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Refund of cenvat credits has been an issue which has been plaguing the service sector for the last few years with quite a few amendments being brought about in the procedure for refund ostensibly to ease the refund process for the assessees though in reality the service exporters continue to face difficulties in getting the refund due to them. While changes have been made in the procedures on paper, difficulties arise as the tax administrative mechanism has remained the same without any changes being made thereto. This has led to the assessees facing the same set of issues over the years without the legislative intention in bringing about changes on paper translating into tangible benefits for the assessees. While the well known issues range from need to prove nexus between services received and the output services provided, to need for filing of claims within the time limit of one year, the new procedure under Rule 5 of Cenvat Credit Rules 2004 read with Notification 27/2012 CE (NT) dated 18th June 2012 would only add to practical difficulties owing to certain drafting issues therein.

While this Notification has sought to retain the basic condition of the need to file the claim within the time limit of one year owing to the reference to Section 11B of Central Excise Act 1944, matters have been complicated by having Rule 5 seeking to specify the turnover that would qualify as export turnover and total turnover which would determine the quantum of refund that a service provider would be in a position to claim in the said period i.e. quarter. The quantum of refund admissible would be the amount which is equal to Net Cenvat Credit availed during the period multiplied by export turnover of services and divided by total turnover. (Net cenvat credit X (Export Turnover of services/Total turnover))

Scenario One - Logical interpretation

A reference to Rule 5(1)(D) of the said Rules would reveal that in order to qualify as export turnover of services, the twin conditions of service having to be provided as well as money having to be received would have to be satisfied as at the end of the relevant quarter. This would clearly indicate that if either one of these conditions is not fulfilled, the service billed would not be regarded as export turnover. In other words, where service value is billed but money is not received as at the end of the quarter or where money is received in advance but service is not provided as at the end of the quarter, the same cannot be part of export turnover of services.

A reference next to Rule 5(1)(E) of the said Rules would bring us to the concept of total turnover. In the context of a pure service provider, it would include the export turnover of services covered by Rule 5(1)(D) along with the value of all other services during the relevant period. The term “relevant period” in this context would mean the period for which claim is filed. While the value of a service would have to be determined in accordance with Section 67 of Chapter V of Finance Act 1994 i.e. gross amount charged for the service where consideration is in monetary terms, the Rule does not clarify the nature of services which would fall within the scope of the phrase “value of all other services”. Considering the fact that we are discussing the value in the context of total turnover, the logical conclusion would be that the phrase would cover all services other than those exported. If this is the case, the total turnover would include the export turnover referred to earlier and the value of those services which are not exported out of India.

In case of a service provider who does not have any service other than taxable services exported out of India, the formula laid down under Rule 5 referred to above would result in full refund of cenvat credits being due to the service exporter in the concerned period/quarter. This is on account of the fact that the numerator referring to export turnover of services and the denominator referring to total turnover would be the same in the absence of services other than those exported. While this interpretation would seem logically sound, it would also be pertinent to look at the legislative intent in defining the scope of the term “export turnover of services” in the numerator.  

Scenario Two - Legislative Intent whether to restrict refund?

If we look at Rule 5, while the term “export service” has been defined to mean a service provided as per Rule 6A of Service Tax Rules 1994 whether or not payment is received for the same, the term “export turnover of services” has been qualified to only include turnover in respect of services provided and consideration received thereon.  If we try to ascertain the reason for this qualification of the term, it would seem as if the intention is to restrict refund during the quarter only to those cases where services are provided and consideration received thereon rather than to consider cases where value is billed with consideration or provision of service or both being due. This interpretation might also receive credence if we were to consider the principles of purposive construction of statutes as followed by Courts from time to time.  If we are to follow this principle in interpreting and applying the formula, we would have a scenario where the numerator and the denominator would have to be different. This is because, where the numerator and denominator are both the same, the service exporter would be entitled to full refund irrespective of the pattern of realization of export proceeds. This conclusion would in a way go against the principle of purposive construction if we were to consider the legislative intent in qualifying the term “export turnover of services” in the numerator.

Therefore, applying this principle, we would have the denominator differing from the numerator in order to give full effect to legislative intent in drafting the term “export turnover of services” and qualifying the same.  In order to facilitate this, the denominator would have to include something more than the export turnover of services and this would lead us to the value of services exported (or billed) whereon the consideration is pending receipt or where amounts have been received in advance but services pending to be provided. This would also be in line with the meaning ascribed to the term “export services” in explanation 1 to Rule 5 as well as the “gunapradhana” axiom in Mimansa Rules of Interpretation the usage of which have been upheld by the Courts from time to time.     

This view would also merit attention if we were to consider the basic premise that “total turnover” would generally include the entire value billed and not exclude anything from its purview. If this were to be the case, the service exporter would be entitled to refund only to the extent of value of export of service backed by realization of proceeds during the concerned quarter. This would be the case even if the exporter happened to be a pure exporter of services without having any billing for local services i.e. within India.

A simple example at this juncture would clarify each of the two scenarios. If a service exporter exports services (i.e. service provided and billed) whose equivalent INR value converted happens to be Rs. 100,000 while realization towards the said services is Rs. 10,000 the cenvat eligible for refund considering a total credit balance of Rs. 20,000 for the quarter would be as follows under the two scenarios –

Scenario I

Scenario II

Export turnover of Services – Rs. 10,000 (A)

Export turnover of services – Rs. 10,000 (A)

Total turnover – Rs. 10,000 (B)

Total turnover – Rs. 100,000 (B)

Cenvat eligible for refund – Rs. 20,000 *(A)/(B) = Rs. 20,000

Cenvat eligible for refund – Rs. 20,000 *(A)/(B) = Rs. 2,000

In the aforesaid example there is no billing towards services provided locally within India. In scenario II, the balance credit of Rs. 18,000 would have to be carried forward to the next quarter for refund considering the pattern of realization of export proceeds.

The basic issue as to applicability of first scenario where full refund would be available or the second scenario where refund would be restricted in the event of service exporter not having any services being billed locally would have to be clarified by the Government owing to issues in drafting of Rule 5 of Cenvat Credit Rules 2004. This should be sooner rather than later as there is a risk of matters being remanded to lower Adjudicating Authority when refund claims are subject matter of litigation with the Department and refund amount is found to have been computed on the basis of scenario one indicated above if and when scenario two is found to be the more appropriate option. If this were to happen, it would only end up in further delaying the refund process as the assessees would be required to recompute the cenvat credit eligible for refund.

Cenvat accumulation and prospective refund whether possible?

Where scenario two is to be followed, it would lead to another issue and that is the question as to cenvat credit attributable to services exported but whereupon receipt of consideration is pending as at the end of the quarter. If the intention is to enable exporters of service to get refund, while at the same time ensuring realization of proceeds, the logical conclusion would be to say that the credit to the extent of services whereupon realization is pending, would have to be carried forward to the succeeding quarter for the purpose of seeking refund. This view should be possible if we were to look at the decision of the Tribunal in M/s Kolektor Technologies India Pvt. Ltd Vs CCE & ST Delhi (2013 (12) TMI 157 CESTAT New Delhi) as well as the decision of the Karnataka High Court in mPortal India Wireless Solutions (P) Ltd Vs Commissioner Service Tax (2011 (9) TMI 450 Karnataka High Court) regarding refund of accumulated credits.      

The likely objection to this view could be on the grounds that “net cenvat credit” under Rule 5 refers to credits during the relevant period though the restriction is not explicitly stated. Considering the fact that exports are to be incentivised as well as the fact that carry forward of credits is not specifically barred by Rule 5, a favourable view in this regard should be possible in the humble opinion of the Author.

Service exporters may note the possibility of the turnover issue cropping up in addition to the ones that are already being questioned, i.e. nexus of services received with output services as well as applicability of time limit for filing claims. In addition due care would have to be taken to ensure that all the conditions for export of service i.e. namely, place of provision of service considering the nature of services to be deemed to be outside India, consideration to be in convertible foreign exchange, recipient to be located outside India and service provider to be located in India to be satisfied before one could claim export status. Due care is necessary in respect of intermediary services where supply of goods is involved owing to the amendment in Rule 2(f) of Place of Provision of Service Rules 2012 with effect from 01st October 2014.

In the humble opinion of the Author, rather than amending Rule 5 by linking refund to realizations, a system of sanctioning refund based on billing with post refund audit to identify erroneous refunds being granted would have been more beneficial to assessees and would also have restored their confidence in the system of refund. An alternative mechanism of transfer of credits by service exporters to other service providers or even manufacturers with onus to proving credit admissibility being on transferor without transferee being held liable would also have gone a long way in incentivising service exports.   

By CA Srikantha Rao T (B.Com, FCA) 

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