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Refund of Cenvat on excisable
and Non-excisable goods
It is a well-accepted principle that for exports
competitiveness of our goods, it must be ensured that only goods are exported
and not taxes.
Services such as banking, clearing and forwarding, insurance,
quality testing, packing, port services, transportation etc. are consumed in the
process of exporting of goods outside India. Further, several excisable material
and consumables are utilized in the manufacture of such exported goods. As
service tax and excise duty is levied on such services and goods, the element of
tax involved could also be exported outside India.
Does there exist any mechanism to ensure that only goods and
not taxes are exported outside India for excisable and non-excisable goods
manufactured in India?
The options available to neutralize the excise and service
tax component from the cost of excisable goods exported are summarized below: -
Rule 3 of the Cenvat Credit Rules, 2004, provides that the
manufacturer of excisable goods can avail credit on inputs goods and services
as defined under Rules 2(k) and 2(l) respectively in the said rules. The said
manufacturer can utilize the accumulated credit so availed against the excise
liability on clearance from the domestic market. In the event of the said
manufacturer for any reason is not in the position to utilize the Cenvat
credit on duty/service tax availed by him, the manufacturer can also claim the
refund of such unutilized credit as per Rule 5 of the Cenvat Credit Rules,
2004 in the ratio specified vide Notification No.5/2006-Central Excise (N.T)
dated 14-3-2006.
The said manufacturer can export the final products without
payment of duty as per Rule 19 of the Central Excise Rules, 2002, or export
the goods on payment of duty and claim rebate of duty paid on the material
consumed/final products under Rule 18 of the Central Excise Rules, 2002.
The manufacturer can alternatively claim drawback of duty
on raw material and service tax on the input services. (The Customs, Central
Excise Duties and Service Tax Drawback Rules, 1995 have been amended vide
Notification No. 80/2006-Customs (N.T.), dated 13-7-2006 to include the words
"input service").
Thus, this will enable the manufacturer of excisable goods
to exclude the cost of excise and service component from his cost of exports,
thereby ensuring export competitiveness in pricing.
However, the above benefit is applicable only in the case
when the manufacturer exports excisable goods. In case of export of
non-excisable goods the manufacturer will not be able to exclude the cost of
excise and service component from his cost of exports for reasons stated
below:
Cenvat Credit Rules, 2004 provides that only the
manufacturer of excisable goods or provider of output services can
avail credit on inputs goods and services. Thus, the Cenvat Credit Rules have
not extended the benefit of Cenvat credit availability and utilization to a
manufacturer of non-excisable goods. Therefore, the manufacturer of
non-excisable goods cannot avail any Cenvat credit on his inputs or input
services utilized by him in exporting the said non-excisable goods. Needless
to state that once the availability is denied at the outset, the question of
utilization or refund does not arise.
Rule 18 of the Central Excise Rules, 2002 provides for
rebate of duty only on excisable goods exported out of India and
on excisable material used in the manufacture of such excisable goods.
Thus, the manufacture of non-excisable goods will not be
entitled for any rebate of duty on excisable material used in the manufacture
of non-excisable goods.
Rule 2(a) of the Customs, Central Excise Duties and Service
Tax Drawback Rules, 1995 states that "drawback" in relation to any goods
manufactured in India and exported, means the rebate of duty or tax, as the
case may be, chargeable on any imported materials or excisable materials used
or taxable services used as input services in the manufacture of such goods.
Further, Rule 2(b) provides that "excisable material" means
any material produced or manufactured in India subject to a duty of excise
under the Central Excises and Salt Act, 1944 (1 of 1944).
Rule 2(da) states that "input service" shall have the same
meaning as is assigned to it in the CENVAT Credit Rules, 2004.
As explained above input service is defined vide Rule 2(l)
of the Cenvat Credit Rules, 2004.
Rule 2(l) of input service means any service used in or in
relation to the manufacture of final products and clearance of "final
products".
Rule 2(g) states that "Final products" means
excisable goods manufactured or produced from input, or using input
service.
Thus, it can be concluded that as the definition of final
products does not include non-excisable goods, the Cenvat credit on input
service utilized in exporting non-excisable goods will not be available as a
drawback.
Though there exist mechanism for ensuring that taxes are
not exported outside India in case of export of excisable goods, similar
provisions should be made in case of export of non-excisable goods. Unless
such amendments are not made in the Cenvat Credit Rules, 2004, Central Excise
Rules, 2002 or the Customs, Central Excise Duties and Service Tax Drawback
Rules, 1995, it will be detrimental to Indian competitiveness in pricing in
the International Market.
Further, vide introduction of ‘The taxation of services
(provided from outside India and received in India) Rules, 2006’, the service
recipient is now liable to pay service tax on services received in India from
outside India w.e.f 19-4-2006. Though this may lead to revenue generation for
the Government, it will affect Indian competition in the International Market
in case of exports of non-excisable goods (consuming such services) as the
cost of such goods will increase drastically in the hands of the Indian
manufacturer in the absence of suitable mechanism for reversing the impact of
taxes!!
Important Court Cases
Some recent important cases are discussed in brief for the
benefit of the readers: -
The applicant is engaged in the business of running
advertising agency in Delhi and had collected publicity charges, against which
the impugned order dated 31st March, 2006 has confirmed a demand of Rs.
40,12,721/- as Service Tax. The learned authorized representative of the
applicant stated that as per the Trade Notice issued by the Department as well
as the clarification made by the learned Commissioner of Central Excise,
Chennai, the applicant has not rendered taxable service to the original client
and hence the demand raised against it, cannot be sustained. The learned
Commissioner observed that as per the definition it is observed that the word
‘client’ has not been defined under the provisions of Act. However, a
client, for the purpose of the ‘Service Tax’ taxation principles, can be
considered to be a person who is receiving the taxable services, provided by
the service provider against a consideration. Thus, the requisite stipulations
of being a client are satisfied in the instant case as it is observed that the
assessee in the normal course of rendering advertising services provided it to
a ‘client’, who happens to be another advertising agency. However, it cannot
be said that other advertising agency cannot be treated as a client just
because he is another such agency and the tribunal held that the applicant has
not made out a case fit enough for waiver of service tax demanded and refused
to grant stay on the matter.
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Bharati Hexacom Ltd. vs. Commissioner of Central Excise,
Jaipur (Service Tax Stay Application No. 2024 of 2005, Service Tax Appeal No.
292 of 2006 Arising out of order-in-original No. 03-04/2006 Dated: 28-2-2006
passed by the Commissioner of Central Excise, Jaipur-1 Dated of Decision:
8-8-2006)
The learned counsel appearing for the appellant has
strongly contended that the applicant had paid sales tax on the SIM cards and
since the cards were goods, there was no question of invoking the provisions
of the said Act for imposition of service tax thereon. He relied on the
decision of the Tribunal on Idea Mobile Communication Ltd. vs. CCE rendered
on 25-5-2006 by Final Order No.978/2006 in which in a case where the levy
of sales tax was not challenged, the Tribunal held that since the sales tax
was already paid, it follows that service tax is not leviable on the item on
which sales tax was collected.
It was observed, "In the present case, it is evident from
the material on record that it is not as if only the SIM cards were sold as
goods. The applicant provided cellular services, and as a part of those
cellular services SIM cards were supplied and shown to have been sold. In this
context, we may refer to the decision in Bharat Sanchar Nigam Ltd. and
Another vs. Union of India and others reported in [2006] 145 STC-0091, in
which Hon’ble the Supreme Court indicating the dominant nature test in
paragraph 46 of the judgment, held in paragraph 87 of the judgment that in
determining the issue the assessing authorities will have to keep in mind
following principles :-
"If the SIM card is not sold by the assessee to the
subscribers but is merely part of the services rendered by the service
providers, then a SIM card cannot be charged separately to sales tax it would
depend ultimately upon the intention of the parties. If the parties intended
that the SIM card would be a separate object of sale, it would be open to the
sales tax authorities to levy sales tax thereon."
In the present case, the applicant was providing cellular
services and as a part of those services, SIM cards were given. Even if some
amount is charged for SIM cards, SIM card of the applicant company was clearly
relatable to the services provided by the applicant and ancillary to it. Such
SIM card could not have been used for any other services. Moreover, unless
activated it was useless, which showed that it was only a part of the services
provided, and not goods separately sold. If some company manufactured SIM
cards for the purpose of selling them to a cellular service provider for his
business, that may stand on the footing of SIM cards being sold as goods which
had nothing to do with cellular service, which was not to be provided by the
manufacturer of such SIM cards and was to be provided by the purchaser who was
to provide cellular services for whom such tailor made SIM cards were
manufactured. It was urged that the applicant was entitled to the benefit of
the Notification No.12/03-ST dated 20-6-2003. Admittedly, this contention has
never been raised so far. Even otherwise, prima facie, this notification
cannot be of any help to the applicant because, SIM cards were not sold as
goods, independent from the services provided, but they were part and parcel
of the services provided and the dominant intent was to provide services and
not to sell the material, namely, SIM cards which on its own without the
service, would hardly have any value".
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