Place of removal: Rattled apple cart or resolved dispute

Rajeev DimriWhat is ‘place of removal’ is a question that has haunted Indian manufactures for a very long time. The question holds specific relevance in reference to determination of the excise valuation and CENVAT credit eligibility on outward freight (i.e. transportation charges beyond the factory gate) in the hands of manufacturers. The revenue’s stand as explained through various circulars, with the latest circular issued in February 2015, has thus far, been that the place of removal is a place where the property in goods passes from the seller to the buyer. This implies that in case of a free on rail (‘FOR’) destination sales i.e. in a transaction where the property in goods is transferred from seller to buyer at the buyer’s premises; such buyer’s premise would be the place of removal. This stand of the revenue was backed by several Supreme Court rulings as well. The age old question as to whether the definition of place of removal as defined under the central excise legislation will apply on CENVAT Credit Rules, 2004 (‘CCR’) was also resolved in the Union Budget 2014 when the definition of place of removal (ad verbatim the definition under excise legislation) was introduced under the CCR.Just as when dust of controversies regarding excise valuation and eligibility of credit on outward freight seemed to settle, the debate has been reignited with the recent Supreme Court judgment in case of Ispat Industries Limited. Apex Court in this case held that outward freight and transit insurance charges are not includible in transaction value for excise valuation purpose since the sales were ex-works. On the face of it, the ruling does not seem to deviate from the larger principle being hitherto endorsed both by the revenue and the industry that the excise valuation and credit eligibility on outward transportation are to be determined basis the terms of sale of the goods in question. Having said that, it is pertinent to note the observation of the Hon’ble Supreme Court that the term ‘any other place’ under the definition of ‘place of removal’ has reference only to the places from which goods are to be sold by the manufacturer and has no reference to the place of delivery (which may be a buyer’s location). Such a categorical observation in the ruling is surely a cause of concern for manufacturers who have been claiming credit on outward freight in case of FOR destination sales. It is thought provoking to note that despite its categorical observations regarding interpretation of the term ‘place of removal’, the Supreme Court has not concluded on the excise valuation issue, basis of the same. Instead, the Court finally relied on the facts such as (i) goods were cleared from the factory on payment of appropriate sales tax; (ii) the sales were made against letters of credit and bank discounting facilities; (iii) invoices were prepared only at the factory directly in the name of the customer in which the name of the insurance company as well as the number of the transit insurance policy were mentioned; and (iv) when the goods were handed to the transporter the assessee had no right to disposal of the goods i.e. the title of goods had passed to the customer; to conclude that the goods were sold at the factory gate. The Court accordingly held that the cost of outward freight was not required to be added for excise valuation in the given case.Interestingly, in case of Roofit Industries Limited earlier this year, the same bench of the Apex Court had held that what is to be determined to arrive at excisable value of goods is the point of time when sale is effected. This would be determined as per the principles of Sale of Goods Act i.e. based on when the ownership of goods is transferred from seller to buyer. It was held that since under the facts of the case the ownership of goods was transferred at the buyer’s premise, such premise would be the place of removal. The revenue’s position too (generally) is in-line with the Supreme Court’s decision in case of Roofit Industries. The observation of the Apex Court, in Ispat Industries case, that the place of removal has no reference to the place of delivery, could again stir up the storm which was beginning to settle. While this proposition allows the tax payers to take a view that transport expenses beyond the factory/ depot cannot be added to the value for levy of excise on the other hand revenue would argue that CENVAT credit will not be available on transport expenses beyond factory/ depot. If manufacturer’s premises are construed to be the only place of removal (even in case of FOR sales), this would be generally commercially more beneficial to manufacturers. This is for the reason that while the differential excise duty is typically 12.5 percent of the transport charges, CENVAT credit on the other hand (30 percent of service tax on transport charges - in most cases) would work out less than 4.5 percent. However, acceptability of even this proposition and following of a consistent approach by the enforcement agencies, is highly suspected. On the other hand, it is also fairly arguable that the observation regarding interpretation of the term ‘place of removal’ of the Apex Court is merely an obiter dictum and not a ratio and therefore is not legally binding as a precedent. This is more so as the Apex Court actually concluded that the outward transport expenses and transit insurance would not be added for levy of excise duty on the basis that the transactions in question were held to be ‘ex-works’ sales. Per this school of thought, the Roofit Industry judgement continues to be good law. In other words in case of FOR destination sales, outward transport charges would need to be added for levy of excise duty and, since identical definition of ‘place of removal’ has been adopted in CENVAT Credit Rules, 2014 wef July 11, 2014 CENVAT credit can be obtained on such transport charges. Availability of CENVAT credit before July 11, 2014 would continue to remain debatable though. Ispat Industries rulings has offered ample room to the enforcement agencies, which are unfailingly driven with revenue augmentation considerations, to selectively use it to deny CENVAT credit on FOR destination sales while continuing to require inclusion of outward freight charges for excise valuation purposes for such sales. It is about high time that the central government intervenes and settles the controversies for good, to truly make doing business in India easy!Author is leader, Indirect Tax, BMR & Associates LLPPoonam Harjani and Dhiraj Agarwal also contributed to this article.Views are personal