2022 (12) TMI 56 - AT - Service Tax

Appeal Granted: Cenvat Credit Refund Approved

The Tribunal allowed the appeal, setting aside the lower authorities' decision to reject the refund claim for accumulated Cenvat Credit of Service tax. ... Refund of accumulated/unutilized Cenvat credit under Rule 5 of Cenvat Credit Rules, 2004 - requirement of nexus between input services and exported output services - procedure for denial/recovery of Cenvat credit under Rule 14 of Cenvat Credit Rules, 2004 - effect of substituted Rule 5 (post-1-4-2012) and TRU clarification on refund entitlementRefund of accumulated/unutilized Cenvat credit under Rule 5 of Cenvat Credit Rules, 2004 - procedure for denial/recovery of Cenvat credit under Rule 14 of Cenvat Credit Rules, 2004 - Whether denial of refund under Rule 5 can be sustained without initiating recovery proceedings under Rule 14 - HELD THAT: - The Tribunal held that denial of a refund claim under the substituted Rule 5 cannot be sustained where the department has not invoked the recovery procedure prescribed by Rule 14. Rule 5 governs the manner and formula for refund of accumulated Cenvat credit but does not itself provide the mechanism to disallow or recover credit already availed. The proper and exclusive remedy to dispute the correctness of availed credit is to initiate action under Rule 14. Since the authorities below did not issue any notice or proceed under Rule 14, rejection of the refund on grounds relating to the correctness or admissibility of the credit was impermissible. The Tribunal applied earlier decisions of coordinate benches and relied on the statutory scheme and TRU clarifications to conclude that the department's failure to follow Rule 14 precluded denial of refund under Rule 5. [Paras 5, 6, 7]Refund denial could not be sustained in absence of initiation of proceedings under Rule 14 and the impugned rejection was set aside.Requirement of nexus between input services and exported output services - effect of substituted Rule 5 (post-1-4-2012) and TRU clarification on refund entitlement - Whether the substituted Rule 5 (post-1-4-2012) permits denial of refund for lack of nexus between input services and exported output services - HELD THAT: - The Tribunal held that after substitution of Rule 5 w.e.f. 1-4-2012, refund entitlement is to be determined by the formula in Rule 5 based on the ratio of export turnover to total turnover and does not require demonstration of a direct nexus between specific input services and exported output services. The Tax Research Unit's clarification of 16-3-2012 was read to confirm the legislative intent of a simplified scheme that dispenses with voluminous documentation and correlation requirements. Reliance was placed on earlier decisions of the Tribunal which interpreted the amended rule consistently to refuse to insist upon nexus for post-amendment refund claims. Applying those principles to the facts (where the appellant's output services were entirely exported), the denial of refund on the ground of 'no nexus' was held to be unsustainable. [Paras 5, 6, 7]Refund under the substituted Rule 5 cannot be denied for lack of nexus; the impugned order rejecting refund on that ground was set aside.Final Conclusion: The appeal is allowed: the impugned order is set aside and the refund claims rejected by the authorities below (for lack of nexus and without resort to Rule 14) are allowed to the extent shown in accordance with law, with consequential relief, if any. Issues Involved:1. Denial of refund of accumulated/unutilized Cenvat Credit of Service tax.2. Rejection of refund claims due to ineligible input services.3. Compliance with Rule 14 of Cenvat Credit Rules, 2004.4. Establishment of nexus between input services and output services.Issue-Wise Detailed Analysis:1. Denial of Refund of Accumulated/Unutilized Cenvat Credit of Service Tax:The appellant challenged the Order-in-Appeal dated 11.3.2019, where the Commissioner (Appeals)-II, Central Tax, CGST Mumbai, partially modified the adjudicating authority's order but upheld the rejection of a refund amounting to Rs.22,88,870/-. The main issue was the denial of refund of accumulated/unutilized Cenvat Credit of Service tax under Rule 5 of Cenvat Credit Rules, 2004, read with Notification No.27/2012-CE (NT) dated 18.6.2012.2. Rejection of Refund Claims Due to Ineligible Input Services:The appellant provided Financial Investment Advisory Services exclusively to overseas clients and filed refund claims for the periods October 2016 to December 2016 and January 2017 to March 2017, totaling Rs.2,10,44,635/-. The Adjudicating Authority rejected Rs.36,86,969/- of the refund claim, citing unregistered premises and lack of nexus between input services and export services. The Commissioner (Appeals) allowed Rs.13,98,099/- but upheld the rejection of Rs.22,88,870/- due to 'no nexus' with the output service.3. Compliance with Rule 14 of Cenvat Credit Rules, 2004:The appellant argued that Rule 14 of Cenvat Credit Rules, 2004, was not followed while rejecting the refund claim. The appellant cited several Tribunal decisions, including BNP Paribas India Solution Pvt. Ltd. vs. Commr. CGST, Mumbai East, which held that denial of Cenvat credit can only be done by issuing a notice under Rule 14. Since the department did not question the availment of credit under Rule 14, the refund could not be denied on the grounds of non-establishment of nexus.4. Establishment of Nexus Between Input Services and Output Services:The Tribunal reiterated that Rule 5 of the Cenvat Credit Rules, as amended, does not require the establishment of a nexus between input services and output services. The Tribunal referred to previous decisions, including Accelya Kale Solutions Ltd. vs. Commr. CGST, Thane, which clarified that post-2012, the refund should be allowed based on the formula prescribed under Rule 5 without insisting on any nexus. The Tribunal emphasized that the amended Rule 5 does not necessitate a correlation between input services and exported services, and the refund should be granted based on the ratio of export turnover to total turnover.Conclusion:In conclusion, the Tribunal found that the authorities below erred in rejecting the refund claim. The Tribunal set aside the impugned order and allowed the appeal with consequential relief, if any, in accordance with the law. The Tribunal reinforced that in the absence of a notice under Rule 14, the refund of Cenvat credit under Rule 5 could not be denied, and the nexus between input and output services should not be insisted upon. The judgment was pronounced in open court on 01.12.2022.