(This is a draft Circular proposed to be issued in order to streamline the process of sanctioning of refund claims, mainly arising on account of service tax borne on input services that have gone into exports of services in terms of notification no. 5/2006. This draft is being placed in public domain for widest possible circulation and an extensive debate from all stakeholders in trade and industry as also from all the field formations of the department. All suggestions and feedback may please be emailed at [email protected] to Shri Deepankar Aron, Director (Service Tax), CBEC (Phone No. 011-23092 747 and Fax No. 011-230922 75) by 30th November 2011. The feedback and suggestions received would be considered for revising the draft circular.)

Draft Circular No.  /2011 – Service Tax (Uploaded on Website 28.10.2011)

Subject: Problems faced by exporters in availing refund of excess credit – regarding

Representations have been received both from the field and the trade regarding difficulties being faced in the determination of the input services which are eligible for refund under notification 05/2006. Resultantly, the issue has spawned delays and disputes, which has necessitated the issue of this clarification.

2. The issue of eligibility of input services to refund under notification no. 05/2006 has been addressed in Circular No. 120/01/2010-ST dated 19th January, 2010 in paragraph 3.1. The criterion laid down in this paragraph for determining the eligibility states that “in case the absence of such input/input service adversely impacts the quality and efficiency of the provision of service exported, it should be considered as eligible input or input service”. This criterion has not been very useful as it is found to be too conceptual and not easily translatable into objective tests that could help in deciding actual cases. Thus a need has been felt for further elaboration by the Board on this issue.
3. The objective that is sought to be achieved by the refund of cenvat credit under notification 05/2006 is to zero-rate the exports. Zero-rating means that the goods and services that are exported from the country should not be burdened with any excise or service taxation. For a 100% exporter who has no domestic business this can be realized only when the ambit of services that are covered by notification 05/2006 is congruent with the ambit of services that are covered by the definition of “input service” that is given in Cenvat Credit Rules, 2004. Thus every input service has to be eligible for refund under notification 05/2006 for a 100% exporter who has no domestic business.
4. The above clearly implies that the scope of Rule 2(l) is congruent with the scope of Rule 5 and the scope of both is congruent with the scope of Notification No. 05/2006 i.e. any service that satisfies the definition of input service as given in Rule 2(l) would also fall within the mischief of Rule 5 and also of Notification No. 05/2006. This is necessary for a perfect pass through from Rule 2 (l) to Rule 5 to Notification No. 05/20 10. Only such a construction can zero-rate the exports.
5. For a business entity that has both export business and domestic business the only additional requirement is to check whether the input service has contributed exclusively to domestic business. If the input service has made no contribution to exports and has been exclusively utilized for domestic operations the service has clearly not contributed to exports and so would not be eligible to refund. For example an advertising campaign for a product that is sold exclusively in the domestic market would not contribute to exports and so would not be eligible for the benefit of notification 05/2006. Every input service that is not identifiable as contributing exclusively to domestic business can be said to have a link with exports though its contribution to export may vary. In order to extract the extent of contribution that the input service has made to exports, notification 05/2006 provides for multiplying the credit that has been taken on an input service with the correction factor (export turnover/ total turnover). It is this extracted amount which indicates the contribution that the input service has made to exports. The extracted amount is also the maximum possible amount that is eligible as refund as per the current statute. In this backdrop, it would not be necessary to link every input service invoice with an output invoice, so long as the input service has a link with the export as discussed above.

6. Field formations and trade have represented about the problems being faced in identifying and linking the input services that have gone into providing the output services. Accordingly, the method to be followed for determining eligibility to refund can be summed up in the following principles:

(1)          Check that the service on which refund is claimed satisfies the definition of input service that is given in Rule 2 (l) of the CENVAT Credit Rules, 2004.

(2)          Next, service is eligible to refund unless facts of the case indicate that the benefit of the service has gone exclusively into domestic business with no spill over what-so-ever into export business.

(3)          The second principle mentioned at sub-para (2) above is to be given a strict construction. Disqualification on this account would be an exception rather than a rule and should be done only when there is unmistakable indication that the benefit of the service has not gone into export business what-so-ever.

(4)          The level at which a determination shall be made of whether the input service has gone exclusively into domestic business or not shall be at the level of the input service invoice. The officer scrutinizing the claim will not disaggregate the invoice and extract elements from it and state that these elements have exclusively contributed to domestic business. If at the level of aggregation that is reflected in an invoice, a portion of the input service that is embodied in the invoice has contributed to exports, then the entire input service invoice shall be eligible for refund.

7. Keeping the above principles and statutory provisions in mind, as also after considering the feedback from the field formations on eligibility of input services, a list of input services that are eligible for grant of refund has been prepared and is in the Annexure. Apart from the conditions mentioned above, certain other conditions subject to which the refund would be applicable are also indicated therein. It may please be noted that the list is not exhaustive, but is illustrative. Further, the exact application would depend upon the facts of each case.
8. It is expected that the principle that has been outlined above would prove useful in determining eligibility to refund of the input services. At the same time, it is expected that the field formations shall strengthen the audit machinery including the pre-audit and the post audit mechanisms, so as to ensure that the process of sanctioning of refund is taking place in due accordance with the statutory provisions, so as to prevent the possibility of any misuse.

9. It is hoped that with the issuing of this circular, smooth and expeditious disposal of exporters claims for refund shall follow. In case of any doubt, an immediate reference may be made to the Board.

Yours faithfully,

(Deepankar Aron) Director (Service Tax)

Annexure

List of Services on which refund is allowed (fully or partially)

S. No. Category of Service Exclusions or Limitations, if any Remarks

1

Advertising agency’s services 65(105)(e) A     company    hires    advertising

agency        for                  programming,

broadcasting       and                        releasing

activities             related                         to
advertisements. This promotes the

brand    of   the   company   which

enhances   its sales and    hence  is

directly    related  to   provision              of
output service.

2

Air travel agents services 65(105)(i) Should not be allowed in case it is for personal use of employees The services are procured     by a

company  in  relation  to travel   of

employees        for       conducting

business   meeting  and  attending

seminars     towards                 professional

objectives.  Hence it is an eligible

input    service  for  exporting  the

taxable    output    service.   These

services   are  required  for  travel

and   tour  of their   employees        in
relation to the company’s business

which are essential for maintain orders and efficient work of the business i.e. export of services.

3

Asset management service

65(105)(zzzzc)

Should not be allowed in case for personal use of employees. May be allowed when used for Banking and other financial services.

4

Banking and other financial services 65(105)(zm) & (zzk) Should not be allowed in case for personal use of employees. These input services are required for issuance of bank guarantee for overseas project / other business activities.
  1. 5.
Business auxiliary services

65(105)(zzb)

These input services are required for procurement of orders and some similar activities.
  1. 6.
Business exhibition services

65(105)(zzo)

These services would   be required
for furtherance of business activities.

7.

Business support services 65(105)(zzzq) Accounting payroll,      transaction processing, routine administration, customer                relationship

management, telemarketing and IT support services are taken by the company to maintain the day to day operations of the company

and are very much the input services on which refund would be eligible.

8.

Cargo handling service

65(105)(zr)

Should be allowed as it is used for business purposes.

9.

Chartered accountant’s services

65(105)(s)

Should not be allowed in case for personal use of employees. These services are required not only for maintaining the accounts and auditing the records but also for complying with the statutory requirements. Hence, these input

services    are   essential   for   the

business    of  export  of               services.

Further,   these   services  help  to

strengthen   the   internal  controls

for    smooth   functioning   of        the
business.

10

Cleaning activity service

65(105)(zzzd)

Should not be allowed in case for personal use of employees. Cleaning activities of the office premises are necessary to enable the employees of the company to perform efficiently.

11

Clearing and forwarding agent’s services

65(105) (j)

Should be allowed as it is used for business purposes.

12

Commercial

training or

coaching service 65(105)(zzc)

Should not be allowed in case for personal use of employees. These services are procured by a company so that employees can get          regular   updates        of         various

changes   in  laws and technology

during     seminars,    coaching             or
training s.

13

Company

Secretary    Service
65(105)(u)

These    services  are  required            for
complying with the requirementsof Companies Act,     1956 as the

assesses are    normally registered
under the said Act.

14

Consulting engineer’s services 65(105)(g) Various engineers are consulted for providing advice in respect of the output service and the same is used in relation to export.

15

Convention services

65(105)(zc)

Should not be allowed in case        services              are

procured     as    a    staff
welfare measure.

As per Circular 120/01/2010-ST dated 19 January 2010, it should not be allowed for entertainment

or    staff   welfare,   however   for

official   purposes,  these  are very
much valid input services.

16

Copyright services 65(105)(zzzzt)Should not be allowed in case for personal use of employeesShould be allowed as these are used for professional activities.

17

Cost accountant’s services

65(105)(t)

Should not be allowed in case for personal use of employeesShould be allowed as these are used for professional activities.

18

Courier service 65(105)(f)Should not be allowed in case for personal use of employees.These services are consumed by a Company for delivery of business documents. The delivery of these documents is essential to process transactions related to exports. Hence, a valid service.

19

Credit rating agencies

65(105)(x)

These services are used for professional purposes.

20

Custom house agent’s services 65(105)(h) These services are used for professional purposes in relation to exports.

21

Design services 65(105)(zzzzd)

These   services  are  required  for

making    designing   of              consumer

products,      industrial                   products,
packages, logos, graphics, website

and   corporate  identity  designing

and       production      of      three

dimensional      models.     Without

these    services   output            services
cannot be provided.

22

Development and supply of content service

65(105)(zzzzb)

These services are required towards marketing efforts of the company concerned and as such have a clear nexus with the output activities.

23

Dry cleaning services

65(105)(zt)

Should not be allowed in case for personal use of employees.Should be used only for office cleaning /                 maintenance.

24

Erection, commissioning or installation service 65(105)(zzd)Should not be allowed in case for personal use of employeesThese services rendered in connection with office premises or office equipment would have a direct nexus with the output activities.

25

Event

management service

65(105)(zu)

Should not be allowed in case        services              are

procured     as    a    staff
welfare measure.

As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, in so far as it is for promotion of the business, it

should be   a valid input.

26

Fashion designing service

65(105)(zv)

Should not be allowed in case for personal use of employees.Should be used only for office purposes.

27

Forward contract services

65(105)(zzy)

 

28

General Insurance Service 65(105) (d)

Should not be allowed in case for personal use of employees; it is also not allowed in so far as it

relates to a motor vehicle except when used for provision of a taxable service for which credit on motor vehicle is available as capital

goods;

Should be used only for office purposes. This could include fixed assets insurance or group insurance for official activities.

29

Goods Transport operators 65(105)(zzp)Should not be allowed in case for personal use of employees.Should be used only for office purposes.

30

Information technology

software service 65(105)(zzzze)

These    services   are   availed            for
procuring the software for runningthe    operation   of   company.        As
export of services is dependent on the better operation of company. Hence the software is an input for

 

providing     output    service.    In

addition     to    this    software                is
required for the data management

31

Intellectual

property services 65(105)(zzr)

Should be used only for office purposes.

32

Interior decorator’s services

65(105)(q)

Should be allowed if used for        renovation            or

maintenance     of                      office
premises only.

 

33

Internet telecommunication services 65(105)(zzzu)

A        company       uses       the

telecommunication      /internet telecommunication services which are    essential  input   services        for

providing   output services.   These

input     services    are           consumed

essentially     for    providing    the

output    services   related  to   the

export       business      and                for
discharging day to day duties by

the administrative staff. Without the telephone and internet facility the services could not have been rendered.

34

Legal consultancy service

65(105)(zzzzm)

Should not be allowed in case for personal use of employees.Should be used only for office purposes.

35

Management or Business consultant’s

services 65(105)

 

Consultancy Services are procured for providing    advice,                     consultancy

and     technical     assistance     in

relation    to   the    business    and

therefore should   be allowed.

36

Management, maintenance or repair service 65(105)(zzg)

A    company   procures      services

maintenance and   repair of office

premise, office equipments etc. The management, maintenance & repair service of office building is

essential      for    conducting                 the
business including exports.

37

Mandap keeper’s services

65(105)(m)

Should not be allowed in case services are procured as a staff welfare measure.As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, for activities relating to business, it should be allowed.

38

Manpower recruitment or supply agency’s services

65(105)(k)

Procurement   of  manpower  is                     a
basic requirement of the industryand for which     it has to engage

 

recruitment agencies. The procurement of these services is essential in view of the high labor turnover and in order to identify the right person for the right job at the right time. An organization can’t operate without appropriate people.

39

Market research agency’s services 65(105)(y) Required for business                               related
activities.

40

On-line

information and database access or retrieval services 65(105)(zh)

 

A company does market analysis, studies economic factors and other market parameters for the

purpose     of    providing    output

service.   For  this  purpose  online

database     and    other                 research
database are used.

41

Packaging services 65(105)(zzzf) Should be allowed.

42

Pandal or shamiana contractor’s service 65(105)(zzw)

Should not be allowed in case        services              are

procured     as    a    staff
welfare measure.

As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff

welfare.   However,  for   activities

relating to business,    it should                               be
allowed.

43

Photography services

65(105)(zb)

Should not be allowed in case        services              are

procured     as    a    staff
welfare measure.

As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, for activities relating to business, it should be allowed.

44

Promotion or Marketing of Brand service

65(105)(zzzzq)

Should be allowed.

45

Public relation management service 65(105)(zzzs)

To     maintain    public    relations,

professionals      are     hired     in

maintaining   relations  with   govt.

authorities      and                    organizations.
Should be allowed

46

Rail travel agent’s services

65(105)(zz)

Should not be allowed in case for personal use of employees.Should be allowed for business use.

47

Real estate agent’s services

65(105)(v)

Should not be allowed in case for personal use of employees.Should be allowed for business use.

48.

Rent a cab service 65(105)(o)

It is not allowed in so far as it relates to a motor vehicle except when used for   provision of a

taxable service for which credit on motor vehicle is available as capital

goods.

 

49

Renting of immovable property services 65(105)(zzzz) The premises from          where                           the
party renders output services or premises where books of accounts of company are                           maintained                           hasbeen taken on rent and accordingly renting of immovable property is essential for operation for the output service.

50

Sale of space or time for advertisement services 65(105)(zzzm) Should be allowed for business use.

51

Scientific or technical consultancy services

65(105)(za)

Should be allowed for business use.

52

Security agency’s services

65(105)(w)

Should not be allowed when used for residential premises i.e. in case for personal use of employees.

The procurement of these services is essential for security of office buildings and equipment. Further,

business        operations                   involve
handling of confidential data.

53

Service of permitting commercial use or exploration of any event organised by a person or organisation 65(105)(zzzzr) Should be allowed for business use.

54

Service relates to short term accommodation 65(105)(zzzzw)Should not be allowed in case for personal use of employeesShould be allowed for business use.

55

Sponsorship services 65(105)(zzzn)

Should not be allowed in case        services              are

procured     as    a    staff
welfare measure.

As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. Should however be allowed for business use.

56

Steamer agent’s services

65(105)(I)

Should be allowed.

57

Stock broker services

65(105)(a)

Should not be allowed in case for personal use of employeesShould be allowed for business use.

58

Storage and warehousing service 65(105)(zza)

Should be allowed.

59

Survey and map- making service 65(105)(zzzc) Should be allowed for business use.

60

Technical

inspection and certification

service

65(105)(zzi)

This input service is related to export of service which is mainly used for inspecting    the items
which are exported to other country at the ports and other places. Should be allowed for business use.

61

Technical testing and analysis

service 65(105)(zzh)

Should be allowed for business use.

62

Telecommunication service

65(105)(zzzx)

Should not be allowed in case for personal use of employees.Should be allowed for business use

63

Transport of coastal goods; and goods transported through inland water service 65(105)(zzzzl)Should not be allowed in case for personal use of employeesShould be allowed for business use

64

Transport of goods by air service 65(105)(zzn)Should not be allowed in case for personal use of employeesShould be allowed for business use

65

Transport of goods by rail service 65(105)(zzzp)Should not be allowed in case for personal use of employeesShould be allowed for business use

66

Transport of goods by road service 65(105)(zzp)Should not be allowed in case for personal use of employees

67

Transport of passengers by air service

65(105)(zzzo)

Should not be allowed in case for personal use of employees.Should be allowed for business use

68

Travel agent’s service 65(105)(zzx)Should not be allowed in case for personal use of employees.Should be allowed for business use

 

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