The Customs, Excise & Service Tax Appellate Tribunal has delivered a pivotal ruling on the eligibility of CENVAT credit for input services used by software export units, reinforcing that mere business necessity does not suffice - there must be a demonstrable nexus with taxable output services. This decision impacts how multinational IT firms structure their input service claims and underscores the necessity of precise documentation and legal reasoning in refund applications.
Background & Facts
The Dispute
M/s. Robert Bosch Engineering and Business Solutions Pvt. Ltd., a 100% software-oriented export unit, filed nine refund claims for unutilized CENVAT credit on various input services between June 2012 and September 2014. The Adjudication Authority and Commissioner (Appeals) allowed only a portion of the claimed Rs.74.92 crore, rejecting Rs.13.36 crore on grounds of lack of nexus between the input services and the appellant’s taxable output services. The disputed services included Business Support Services, visa fees, travel insurance, life insurance, cleaning services, management consultancy, training, accommodation, manpower recruitment, and clearing and forwarding.
Procedural History
- 2012 - 2014: Appellant availed CENVAT credit on various input services and claimed refunds under Rule 5 of the CENVAT Credit Rules, 2004.
- 2016 - 2017: Adjudication Authority and Commissioner (Appeals) rejected claims on grounds of no nexus, procedural lapses, or exclusion under Rule 2(1)(C).
- 2017: Appellant filed nine appeals before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Bangalore.
- 2026: Tribunal heard appeals collectively and issued final order.
Relief Sought
The appellant sought full refund of Rs.13.36 crore denied by lower authorities, arguing that all services had a direct nexus with export of services, were used for business purposes, and were previously allowed in identical periods. It also challenged the methodology used to compute refund under Notification No. 27/2012.
The Legal Issue
The central question was whether CENVAT credit on input services is admissible solely on the basis of business utility, or whether a direct and demonstrable nexus with output services is mandatory under Rule 2(1) of the CENVAT Credit Rules, 2004, particularly when services fall outside the negative list but are subject to exclusion clauses.
Arguments Presented
For the Appellant
The appellant relied on multiple precedents including HCL Technologies Ltd v. Commissioner of Cus., C. Ex. & S.T., Noida and WNS Global Services, arguing that services like visa fees, travel insurance, cleaning, training, and management consultancy were essential for delivering export services. It contended that the exclusion under Rule 2(1)(C) applied only to purely personal or welfare-oriented services, not those integral to business operations. It further argued that the refund computation methodology adopted by the authorities incorrectly deducted credit utilized for domestic liability, contrary to the formula prescribed under Rule 5.
For the Respondent
The Revenue maintained that services such as general health insurance, accommodation, and cleaning were excluded under Clause (C) of Rule 2(1) as they constituted personal consumption or welfare measures. It argued that the appellant failed to establish a direct link between these services and the export of software, and that the refund claims were procedurally defective due to incomplete documentation and invoices addressed to SEZ units. The Revenue also defended the computation method as consistent with statutory requirements.
The Court's Analysis
The Tribunal examined the statutory framework under Rule 2(1) of the CENVAT Credit Rules, 2004, which defines "input service" as any service used in the provision of output services, subject to specific exclusions under Clause (C). The Court emphasized that the mere fact that a service is used in business operations does not automatically render it an "input service" - a direct nexus with the output service must be established.
"The exclusion under Clause (C) is not a blanket bar on all services benefiting employees; it targets services that are personal in nature and not integral to the provision of taxable output services."
The Tribunal noted that while services like visa fees and business travel insurance were previously allowed in the same entity’s earlier periods, the current claims lacked supporting documentation to prove nexus. It distinguished Suzuki Motors, where medical insurance was allowed due to statutory mandate under the Employees’ State Insurance Act, noting no such compulsion existed here.
Regarding refund computation, the Tribunal held that the lower authorities erred in deducting CENVAT credit utilized for domestic liability before applying the refund formula under Rule 5. The correct approach, as established in the appellant’s own prior order (Final Order No. 23114-23130/2017), is to deduct only ineligible credit from gross credit availed, not net credit after domestic utilization.
The Court also rejected blanket denial of claims due to invoices addressed to SEZ units, citing precedent that procedural irregularities cannot override substantive eligibility if the service was consumed in a STPI unit.
The Verdict
The appellant partially succeeded. The Tribunal upheld the denial of Rs.2.48 crore for general insurance services due to exclusion under Rule 2(1)(C) and absence of statutory mandate. All other disputed claims - totaling Rs.11.53 crore - were remanded for de novo adjudication. The Tribunal directed the Adjudicating Authority to reassess eligibility based on documented nexus, correct refund computation methodology, and opportunity to produce evidence.
What This Means For Similar Cases
Nexus Must Be Documented, Not Assumed
- Practitioners must maintain detailed records linking each input service to specific output services, especially for IT/ITES exporters.
- Generic assertions like "this service helps us deliver better services" are insufficient; invoices, project logs, and internal memos must show direct operational linkage.
- Services previously allowed in prior periods do not create automatic entitlement - each claim must be substantiated independently.
Refund Computation Must Follow Statutory Formula Correctly
- The refund formula under Rule 5 must be applied on gross CENVAT credit availed, minus only ineligible credit.
- Deducting credit utilized for domestic liability before applying the export-to-total turnover ratio is legally erroneous.
- Practitioners should audit prior refund claims using this corrected methodology to identify potential overpayments or under-refunds.
Procedural Lapses Do Not Nullify Substantive Eligibility
- Invoices addressed to SEZ/STPI units cannot be grounds for denial if the service was consumed in a STPI unit.
- Documentary deficiencies must be remedied through opportunity to produce evidence, not outright rejection.
- Authorities must issue speaking orders addressing each claim individually, not through blanket denials.
