CESTAT Mumbai has allowed refund of Cenvat credit on export of Scientific & Technical Consultancy services. Considering the pricing method, it held that Rule 3 and not Rule 4 of the Place of Provision of Services Rules, 2012 was applicable. The Tribunal observed that from payment of material cost plus a markup by the service recipient, it cannot be concluded that goods were made physically available by the service recipient. Pricing method was also held as not a reimbursement. Absence of clause that service recipient was to provide material for R&D was also noted.
FULL TEXT OF THE CESTAT JUDGEMENT
This Appeal has been filed by the Appellant, assailing the order dated 05/04/2018 passed by the Commissioner of Central Tax (Appeals), Raigad in Order-in-Appeal No. MKK/01/RGD-APP/2018-19.
2. The Appellant have filed a refund claim of accumulated Cenvat credit for the input service under Rule 5 of Cenvat Credit Rules, 2004 for the provision of output services exported for the period April, 2016 to June, 2016 for an amount of Rs. 5,22,74,046/- on 31/03/2017 in terms of Notification No. 27/2012-CE (NT) dated 18/06/2012 alongwith supporting documents. Personal hearing was granted to the Appellant. After hearing, the Adjudicating Authority vide Order-in-Original dated 24/10/2017 held that Scientific & Technical Consultancy Services for the month of June, 2016 cannot be treated as export of service and accordingly recalculated the export turnover and reduced the refund claim by Rs. 13,27,192/-and also rejected the claim of Rs. 4,844/- on the ground that the Appellant has availed ineligible credit. Aggrieved, the Appellant filed Appeal before the Commissioner and the Learned Commissioner vide impugned order dated 05/04/2018 the rejected Appeal filed by the Appellant.
3. I have heard Learned Chartered Accountant for the Appellant and Learned Authorised Representative for the Revenue and perused the record including the material supplied by the learned Counsel during the course of hearing. According to Revenue, the Scientific and Technical Consultancy Service provided by the Appellant being performance based services therefore it falls under Rule 4 of Place of Provision of Service Rules. It was submitted on behalf of Revenue that as per Rule 4 ibid, the Place of Provision of Service shall be the location where the services shall be performed and since the services have been performed in India, the Place of Provision of Service is in India and therefore the Appellant fulfilled the condition, according to which the Place of Provision of Service should be outside India.
According to Learned Authorised Representative, the service in issue cannot be treated as export of service. He also submitted that refund amount of Rs. 4844/- cannot be granted since the input service in three cases do not have any nexus with output service. Learned Chartered Accountant for the Appellant on the other hand submitted that the service provided by the Appellant is in the nature of Research and Development Service which is covered under Rule 3 of Place of Provision of Service Rules and not under Rule 4 of ibid. He also submitted that the refund claim was filed under Notification No. 27/2012-CE (NT) dated 18/06/2012 under Rule 5 of the CCR, 2004 which provide that in case refund claim sanctioned is less than the refund claim, then the difference shall be allowed as re-credit and therefore the difference of Rs. 13,27,192/- is accruing to the Appellant under the existing law. He also submitted that Scientific and Technical Consultancy Services performed by the Appellant has been considered as export of service by the department in previous years. According to him, the turnover of Scientific and Technical Services provided by the Appellant shall be considered under Rule 5 of CCR of 2004 when the amount due is received in foreign currency.
4. The reading of the provision of Rule 4 of Place of Provision Service Rules, 2012 makes it clear that the said Rule is applicable when the service is to be provided with respect to goods which are physically made available by the recipient of service to the provider of service. In the instant matter, as per agreement dated 03/11/2007 between the Appellant i.e. Service Provider and Dow International Technology Corporation, USA (DITC)i.e. Service receipient, DITC shall be reimbursing the cost incurred by Appellant, including material cost for performing research & development activities at a mark up of 10%. Only on the basis of this Clause, the ld. Commissioner has come to the conclusion that goods/material have been purchased by the Appellant on behalf of DITC and therefore in a way the goods are made physically available by DITC to the Appellant and as such Rule 4 is applicable. It is not disputed that in the instant matter, the goods were purchased by the Appellant themselves for Research & Development as per their own choice/decisions. There is nothing in the agreement that the Appellant are bound to purchase particular goods or materials as per the instruction of DITC nor any clause/document have been brought on record which suggest that the Appellant is bound to purchase the material/goods as per the direction of DITC i.e. the service recipient. I have gone through the agreement and there is no clause in the agreement which mention that service recipient was to provide goods/material for research & development carried out by the Appellant. The CBEC vide Education Guide has explained the services which shall be covered under Rule 4(a) of Place of Provision of Service Rules, 2012. According to the said Education Guide, the essential characteristics of a service to be covered under this Rule is that the goods temporarily come into the physical possession or control of the service provider and without this happening, the service cannot be rendered. So far as reimbursement of material cost plus a mark-up of 10% on the same is concerned, it is a method of pricing considered in the agreement, since the result from research & development activity performed by the Appellant cannot be determined at any particular point of time. In my view, the aforesaid pricing method cannot be treated as reimbursement of expenses. Reimbursement means paying the service provider exact cost incurred by him on behalf of service recipient, therefore there is no reimbursement of goods involved in the matter. Since the research activity performed by the Appellant leads to formation of a new product different from the original raw material therefore Rule 4 of Place of Provision Of Service Rules, 2012 (hereinafter referred to as “Rules, 2012”) will not be applicable. In my opinion, the research & development service falls under Rule 3 of Rules, 2012, according to which, the location of service provided shall be constructed as the location of recipient. In the present case, the location of service recipient i.e. DITC is outside India and therefore the said service shall be treated as export of service. The same is supported by the following decision also:
i. Advinus Therapeutics Ltd; 2017(51) S.T.R. 298 (Tri.-Mum)
ii. Sai Life Sciences Ltd; 2016 (42) S.T.R. 882 (Tri.-Mum)
iii. Midas Care Pharmaceuticals Pvt Ltd. 2014-TIOL-1484-CESTAT-MUM
In view of the above, it can be safely said that the Research & Development Service performed by the Appellant is export of service in terms of Rule 3 of Rules, 2012. Earlier also for the period July, 2012 to September, 2012, October, 2012 to December, 2012 and January, 2013 to March 2013, the said services were treated as export of services by the department and no relevant material has been placed on record to treat the same differently for the period in dispute. Therefore the Scientific and Technical Consultancy Services provided by the Appellant to DITC is to be treated as export of service. Rule 5 of Cenvat Credit Rules, 2004 was amended vide Notification No. 18/2012-CE (NT) dated 17/03/2012 and after amendment the said rule provides that the refund of Cenvat credit is allowed to service provider when the output service is exported. After amendment of the said Rule, no nexus is relevant between input or input services with the output service and therefore the present refund claim which relates to the period April, 2016 to June, 2016 is correctly availed by the Appellant for the aforesaid service. So far as the rejection of the amount to Rs. 2184/- qua garden maintenance services is concerned, the Principal Bench of the Tribunal in the matter of HCL Technologies Ltd; 2015 (40 STR 369 Tri.-Del) held that the garden service qualified as input services and therefore following the said principle, I am allowing this refund claim. Similarly, recruitment service was rejected on the ground that there is no nexus between the recruitment service and the output service provided by the Appellant. On this issue also, a co-ordinate bench of the Tribunal in the matter of Sai Life Sciences Ltd (supra) has held that since the company therein has recruited the employees having vast experience in research, therefore credit is admissible. Following the same ratio, I am also inclined to allow the Cenvat credit under this head.
5. In view of the discussions made hereinabove, the Appeal filed by the Appellant is allowed with consequential relief, if any
(Order pronounced in the open Court on 06.09.2019)