The Delhi High Court in the case of Commissioner of CGST Delhi East v. Anand and Anand, SERTA 9/2022 decided on 01.08.2022, held that the refund of unutilized Central Value Added Tax (hereinafter referred to as “CENVAT”) Credit can be claimed on account of export of legal services.
Anand and Anand (hereinafter referred to as the “Respondent”) is a firm of legal practitioners, rendering legal services in India and outside India. The Respondent specialises in the field of Intellectual Property Rights, in which 75-80% of the revenue is generated by export of legal services.
The Respondent had sought the refund of unutilized CENVAT Credit under Rule 5 of the CENVAT Credit Rules, 2004 (hereinafter referred to as the “CENVAT Rules”) for the CENVAT Credit accumulated from 2012 to 2015.
The Revenue had initially sanctioned the refund of CENVAT Credit for the period of July to September 2012, October to December 2012, January to March 2013 and April to June 2013 vide Orders-in-Original pertaining to the respective periods of assessment.
However, the sanction of refund was subjected to review by the Principal Commissioner, Service Tax and a decision was taken to prefer appeals against the said Orders-in-Original. The Commissioner of CGST Delhi East (hereinafter referred to as the “Appellant”) filed appeals against the said Orders-in-Original and the sanction of refund was reversed for the aforementioned periods.
For the period of assessment from July 2013 to March 2015, the refund of CENVAT Credit was rejected and on appeal by the Respondent, the order of rejection was sustained. The Respondent preferred appeals before the Customs, Excise and Service Tax Appellate Tribunal, Delhi (hereinafter referred to as the “CESTAT”) for the five Orders-in-Appeal rejecting the refund. The CESTAT passed a common order with respect to the five appeals and allowed all the appeals.
Hence, aggrieved by the Order of CESTAT allowing the sanction of refund of CENVAT Credit, the Appellant filed the present appeal under Section 35G of the Central Excise Act, 1944 (hereinafter referred to as “Central Excise Act”) and Section 174 of Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”).
ISSUES BEFORE THE DELHI HIGH COURT
- Whether the CESTAT was correct in holding the Respondent eligible for refund of CENVAT Credit on services on which no tax was payable by the Respondent?
- Whether the CESTAT was correct in holding that the services provided by the Respondent was covered under the definition of “Output Services” defined under Section 2(p) of the CENVAT Rules?
- Whether the CESTAT was correct in allowing the refund claims of the Respondent?
CONTENTIONS OF THE PARTIES
The Appellant contended that the CESTAT misinterpreted the provisions of the CENVAT Rules and stated that as per Rule 5 and Rule 2(p) of the CENVAT Rules, the Respondent was exporting legal services without payment of service tax. Thus, the Respondent would be ineligible for refund of CENVAT Credit.
The Appellant relied on the analogy that as CENVAT Credit was not available for services exempted from service tax, the same principle would be applicable on the services that are exported without payment of service tax.
The Respondent submitted that under Rule 5 and 2 (p) of the CENVAT Rules, “output services” excluded the services provided by service providers located in India, where the service tax was paid by the recipient on reverse charge basis, and where such recipient was also located in India.
The Respondent relied upon Section 68(2) of the Finance Act 1994, Rule 2(1)(d)(i)(D)(II) of the Service Tax Rules, 1994 and Notification No. 30/2012-Service Tax dated 20.06.2012 issued by Government of India, Ministry of Finance, Department of Revenue in support of its plea.
DECISION AND FINDINGS
The High Court observed that in accordance with Section 68(2) of the Finance Act 1994, Rule 2(1)(d)(i)(D)(II) of the Service Tax Rules, 1994 and Notification No. 30/2012-Service Tax dated 20.06.2012, in case of an individual advocate or a firm providing legal services to an entity located in the taxable territory, the tax would be borne by the recipient of the legal services.
The High Court held that as per Rule 2(p) of the CENVAT Rules, for a service provider being a resident of India, not covered under the negative list of services in Section 66D of Finance Act, 1994 and where the entire tax is paid by the recipient, the services provided would be excluded from the purview of output services. The High Court noted that the Respondent is a resident of India and is also not covered in the negative list of Section 66D of the Finance Act.
The High Court stated that in accordance with Rule 5 of the CENVAT Rules, a service provider providing output service which is exported without payment of service tax is eligible for refund of CENVAT Credit. Further, the High Court observed that Rule 6A of CENVAT Rules excludes export from exempted services.
Hence, the High Court upheld the Order of CESTAT allowing the refund of CENVAT Credit and disallowed the appeal.
In this decision, the High Court analysed the peculiar facts of case involving the Respondent, a law firm, engaged in the export of legal services on which the service tax was paid by the recipient on reverse charge basis, and not by the Respondent itself.
The High Court analysed the various provisions and Notifications of CENVAT Law pertaining to refund of CENVAT Credit, and noted that the export of legal services would not be fall within the purview of ‘exempted services’ as service tax is paid on the same by the recipient on reverse charge basis.
Thus, the High Court allowed the Respondent law firm to avail the refund of CENVAT Credit in terms of the CENVAT Rules, the Central Excise Act and the CGST Act. This decision of the High Court is a landmark judgment as it declares the export of legal services by law firms to be eligible for the refund of CENVAT Credit, and would be useful to the legal fraternity providing legal services to overseas clients.
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