J K Mittal: The mystery of tax refunds

On March 14, the government amended Rule 5 of the Cenvat Credit Rules as well as issued Notification No. 5/2006-CE (NT), and directed that the refund of Cenvat credit will be allowed under Rule 5 ibid, inter alia in respect of input services used in the manufacture of final product which is cleared for export.

The changes in the law enable exporters to seek refund only for those input services that are used "in the manufacturing of" the final product which is cleared for export under bond or letter of undertaking. In the case of Beehive Foundry Engg. Works vs Commissioner of C. Ex., Madras 1997 (93), ELT 490 (Tribunal), it was held that words "used in manufacture of" have a restricted meaning than the term used "in connection with the manufacture of". Thus, the refund is only restricted to those input services that are used in the manufacturing of the final product which is exported.

It appears that while making the law, the government has not appreciated the facts that primarily the "input" are used "in the manufacturing of" the final products and not the "input service". Therefore, restricting the refund only for those input services that are used "in the manufacturing of" the final product, is too narrow an approach and leaves no scope for the refund of service tax suffered on various input services related to exports. Therefore, service tax paid by exporters on export commission paid to foreign agents, telephone, courier, consultancy fee and so on cannot be refunded, even though all such items are directly related to exports "" refund of service tax paid on such services is not allowed as the services have not been used "in the manufacturing of" the final product which is cleared for export.

On the one hand, according to clause (c) of sub rule (2) of Rule 3 of the Draft Taxation of Service (Provided from outside India and received in India) Rules, 2006, exporters have to pay service tax on the commission paid to foreign agents for availing services of marketing of their goods and services abroad; and, on the other hand, the aforesaid amendments in Cenvat Credit Rules do not allow even a 100 per cent export-oriented unit to get the refund of service tax, which it pays on export commission paid to foreign agents, and which is directly related to the export.

To attain the objective of the government that exports should be free from all taxes/levies, service tax levied on all taxable services, which are eligible as "input services" under Rule 2(l) of the Cenvat Credit Rules, 2004, and are related to exports of goods/services, should be refunded to the exporters.

The author is a service tax expert