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By: Dr. Sanjiv Agarwal
October 22, 2009
  • Contents

Refund to Exporters

Rule 5 of the Cenvat Credit Rules, 2004 states that where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is  exported, the Cenvat credit in respect of the input or input service so used shall be allowed to be utilized by the manufacture or provider  of output service towards payment of duty of excise on any final product cleared for home consumption or for export on payment of duty or service tax on output service and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.

According to Rule 5 of the Cenvat Credit Rules, 2004, Government has provided for allowance of refund of the accumulated unutilized Cenvat credit to the person who export their output services and are not in a potion to utilize such accumulated unutilized Cenvat credit.

The said the Rule and Notification provide that the refund of Cenvat credit shall be allowed in respect of input or input service used in providing output service which has been exported without the payment of service tax subject to safeguards, conditions and limitation, set out in the appendix to the said Notification. As such, only those input service will be eligible for refund of Cenvat Credit which has been used in providing output service which has been exported.

         Notification No 5 / 2006

The Central Government vide Notification No. 5/2006-CE(NT) dated 14.03.2006 has specified form and procedure / conditions for claiming unutilized Cenvat credit as allowed under Rule 5 of the Cenvat Credit Rules, 2004.

         The condition No. 2 of the Appendix to the Notification No. 05/2006 states that the claims for such refund are submitted not more than once for any quarter in a calendar year and condition No. 4 states that the refund is allowed only in those circumstances where a manufacturer or provider of output service is not in a position to utilize the input credit or input service credit allowed under rule 3 of the said rules against goods exported during the quarter or month to which the claim relates.

Interpretation of Period        

The period of claim as referred to in the Notification as well as in Form "A" annexed to the Notification, relates to the period during which the output services are exported and the cenvat credit of duty/service tax taken during such period remains unutilized and by no stretch of imagination such interpretation ought to link it to the period of availment of input services per se. The "period" under the said Notification, firstly relate to the period during which the output services are exported and secondly, to the period of availment of Cenvat credit on input service and not to be availment of the input service per se. What is relevant aspect under the law is the period of entitlement to avail the Cenvat credit on input or input services against the export of services and not the period of availment of the input service.

To illustrate, suppose an export of service takes place on 5th July, then it is not necessary that inputs and inputs service should be consumed  within the quarter itself ,ie, between 1st and  4th July. Such an interpretation would render cenvat provisions absurd and redundant.    

It has been noticed that in many cases, the ground taken Department by taken while rejecting the refund claim is that certain invoices of input services pertain to dates prior to the period of refund claims. It is submitted that rule 3 of the Cenvat Credit Rules allows the provider of output service to take credit of service tax only after the payment of such input service. If the refund claim would be eligible only if the input services are dated within the period of the refund claim i.e., within the same month to which the refund claim relates to, it would amount to availment of the cenvat credit even prior to making the payment of service tax to the service provider and that would direct conflict to the provisions enumerated under Rule 3 of the Cenvat Credit Rules. The adjudicating authority has taken a wrong and narrow interpretation of the same..          

The refund of tax paid on input service in case of export of service has been brought in the service tax for exporters through Cenvat Credit Rules. Support  can be drawn from judgments of various Courts / Tribunals that have held that for want of procedural infirmities, Cenvat Credit cannot be denied. For example, following citations are relevant:

i)                    Tisco Ltd. vs.CCE (2005) 68 RLT  (404)

ii)                   CCE vs V.R.S. Industries Ltd. (2002) (147) ELT (217)

iii)                 Bharat Roll Industry Pvt. Ltd. vs. CCE (1999) (114) ELT 51)

iv)                 Marson Ltd. vs CCE (2001) (136) ELT ( 757)

v)                  Swastik Formulations (P) Ltd. vs. CCE (2002) (121) ELT 77)

vi)                 Deepthi Insulated Cables Pvt. Ltd. vs. CCE (2002) (123) ELT 933)

vii)               Malwa Cotton and Spinning Mills vs. CCE (2003) (56) RLT 60)


Principles of Interpretation

      On interpretation principles, following pronouncements are relevant

a)         In the case of M/s. Belapur Sugar & Allied Industries vs. CCE , Aurangabad  (1999) 108 ELT  9 SC, the Hon'ble Supreme Court in Para 9 has held that:

" Before we proceed to scrutinise the Notifications, the law to interpret is settled. Unless there is anything to the contrary in the Act, Rules or Notification, if there be two possible interpretation, it is that interpretation which subserve the object and purpose should be accepted…….."


b)         The Hon'ble CESTAT in the matter CCE Calcutta II vs. Black Diamond Beverages Ltd.,1998 (103) ELT-665 has held that:

"it is again a settled proposition of law that law has to be interpreted in a practical and reasonable manner which does not lead to any absurdity."                                                                                                                                

c)            In Re Shalimar Rexine India Ltd.(2007) 214 ELT 444 (Sett. Comm.), it has been held that interpretation, that render provisions superfluous should be avoided.

d)      Supreme Court in State of Himachal Pradesh v. Kailash Chand Mahajan AIR 1992 SC 1277 discussed the intention of the legislature thus, assimilates two aspects; in one aspect it carries the concept of 'meaning' i.e what the words mean and in another aspect, it conveys the concept of 'purpose and object' or the 'reason and sprit' pervading through the statue. The process of construction, therefore, combines both literal and purposive approaches. In other words, the legislative intention and  the true or legal meaning of an enactment  is derived  by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed.

e)       Madras High Court in Commissioner of Customs, Tuticorin v. LT Karle & Co. ( 2007) 207 ELT 358 (Madras) observed that a fiscal statute, strict construction does not rule out reasonable construction to give effect to purpose / intention of any particular provision as apparent form the scheme of a statute, with assistance of legally permissible external aid.   


" In order to apply the principles of reasonable construction to give effect to the purpose or intention of the provision, as apparent from the scheme of the act, the court must endeavour to harmonize different provisions in the same Act and prefer an interpretation which would lead to a harmonize construction rather than to lead to inconsistency. The cardinal principle is that the statute should be interpreted in such a way as to avoid absurdity and to have harmonious effect.

The court must construe the relevant provision to make it workable, unless it is impossible to do so, rather than make it meaningless.

An attempt must always be made to reconcile the relevant provisions as to advance the remedy by the statue, but not to deny the remedy provided under the statue, otherwise, the very purpose or the intention of the statutory provisions would manifestly be defeated"


While doing so, preference should be given to construction that harmonizes different provisions, makes them meaningful, advance remedy provided by statute and avoid absurdity.

f)          It has been held that an interpretation that results in hardship, serious inconvenience, injustice, absurdity or anomaly or which leads to inconstancy has to be rejected and preference should be given to that construction to avoid such result. The Court will adopt that which is just, reasonable and sensible rather than that which is none of those things { Holmes v. Bradfield Rural District Council (1949) I ALL ER 381 (KBD; Nasiruddin v State Transport Appellate Tribunal AIR 1976 SC 331 (1975)}. Similarly, a constuvtion giving rise to anomalies should be avoided ( Veluswani Thevar v. G Raja Nainar AIR 1959 SC 422)

g)      In case of exemption notification, it has been held that in a strict construction principle, it is settled law that once a case for exemption notification is found to be covered by Notification on strict interpretation, a liberal approach is permissible in further considerations. ( CCE, Chennai v. Titan Industries Ltd. (2007) 214  ELT 316 (CESTAT , Chennai).

Accumulated Credit

Rule 5 talks of accumulated credit and not the input credit for the quarter. The requirement is for making a claim for the exports made during the quarter and inputs and input services should relate to those exports, irrespective of period of such input consumption in relation to exports under question. In Bharat Seats Ltd v CCE, New Delhi 2009 -TMI - 35431 - (CESTAT, NEW DELHI),  it was held that nature of Cenvat credit is that of credit earned by assessee which is utilized for ultimate discharge of duty liability and to deny it, burden of proof is on the revenue to show that inputs (or input services) were gathered merely on paper, without undergoing consumption. Support can be drawn from the following decisions -

a)      In Bala Handlooms Exports Co. Ltd. v. CCE, Chennai 2007 -TMI - 34820 - (CESTAT, CHENNAI), refund of accumulated unutilized Cenvat credit was allowed. It was held that Rules provides for refund of Cenvat credit taken on inputs where for any reason the same could not be utilized for clearing final products for home consumption or export products on payment of duty. The Tribunal concluded that appellants were eligible for refund of accumulated Cenvat Credit in terms of Rule 5 of the Cenvat Credit Rules.

b) In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CCE, Tirunelvali  [2008 -TMI - 3528 - CESTAT, CHENNAI] it was held that Rule 5 of Cenvat Credit Rules approves sanction of refund of accumulated credit where adjustment of credits is not possible for any reason. It was also held that refund was not deniable if the credit was lying unutilized in the Cenvat account and assessee claims refund of the same.

In this case, the Notification No. 11/2002-CE (NT) dated 1.3.2002 laid down the procedure for refund of Cenvat credit under Rule 5 of Cenvat credit Rule 2002. Accordingly, the notification, inter alia, laid down that "the refund is allowed only in those circumstances where a manufacturer is not in a position to utilize the credit of the duty on inputs allowed under Rule 3 of the said rules against goods exported during the quarter or month to which the claim relates". Based on this, the Department argued that the impugned order under appeal was in accordance with law and thus, sustainable. The Tribunal held that Rule 5 of Cenvat Credit Rules grants a substantive right to the assessee for obtaining refund of accumulated cenvat credit if the same cannot be adjusted 'for any reason'. As the rule approves sanction of refund where adjustment of the credit is not possible "for any reason", the refund cannot be denied if the same was lying unutilized in the Cenvat account and the assessee claimed refund of the same

c)      In CCE, Pondicherry v. Himalaya Granites Ltd. [2008 -TMI - 30533 - CESTAT, CHENNAI], Tribunal did not find any reason to interfere where the refund claim was allowed on credit relating to input service which accumulated owing to export of goods. In the instant case, refund claims in dispute related to the period subsequent to 10.9.2004 when Rule 5 was substituted and it was held that Rule 5 of Cenvat credit Rules 2004 during the material period (April 2005- March, 2006) empowered the authorities to grant refund of accumulated Cenvat Credit relating to inputs and input services on account of export of final products. The revenue's appeal was thus dismissed.  

Not only this, even the refund for the period prior to issuance of the notification has been allowed as is evident from the following pronouncements-

a)      In C & CCE, Vapi v. DNH Spinners (2009) 18 STJ 415 (Cestat, Ahmedabad), where documents were not in the name of assessee's factory but were issued in the name of its head office and subsequently endorsed by the head office, it was held that there was no dispute on the input services received by the assessee and that substantive benefit cannot be denied on the procedural or technical grounds.

b)      In CCE & C, Nashik  v. Sipra Engineers Pvt Ltd. (2008) 15 STT 467 (Cestat, Mumbai), where the refund claim was rejected on the ground that assessee had not proved that it could not utilize amount of Cenvat credit, for goods cleared for home consumption and that there was a violation of procedure as given in notification, it was held that since there was substantial compliance of procedure laid down by notification and export was not in dispute, refund of unutilized Cenvat credit was held to be sustainable and revenue's appeal rejected.

It can therefore, be seen that even when condition or procedure was not prescribed, refunds were allowed as per Rule 5 following the legislative intention.


= = = = =


By: Dr. Sanjiv Agarwal - October 22, 2009


Discussions to this article


Dear Sir,

We are manufacturer and exporter of pharmaceutical formulations situated at Mumbai. Our entire production is exported.

We earlier have been claiming refund of central excise duty under claim under rebate for our export shipments but since the value addition is low on and average there is always accrual of credit in RG23 A.

On our request for claim for balance accrued credit dept., is of view that it can not be refunded since part we have claimed under rebate .

Query : Can you please guide whether above detailed view of dept., is correct, can you help us ? with correct solution which can enable us to claim  refund of accrued credit..

Your help in the matter will be appreciated.

Lalit Shah

Vardhman exports

Mumbai 400 086.

Tel. : 40785555. 

By: lalit shah
Dated: 29/03/2012


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