Recently in the case of Kbace Tech Pvt. Ltd. Vs CCE/ CST CESTAT ruled that the refund or CENVAT credit on input services is allowed only if the services are consumed in the output service. It is held that the Board’s Circular No. 120/01/2010-ST, dated 19-1-10 does not have the effect of amending the statute and cannot be seen as authorising sanction of refund if the credit of service tax does not relate to services consumed for providing the output service.
The Order has initiated the new battle between the tax administration authorities and judicial organs over legislative intentions behind the grant of refund of Cenvat credit on input services to the service exporter. The Latest decision has the department a reason to block the service tax refunds.
To relax the controversies revolving around the eligibility of refund claim to the service exporters, the Central Board of Excise and Customs came out with a Circular on January 19 this year, clarifying the position in favour of the various service exporters. Further, in order to support the Board’s view, the Union Budget 2010 brought retrospective amendments vide Notification No. 5/2006 (‘the Notification’) to rules governing the procedural aspects of claiming refund of unutilised Cenvat credit. However, soon after the issue of much-awaited clarifications and proposed amendments in the Notification, Bangalore CESTAT in the case of KBace Tech has shaken the very foundation of the Cenvat credit scheme that governs the eligibility of the input services for Cenvat credit.
Introduction of the levy of service tax in 1994 was the first initiative towards the unified value added tax (covering goods as well as services). The service tax being a consumption tax, input tax credit mechanism was introduced to avoid the cascading effect. Cenvat credit has been evolving and has undergone many changes over time.
In brief, earlier, Rule 5 of the Cenvat Rules allowed the refund of Cenvat credit availed on the inputs or input services only to manufacturer exporters.
Though delayed, government amended the Rule 5 and the Notification to cover service exporters under the refund scheme.
However, the amendment of the Cenvat Rules and issuance of the Notification could not ensure the smooth and hassle-free function of the Input Credit Mechanism and sanction of the refund claims for service exporters. In fact, it began the new era of the fresh litigation with regard to determination of the eligibility of refund of credit availed on input services used in relation to the exported output services.
The refund claims filed by the applicants were mostly rejected or delayed on account of the confusion pertaining to the establishment of the nexus between the input services procured and output services provided by the service exporter. The confusion was on account of the contradictory languages used in the Cenvat Rules and in the Notification. The Cenvat Rules defining the term ‘input services’ permits the availment of Cenvat credit on the input services that are ‘used for’ providing output services, whereas, the Notification while permitting the refund of Cenvat credit termed that refund on input services ‘used in’ provision of output services exported is available.
This created room for interpretation by the authorities that refund is eligible only with respect to input services, which have direct nexus with the output services as the Notification states that the input services should be ‘used in’ provision of export of services.
In order to clarify the correct position, the CBEC issued the Circular dated January 19, 2010, which clarified that there cannot be different yard sticks to determine the nexus between the input and output services under the different provisions of the service tax legislation. The different phrases used in the various provisions of service tax legislation should be construed in a harmonious manner to understand that Cenvat credit on the input services are eligible in case its absence adversely impacts the efficiency and quality of the output services.
The above Circular and the amendment in the Notification in the Union Budget were welcomed by service exporters with a hope that the long-awaited refund would now start flowing.
However, this hope has been drastically shaken by the Bangalore Tribunal in the case of KBace Tech. The Tribunal while remanding back the matters observed that:
