2025 (9) TMI 1276 - HC - Service Tax

Refund allowed for services supplied for foreign client consumed in India where recipient outside India and payment in convertible forex

Principal Commissioner of Central-Tax Bengaluru Versus Misys Software Solutions (India) Pvt. Ltd.,

The HC held that services supplied on behalf of a foreign client and consumed in India nevertheless qualify for refund where (i) the service recipient is ... Export of services or not - services rendered by the respondent to the customers in India on behalf of the foreign client and consumed in India and exhausted in India - benefit of refund of export to the services provided and consumed/exhausted in the territory of India - period from July 2008 to September 2008 and from April 2009 to September 2009 - HELD THAT:- The case of the Revenue is that, though the recipient of the service is located outside India and payment has been received in convertible foreign exchange, since the service is utilized in India, the Assessee is disentitled to refund. This contention cannot be accepted. The Hon’ble Supreme Court in Commissioner of Service Tax-III, Mumbai v. M/s. Vodafone India Limited [2025 (8) TMI 938 - SUPREME COURT], while considering the controversy for the period between 2003 and 2014, has upheld the finding of the CESTAT extending relief to the Assessee under sub-rule (3) of Rule 3 of the Rules, on compliance with the twin conditions, namely: (i) the recipient of the service is located outside India, and (ii) payment for the service is received in convertible foreign exchange. Compliance with these twin conditions is not in dispute by the Revenue. In light of the enunciation of law by the Hon’ble Supreme Court in M/s. Vodafone India Limited the substantial questions of law raised in this appeal are no longer res integra. The aforesaid judgment of the Hon’ble Supreme Court is squarely applicable to the facts and circumstances of the present case, and the issue stands concluded in favour of the Assessee. The substantial questions of law are answered in favour of the respondent-Assessee and against the appellant-Revenue - appeal of Revenue dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether services rendered from India to customers in India on behalf of a foreign client, but for which payment is received in convertible foreign exchange and the recipient is located outside India, qualify as 'export of services' under the Export of Services Rules, 2005 (Rule 3) for purposes of refund of unutilized CENVAT credit. 2. Whether the Tribunal was correct in allowing refund of unutilized input service tax where the services were provided from India, consumed/exhausted in India, but the statutory conditions in Rule 3 (as amended) - recipient located outside India and payment in convertible foreign exchange - were satisfied. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether services of the described character constitute 'export of services' under Rule 3 of the Export of Services Rules, 2005. Legal framework: Prior to amendment, Rule 3 required (i) service provided from India, (ii) service used outside India, and (iii) payment in convertible foreign exchange. Following amendment effective 27.02.2010, the requirement that the service be 'used outside India' was omitted, leaving two conditions under sub-rule (3): (a) recipient of service is located outside India; and (b) payment for the service is received in convertible foreign exchange. The issue arises for show-cause periods partly before and partly after the amendment. Precedent Treatment: The Court considered the binding exposition of law by the Supreme Court on the issue for the relevant period, which upheld tribunal findings that compliance with the twin conditions of recipient location outside India and receipt of payment in convertible foreign exchange suffices for export treatment under sub-rule (3) for the period considered. Interpretation and reasoning: The Court analyzed the text of Rule 3 as it stood during the relevant period and emphasized that, after omission of the 'used outside India' requirement, the statutory test is satisfied by the two remaining conditions. The fact that the services were physically consumed/exhausted in India does not negate export classification where the statutory conditions are met. The Court gave primacy to the explicit statutory language and to the Supreme Court's authoritative interpretation, applying it to the present facts where the two conditions are indisputably fulfilled. Ratio vs. Obiter: Ratio - where Rule 3's twin conditions (recipient located outside India and payment in convertible foreign exchange) are satisfied, services rendered from India qualify as export of services for refund purposes even if consumed/exhausted in India, once the 'used outside India' requirement is omitted. Obiter - incidental remarks on earlier formulations of Rule 3 prior to amendment are explanatory but not decisive for the post-amendment test. Conclusion: The services in question qualify as 'export of services' under sub-rule (3) of Rule 3 for the periods in dispute, because the two statutory conditions are met. Issue 2: Whether the Tribunal was correct in granting refund of unutilized input service tax where services were provided from and consumed in India but met the statutory conditions for export. Legal framework: Refund of unutilized CENVAT credit for export of services is governed by Notification procedures read with Rule 3. Entitlement turns on statutory characterization of the services as export under the Rules for the relevant period; compliance with Rule 3's conditions is the determinative criterion for refund eligibility. Precedent Treatment: The Supreme Court's decision construing Rule 3 for the period up to 2014 was treated as controlling, upholding tribunal relief where the twin conditions were met. The Court in the present judgment applied that precedent directly, treating it as settling the law (no longer res integra). Interpretation and reasoning: Given the binding precedent and the uncontroverted compliance with the two conditions, the Tribunal's grant of refund is consistent with the statutory scheme and higher court authority. The Revenue's contention that physical utilization/consumption in India defeats refund was rejected because the amended Rule 3 does not require use outside India; payment and recipient location suffice. The Court relied on the statutory amendment and the Supreme Court's authoritative reading to conclude that the Tribunal correctly applied the law. Ratio vs. Obiter: Ratio - a Tribunal's award of refund under Notification/Rule 3 is correct where the statutory twin conditions are satisfied, notwithstanding physical consumption in India. Obiter - policy arguments or equitable considerations urged by Revenue about perceived misuse are peripheral and do not alter the statutory test. Conclusion: The Tribunal was correct in allowing the refund; entitlement follows from satisfaction of Rule 3's conditions and binding higher court authority. Cross-references and Final Determination Where the statutory conditions under sub-rule (3) of Rule 3 (recipient located outside India and payment in convertible foreign exchange) are satisfied, the Court - following the Supreme Court's precedent - answers the posed substantial questions in favour of the assessee and against the Revenue, and upholds the Tribunal's grant of refund of unutilized input service tax despite consumption/exhaustion of the services in India.