2022 (10) TMI 736 - AT - Service Tax

Tribunal overturns denial of refund due to lack of nexus, upholds compliance with CENVAT Credit Rules

The Tribunal overturned the denial of refund in a case concerning the nexus of 'taxable service' and 'output service' under CENVAT Credit Rules, 2004. The ... Refund of CENVAT Credit - denial of credit on alleged lack of nexus of taxable service procured and the output service travels beyond the limited disposal envisaged in rule 5 of CENVAT Credit Rules, 2004 - HELD THAT:- It is seen from the impugned order that the first appellate authority has traversed beyond the issues raised in the show cause notice by insisting upon filtration through the mesh of the amended definition of ‘input service’ in rule 2(l) of CENVAT Credit Rules, 2004. Furthermore, it is also seen that the first appellate authority appears to have placed undue premium on the necessity of furnishing evidence of ‘input services’ having been directly consumed in rendering eligible output that are exported. It is beyond conception to even conjuncture the consumption of service; implicit in consumption is tangible and transferability both of which are absent insofar as services are concerned. The first appellate authority appears to have insinuated aspects into rendering of services that neither enumerated nor even intended by Finance Act, 1994 - Rule 5 of CENVAT Credit Rules, 2004 is a mechanism specifically designed and comprehensively formulated for reimbursement of tax/duties paid on procurement of inputs/input service to the extent of these are attributable to service that are exported by the appellant. The consequences of denial of refund is not erasure from the CENVAT credit account but restoration therein for utilization in discharge of taxes/duties of services/goods cleared domestically. The procedure for claiming such refund, enshrined in notification no. 27/2012-Central Excise Act, 1944 (NT) dated 18th June 2012, must necessarily be in conformity with the boundaries within which the claim of refund is initiated as per rule 5 of CENVAT Credit Rules, 2004. Neither of these provide for any option other than sanction of refund, subject of course, to eligibility of amount in accordance with the formula prescribed therein, and denial of the refund - By denial of refund as a consequence of denial of eligibility for CENVAT credit, the final outcome has traversed beyond the scope of rule 5 of CENVAT Credit Rules, 2004 and which, but for the finding on nexus, was to be attributed to the tax on the ‘input services’ used for rendering ‘output service’, and therefore the order itself is not in accordance with law. Issue decided in the case of PMI ORGANISATION CENTRE PVT. LTD. VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX, MUMBAI EAST [2022 (3) TMI 192 - CESTAT MUMBAI], where it was held that The reasons assigned by the authorities below in this case for denial of the refund benefit to the applicant shall not stand for judicial scrutiny inasmuch as other than the allegation of non-establishment of nexus, the department had never questioned nor pointed out any discrepancy, alleging that the ingredients mentioned in Rule 5 ibid have not been complied with by the appellant. Hence, refund benefit shall not be denied to the appellant. Appeal allowed - decided in favor of appellant. Issues:Refund denial based on lack of nexus of 'taxable service' and 'output service' under CENVAT Credit Rules, 2004; Scope of eligibility for refund under rule 2(l) of CENVAT Credit Rules, 2004 as amended from 1st March 2011.Issue 1: Refund denial based on lack of nexus of 'taxable service' and 'output service' under CENVAT Credit Rules, 2004:The appeals were filed against the denial of refund by the original authority, upheld partially by the first appellate authority. The appellant, a subsidiary of an overseas entity, sought refund of accumulated CENVAT credit for specified periods. The denial was based on alleged lack of nexus between 'taxable service' and 'output service,' leading to restriction of refund eligibility. The first appellate authority also found certain services non-compliant with the definition in rule 2(l) of CENVAT Credit Rules, 2004. The appellant contended that the denial of credit should follow the process in rule 14 CENVAT Credit Rules, 2004, emphasizing that the department should only consider compliance with the formula under rule 5 for refund applications.Issue 2: Scope of eligibility for refund under rule 2(l) of CENVAT Credit Rules, 2004 as amended from 1st March 2011:The appellant argued that the amended rule 5 of CENVAT Credit Rules, 2004, introduced a simplified scheme for refunds without necessitating a nexus between input and output services. The TRU clarified that under the amended rule, the nexus requirement is eliminated, and refunds are based on export turnover to total turnover ratio. The Authorized Representative contended that changes in rule 2(l) CENVAT Credit Rules, 2004, impact service eligibility for credit, emphasizing the necessity of nexus for refund eligibility. The first appellate authority's focus on the amended definition of 'input service' in rule 2(l) was deemed excessive, with undue emphasis on evidence of direct consumption of input services for eligible output services exported.Conclusion:The Tribunal found that the denial of refund based on lack of nexus was not justifiable, as the department did not question compliance with the formula under rule 5 for refund applications. The order was set aside, emphasizing that denial of refund should strictly adhere to the boundaries set by rule 5 of CENVAT Credit Rules, 2004. The denial of refund due to lack of nexus beyond the scope of rule 5 was deemed unlawful. The decision aligns with previous Tribunal rulings, emphasizing adherence to the statutory provisions for refund eligibility. The appeals were allowed with consequential relief, overturning the impugned order.