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Refund of Cenvat Credit – Service Exporters

Background

The service exporters have been enabled to get the cenvat credit on capital goods, inputs and input services incurred in providing the services as a refund in various methodologies from 2006 onwards. However across the country in varying degrees, the credit is not forthcoming. The experience in developed/ developing countries is that the entire refund process is quite fast and the exporters in those countries can recognize the same and are not required to take that as a cost.

The refund of credit for service exporters has been an area of much unfairness and frustration with several unhealthy practices of pay offs between 1- 3% being put forward as a pre condition for the sanction by many unscrupulous/ corrupt officers. Some of them have been caught, however the practice is increasing day by day indicating the amounts involved. The honest tax compliant service provider who is not able to [ due to applicability of the foreign corrupt practices Act ] or on their own moral ground not willing to adopt these nefarious practices is the silent sufferer.

However on many grounds [ valid and invalid] the refunds are denied and one may have to keep litigating several times for the same refund claim. Repeated requests to provide information and copies available with the revenue is also a frustrating experience. At times the officers are afraid of audit issues and take the safer route of not doing anything.  Commissioners do not fix the appeal for years together. When they hear some of them routinely dismiss the appeals.  The undocumented instructions to delay/ deny the refunds coming from the top [whether from the FM level or lower is not very clear] also appear to be playing a big role. In some Commissionerates 100% denial has also been observed.  On the public platforms / stage/ in papers the immense reforms put in place /effort to get these streamlined is being heard for the past 5 years. However the results indicate that there is no will and administratively the same is being defeated.

This article provides the background of the cenvat scheme, legal provisions from the starting as also the various segments under which the refunds are being delayed/ denied.  We also provide our comments on the possible way forward and the possible justification with case law reference for avoiding / meeting the issues raised. The action taken would lead to a shortening of the period required.  The discussions are as under:

a. Understanding the Cenvat Credit Scheme

b. Cenvat Credit refund provisions applicable as on date

c. Indicative Judicial Decisions [ period and appropriateness needs to be confirmed]

d. Legal Issues for rejecting refund

e. Undisputed Input Services

f. Disputed Input Services – Justification

g. Disputed Procedural aspects – to be avoided where possible

h. Other Common Issues

i. Frivolous ground of rejection [ Ire/ dis satisfaction needs to be communicated & if appealed ruling sought

j. Possible Way Forward

The Cenvat Credit Scheme

The cenvat credit scheme was bought about to avoid the cascading effect of multi point levy. Theoretically it was to ensure that taxes paid at earlier points of time are not forming part of the cost of services at later point of time.  All taxes incurred to be seamlessly allowed as credit. This is also one of the major basic concepts of GST. However we have seen over a period of time that the definition itself has been becoming more restrictive which is not proper. However the express restrictions cannot be challenged and those would have to be followed. The availment of credit also would get affected as credit which was admissible earlier may not be admissible at a later point of time.   

It has been held that the scheme is a beneficent scheme where the purpose is to provide the benefit and not to deny the same for procedural reasons. In the decision in Coca cola affirmed by the Supreme Court it was observed that once costs incurred have been added to arrive at the value, there is no scope to deny the same.  

Specific Provisions Related to Refunds and Cenvat Credit

This part being a reference material has been provided in Annexure –I at the end of this article. Summary provided hereunder:

a. Nexus not required to be established from April 2012 as per Circular

b. One can avail credit of capital goods / inputs used in export of services. Refund under Rule 5 not available for capital goods.

c. One is admissible for interest due to delayed refund – advisable to claim for bringing accountability to the revenue authorities

d. There are procedural requirements which can if not followed lead to denial of claim. {explained in other parts of this article.}

Some Relevant Case laws- Indicative of Judicial View

a. GTN Engineering I Ltd.  [2012 (281) ELT 185 ( Mad)] – Dt of final product exported is the date for reckoning limitation. In the case of services as the receipt of the CFE is important the relevant date would be the date of receipt of monies in CFE.

b. Spel Semi conductors Ltd. – 2012 (26) STR 541 ( T-chen) – Original claim filed under Rule 5. Subsequent re submitted under Not. 41/07. Not barred if first one is within time.

c. DBOI Global Services P ltd. [ 2013 (29) STR 117 (bom) – Reasons of CA certificate is false, reconciliations statements not considered, no record of findings of why documents furnished not sufficient, why additional documents were necessary. Strictures on officer.

d. Coca Cola India P ltd. [ 2009 (242) ELT 168 (Bom)- affirmed by SC] – Burden of ST to be borne by ultimate customer. Advertisements, sales promotion market research ++ eligible credits.

e. Deloittee Tax Services I P ltd. [ 2008 (11) STR 266 ( T- Blr)] – Equipment hiring, professional consultation, recruitment, security, facility operation, courier service, cafeteria – eligible.

f. Chamundi Textiles Ltd. [2012(26) STR 498 ( T- Blr)] – Documents not indicating assessee is recipient – not eligible. Where raised on Ho and no dispute on receipt – eligible. In another name – But on account of assessee- eligible.

g. Convergys India P ltd. 2009 (16) STR 198 (T-blr) – Late filing of declaration is a procedural error. Substantial concession not deniable.

h. TKML 2012 (286) ELT 690 ( T- Blr)] – A CA certificate is a collaborative evidence which can be supported with invoices and records to prove veracity.

i. Mavenir Systems P Ltd. – 2012 (27) STR 510 (T-Blr)] – Mere assertion in the order that there is absence of nexus between input and output is not a valid order.

j. Cadilla Pharma Ltd. – Insurance for export eligible.

k. Ramdev Food Products  P ltd. [ 2011 (23) STR 475 ( T-Ahm)] – Where errors are rectifiable there is no need to reject. The application.

l. Tuticorin Alkalis Chem & Fertilisers Ltd.  [ 2009 (15) STR 645 (T-Chen) ] – Credits lying unutilized in cenvat account – Refund available under Rule 5.

m. Shell India Markets P Ltd. [ 2012 (28) STR 87 (Kar) ] – It is to be ensured that input services are not utilized for other purposes.

n. Kbace Tech P Ltd. – Whether the credit relates to services consumed for providing output services. Circular cannot restrict the credit – cannot amend statute.

o. Sterling Hoffman Software Consultants [ 2012(28) STR 253 (T- Ahm)] – Banker certificate sufficient and acceptable. Accounts in computer having details of invoice, amount of consideration and ST payable sufficient.

p. Vishal Mallebles Ltd.  [ 2013 (287) ELT 234 ( T- Ahm)] – Bank commission eligible.

q. Heartland Banagalore Transcription Services P ltd. – 2011 ( 21) STR 430 (T-blr) – ISO certification, Professional services of audit/ accountancy housekeeping insurance of equipment are necessary. Remanded for confirmation

r. Capiq Engg P Ltd. [ 2009 (245) ELT 186 (T-Ahm)} – One to one co-relation need not be quarter to quarter as long as credits availed correctly.

s. mPortal India Wireless Solutions [ 2012(27) STR 134 (Kar) – Registration with dept. not a pre requisite for claiming credits.

Disputed Legal aspects [ These aspects have to be taken into consideration at the time of preparation of the documents] 

a. Claim to be made to the ACCE/ DCCE [ ST] – Covering sheet may have an index with pages.

b. 100% credit claimed where exempted services exist -  Reversal of proportionate credit to be done in advance.

c. Time barred beyond 1 year- From date of receipt of CFE.

d. Foreign exchange received after 1 year

e. Services not an export service – Demand with interest and penalty possible prior to 1.7.2012

f.  Reversal of credit though refund only partially allowed – Reversal to be made to extent allowed or appeals filed for balance and fact of full reversal made clear in correspondences and appeal.  

g. Input services changing definition over period of time not considered – Law as it stood at relevant time important. In periods where not available not to be considered. Where large amounts involved to litigate further as scheme is beneficient. In other cases to be reversed and forgotten

h. Nexus of input services used for export services +  1:1 co-relation -  Earlier period prove how it si intrinsically connected to the activity of the SP. No such restriction there after April 2012

Undisputed Credit [ This at least requested to be released where there is resistance from revenue]

1. Telecommunication & Internet

2.  Rental of IP

3. Maintenance of IT Equipment

4. Manpower Recruitment Services

Disputed Input Services- Nexus to Exports being questioned. [ See case laws above for clarity also- try and avoid denial ]

1. Business Support – These as the name suggests would be services which are essential and are being outsourced. Without these activities the business cannot be carried out. Therefore no valid reason for denial.  [ Zenta Pvt Ltd 2012 (284) ELT 45 ( T- Mum)]

2. Business auxiliary – Similar to above but would include business development effort. No reason for denial. [ Coca Cola ]

3. Consulting engineering – Basic need- Covered by case law also

4. Security agencies -  As above

5. Technical testing and analysis – The need maybe highlighted to avoid the denial.

6. Chartered Accountant – Provides advisory and audit services

7. Payroll processing not an input service- Incorrect- Without that company cannot function- Zenta

8. Management or business consultancy- Essential for business – case law covered

9. Courier services – Essential for business – case law covered.

10. Rent a cab – Now not eligible

11.  Mobile – Eligible as used for providing service - Godrej Sara Lee – 2012 (26) STR 417 ( T- Chen)

12.  Many more – Normally if used in the provision of services then eligible.

Disputed Procedural aspects [ Maybe avoided where possible – necessary evil - to avoid delay  though they are defensible] 

1.  Difference in ST-3 and Form A

2. Softex form not attested by STPI

3. Declaration not as specified

4. Covering letter not in letter head of company

5.  Previous application rejected therefore this one also is to be rejected

6. Signature of the authorized person not on record

7. Copies of invoices are not provided.

8. Input services do not have appropriate information requirements – Rule 4A.

9. Bifurcation between main premises and cafeteria/ car parking not provided

10. Amount certified by CA and claimed different

11. Copy of Appendix – 22A not furnished

12. FIRC not co-related to exports [ advance or on account payment avoided if possible]

13.EOU/ STPI/ PBW license not provided

14. Long time taken to file the certificates/ reconciliation/ persons to assist in doing the officers work.

15. Many others – Use common sense to resolve.

Other Issues raised to deny refund

1.  When concern not registered in earlier periods though exporting can claim the refund for previous years? Yes – Case law referred above.

2.  Exported services used in India ultimately?

3. When the concern was audited earlier and there was no dispute on eligibility could the officer sanctioning refund dispute? – Normally not. Convergys decision referred above.

4. Credit availment of input services used in additional place of business not in centralized registration

5. Documents from bank beyond bank realization certificates + auditors certificate like softex forms, bank statements, STPI reports, bankers certificates…..

6. Classification of services by SP incorrect therefore refund rejected.

7. OIO with specific direction not heeded. – Compliant to be lodged with officer who issued the 1st order and with CCCE.

Frivalous Grounds often used to reject refund. [ Illogical/ unreasonable reasons should be highlighted to revenue]

a.  Export invoices having no classification of services exported

b.  FIRC address not matching

c. Inspite of reply to SCN, order passed saying no reply

d. No description of services in the invoice of the service provider

e. Mismatch in softex and FIRC – advances and specific services.

f.  Order goes beyond SCN issued

g.  Many other …. [please send mail on your experience to mhiregange@gmail.com]

Way Forward – Some Suggestions

I.  Ensure that the claim forms are prepared in carefully along with legally and commonly required annexures to reduce the chance of denial.

II.  Ensure that regular follow up and support to verify the invoices [ at ST office] is in place.

III.  When there is an objection which can be corrected though not legally required- do it

IV. Reply quickly to the SCN and seek an early hearing date by way of communication regularly.

V.  Appeal filed quickly to order denying the refund. Seek specific directions from the Commissioner Appeals / CESTAT.

VI. When there is inordinate delay make specific representation based on the office which is delaying/ denying without adequate reason.

VII. The service exporters should through their respective trade associations and the export promotion council and on their own make representation of the fact that the Governments stated policy of making exports competitive is being systematically by way of denial and delays bought to nought.

VIII.  The service exporters should seek transparency and even methodology of expediting the refunds.

IX. The industry as a whole should seek accountability of the executive who can deny/ delay with impunity as there is no impact on them.

This area of government apathy is also the cause of India’s low ranking in terms of ease of doing business, corruption, tax reforms movement which requires to be corrected. We need to get off  the chair of spectators and join the game as players with a loud voice which is made to be heard, if we wish to contribute.

Am making a reference to our Mahatmas saying – be the change you wish to see in others. 

CA Madhukar N Hiregange & CA Akbar Basha


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Category Service Tax, Other Articles by - Madhukar N Hiregange 



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