CENVAT Refund on Exported IT Services: Key Takeaways from AMD Research & Development Centre India Pvt Ltd Vs Commissioner of Central Excise And Service Tax (CESTAT Hyderabad)

The decision in AMD Research & Development Center India Pvt Ltd Vs Commissioner of Central Excise And Service Tax (CESTAT Hyderabad) provides detailed guidance on three recurring issues in Rule 5 refunds under the CENVAT Credit Rules, 2004 for service exporters:

  • Whether CENVAT credit of Service Tax paid under Reverse Charge Mechanism can be denied by invoking Rule 9(1)(bb)
  • How the refund formula under Notification No. 5/2006-CE (NT) should be correctly applied
  • Whether purely procedural lapses in submitting invoices can be used to reject refund where substantive eligibility exists

The appeal arose from an order dated 22.03.2012 of the Commissioner (Appeals), Hyderabad, which had partly rejected the assessee’s refund claim for the period January 2010 to March 2010.

Background of the Dispute

Nature of business and refund claim

The assessee, M/s AMD Research & Development Centre India Pvt Ltd, is engaged in providing Information Technology Software Services. These services were exported without payment of Service Tax.

During the quarter January 2010 to March 2010, the assessee accumulated unutilised CENVAT credit on various input services. A refund application under Rule 5 of the CENVAT Credit Rules, 2004 read with Notification No. 5/2006-CE (NT) was filed for the unutilised credit attributable to exports.

  • The Original Adjudicating Authority allowed part of the claim and rejected the balance.
  • The Commissioner (Appeals), vide order dated 22.03.2012, confirmed the partial rejection.
  • The assessee challenged this order before the Customs, Excise and Service Tax Appellate Tribunal, Hyderabad.

Issues surviving in appeal

As recorded, the surviving dispute before the Tribunal revolved around three components:

  1. Reverse charge Service Tax credit

    • Refund of CENVAT credit of Rs. 2,42,39,076/- relating to Service Tax paid under Reverse Charge Mechanism was disallowed.

  2. Incorrect application of refund formula

    • According to the assessee, the authority had applied the export turnover ratio to the closing balance of CENVAT credit, rather than to the gross eligible credit earned during the quarter, resulting in an alleged excess rejection of Rs. 11,16,153/- (a different figure of Rs. 11,61,530/- also appears in the order, as discussed below).

  3. Procedural rejection of two invoices

    • Refund of Rs. 3,11,450/- was denied on the ground of non‑submission / procedural deficiencies in relation to two invoices.

The Tribunal examined each of these three aspects separately.

Issue 1: CENVAT credit of Service Tax paid under Reverse Charge

Assessee’s position

On the first and principal issue, the assessee argued as follows:

  • Service Tax under Reverse Charge was duly paid in March 2010 through TR-6 challans, before issuance of the Show Cause Notice.
  • CENVAT credit was taken on the strength of these TR-6 challans as permitted under Rule 9(1)(e) of the CENVAT Credit Rules, 2004.
  • The Department had invoked Rule 9(1)(bb) to deny the credit; however:
    • Rule 9(1)(bb) was introduced only with effect from 01.04.2011 and therefore could not govern the period January 2010 to March 2010.
    • In any event, Rule 9(1)(bb) applies to supplementary invoices, bills or challans issued by a provider of output service, not to documents evidencing Service Tax paid by a recipient under Reverse Charge.

On this basis, the assessee contended that denial of refund on the strength of Rule 9(1)(bb) was without legal foundation.

Tribunal’s analysis on Rule 9

The Tribunal first noted that there was no dispute on facts regarding:

  • The assessee’s liability under Reverse Charge, and
  • Actual payment of Service Tax for the period in question by TR-6 challans in March 2010, followed by availment of CENVAT credit.

The Tribunal then examined the text and scheme of Rule 9 of the CENVAT Credit Rules, 2004: