Whether refund of accumulated credit under Rule 5 admissible to 100% EOU that exported software?

Case:-KPIT CUMMINS INFOSYSTEMS LTD VERSUS COMMISSIONER OF CENTRAL EXCISE, PUNE-I

Citation:-2013-TIOL-931-CESTAT-MUM

Brief Facts:-The appeal is directed against Order-in-Appeal No. PI/VSK/161 & 162 dated 19/06/2009 passed by the Commissioner of Central Excise (Appeals), Pune -I.

The appellant, M/s KPIT Cummins Infosystems Ltd., Hinjewadi, Pune are registered with the department for the purpose of service tax under the category of management Consultant, Maintenance or Repair Services, Auxiliary Service, Online Information and Data Services, Business Support Service, Bank and Financial Services, Commercial Coaching and Training Services, Renting of Immovable Property Service, etc. During the period April, 2007 to March, 2008, they filed four refund claims totally amounting to Rs.2,14,45,060/- in terms of Rule 5 CENVAT Credit Rules, 2004 on the ground that in view of the export of services made by them they are unable to utilize the accumulated CENVAT credit and, therefore, the unutilized CENVAT should be allowed to br refunded in terms of the above said rule. The department was of the view that the services exported by the appellant were software development and software consultancy services falling under the taxable service category of ‘Consulting Engineer' and during the impugned period they had not obtained service tax registration in respect of the said service. It was also noted that the appellant had not maintained any separate accounts for the inventory of ‘input services' meant for use in providing taxable output service and quantity of input service which is intended for use in the exempted services as required under Rule 6 of the CENVAT Credit Rules, 2004. Accordingly, a show cause notice dated 29/09/2009 was issued proposing to reject the refund claims.

The notice was adjudicated vide order dated 23/02/2009. The learned adjudicating authority observed that as per Rule 6(3)(c) of the CENVAT Credit Rules, there was a cap on the utilisation of CENVAT credit equal to 20% of the service tax payable on the output service. He observed that the accumulation occurred on account of this cap of 20% and not on account of export of output service and accordingly, he held that the appellant was not eligible for refund under Rule 5 of the CENVAT Credit Rules. However, the adjudicating authority did not confirm the demand for recovery of wrongly availed CENVAT credit in his order.

The appellant preferred an appeal before the lower appellate authority who rejected the refund claims on the finding that the accumulation of CENVAT credit has taken place in view of the cap provided under Rule 6(3)(c) of the CENVAT Credit Rules and not on account of export and, therefore, refund under Rule 5 of the CENVAT Credit Rules does not arise. Accordingly, he dismissed the appeal. Hence the appellant is before Tribunal.

Appellant Contentions:-The appellant submitted that he is a 100% EOU and during the impugned period they exported ‘software maintenance service', software development service' and ‘software consultancy service' and for these services exported they received consideration in convertible foreign exchange. They had availed CENVAT credit of service tax paid on various input services which were used for the export of software services. In view of this, they had accumulated CENVAT credit in the CENVAT account attributable to the said export of software services and, therefore, they are rightly eligible for the refund under Rule 5 of the CENVAT of the CENVAT Credit Rules, 2004. It is also contended that software maintenance and repair service undertaken by them was a taxable service under Section 65(105)(zzg) of the Finance Act, 1994 and the department had wrongly construed that the above exported service is an exempted service. The CBEC also, vide circular No. 81/2/2005-ST dated 07/10/2005 had clarified software falls under ‘management, maintenance or repair service'. It is also argued that export of software developed by them for export of goods and IT software is classifiable under Chapter Heading No. 8523 of the Central Excise Tariff act, and export of excisable goods is clearly eligible for the benefit of Rule 5 of the CENVAT Credit Rules.

As regards the IT enable services i.e. software consultancy service exported by them during the said period, it was classifiable as an ‘exempted service' under Rule 2(e) of the CENVAT Credit Rules, 2004 and even if an exempted service is exported, then the benefit of CENVAT Credit and Rules thereof shall be allowed to the exporter of exempted service as well. The hon'ble High Court of Karnataka in the case of mPortal India Wireless Solutions P. Ltd. vs. Commissioner of Service Tax, Bangalore 2012 (27) STR 134 (Karn.) = (2011-TIOL-928-HC-KAR-ST) in an identical situation in respect of a 100% export oriented unit engaged in development and export of software during 2006-07 has held that benefit of refund of service tax paid would be available under Rule 5 in spite of IT software being a non-taxable item. He also relied on the decision of the hon'ble High Court of Bombay in the case of Repro India Ltd. vs. Union of India 2009 (235) ELT 614 (Bom.) = (2007-TIOL-795-HC-MUM-CX) wherein, in the context of exported goods, the hon'ble High Court held that CENVAT credit would be available on input or input services used in the manufacture and export of exempted goods.

Respondent Contentions:- The Respondent appearing for the Revenue reiterates the findings of the lower authorities and prays for sustaining the order.

Reasoning of Judgment:-We have considered the submission from both the parties and perused the record, we find that during the impugned period the appellant had exported the following goods/services:

(i)    Software Maintenance Service, classifiable under the category of ‘Management, Maintenance or Repair Service';
(ii)           Software Development service; and
(iii)          Software Consultancy Service.
As regards the management, maintenance or repair of computer software service, the same is classifiable under the taxable service category of ‘management, maintenance or repair service' as defined in Section 65(64) of the Finance Act, 1994. As regards the development of software and software consultancy, the same became taxable under service tax only w.e.f. budget 2008 when ‘Information Technology Software Service' was brought under the tax net for the first time. Therefore, as far as these two services are concerned, they were not a taxable service during the impugned period.

Nevertheless, they were exempted services as defined in Rule 2(e) of the CENVAT Credit Rules, 2004 as per which:

"'exempted services means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act".
In other words, exempted services included both taxable services as well as non-taxable services. As regards "output service" as per Rule 2(p) of the CENVAT Credit Rules –
"output service' means any taxable service provided by the provider of a taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider' and ‘provided' shall be construed accordingly."
Under Rule 5 of the CENVAT Credit Rules:
"where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilised by the manufacturer or provider of output service towards payment of duty of excise on any final product cleared for home consumption or for export on payment of duty or service tax on output service, and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification."
Accordingly, Notification NO. 5/2006-CE (.N.T.) dated 14/03/2006 has been issued. Rule 6 of CENVAT Credit Rules, 2004 deals with obligation of the manufacturer of dutiable and exempted goods and provider of taxable and exempted services. Under Rule 6(3)(c), the provider of output service shall utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. In the present case, the services provided by the appellant and exported is not a taxable output service inasmuch as software development software service and software consultancy service become taxable only in the Budget 2008. Therefore, the cap of 20% prescribed under Rule 6(3)(c) have no application whatsoever. Therefore, there was no bar on the appellant in availing full credit in respect of IT software services during the material period.
The appellant has received input/input services for rendering of taxable services during the material period, which has been exported. The hon'ble High Court of Karnataka in mPortal India Wireless Solutions P. Ltd. (supra) case, in a similar situation, held as follows:
"6. The assessee is a 100% export oriented unit. The export of software at the relevant point of time was not a taxable service. However, the assessee had paid input tax on various services. According to the assessee a sum of Rs.4,36,985/- is accumulated cenvat credit. The Tribunal has categorically held that even though the export of software is not a taxable service but still the assessee cannot be denied the cenvat credit. The assessee is entitled to the refund of the Cenvat credit. Similarly insofar as refund of cenvat credit is concerned, the limitation under Section 11B does not apply for refund of accumulated cenvat credit. Therefore, bar of limitation cannot be a ground to refuse cenvat credit to the assessee.
Insofar as requirement of registration with the department as a condition precedent for claiming cenvat credit is concerned, learned counsel appearing for both parties were unable to point out any provision in the cenvat credit rules which impose such restriction. In the absence of a statutory provision which prescribes that registration is mandatory and that if such a registration is not made the assessee is not entitled to the benefit of refund, the three authorities committed a serious error in rejecting the claim for refund on the ground which is not existence in law. Therefore, said finding recorded by the Tribunal as well as by the lower authorities cannot be sustained. Accordingly, it is set aside.”
The appellant mPortal India Wireless Solutions P. Ltd. was also a 100% EOU and the transaction undertaken are also identical in the sense that they relate to export of software. Therefore, the above decision is squarely applicable to the facts of the case before us. In any case, the object of EXIM Policy of the Government of India is to promote exports of goods and services and not export of taxes. Service tax being a destination based consumption tax, in the case of exports there should not be any tax burden and the tax burden, if any, is to be imposed by the Government of the country where the services are consumed. Otherwise, it would render the exports of software uncompetitive. Keeping in view of above policy objective of the government, it is appropriate to hold that the appellants are eligible for the refund of the amount claimed by them of Rs.2,14,45,060/- during the impugned period on account of export of exempted services subject to the satisfaction of other conditions prescribed in Notification No. 5/2006-CE(NT) dated 14/03/2006 and the Revenue shall verify the same.

Decision:- The appeal is allowed in the above terms with consequential relief, if any.

Comment:-The substance of this case is that when there is not bar in full availment of credit on exported services, then the denial of refund of the accumulated credit under Rule 5 is not tenable.

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