By TIOL News Service

MUMBAI, JUNE 20, 2013: THE appellants are registered 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 of CCR, 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 the 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 CCR, 2004.

SCN was issued proposing to reject the refund claims and the same was adjudicated by holding as under -

+ 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;

+ that the accumulation occurred on account of this cap of 20% and not on account of export of output service and accordingly, the appellant was not eligible for refund under Rule 5 of the CCR.

However, the adjudicating authority did not confirm the demand for recovery of wrongly availed CENVAT credit in his order.

Since the lower appellate authority rejected the appeal, the assessee is before the CESTAT.

The following submissions were made -

+ They are 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.

+ ‘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'.

+ 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.

+ IT enabled services i.e. software consultancy service exported by them during the period was classifiable as an ‘exempted service' under Rule 2(e) of the CCR, 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. Reliance is placed on the decisions in mPortal India Wireless Solutions P. Ltd. vs. Commissioner of Service Tax, Bangalore - (2011-TIOL-928-HC-KAR-ST) & Repro India Ltd. vs. Union of India - (2007-TIOL-795-HC-MUM-CX).

The Revenue representative reiterated the findings of the lower authorities.

The Bench observed -

"5.2 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.

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

"'exempted services' means …"

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 …'

Under Rule 5 of the CENVAT Credit Rules:

"where any input or input service …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."

5.4 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.

5.5 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:

"x x x"

5.6 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."

In fine, the appeal was allowed with consequential relief.

(See 2013-TIOL-931-CESTAT-MUM)