The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Regional Bench, has set aside the denial of refund of Rs. 2,42,39,076 pertaining to Service Tax paid under the Reverse Charge Mechanism (RCM). The Tribunal held that Rule 9(1)(bb) of the Cenvat Credit Rules, 2004, introduced with effect from 01.04.2011, is not applicable to the period in dispute (January 2010 to March 2010). The credit availed on the basis of TR-6 challans under Rule 9(1)(e) is valid, and the denial of refund on this ground is unsustainable in law.
Background & Facts
The Dispute
The appellant, M/s AMD Research & Development Centre India Pvt Ltd., is engaged in providing information technology software services, which are exported without payment of Service Tax. During the period January 2010 to March 2010, the appellant accumulated Cenvat Credit of input services and filed a refund claim of the unutilized credit under Rule 5 of the Cenvat Credit Rules, 2004 read with Notification No. 5/2006 - CE (NT). The Original Authority partly sanctioned the refund while rejecting certain amounts. The Commissioner (Appeals) upheld the rejection, leading to the present appeal.
Key Facts
- The appellant is engaged in providing information technology software services, which are exported without payment of Service Tax.
- During the relevant period (January 2010 to March 2010), the appellant accumulated Cenvat Credit of input services.
- The appellant filed a refund claim of the unutilized credit under Rule 5 of the Cenvat Credit Rules, 2004 read with Notification No. 5/2006 - CE (NT).
- The Original Authority partly sanctioned the refund while rejecting certain amounts:
- Rs. 2,42,39,076 pertaining to Service Tax paid under Reverse Charge Mechanism.
- Rs. 11,16,153 due to incorrect computation by applying the export turnover ratio on the closing balance instead of the gross eligible Cenvat Credit.
- Rs. 3,11,450 on procedural grounds relating to two invoices.
- The appellant discharged Service Tax under RCM through TR-6 challans in March 2010 and availed credit on the basis of those challans.
Procedural History
- 22.03.2012: Commissioner (Appeals) passed the impugned order upholding the rejection of a part of the refund claim.
- 13.04.2026: Appeal heard by CESTAT Hyderabad Regional Bench.
- 23.07.2026: Final order passed by CESTAT Hyderabad.
Relief Sought
The appellant sought:
- Setting aside the rejection of refund of Rs. 2,42,39,076 pertaining to Service Tax paid under RCM.
- Recomputation of refund by applying the export turnover ratio on the gross eligible Cenvat Credit, resulting in excess rejection of Rs. 11,16,153.
- Grant of refund of Rs. 3,11,450, which was rejected on procedural grounds.
The Legal Issue
The central question was whether Rule 9(1)(bb) of the Cenvat Credit Rules, 2004, introduced with effect from 01.04.2011, applies to Service Tax paid under the Reverse Charge Mechanism during the period January 2010 to March 2010. Additionally, whether the computation of refund should be based on the gross eligible Cenvat Credit or the closing balance.
Arguments Presented
For the Appellant
- Rule 9(1)(bb) is not applicable to the period in dispute as it was introduced only with effect from 01.04.2011.
- Rule 9(1)(e) specifically recognizes a challan evidencing payment of Service Tax by the person liable to pay tax under Reverse Charge as a valid document for availing credit.
- The denial of refund by invoking Rule 9(1)(bb) is legally unsustainable.
- The computation of refund should be based on the gross eligible Cenvat Credit, not the closing balance.
- The rejection of Rs. 3,11,450 on procedural grounds is unjustified as the invoices have been produced before the Tribunal.
For the Respondent
- The rejection of refund is proper in law as the appellant failed to comply with the provisions of Rule 9(1)(bb).
- The computation of refund based on the closing balance is correct.
- The rejection of Rs. 3,11,450 on procedural grounds is justified.
The Court's Analysis
The Tribunal examined the provisions of Rule 9(1)(e) and Rule 9(1)(bb) of the Cenvat Credit Rules, 2004. It noted that Rule 9(1)(bb) was introduced with effect from 01.04.2011 and applies only to supplementary invoices, bills, or challans issued by a provider of output service. The Tribunal observed:
"Rule 9(i)(bb) is applicable to supplementary invoice, bill or challan issued by provider of output service and Rule 9(i)(e) is applicable, inter alia, to a person liable to pay Service Tax under Rule 2(1)(d) of Service Tax Rules, 1994. It is apparent that the appellant is not service provider and therefore Rule 9(i)(bb) would not be applicable to them. The appellant is paying Service Tax on reverse charge basis in terms of Rule 2(1)(d) of Service Tax Rules, 1994 and therefore credit can be availed in terms of Rule 9(i)(e) of Cenvat Credit Rules."
The Tribunal also noted that the appellant had discharged Service Tax under RCM through TR-6 challans in March 2010 and availed credit on the basis of those challans. The denial of refund by invoking Rule 9(1)(bb) is therefore legally erroneous.
Regarding the computation of refund, the Tribunal held that the export turnover ratio should be applied on the gross eligible Cenvat Credit earned during the quarter, not merely on the closing balance. The computation adopted by the Adjudicating Authority was inconsistent with the formula prescribed under Notification No. 5/2006.
With regard to the rejection of Rs. 3,11,450 on procedural grounds, the Tribunal noted that the appellant has placed the invoices on record before the Tribunal. Refund cannot be denied merely on technical grounds when the substantive eligibility is otherwise established.
The Verdict
The appeal was allowed partly. The Tribunal set aside the impugned order to the following extent:
- The rejection of refund of Rs. 2,42,39,076 relating to Service Tax paid under reverse charge is set aside.
- The rejection of Rs. 11,16,153 arising from incorrect computation is set aside, with a direction to recompute the refund strictly in accordance with Notification No. 5/2006.
- The rejection of Rs. 3,11,450 on procedural grounds is remanded to the Adjudicating Authority solely for the verification of the invoices already produced by the appellant, and upon verification, the consequential refund shall be granted.
What This Means For Similar Cases
Rule 9(1)(bb) Is Not Retrospective
Practitioners must ensure that the period of refund claims falls within the applicability of Rule 9(1)(bb). For periods prior to 01.04.2011, Service Tax paid under RCM is governed by Rule 9(1)(e), and credit cannot be denied by invoking Rule 9(1)(bb).
Gross Eligible Credit, Not Closing Balance, Determines Refund
The computation of refund must be based on the gross eligible Cenvat Credit earned during the relevant quarter, not merely on the closing balance. This ensures that the refund is computed accurately and in accordance with the statutory formula prescribed under Notification No. 5/2006.
Procedural Rejections Must Yield to Substantive Eligibility
Refunds cannot be denied merely on technical or procedural grounds when the substantive eligibility is otherwise established. Practitioners should ensure that all relevant documents, including invoices, are produced before the adjudicating authority to avoid procedural rejections.
