CBEC issues draft circular on streamlining the process of ...

Vol. 6 Issue 11.1 November 03, 2011

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CBEC issues draft circular on streamlining the process of Taxand’s Global Guide to M&A
sanctioning service tax refunds for service exporters under Tax. Click here to view media
Rule 5 commentary.

In a move that should be welcomed by service exporters, the Central Board of Excise Taxand voted Top Tax Planning
and Customs (“CBEC”) has issued a Draft Circular with respect to Refunds of Service Advisor in 32 countries in ITR’s
Tax (“Draft Circular”). 2011 poll. Click here to view
article.
Background
Taxand conducted Global Survey
• The Draft Circular has been issued in the wake of several representations received 2011 – Taxand the CFO. Click
from the industry as well as field formations regarding difficulties being faced in here to view full research findings.
determining input services eligible for refund under Notification 5/ 2006 dated
March 14, 2006 (“Refund Notification”). Taxand & PERE 2012 Global
Guide to Tax.
• The Draft Circular aims to streamline the process of sanctioning Rule 5 refund
claims pertaining to input services arising under the Refund Notification. BMR Advisors, in association with,
IPPAI, has produced a survey
• While this issue was sought to be addressed vide Circular No. 120/01/2010-ST report "Impact of Taxation on the
dated January 19, 2010, the principle/ test laid down therein was found to be too Energy Value Chain & Electricity
conceptual and could not be easily applied in practical situations at the time of Prices in India", analyzing the
processing refund applications. present regulatory and policy
framework for the energy sector .
• Hence, the need was felt for another clarification by the CBEC on the scope of Click here to view report.
input services eligible for refund under the Refund Notification.
BMR Advisors is ranked fourth
Eligibility criteria specified in the Draft Circular most active financial advisor for
India in Thomson Reuters Mid-
Recognizing the difficulties faced in identifying the nature and scope of input services Market Insight.
eligible for refund, the Draft Circular lays down the following key criteria in determining
eligibility for refund: BMR Advisors is ranked second
Most Active Transaction Advisor
• The first test to be applied is whether the service on which refund is claimed (Private Equity) according to the
Venture Intelligence League Table

satisfies the definition of “input service” defined under Rule 2(l) of the CENVAT for the first quarter of 2011
Credit Rules, 2004 (“CENVAT Rules”).
BMR wins India Case of the Year,
• Once a service qualifies as “input service”, refund of the same shall be eligible, and Best Use of the Internet
wholly or in part depending on proportion of export turnover to total turnover, as awards at 5th International Tax
specified in the Refund Notification. Review Asia Awards, 2010.

• In the event it is determined, without doubt, that a particular input service is used BMR is ranked Tier 1 in ITR’s
exclusively for domestic services, such service would not be eligible for refund “World Tax 2011” guide, to the
purposes. World’s leading tax firms.

According to the Draft Circular, disqualification on this account would be an BMR is rated Great Place to Work
exception rather than a rule and should be done only when there is unmistakable 2010; Great Place to Work
indication that the benefit of the service has not gone into export business what- Institute
so-ever. Further, such determination would be at the level of the “input service
invoice”, without disaggregating the invoice to disallow certain elements pertaining Mahesh Jaising
to domestic business.
Jayashree Parthasarathy
List of services identified as eligible
Kunal Wadhwa
Keeping in mind the above principles and statutory provisions, and after obtaining
feedback from field formations on eligibility of input services, the following has been TR Venkateswaran
laid out:
Rajeev Dimri, New Delhi
• The Draft Circular has identified a list of 68 input services (listed in a separate +91 124 339 5050
Annexure) that should be eligible/ ineligible for refund. [email protected]

• Apart from the above principles, the Annexure has further provided conditions in Sujit Ghosh, New Delhi
determining eligibility/ ineligibility of specific services for the purpose of refund. +91 124 339 5070
[email protected]
• The Draft Circular specifically mentions that the list is illustrative and not
exhaustive and eligibility ought to be determined depending on the facts of the Ajay Mehra, Mumbai
case. +91 22 3021 7030
[email protected]
• Among the key services specified, the following typical key services availed by
companies in the IT/ITES sectors have been specified to be services eligible for Malini Mallikarjun, Mumbai
refund: +91 22 3021 7025
[email protected]
Information Technology Software Services
Himanshu Tewari, Mumbai
Telecommunication Services +91 22 3021 7099
[email protected]
Renting of Immovable Property Services
Mahesh Jaising, Bangalore
Business Auxiliary Services (specifically pertaining to sales promotion) +91 80 4032 0140
[email protected]
Business Support Services (pertaining to accounting, payroll, IT support
services, etc.) K Sivarajan, Chennai
+91 44 4298 7000
Management Maintenance and Repair Services [email protected]

Manpower Recruitment and Supply Services

• With respect to services which are ineligible, the Draft Circular provides for
services such as “rent-a-cab services”, “motor vehicle insurance services” and
any other service used by employees for their personal use and consumption
such as renting/ maintenance services received in connection with residential
accommodation of employees, event management/ convention services received
in connection with employee welfare events and activities, etc.

The draft circular may be accessed at http://www.cbec.gov.in/draft-circ/draftcirc-st.pdf

BMR comments and analysis

The Draft Circular is a commendable initiative made by the CBEC after persistent
representations made by service exporters, especially the IT/ITES sector, which
should welcome the Draft Circular as well as the principles laid down therein. The
Draft Circular clarifies most of the issues that have been the stumbling blocks with
regard to adjudication of refund claims under Rule 5 and the CBEC hopes that
smooth and expeditious disposal of refund claims by exporters shall follow.

An important principle that the Draft Circular has laid out is that once a service
qualifies as “input service”, the same shall be eligible for refund and there shall not
be any further filter applied on these services to determine eligibility. Therefore, the
Annexure to the Draft Circular could also serve as a guide to determine eligibility of
CENVAT credit for services, in light of the amended CENVAT Rules with effect from
April 1, 2011.

Having said this, on a reading of the Draft Circular, the following aspects require a
specific clarification:

• Applicability of the Draft Circular to refund claims already filed under Rule 5 and
pending adjudication, as the Draft Circular is silent on its applicability on pending
claims.

Further, a specific clarification may be made that the exclusion of certain
services from refund eligibility on account of change in the definition of “input
services” shall be only from April 1, 2011 and shall be allowed for the prior
period.

• The aspect of disallowing services exclusively used in domestic operations may
be re-examined as the same is not envisaged as per the Refund Notification.
Further, the restriction in credit towards domestic services should be addressed
by applying the formula pertaining to export turnover vis-à-vis domestic turnover.
Alternatively, a specific clarification could be made to state that full refund shall
be allowed on services exclusively used in exports and proportionate refund for
common input services;

• While it is specified that the list of services in the Annexure to the Draft Circular
are illustrative and not exhaustive, a specific clarification could be issue that

refund would be allowed in respect of all other services not specified in the
Annexure where used in the business of the service exporter; and

• Prescription of a time line to dispose of refund applications (already filed and to
be filed). It may be recollected that the earlier circular had prescribed a timeline
of 30 days on receipt for disposal of all claims filed by exporters. A reiteration
of the same would be important for expediting disposal of claims.

While the Draft Circular has sought to address the primary issue on eligibility of
input services for refund, there are many other issues that still impact refund
claims, which are summarized below:

• Technical issues which are not necessarily objective in nature, such as non
inclusion of premises under registration, evidence to establish payment of
service tax on renting of immovable property services by landlords, STPI
approval containing activities different from that provided by the applicant,
services provided onsite are not exports, etc

• Documentation issues such as export invoices not conforming to requirements
under Rule 4A of Service Tax Rules, correlation between FIRC and export
invoices not available, shortcomings found in the certificate of the Statutory
Auditor

• Importantly, in several cases there has been disregard to the Statutory Auditor
certification and to the voluminous documentation filed, as well as disregard to
the “list of documents” for refund claims as per the CBEC website, by asking for
many other additional documentation.

The CBEC has called for inputs by November 30, 2011 and given the wide
implications that this Circular shall have, service exporters should consider filing
representations on the above issues.

Disclaimer:
This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation
and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss
arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It
is recommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need
to refer to the original pronouncements.

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