2015 (7) TMI 826 - AAR - Service Tax

CENVAT Credit - Capital goods being immovable property - Revenue contended that the applicants would receive constructed pipeline system which is embedded to the earth and therefore cannot be termed as goods for availing Cenvat credit of duty as they are neither moveable nor marketable - Next issue raised by the Revenue is that the EPC Contractors who received the duty paid pipes and valves (capital goods) for laying the pipeline were only eligible to take Cenvat Credit on capital goods under Rule 3 of Cenvat Credit Rules 2004 and not the applicants. - Duty paying documents. Held that - in present case capital goods (pipes and valves) are to be used for providing output service and it is not relevant whether these goods provide such service by being embedded to the earth. Therefore we agree with the applicant that the relevant date to determine whether an item qualifies to be capital good is the time of its receipt and not subsequent date. Ownership - since the applicant would receive the pipes and valves as owners and then issue them on bailment to the EPC contractor for a specific purpose of providing services to bring into existence a pipeline. Therefore the contention of Revenue that when pipes and valves are transferred from manufacturer to the applicant applicant would get possession of pipes and valves from the manufacturer but same is not for consideration and thus there would be no sale in terms of Section 2 (h) of Central Excise Act 1944 - is factually incorrect. Duty paying document - EPC contractor who pays for the goods to the manufacturer may direct said goods to be delivered at applicant s site without it coming to the premises of EPC contractor and he (EPC contractor) need not be a registered dealer with the Central Excise. However applicant cannot take Cenvat Credit of Central Excise duty paid on pipes and valves on the basis of invoice issued by intermediary dealer until and unless this intermediary dealer is a registered dealer . Therefore the contention that the applicant is eligible to Cenvat credit of Central Excise duty paid by the manufacturer on pipes and valves on the basis of documents issued by intermediary dealer would be as per Central Excise Rules read with Cenvat Credit Rules only when said intermediary dealer is a registered dealer . Appellants are eligible to avail Cenvat Credit of excise duty that would be paid on the pipes and valves procured from the manufacturer against the applicant s output service tax liability for services in the nature of transport of gas through pipeline provided invoice for said Cenvat Credit of Central Excise duly on pipes & valves is issued by registered dealer .

Summary

The core legal questions considered by the Authority for Advance Ruling (AAR) include:

1. Whether the applicants are eligible to avail Cenvat Credit of excise duty paid on pipes and valves procured from manufacturers against their output service tax liability for services in the nature of transport of gas through pipelines.

2. Whether pipes and valves, which become part of an immovable pipeline system embedded in the earth, qualify as "capital goods" under the Cenvat Credit Rules, 2004.

3. Whether the change in nature of pipes and valves from movable goods to immovable property upon installation affects eligibility for Cenvat Credit.

4. Whether the applicants, as recipients of services and goods, can avail Cenvat Credit when EPC contractors (service providers) receive the pipes and valves first and subsequently use them in works contracts.

5. Whether the documents proposed by the applicants for availing Cenvat Credit, particularly invoices under a bill-to-ship-to arrangement where goods are directly shipped to the applicant from the manufacturer but invoiced to the EPC contractor, satisfy the documentary requirements under Rule 9 of the Cenvat Credit Rules, 2004.

6. Whether the applicants can avail Cenvat Credit on the basis of invoices issued by intermediary dealers (EPC contractors) who may or may not be registered dealers under Central Excise Rules.

Issue-wise Detailed Analysis:

1. Eligibility to Avail Cenvat Credit on Pipes and Valves for Output Service Tax Liability

The applicants, subsidiaries of a government company, engage in rendering taxable services classified as "Transport of goods through pipeline or other conduit service" under section 65(105)(zzz) of the Finance Act, 1994 (pre-July 2012). They propose to lay pipelines using an EPC model, involving supply and installation of pipes and valves, and seek to avail Cenvat Credit on excise duty paid on these capital goods against their output service tax liability.

The applicants contend that pipes and valves are integral to the output service of transporting gas through pipelines, establishing an inextricable link between the capital goods and the taxable service. They rely on the statutory framework of the Cenvat Credit Rules and the Service Tax (Determination of Value) Rules, 2006, asserting that restrictions on credit availment apply to service providers (EPC contractors) but not to service recipients (applicants).

The Revenue argued that the issue was already decided by the Appellate Tribunal and thus barred under Section 96D(2) of the Finance Act, 1994. However, the Gujarat High Court clarified that the AAR could decide the question on merits without causing conflicting rulings, as the AAR's ruling binds only the applicant and the tax authorities.

The Authority accepted the High Court's view, allowing the matter to be heard on merits.

2. Classification of Pipes and Valves as Capital Goods Despite Becoming Part of Immovable Property

The Revenue contended that once pipes and valves are embedded in the earth as part of the pipeline system, they lose their character as "goods" and become immovable property, thus disqualifying them from being capital goods eligible for Cenvat Credit. Reliance was placed on the Bombay High Court's judgment in a cellular company case, which held that towers and similar structures fixed to the earth are immovable and non-excisable, hence ineligible for credit.

The Authority examined Rule 2(a) of the Cenvat Credit Rules, 2004, which explicitly includes tubes, pipes, and fittings under the definition of "capital goods" when used for providing output services. The Authority noted that even storage tanks, which are immovable, are categorized as capital goods under the Rules. Therefore, pipes and valves, though ultimately embedded, qualify as capital goods for credit purposes.

The Authority further relied on a Larger Bench decision holding that eligibility for credit is determined at the time of receipt of goods, not by subsequent transformation. Since the applicants receive pipes and valves as capital goods before installation, the subsequent embedding does not affect credit eligibility.

3. Eligibility of Applicants to Avail Credit When EPC Contractors Receive and Use Pipes and Valves

The Revenue argued that EPC contractors, as service providers, are eligible to take Cenvat Credit on capital goods under Rule 3 of the Cenvat Credit Rules, 2004, but the applicants cannot, especially since the EPC contractors use the goods in works contracts that result in immovable property.

The applicants countered that restrictions on credit under Explanation 2 to Rule 2A of the Service Tax (Determination of Value) Rules, 2006, apply only to service providers (EPC contractors), who cannot take credit on inputs used in works contracts if they opt for valuation under Rule 2A. The applicants, as service recipients, are not subject to this restriction and can avail credit provided they fulfill statutory conditions.

The Authority agreed, noting that EPC contractors will not take credit on pipes and valves, opting instead for Rule 2A valuation, while the applicants, as output service providers, satisfy conditions under Rule 3 and are eligible to take credit on the capital goods received.

The Authority also observed that this procedure is revenue neutral and was not opposed by the Revenue.

4. Validity of Documents for Availing Cenvat Credit under Bill-to-Ship-to Arrangement

The Revenue challenged the documentary basis for credit, arguing that the invoices under which applicants seek credit are not proper under Rule 9 of the Cenvat Credit Rules, 2004, because goods are directly shipped to the applicants' site from manufacturers without passing through EPC contractors' premises, and EPC contractors are not registered dealers.

The applicants explained that the EPC contracts provide for ownership of pipes and valves to pass to them ex-works at the manufacturer's factory, with goods directly shipped to their site under manufacturers' invoices showing the applicants as consignees. The applicants then issue the pipes and valves on bailment to EPC contractors for installation.

The applicants relied on CBEC Circulars No. 96/7/95-CX and 218/52/96-CX, which clarify that goods can be moved directly from manufacturer to user on the order of a dealer without the goods coming to the dealer's premises, and that persons involved in such transit sales need not be registered dealers. The manufacturer's invoice under Rule 52A suffices for credit availment by the end user.

The Revenue's contention that there is no sale between manufacturer and applicant because possession is not transferred for consideration was rejected by the Authority as factually incorrect. The Authority found that ownership passes from manufacturer to EPC contractor, but possession passes directly to the applicant, who is the owner and then issues the goods on bailment to the EPC contractor.

5. Requirement of Invoice Issued by Registered Dealer for Credit Availment

The Authority examined Rule 11 of the Central Excise Rules, 2002, including its amendment by Notification No. 8/2015-CE (NT) dated 01.03.2015, which mandates that if goods are sent directly to any person on the direction of a registered dealer, the invoice must contain details of both the registered dealer as buyer and the consignee, and credit shall be taken on the basis of the registered dealer's invoice.

The applicants undertook to comply with this new procedure by taking credit on the invoice raised by the intermediary dealer (EPC contractor) who is a registered dealer. The Authority noted that invoices issued by intermediary dealers who are not registered dealers do not qualify for credit under Rule 9.

The Authority concluded that while EPC contractors may direct goods to be delivered to the applicants' site without the goods coming to their premises, and need not be registered dealers for such delivery, the applicants can avail credit on the basis of invoices issued by registered dealers only. Thus, credit is admissible only if the intermediary dealer (EPC contractor) is a registered dealer.

Significant Holdings:

"Pipes and valves, though ultimately embedded in the earth as part of the pipeline system, are specifically mentioned under Rule 2(a) of the Cenvat Credit Rules, 2004 as capital goods used for providing output services and therefore qualify for Cenvat Credit."

"Eligibility for Cenvat Credit is to be determined at the time of receipt of capital goods and is not affected by subsequent transformation of the goods into immovable property."

"Restriction on availment of credit under Explanation 2 to Rule 2A of Service Tax (Determination of Value) Rules, 2006 applies only to the provider of taxable service (EPC contractors) and not to the service recipient (applicants), who are entitled to avail credit on capital goods received."

"The transfer of possession of pipes and valves directly from the manufacturer to the applicant, who is the owner, followed by issuance on bailment to EPC contractors, constitutes a valid transfer for consideration under Section 2(h) of the Central Excise Act, 1944."

"Cenvat Credit can be availed by the applicant only on the basis of invoices issued by registered dealers. EPC contractors who are not registered dealers cannot issue invoices valid for credit under Rule 9 of the Cenvat Credit Rules."

"Bill-to-ship-to arrangements where goods are directly shipped to the applicant's premises under the cover of manufacturer's invoice are valid for credit availment, subject to compliance with the requirement that the intermediary dealer be a registered dealer."

"The applicants are eligible to avail Cenvat Credit of excise duty paid on pipes and valves procured from the manufacturer against their output service tax liability for transport of gas through pipeline services, provided the invoice for such credit is issued by a registered dealer."