IN-TRANSIT SALE UNDER FIRST STAGE DEALER REGISTRATION
In an all confounding network of Indirect Taxation, we recently came across a situation for one of our Clients which forced us to dig deep in to the Central Excise Laws and delve into the rules concerning First Stage Dealer (FSD) Registration.
Many a time, there are transactions when a trader (‘Intermediary’) procures goods from a manufacturer (‘Manufacturer’) and supplies them to a customer (‘Customer’). Thus, the Intermediary is only a trader who procures from one and sells to another after adding its profit margin. The said goods are used by the Customer for further processing and thus the Customer is entitled to avail the CENVAT Credit of the excise duty on the subject goods. However, as an Intermediary does not have excise registration, therefore, is unable to pass on the excise duty to the Customer which is charged by the Manufacturer.
The atypical case study which appeared before us was based on the same issue. The Manufacturer had location pan India and was required to supply the subject goods directly to the Customer’s warehouse (located pan India).
Such being the nature of the transaction, it occasioned the following queries:
- Whether the Intermediary should take FSD registration to pass the CENVAT credit to the Customer?
- If not, would the Customer be eligible to avail the CENVAT Credit of excise duty charged by the Supplier?
- What is the best possible option in the current scenario?
Introduction of First Stage Dealer:
In normal circumstances, the Intermediary (being a trader) would only be registered with respective state Value Added Tax Department. As the trader would not be having any output excise obligation, thus it will not able to take CENVAT Credit of excise duty charged by the Manufacturer and pass on to the Customer. Consequently, the excise duty charged by the Supplier will become cost to the Intermediary and impact the pricing of the goods.
To overcome such a situation, Rule 2(ij) of CENVAT Credit Rules, 2004 was introduced wherein First Stage Dealer was defined as:
‘…a dealer, who purchases the goods directly from, –
(i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or …..’
Basis the above definition, the Intermediary qualified to be a First Stage Dealer and could issue CENVAT invoice through which the Intermediary was able to pass the excise duty charged by its Supplier to its Customer.
Department’s contention in 1990s:
In in-transit sales, the consigned goods were being directly sent from the Supplier’s warehouse to Customer’s and therefore the Intermediary was never in possession of the goods. The Revenue authorities thus started contesting that since there was never a transfer of possession of goods to Intermediary, therefore, the Intermediary could not be considered as a dealer. Consequently, the Intermediary could not become an FSD and thus not entitled to issue CENVATable invoice.
This approach of the Revenue resulted in great confusion which was subsequently settled by the Board vide Circular No. 96/7/95-CX dated 13 February 1995 and 137/48/95 dated 18 July 1995 wherein it was clarified that though there was no fiduciary relationship between the Supplier and the Customer, yet the Customer was entitled to avail the CENVAT Credit of excise duty charged by the Supplier on the strength of the Supplier’s invoice itself. Thus, the Intermediary was not required to take an excise registration to pass the duty.
Kernel Drawback of the Circulars:
As the Customer was only entitled to get a CENVAT credit against the Manufacturer’s invoice, the Customer was always aware of the sourcing and pricing of the goods. To overcome the business implications of the same, the Intermediary started receiving the goods in its warehouse and subsequently delivering the same to the Customer. As the Intermediary in this transaction was storing the goods, therefore, it also enabled him to issue a CENVATable invoice.
However, the aforesaid procedure lead to the following difficulties:
- Increase in transportation and compliance cost of the Intermediary
- Increase in the number of FSD registrations putting un-necessary burden on the Revenue
Latest Clarification by the Revenue:
These lacunae in time were cured by Notification 8/2015-CE (NT) dated 01 March 2015, which introduced the following Proviso to Rule 11 of the Central Excise Rules, 2002:
“Provided also that if the goods are directly sent to any person on the direction of the registered dealer, the invoice shall also contain the details of the registered dealer as the buyer and the person as the consignee, and that person shall take CENVAT credit on the basis of the registered dealer’s invoice”
By introducing the above Proviso, it became possible for an Intermediary to issue an invoice to the Customer basis which the Customer would be eligible to avail CENVAT credit even in cases where goods were directly transferred from Supplier to the Customer. However, it created an ambiguity for unregistered dealers for liability of obtaining registration in order to pass on the CENVAT credit to the Customer.
Once again vide Circular No. 1003/10/2015-CX dated 05 May 2015, the Revenue resolved the issues by clarifying that in case of in-transit sales, FSD is entitled to issue an invoice wherein the CENVAT Credit can be availed by the Customer.
Following are the key points of the above clarification:
- In order to issue a CENVAT invoice, FSD is no longer liable to get the goods in its warehouse. In case of in-transit sales, Intermediary may issue an invoice (as FSD) and CENVAT Credit can be availed by the Customer basis the same.
- In case of direct transfer of the whole consignment, CENVAT Credit can be availed by the Customer on the basis the invoice of the Supplier as well. Under this scenario, the Intermediary would be allowed to issue only a commercial invoice (not CENVATable invoice).
In case of procuring whole consignment from Supplier and thereafter distributing it to various Customers through various invoices, it would be possible for the Intermediary to order direct transport of the consignments as per the individual sales to Customers without bringing the goods to his godown.
- In case, the Intermediary is not registered, then he would not be eligible to issue any CENVATable invoice and thus Customer would have to avail the CENVAT Credit basis Supplier’s invoice.
The Government has now settled the ambiguity which existed earlier on the issue thereby making the provisions limpid clear by streamlining the entire transaction.