Refund of CENVAT Credit on input services for exporters - CESTAT drops a bombshell - says credit or refund is admissible only if services are consumed in providing output service
BEFORE the recent explosion in Bangalore, another explosion took place in the same city. While the venue for the former was a cricket stadium, the later took place in an open court hall of the CESTAT. In an order which shakes the entire foundation of the CENVAT Credit scheme on input services, which the Government has been implementing with some considerable degree of success from 2004 onwards, the CESTAT ruled that the refund or CENVAT credit on input services is allowed only if the services are consumed in the output service.
It was all going smooth until some scrupulous service exporters believed that they would be entitled to refund of service tax paid on the input services used by them under Rule 5 of the CENVAT Credit Rules read with notification dated 14.3.2006. Soon they realised that getting refund from the department was not so easy. Since the stakeholders are mainly multinational BPOs who also happen to be 100% EOUs earning foreign exchange to the exchequer, the issue attracted the attention of the Board which tried to see things move fast, issued clarifications on a couple of occasions.
Having realised that even these clarifications would not ensure smooth sanction of refunds, it even proposed in this year's Budget to amend the Notification 5/2006 CE retrospectively to remove the hitches that were standing between the claim and the refund cheque. Little did they realise that there will be cases pending before the Tribunal and for the officers representing Revenue, their job is to see the revenue appeal wins, come what may.
In a bunch of appeals relating to refund claims under Rule 5, the CESTAT delivered a judgement which will have far-reaching consequences on the entire CENVAT Credit scheme for service providers who export their services.
CESTAT held in unequivocal terms that the Government's rules making power cannot go beyond the statutory provisions. To put it simply, while Section 37(2) of the Central Excise Act, 1944 and Section 94(2) of the Finance Act empower the Government to make rules for providing credit / rebate of input services consumed for providing taxable services, it cannot make a rule to allow credit on all and sundry services which are not consumed but defined as input services under rule 2(l) of the CENVAT Credit Rules, 2004.
What a few exporters asked was refund of credit. What all the taxpayers will now get is show cause notices, denying the CENVAT credit on all input services which are not consumed in providing output services. Taking a cue from this case law, auditors from the department as well as CAG will pounce on the assessee with all types of objections and show cause notices will start flying. Of course, “preventive and intelligence” officials will not be far behind.
So there is an urgent need to do some fire-fighting. We suggest that it is high time Board intervenes in this sordid saga and proposes retrospective amendments to the relevant statutory provisions and the rules as well so that the Government's policy of zero rating the exports retains its sanctity and not bushwhacked by CESTAT in such a brazen manner.
If the Board acts fast, there is still time for them to make the amendments before the Finance Bill 2010 is enacted.
Also see our detailed analysis of the order in ‘ST se GST Tak' today.