BT Associates BT Associates
Chartered Accountant, India
Confidential & Private Circulation This note is specifically helpful to
IT Software Exporters
Challenges
for
IT software exporters
thinking to claim refund/rebate of
excise duty and service tax paid on consumption
of goods and services
Content -
  Background Who can claim refund? What can be claimed as refund? How to claim refund? Rebate of ST paid on services consumed Refund of unutilised CENVAT Credit
 

 

BACKGROUND
BACKGROUND

Introduction of “Information Technology Software Service” vide clause zzzze to Section 65(105) of the Finance Act’1994 would give rejoice to software exporters in a sense that services rendered by the said industry to their overseas client would be considered as export of services not chargeable to service tax but at the same time they would be entitled to refund of service tax paid on consumption of services.
  

WHO CAN CLAIM REFUND?

WHO CAN CLAIM REFUND?

Software exporter companies providing IT/ITES services to overseas clients and meeting following requirements can claim refund:

a) Service is provided from India and used outside India.
b) Payment for such service is received in convertible foreign exchange;
c) Such Services is provided in relation to business or commerce
d) Recipient of service is located outside India.
e) Services provided falls within the definition of “Information Technology Software Service”
Presently, service tax laws in relation to refund claim specifically required services exported to be considered as “taxable service”. Further, information technology service was not well defined. However, with amendment made in the Service Tax provision by way of introduction of “Information Technology Software Service”, having very wide definition, we understand that services provided by the software exporters would fall within the ambit of aforesaid definition. Thus, we understand that by virtue of said amendment it is a time for “software exporters” to really think about exploring various possibilities of getting refund of service tax paid on consumption of service and excise duty paid on consumption of products.
  
     

WHAT CAN BE CLAIMED AS REFUND?

Service tax paid on services consumed – As a thumb rule, service tax paid on consumption of each and every service would be eligible for refund. This is mainly for the reason that the term “input service” has been widely defined under Rule 2(l) of the CENVAT Credit Rules’2004”. For instances, IT companies pays service tax on consumption of following services:

  

The definition of “input service” as defined under Rule 2(l) of the CENVAT Credit Rules’2004 is very wide. For the sake of convenience the definition of ‘input service’ is reproduced and explained as under

“input service” means any service:-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal,

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.
a) Security agency,
b) Car rental,
c) Lease line and telephone,
d) Office rent,
e) Consultant fees,
f) Audit fees,
g) Recruitment agency fees,
h) Insurance,		   i) Advertising agency,
j) Clearing and forwarding agent fees,
k) Travelling agency,
l) Banking and financial agency,
m) Maintenance & repairs,
n) Intellectual property,
o) Sponsorship
 

The second leg of the definition which is commonly called ‘ includes’ portion could be dissected as under:

(i) services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an Office relating to such factory or premises,
(ii) advertisement, sales promotion,
(iii) market research
(iv) storage up to the place of removal,
(v) procurement of inputs,
(vi) activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security,
(vii) inward transportation of inputs or capital goods and outward transportation up to place of removal.

The services which are specifically enumerated and similar activities which qualify as ‘activities relating to businesses would fall within the purview of the definition of ‘input service’ provided it is received by the output service provider. The term ‘activities relating to business’ has been used in the Rule giving illustrations, preceded with the words ‘such as’ which widens the scope of the term. The use of the words ‘such as’ in the definition of ‘input service’ has been defined in a wide manner and includes in its periphery not only the illustrations given and is in no way restrictive in nature. The words ‘such as’ are used only to illustrate the scope. Moreover, we understand that as per inclusive definition of ‘input service’, all services used for activities relating to business are ‘input services’. The definition does not say ‘activities relating to business pertaining to manufacture or provision of output service’. Thus, all input services used in activities relating to business are ‘input service’, whatever may be the purpose.

Excise duty paid on products consumed – Excise Duty paid on goods excluding capital goods used for providing exported services may also be claimed as refund.
     


HOW TO CLAIM REFUND?

HOW TO CLAIM REFUND?

IT companies registered with Service Tax can claim refund under couple of options namely a) Refund of unutilized CENVAT Credit under Rule 5 of the CENVAT Credit Rules’2004 vide Notification No. 5/2006-CE(NT) dated 14-03-2006 as amended and b) Rebate of service tax paid on services used for export of services under Rule 5 of the Export of Service Rules’2005 vide Notification No. 12/2005-ST dated 19-04-2005 as amended. However, it is important to mention that both these rebate and refund provisions are mutually exclusive.

IT companies NOT registered with Service Tax MAY claim rebate of service tax paid on services used for export of services under Rule 5 of the Export of Service Rules’2005. Please refer to our discussion on term “may” used for IT companies not registered with service tax hereunder:

The relevant procedure under Refund/Rebate claims are being explained hereunder
 

REBATE OF SERVICE TAX PAID ON SERVICES CONSUMED

Relevant Provisions:
As per the provisions of Rule 5 of the Export of Services Rules’2005 service tax paid on exported taxable services or service tax paid on input service or duty paid on input would be eligible as “Rebate”. The Central Government has issued Notification No 12/2005-ST dated 19th April’2005 providing conditions, procedure and restriction in relation to Rebate mechanism

Conditions :

  • Service exported should fall within the definition of taxable service as provided under Section 65(105) of the Finance Act’1994
  • Taxable service has been exported in terms of Rule 3 of the Export of Service Rules’2005.
    Rule 3 in relation to “information technology software service” provides following conditions
    • Service is provided from India and used outside India.
    • Payment for such service is received in convertible foreign exchange.
    • Such Services is provided in relation to business or commerce.
    • Recipient of service is located outside India.

  • Taxable services exported to Nepal & Bhutan are not eligible for rebate
  • Duty has been paid on the inputs for which rebate is claimed
  • Service Tax and Cess has been paid on the inputs for which rebate is claimed
  • The total amount of rebate should be more than Rupees Five hundred.
  • No CENVAT Credit has been availed on Input and Input Services for which rebate is claimed
  • Input and input services on which duties and service tax paid which are claimed as refund should be accompanied by invoice issued under Rule 11 of Central Excise Rules’2002 and invoice/bill/challan issued under Rule 4A of the Service Tax Rules’1994 respectively.
REBATE OF SERVICE TAX PAID ON SERVICES CONSUMED
Filing for Rebate Application

Filing for Rebate Application:

  • Declaration to be filed with the Jurisdictional Assistant/Deputy Commissioner of Central Excise prior to date of export of taxable service.
  • The declaration should contain details like description, quantity, value, rate of duty and amount of duty payable on the inputs actually required to be used in providing taxable export service. Similar details would also be required for “input service” actually required to be used in providing taxable export service.
  • Before accepting the declaration the Assistant/Deputy Commissioner of Central Excise may verify the correctness of such declaration prior to export of taxable services by calling for any relevant information or samples
  • Rebate claim can be filed only after taxable service has been exported.
  • The claim for Rebate shall be filed in Form ASTR-2 with the jurisdictional Assistant/Deputy Commissioner of Central Excise along with the following documents

    • Invoices issued under Rule 11 of the Central Excise Rules’2002 or Rule 4A of the Service tax Rules’1994 in relation to input or input services respectively for which rebate is claimed
    • Documentary evidence to support realisation of foreign exchange in relation to export of service. Bank remittance certificate (BRC) is issued by banker towards foreign exchange realisation.
    • Documentary evidence to support payment of duty on inputs or service tax and cess on input services. Vendor payslip or bank statement with reconciliation and/or workings may be submitted.
    • A declaration that such service has been exported in terms of Rule 3 of the Export of Service Rules’2005.
    • Rebate by way of issuance of cheque would be issued by the jurisdictional Assistant/Deputy Commissioner of Central Excise

 

Penal Provisions:
Rebate so availed shall be recoverable with Interest as per the provisions of Section 73 and Section 75 of the Finance Act, 1994 as if no service tax and Cess have been paid on such taxable service if any of the following provisions are contravened:

  • Where duty / service tax / cess for which rebate is claimed is not paid
  • Taxable service for which rebate is claimed is not exported
  • CENVAT credit is availed on input or input services for which rebate is claimed

While the notification does represent a benefit, there are more questions that need to be answered, namely:

What does this notification seek to achieve?

As Stated earlier the notification would benefit the service exporter to claim refund ofservice tax paid on services consumed andexcise duty paid on inputs used for suchexport service

Whether rebate claim shall be made with the Central Excise Authorities or ServiceTax Authorities?
It has been clarified by the Central Board of Excise & Customs vide master circular atPara 12.7 that the for rebate claims or refundof CENVAT Credit application has to be filedin the Central Excise or Service TaxDivision/Group where the assessee isregistered.

What is the due date for filing the Rebate Application?
No time limit has been prescribed in the Notification for filing for the claim for Rebate

Whether education cess and Secondary Higher Education cess paid on input is eligible as rebate
Yes, both are eligible as per explanation to Notification No.

Whether Duty paid on capital goods are eligible for rebate?
Rebate claim is only eligible for duty paid on inputs and service tax paid on input services.
In the context of this notification, an attempt has been made to address a few ubiquitous questions:

 

Whether IT companies not registered with Service tax can claim rebate under this notification?
As per the provisions of Section 69 of the Finance Act’1994 following person are required to take service tax registration:

  • Person liable to pay service tax, or
  • Person or class of person, which Central Government may specify by way of notification. Accordingly, vide Notification No. 26/2005-ST dated 07-06-2005 following persons have been specified:
    • An input service distributor; and
    • Any provider of taxable service whose aggregate value of taxable service in a financial year exceeds nine lakhs rupees. The value of taxable services exported would not be considered in the aggregate limit of nine lakhs rupees.

On the aforesaid backdrop, IT companies providing taxable services and exporting them as per the provisions of the Export Service Rules’2005 are not required to take service tax registration.

There is no discrimination between registered unit and non registered unit under the Export of Service Rules’2005. Further, the Notification No. 12/2005-ST dated 19-04-2005 as amended does not debar non registered unit from rebate claim. It is only in the form attached to the said notification, an applicant of rebate claim is require to provide service tax number at specified place. Thus, we understand that a non registered unit exporting taxable service may claim rebate from the jurisdictional Service Tax authority. Although, we understand that there may be certain practical difficulties, however, as long as an IT company exporting taxable services and meeting all the requirement of the Export of Service Rules’2005 and notification issues there under, eligible rebate must be granted.

However, non registered IT companies would not be eligible to avail CENVAT Credit, hence refund of unutilised CENVAT Credit as per the provisions of Rule 5 of the CENVAT Credit Rules’2004 is not applicable.

Is it practically possible to file a declaration prior to every export?
No, but as per the procedure laid down in the notification, a declaration is to be filed prior to every export of services. We understand that such provisions are made keeping in mind similar provisions already existing in relation to export of goods under Central Excise laws. However, export of goods and export of services are altogether very different in nature.

Under the circumstances, we understand that necessary representation may be made with the higher authorities like Commissioner of Service Tax to resolve timing of declaration, which can be made on periodical basis.

Whether application for rebate can be filed pending acceptance of declaration by the Jurisdictional Assistant Commissioner / Deputy Commissioner?
No, in application for rebate claim specific reference to declaration approval number has to be mentioned.

Declaration is to be filed prior to export of service, one of the details to be filed in said declaration is particulars of input and input services “actually required to be used in providing taxable service exported”, is it possible to ascertain prior to export of services as to what input and input service would be “actually required”

We understand that such provisions are made keeping in mind similar provisions already existing in relation to export of goods under Central Excise laws. However, export of goods and export of services are altogether very different in nature. Having said that necessary representation shall be made with the jurisdictional Assistant Commissioner / Deputy Commissioner providing such details of input and input services “generally” used in relation to export of services.

REFUND OF UNUTILISED CENVAT CREDIT

Relevant Provisions:
As per the provisions of Rule 5 of the CENVAT Credit Rules’2004 input services used for providing export services can be utilised against service tax payable on output taxable services and where such adjustment is not possible unutilised CENVAT amount would be refunded. The Central Government has issued Notification No 05/2006-CE(NT) 14th March’2006 providing conditions, procedure and restriction in relation to Refund of unutilised CENVAT Credit mechanism

Conditions:

  • Refund of CENVAT Credit is allowed in respect of input or input service used in providing output service which is exported without payment of service tax. Thus, cases involving export of services on payment of service tax, refund mechanism is not available, however, rebate mechanism as explained here-in-above is available.
  • The Refund can be claimed only when the exporter of output service cannot utilize the input service Credit towards domestic output service, if any for the relevant quarter.
  • Taxable service has been exported in terms of Rule 3 of the Export of Service Rules’2005. Rule 3 in relation to “information technology software service” provides following conditions

    • Service is provided from India and used outside India.
      Payment for such service is received in convertible foreign exchange.
      Such Services is provided in relation to business or commerce.
      Recipient of service is located outside India.

  • The Refund can be claimed once for any quarter except for the Export Oriented Unit (EOU) / unit registered with STPI, they can claim it every calendar month. The monthly filing of refund claim is also available to exporters having 50% or more of export of output service to total output service.
  • Applicant shouldn’t have file Drawback or rebate for such refund claim
  • Maximum Refund calculated would be as under:
    Input Credit during a given period of time X Export Turnover during the quarter /Total Turnover during the quarter

Filing for Refund Application:

  • The claim for Refund shall be filed in prescribed Form A with the jurisdictional Assistant/Deputy Commissioner of Central Excise along with the following documents:

    • Invoices issued under Rule 4A of the Service tax Rules’1994 in relation to output service exported
    • Certificate from the bank certifying realization of export proceeds
    • Statement showing CENVAT Credit taken and utilised (up to whatever extent) in relation to input and input service and unutilised CENVAT Credit for relevant quarter.

  • A declaration that applicant has not filed Drawback or rebate for such refund claim
  • Refund claim shall be filed before expiry of the period specified in Section 11B of the Central Excise Act’1944.
  • The jurisdictional Assistant/Deputy Commissioner of Central Excise after necessary examination of claim shall sanction refund claim by way of issuance of cheque.

 

In the context of this notification, an attempt has been made to address a few ubiquitous questions:

What does this notification seek to achieve?
As Stated earlier the notification would benefit the service exporter to claim refund of service tax paid on services consumed and excise duty paid on inputs used for such export service.

Whether rebate claim shall be made with the Central Excise Authorities or Service Tax Authorities?
It has been clarified by the Central Board of Excise & Customs vide master circular at Para 12.7 that the for rebate claims or refund of CENVAT Credit application has to be filed in the Central Excise or Service Tax Division/Group where the assessee is registered.

Whether Duty paid on capital goods are eligible for refund?
Refund claim is only eligible for duty paid on inputs and service tax paid on input services.

In the context of this notification, an attempt has been made to address a few ubiquitous questions:

Whether IT companies not registered with Service tax can claim refund of un utilised CENVAT Credit under this Notification?
IT Companies not registered with the Service Tax Department would not be eligible to avail CENVAT Credit, hence refund of unutilised CENVAT Credit as per the provisions of Rule 5 of the CENVAT Credit Rules’2004 is not available.

What is the due date for filing the Refund Application?

  • As per Notification No 05/2006-CE (NT) 14thMarch’2006 time limit for filing quarterlyrefund claim shall be made before expiry ofthe period specified in Section 11B of theCentral Excise Act’1944.
  • As per the provisions of Section 11B of the Central Excise Act’1944, refund claim shall be filed within one year from the relevant date. The term relevant date has been provided for various situation, however, nothing has been provided for “refund of unutilised CENVAT Credit”. Thus, there is no specific provisions in this regard under Section 11B of the Central Excise Act’1944.
  • Hon’ble Ahemdabad Tribunal in the case of Swagat Synthetic’s Ltd –vs- Commissioner of Central excise (Surat) 2007 (220) ELT 949 (Tri-Ahmd) held that there is no time limit for claiming the Refund of unutilised CENVAT Credit
  • Hon’ble Kolkata Tribunal in the case of Gillooram Gourishankar –vs- Commissioner of Central Excise (Ranchi) 2007 (213) ELT 528 (Kol-Tribunal) held that refund claim cannot be filed immediately after the export without exploring the ways to utilize the Credit and hence question of time limit is not applicable.
  • On the aforesaid backdrop, we understand that a refund claim in relation to unutilised CENVAT Credit may be lodged without any time restriction, however, such decision should be made only after taken into account that same would be challenged by the Service Tax / Excise Authorities.

Disclaimer: This Report has been prepared based on information and/or facts provided by you. Should the facts and/or information relied upon by us be otherwise, we do not hold any responsibility. The Report has been prepared based on the law as on date. Tax laws are subject to change from time to time and any such change may affect the advice contained in this Report. We have no responsibility to update our advice for the events and circumstances occurring after the date of the presentation of this report unless specifically requested by you.