2026 (2) TMI 182 - HC - Service Tax

Refund of unutilised Input Tax Credit for export of services: nexus requirement removed by retrospective amendment, appeals dismissed.

Refund of unutilised input tax credit for export of services turned on whether a nexus was required between input services and output services. The ... Refund of unutilised Input Tax Credit - export of services - nexus between input service and output service - retrospective amendment substituting 'used for' for 'used in' - Rule 5 of the Cenvat Credit Rules / Export of Service Rules (refund formula) - TRU circular - simplified refund scheme - Rule 14 (recovery of wrongly availed Cenvat credit) not invoked - HELD THAT:- We find that the issue of nexus/correlation is no longer an issue in view of the retrospective amendment to Notification No. 5/2006 with effect from 14th March 2006 where the earlier words “used in” were substituted by the words “used for”. The TRU circular also makes it clear that this amendment was brought about to simplify the scheme of refunds and that the new scheme did not require the kind of correlation that was needed between exports and input services used in such exports. The Board’s Circular of 2010, which was issued prior to the retrospective amendment coming into force, also made it clear that the words “used in” in Notification No. 5/2006, as it existed, had to be read harmoniously with Rule 2 (l), which defined and included within its ambit all services used in or in relation to the manufacture of final products and includes services used directly or indirectly. It was clarified that Rule 2 gave wide scope to the input services for provider of output services by including within its ambit services “used… for providing an output service” and clarified that the wordings of the notification and Rule 2(l) must be read harmoniously. The CESTAT, in its order, has also referred to the aforesaid facts and has rightly concluded that no nexus was required between input services and output services. No substantial question of law arises in the above appeals. We, accordingly, uphold the order of the CESTAT and reject these twenty-six appeals filed by the revenue. Issues: Whether refund of unutilised Cenvat/Input Tax Credit paid on input services in respect of exported services is admissible without establishing a direct nexus/correlation between the specific input services and the exported output services.Analysis: The Court examined Rule 5 of the Cenvat Credit Rules, 2004 and Rule 2(l) defining 'input service', the retrospective substitution of the phrase 'used in' by 'used for' effected by Section 74 of the Finance Act, 2010 and Notification dated 27.02.2010, and the clarificatory circulars of the Tax Research Unit and the Board. The statutory scheme, as amended and clarified, was analysed to determine whether it requires a one-to-one or direct nexus between particular input services and exported output services for refund eligibility. The Court considered the CESTAT's reliance on the retrospective amendment and the TRU circular introducing a simplified refund scheme (including refund in proportion to export turnover to total turnover) and the Board's earlier circulars advocating harmonious construction of the notification and the Cenvat rules. The Court also noted that recovery proceedings under Rule 14/Section 73 were not invoked by Revenue in the assessed cases.Conclusion: The requirement of establishing a direct nexus/correlation between specific input services and exported output services is not necessary for grant of refund under Rule 5 as amended and clarified; refund entitlement is to be determined by the statutory formula and the amended/clarified scheme. The appeals filed by Revenue are dismissed and the orders allowing refund in favour of the assessee-respondent are upheld.