Central Excise law, after six decades of its existence, is expected to yield its place to the Goods & Service Tax (GST) shortly but it continues to evolve even today. Determination of ‘place of removal’ for the purpose of inclusion of freight and insurance charges in assessable value, under Central Excise Law is one such issue which keeps evolving and at the same time baffles not just the assessee but also the Department, Tribunal and Courts. This article attempts to trace the legislative and judicial journey of ‘place of removal’ with a view to seek a better place in the statute book for this concept.
The origin
‘Place of removal’ was first introduced in the Central Excise Act, 1944 vide the Central Excises and Salt (Amendment) Act, 1973, which came into force on 1-10-1975 and which brought about an amendment in Section 4 of the 1944 Act. Prior to the amendment, Section 4 provided for determination of value as the price for which an ‘like’ article is sold or capable of being sold at the time of removal from the factory or any other premises of manufacturer, for delivery at the place of manufacture or production. By the said amendment, the concept of ‘normal price’ was introduced, whereby the value was deemed to be the price at which goods are ordinarily sold to a buyer in the course of wholesale trade for delivery at the time and place of removal, provided certain conditions are fulfilled. ‘Place of removal’ was defined to mean factory, or any other premises of production or manufacture of the excisable goods; or a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty, from where such goods are removed.
The Supreme Court in Union of India v. Bombay Tyre International Ltd. [1983 (14) ELT 1896 (SC)] and Collector of Central Excise v. T I Millers Ltd. [1988 (35) ELT 8 (SC)], while deliberating upon valuation in the case of related persons, was of the view that two kinds of transactions fall within the scope of Section 4 i.e. where the sale is effected at the factory gate and secondly those where the sale in the course of wholesale trade is effected by the assessee through its sales organisation at a place or places outside the factory gate. Even in J.K. Spinning and Weaving Mills Ltd. v. Union of India [1987 (32) ELT 234 (SC)], the Supreme Court observed that the ‘place of removal’ may be a factory or any other place or premises of production or manufacture of excisable goods, etc.
Extending the place of removal
With effect from 28-9-1996, by Finance Act, 1996, another category i.e. depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory, was added to the definition of ‘place of removal’. In respect of the said amendment, Department issued Circular No. 251/85/96-Cx dated 14-10-1996, to clarify that sale price at any of these “places of removal” will be the normal price for levy of excise duty and there can be different assessable values for the same excisable goods depending upon the place of removal and that a sale price at any place of removal other than factory gate has to take into account all the expenses incurred towards transport including freight, insurance, etc. and thus all these expenses will form part of the sale price for determination of assessable value. Further, in case of inter-depot transfer it was clarified that duty may be initially charged with reference to place of removal from where the goods are actually removed/intended to be sold and by charging differential duty, if any, on the basis of assessable value prevalent at the actual “place of removal” i.e. the storage depot, etc., from where the goods are finally sold.
Escorts & other rulings
Even though the aforementioned judgments are not in respect of inclusion of freight and insurance charges in the assessable value, the aforesaid obiter(s) cannot be ignored. The issue of inclusion of freight and insurance charges in the assessable value, was first discussed in detail by the Supreme Court in Escorts JCB Ltd. v. CCE, Delhi - II [2002 (146) ELT 31 (SC)]. The issue before the Apex Court, pertained to the periods, both prior and post, 1996 amendment. The Supreme Court, after considering various terms of the agreement i.e. transaction of sale, payment of price, handing over possession of goods and arranging transit insurance, was of the view that the ‘place of removal’ is the factory premises and that freight and transit insurance were not to be included in the normal value of the goods. The Court relied on the fact that the transaction was full and complete and nothing was required to be done after the goods leave the factory premises.
Prior to Escorts JCB (Supra), the Supreme Court in Commissioner v. Frexton Cables (India) [2002 (146) ELT A102 (SC)], had dismissed the appeal filed by the Department against the Tribunal decision, relying on similar reasoning. The Supreme Court in several subsequent cases [Commissioner v. Purisons Engineers (P) Ltd. 2003 (152) ELT A265; Commissioner v. Ravi Cable Industries, 2003 (152) ELT A266; Hindustan Wires Ltd. v. Commissioner, 2003 (157) ELT A44; CCE, Shillong v. India Carbon Ltd., 2011 (269) ELT 6 (SC)] relied on the same. These decisions dealt with similar position of law, as it existed at the time of Escorts JCB (Supra). Even in the case of CCE, Noida v. Accurate Meters [2009 (235) ELT 581 (SC)], the Supreme Court held that any place from where excisable goods are sold can be a place of removal.
Certain statutory & clarificatory dressings
However, Section 4 was substituted by Finance Act, 2000 and the third category as brought in by the above said 1996 amendment was omitted from the definition of ‘place of removal’. However, CBEC issued Circular No. 59/1/2003-CX., dated 3-3-2003, to clarify that Rule 7 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 covered the omitted category. The aforesaid Circular also clarified that it would be relevant to determine point of ‘sale’ in case of removal of excisable goods. With effect from 14-5-2003, by amendments made through Finance Act, 2003, the omitted third category was re-introduced in the definition of ‘place of removal’.
In 2004, Cenvat Credit Rules were brought in and it was stated that credit of ‘input services’ would be admissible upto the place of removal. Department in Circular No. 97/8/2007 dated 23-8-2007 clarified that Cenvat credit of service tax paid on transportation up to the place of sale would be admissible if the sale and the transfer of property in goods occurred at the such place. Also, Circular No. 988/12/2014-CX., dated 20-1-2014 reiterated the same and further stated that payment of transport, inclusion of transport charges in value, payment of insurance or who bears the risk are not the relevant considerations to ascertain the place of removal but one has to go by the provisions of Sale of Goods Act, 1930.
Recent judgements
As it is obvious from the above said judgments of the Supreme Court and the circulars issued by the Department, till 2014 both the Department and the Courts shared the view that the determination of ‘place of removal’ is purely dependent on ‘point of sale’ and factors such as freight, insurance, possession, ownership, etc., may be relevant but not the determinative factors to ascertain the said ‘point of sale’. Also, if the terms of an agreement or conditions of a transaction would imply that the buyer’s place is the ‘point of sale’, there was nothing contained in Central Excise Act, 1944, Valuation Rules, 2000 or Cenvat Credit Rules, 2004 that would bar it. The Supreme Court summarized the same in Commissioner v. Roofit Industries Ltd. [2015 (319) ELT 221 (SC)] in the following words and also in the facts of case, held the buyer’s premise to be the ‘point of sale’:
“The principle of law, thus, is crystal clear. It is to be seen as to whether as to at what point of time sale is effected namely whether it is on factory gate or at a later point of time, i.e., when the delivery of the goods is effected to the buyer at his premises. This aspect is to be seen in the light of provisions of the Sale of Goods Act by applying the same to the facts of each case to determine as to when the ownership in the goods is transferred from the seller to the buyer…”
Can buyer’s premises be place of removal post Ispat ruling?
The aforesaid legal position was re-iterated by the Hon’ble Supreme Court in CCE, Mumbai – III v. Emco Ltd. [2015 (322) ELT 394 (SC)]. In this while remanding the case for fresh decision, the Court held thus:
19. The consequence of the aforesaid discussion would be to set aside the order of the Tribunal and remit the case to it for fresh consideration after looking into the facts of the present case, namely, the terms and conditions of the sale with the buyer and determination on that basis as to which was the place of removal, that is whether it was the factory gate of the assessee or the place of delivery.
However, it was in Commissioner v. Ispat Industries Ltd. [2015-TIOL-238-SC-CX], that the Supreme Court departed from the jurisprudence it had developed over a period of 30 years. The Apex Court, in the Ispat case, upholds the principle laid down in Escorts JCB (Supra) to the extent that the ‘place of removal’ is required to be determined with reference to ‘point of sale’. However, at the same time, it restricts such determination, by stating that under no circumstances, buyer’s premise can be the place of removal for the purpose of Section 4. Further, while discussing Roofit Industries (Supra), a judgment delivered by the same bench, the Court has distinguished the facts of the case but did not explicitly over-rule the judgment on the legal principles applied. This judgment can be a double-edged sword. While the Department will never be able to include freight charges upto buyer’s premises on the ground that the same constituted place of removal, assessees will be compelled to mount insurmountable defence to claim Cenvat credit on outward freight.
In a nutshell, the existing legal position, appears to be that there can be exceptions, depending upon the facts of the case, to the thumb rule laid down by the Supreme Court that buyer’s premises cannot be a ‘place of removal’ under Section 4. But to benefit from such exception, one has to establish that the sale is not ex-works (unlike Escorts or Ispat cases) but one of FOR destination sale (like Emco and Roofit cases) with ownership, risk in transit, etc., remaining with the seller till they are accepted by buyer on delivery and till such time of delivery, seller alone (not even carrier) remains the owner retaining right of disposal.
Concluding note
To conclude, it would not be incorrect to state that even a cursory analysis of the judgments is sufficient to indicate that the issue as to what is place of removal is far from being settled. The Department despite amending the law for the past 4 decades and issuing circulars till 2015, relying upon various Supreme Court judgments, is yet to come up with assessee-friendly solution to provide certainty to the issue if not an outright benefit. The far-reaching effect of this uncertainty will be seismic and would give rise to litigation in coming months and years, not just in respect of valuation but also on other issues like Cenvat credit on outward freight. Budget 2016 is just a month away and it is right time that the government extends an olive branch to the industry by appropriately amending the provisions besides clarifying the attendant issues.
[The authors are, respectively, Senior Associate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi]