovation
etc. of factory;
(iv) Services in relation to advertisement, sales promotion, storage etc.; and
(v) Services used in relation to activities relating to business and outward
transportation up to the place of removal.
And further held that each of the above limbs of the input service definition
is an independent benefit /concession conferred on the taxpayer and if any
one of the limbs of the definition of input service is satisfied, the credit is
admissible even if the other limbs of the definition are not satisfied. As an
illustration, the Honble Tribunal has observed that services used in relation
to setting up, modernization, repair of a factory could be allowed as credit
even if they are assumed to be not an activity relating to business.
The reasoning given by the Larger Bench that if any one of the limbs of the
definition of input service is satisfied, the credit is admissible even if the
other limbs are not satisfied is not in accordance with the principles of strict
interpretation of fiscal statutes. The Cenvat Credit Scheme is no doubt a
beneficial scheme and the intension of the legislature is to minimize the

cascading effect of multi stage taxation on goods and services. It seeks to

off set the incidence of duties of Central Excise and Service Tax paid on
goods and services that are consumed / used in the manufacture of excisable
goods or providing taxable output services. Such goods may be in the nature
of materials which get consumed in the production of further goods and / or
providing services i.e., inputs, or those which are used without being
consumed for producing further goods and/or rendering services i.e. capital
goods. Cenvat Credit of specified duties paid on inputs, input services or
capital goods is not allowed when the resultant final products or output
services in which they are consumed are fully exempted either under Central
Excise or Service Tax. Goods and services which are partially used as inputs
in the production of two or more goods/ services will be entitled to avail
credit only if any one of the output goods / output services is leviable to
Excise duty or Service Tax. The Cenvat credit on capital goods is also
available only if one of the final outcome, whether it is goods or services is
chargeable to either Excise duty or Service Tax.
The issue before the judiciary is to decide the question as to whether the
GTA service /outward transportation of the manufacturing goods from the
factory gate to the customers door step can be availed as Cenvat Credit and
whether the outward transportation of the manufacturing goods from the
factory gate to the customers door step falls within the definition of Input
Service?
It is no doubt that the issue is pertaining to the interpretation of the
Definition clause and the internal aids to construction and not the external
aids to construction. While reading the definition clause the definition clause
should be read as whole and the interpretation of the definition should be
made only in case of any ambiguity in the definition clause. By going
through the definition clause it is no doubt that the definition can be divided
in to several parts and each of the limbs of the definition gives its own
meaning but the definition clause cannot be divided in parts and it cannot be
interpreted. The words used in the definition are keeping in view the objects
and reasons of the statute. If any one of the part of the definition clause is
picked up and interpreted then the very object of the act will be defeated.
The Honble Supreme court has on several occasions has pointed out that the
definition clause should be read as whole and in case of interpretation of
definition clause the court should only give preference to the words used in
the definition and not the object of the statute.

In the instant case definition clause involves both the word Means and
Includes. Both the Means and Includes clause may give wide meaning
to the definition clause but when the includes clause specifically restricts the
outward transportation up to the place of removal then no body can expand
that the outward transportation from the place of removal can be considered
as an input service for the purpose of availment of Cenvat Credit and the
same will leads to misinterpretation of the definition clause and the very
object of government to give benefit will taken away from collecting the
revenue.
It is well settled rule of interpretation that the Courts must assume that
every word used in the exemption notification is intended to be given
effect to, more so, in a taxing statue. The Honble Apex Court in the
case of Hemraj Goverdhan Das Vs Assistant Collector reported in
1978 (2) ELT 350 (SC) has held that, it is settled principle of law
that to interpret fiscal laws, each and every word expressed in the
statute has to be construed strictly and there cannot be any liberal
interpretation with greater flexibility. The text and the context are
very important.
Gujarat Ambuja Cements Ltd Vs. CCE, Ludhiana 2007 (6) STR 249 (TriDelhi) has held that a statute is to be read as a whole and words used
interpreted taking into account the context in which they are used.
Definitions are to be looked at as a whole. Clauses of a definition are not to
be read disjunctively. In the present case, the statute deals with a tax on
manufacture. The definition is in the context of relief in regard to duty/tax
paid on input services. Post sale transport of manufactured goods is not an
input in manufacture. The two clauses in the definition take care to
circumscribe input credit by stating that service used in relation to the
clearance from the place of removal and service used for outward
transportation upto the place of removal are to be treated as input service.
The first clause does not mention transport service in particular. The second
clause restricts transport service credit upto the place of removal. When
these two clauses are read together, it becomes clear that transport service
credit cannot go beyond transport upto the place of removal. The two
clauses, one dealing with general provision and another dealing with a
specific item, are not to be read disjunctively as to bring about conflict and
to defeat the law scheme. The purpose of interpretation is to find harmony
and reconciliation among the various provisions.

A fiscal statute has to be interpreted very strictly as held by the Apex Court
in the case of Commissioner of Sales Tax, U.P. Vs Modi Sugar Mills Ltd
[AIR 1961 SC 1047]. According to Maxwell on the Interpretation of the
Statutes 12th Edition statutes which impose pecuniary burdens are subject to
the rule of strict construction. It is well settled rule of law that all charges
upon the subject must be imposed by clear and unambiguous language,
because in some degree they operate as penalties; the subject is not to be
taxed unless the language of the statute clearly imposes the obligation, and
language must not be strained in order to tax a transaction which, had the
legislature thought of it, would have been covered by appropriate words. In
a taxing Act, one has to look merely what is clearly said. There is no room
for any intendment. There is no equity about a tax. There is no presumption
as to a tax. Nothing is to be read in, nothing is to be implied. One can only
look fairly at the language used.
According to the definition any services which are used in or in relation to
the manufacturing of final product can be considered as input service. But in
the instant case outward transportation is nowhere connected to the
manufacturing processes and it is post manufacturing process outside the
factory for .
Where the words used in a definition clause is un-ambiguous, and clear, the
rule of literal interpretation would apply and there is no need to ascertain the
legislative intent in such cases, as held by the Honble Supreme Court in the
case of Reserve Bank of India Vs Peerless Co reported in (1987) 1 SCC.

It is pertinent that whether the outward transportation is any where

connected to the manufacturing processes either directly or indirectly.
By looking at definition clause of the Input Services
It is very clear that the that more than hundred crores of rupees is in many
cases
Input services of course payment of tax is a criteria to take credit on the

RULE - 2 (l) "input service" means any service,(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation
to the manufacture of final products and clearance of final products from the
place of removal; and
includes services used in relation to setting up, modernization,
renovation or repairs of a factory, premises of provider of output service or
an office relating to such factory or premises, advertisement or sales
promotion, market research, storage upto the place of removal, procurement
of inputs, activities relating to business, such as accounting, auditing,
financing, recruitment and quality control, coaching and training, computer
networking, credit rating, share registry, and security, inward transportation
of inputs or capital goods and outward transportation upto the place of
removal;
Whether the post manufacturing process i.e., the outward transportation of
goods from the place of removal/depot/factory gate up to the place of
consumer door step can be considered as an input service for the purposes
of giving benefit to the assessee under the beneficial legislation?
Before going to examine the issue it is very much necessary that whether the
definition of "input service" defined under Section 2 (l) of the CC Rules
covers the outward transportation or not?
According to RULE - 2 (l) "input service" means any service,(i) used by a provider of taxable service for providing an output service;
or
(ii) used by the manufacturer, whether directly or indirectly, in or in
relation to the manufacture of final products and clearance of final
products from the place of removal, and
includes services used in relation to setting up, modernization, renovation
or repairs of a factory, premises of provider of output service or an
office relating to such factory or premises, advertisement or sales
promotion, market research, storage upto the place of removal,
procurement of inputs, activities relating to business, such as
accounting, auditing, financing, recruitment and quality control,
coaching and training, computer networking, credit rating, share

registry, and security, inward transportation of inputs or capital

goods and outward transportation upto the place of removal;
From the language employed in the definition it is no doubt true that the
definition itself gives a very wide meaning to the definition of input
service and the word means used in the definition clause go on
explaining that any service used by the manufacturer, whether directly or
indirectly, in or in relation to the manufacture of final products and clearance
of final products from/up the place of removal. It is no doubt that the
definition itself gives a very wide meaning and it is expandable. But the
word includes used in definition clause includes many of the items which
are no where connected with the manufacturing processes. By going through
the definition and the Cenvat Credit Rules it is no doubt that the rules are
made with an intension to give benefit to the manufacturer to take credit on
the materials used in the manufacturing processes.
Now the question that arises for consideration and the issue throughout the
India is as to whether the post manufacturing process or the outward
transportation of the manufacturing goods from the factory gate/depot/place
of removal to up to the place of customers door step can be considered as an
input service?
It is very clear from the definition clause itself that when the inclusive clause
specifically restricts the the outward transportation up to the place of
removal then it is impermissible to give benefit from the place of removal.
When the definition clause involves the word means and includes then
the court should consider both the word means and includes while
interpreting the definition clause. The court cannot pick up one part in the
definition clause and interpret the same to decide the issue. It may be true
that the intension of the legislature is to give benefit to the manufacturer to
take credit on the materials which are used in the manufacturing processes
even if it is not directly connected with the process of manufacture. But
while interpreting the definition clause the court cannot look at the objects of
the statute because the main issue is relating to the interpretation of the
definition clause and the court can only apply the internal aids to
construction and not the external aids to construction. The court can decide
the issue after considering the whole texts and contexts used in the definition
and not the objects of the statute.

The word includes used in the definition clause includes the services used
in relation to setting up, modernization, renovation or repairs of a
factory, premises of provider of output service or an office relating
to such factory or premises, advertisement or sales promotion,
market research, storage upto the place of removal, procurement of
inputs, activities relating to business, such as accounting, auditing,
financing, recruitment and quality control, coaching and training,
computer networking, credit rating, share registry, and security,
inward transportation of inputs or capital goods are specifically
included with an intension to give benefit to the manufacturer to take
credit even though they are no connected with the manufacturing
processes. The same is not the reason to avail credit on the outward
transportation of the manufacturing goods from the place of removal
up to the consumer door step and the same will taken away the right
of the government to collect it revenue. If every thing is to be
included in the input service then the there will be no revenue to the
Government.
In the instant case the court can interpret the definition only by applying the
literal rule to the texts and contexts used in the definition.
The Honble Supreme Court on several occasions while interpreting the
provisions of statutes has laid down law that how the law should be
interpreted to construe the definition clause.