Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers and manages the selected process based on defined and measurable performance criteria. Business Process Outsourcing (BPO) is one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry in India. Outsourcing BPO Services to India is one of the popular business practices in today's competitive environment. The Indian BPO industry is constantly growing. BPO [Business Process Outsourcing] has been the latest mantra in India today. As the current sources of revenue face slower growth, software companies are trying new ways to increase their revenues. BPO is top on their list today. IT services companies are making a quick entry into the BPO space on the strength of their existing set of clients. The Government of India has also time and again by way of various acts & regulations pledged its unconditional support in the growth of this industry which has opened up huge employment opportunities.

BPO’s/Call Centers engaged in total or partial export of services have been facing a tough time in getting refund of the Cenvat credit on the input services used for the exported ouput services from the Central Excise Department due to contradictions in the Cenvat Credit Rules, 2004 and Notification No. 5/2006-CE (NT) dated 14.03.2006. This refund of accumulated Cenvat Credit on inputs/input services is a very important component in the economics of this industry. The major reason causing delay in granting refunds as well as rejecting the claims is that the Cenvat Credit Rules, 2004 permitted the exporter of services to take credit of the service tax paid on services used directly or indirectly, in or in relation for providing output service, whereas the Notification No. 5/2006-CE (NT) restricted the refund of service tax paid only to such input services which are used in providing the output services exported. The refund claims were rejected on the ground that the nexus between input services and the services exported has to be closer and more direct than that is required for taking credit. Due to lack of any specific guidelines it was also found difficult while processing the refund claims to co-relate services utilized with a specific instance of export or service. Since the notification required the claim of refund to be filed quarterly this resulted in the refund claim of large exporters of services being accompanied with hundreds of invoices. There was no clarity in the Cenvat Credit Rules, 2004 or in the notification as to whether the refund is eligible only of that credit which is accumulated during the said quarter or the accumulated credit of the past period can also be refunded. The manner in which the refund claims accompanied by invoices containing incomplete data regarding the description of service, name of the receiver of the inputs/input services or its classification needs to be handled was also lacking under the law.

On receiving representations from the trade, the Union Finance Ministry decided to examine this issue of refund of cenvat credit on input services to output service exporters and issued clarifications. Through the Circular No. 120/01/2010-Service Tax dated 19.01.2010 the Ministry has clarified that the primary objection indicated by the field formations is that the language of Notification No. 5/2006-CE (NT) permits refund only for such services that are used in providing output services. In other words, the view being taken is that to be eligible for refund, input services should be directly used in the output service exported. As regards the extent of nexus between the input services and the export services, it must be borne in mind that the purpose is to refund the credit that has already been taken. There cannot be different yardsticks for establishing the nexus for taking of credit and for refund of credit. Even if different phrases are used under different rules of CENVAT Credit Rules, they have to be construed in a harmonious manner. To elaborate, the definition of input services for manufacturer of goods, as given in Rule 2 (l) (ii) of CENVAT Credit Rules, 2004, includes within its ambit all services used “ in or in relation to the manufacture of final products” and includes services used “ directly or indirectly ”. Similarly Rule 2 (l) (i) of CENVAT Credit Rules also gives wide scope to the input services for provider of output services by including in its ambit services “ used....for providing an output service ”. Therefore, the phrase, “used in” mentioned in Notification No. 5/2006-CE (NT) to show the nexus also needs to be interpreted in a harmonious manner. The following test can be used to see whether sufficient nexus exists. In case the absence of such input/input service adversely impacts the quality and efficiency of the provision of service exported, it should be considered as eligible input or input service. In the case of BPOs/call centres, the services directly relatable to their export business are renting of premises; right to use software; maintenance and repair of equipment; telecommunication facilities; etc. Further, in the instant example, services like outdoor catering or rent-a-cab for pick-up and dropping of its employees to office would also be eligible for credit on account of the fact that these offices run on 24 X 7 basis and transportation and provision of food to the employees are necessary pre-requisites which the employer has to provide to its employees to ensure that output service is provided efficiently. Similarly, since BPOs/call centers require a large manpower, service tax paid on manpower recruitment agency would also be eligible both for taking the credit and the refund thereof. On the other hand, activities like event management, such as company-sponsored dinners/picnics/tours, flower arrangements, mandap keepers, hydrant sprinkler systems (that is, services which can be called as recreational or used for beautification of premises), rest houses etc. prima facie would not appear to impact the efficiency in providing the output services, unless adequate justification is shown regarding their need. Problem of co-relation between inputs and outputs and scrutiny of large number of documents was being faced in another scheme [Notification No. 41/2007-ST dated 06.10.2007] which grants refund of service tax paid on services used by an exporter after the goods have been removed from the factory. In Budget 2009, the scheme was simplified by making a provision of self-certification (notification no. 17/2009-ST)] where under an exporter or his Chartered Accountant is required to certify the invoices about the co-relation and the nexus between the inputs/input services and the exports. The exporters are also advised in the circular to provide a duly certified list of invoices. The departmental officers have been directed in the circular to make only a basic scrutiny of the documents and if found in order, sanction the refund within one month. The reports from the field show that this has improved the process of grant of refund considerably. It has, therefore, been decided that similar scheme should be followed for refund of CENVAT credit under Notification No. 5/2006-CE (NT). The procedure prescribed herein should be followed in all cases including the pending claims with immediate effect. The exporter should, along with the refund claim, file a declaration containing the details of the input service availed and out service exported. The declaration should be certified by a person authorized by the Board of Directors (in case of a limited company) or the proprietor/partner (in case of firms/partnership) if the amount of refund claimed is less than Rs.5 lakh in a quarter. In case the refund claim is in excess of Rs.5 lakh, the declaration should also be certified by the Chartered Accountant who audits the annual accounts of the exporter for the purposes of Companies Act, 1956 (1 of 1956) or the Income Tax Act, 1961 (43 of 1961), as the case may be. The Assistant or Deputy Commissioner may, after verification of the fact that the input credit has been correctly claimed, sanction the refund on the basis of the declaration. In case there is a doubt about the correctness of the claim of CENVAT credit on any service, the undisputed amount may be refunded and the balance claim may be decided after following the dispute settlement process. As regards the quarterly filing of refund claims and its applicability, since no bar is provided in the notification, there should not be any objection in allowing refund of credit of the past period in subsequent quarters. It is possible that during certain quarters, there may not be any exports and therefore the exporter does not file any claim. However, he receives inputs/input services during this period. To illustrate, an exporter may avail of Rs.1 crore as input credit in the April – June quarter. However, no exports may be made in this quarter, so no refund is claimed. The input credit is thus carried over to the July-September quarter, when exports of Rs.50 lakh and domestic clearances of Rs.25 lakh are made. The exporter should be permitted a refund of Rs.66 lakh (as his export turnover is 66% of the total turnover in the quarter) from the Cenvat credit of Rs.1 crore availed in April-June quarter. The illustration prescribed under para 5 of the Appendix to the notification should be viewed in this light. However, in case of service providers exporting 100% of their services, such disputes should not arise and refund of CENVAT credit, irrespective of when he has taken the credit, should be granted if otherwise in order. Such exporters may be asked to file a declaration to the effect that they are exporting 100% of their services, and, only if it is noticed subsequently that the exporter had provided services domestically, the proportional refund to such extent can be demanded from him. In case of incomplete invoices, the department should take a liberal view in view of various judicial pronouncements by Courts. It had earlier been prescribed in Circular No. 106/09/2008-ST dated 11.12.2008 that the invoices/challans/bills should be complete in all respect. This circular was issued with reference to Notification No. 41/2007 dated 06.10.2007 as specific services eligible for refund under the notification has been specified. Thus, a stricter requirement exists under the said notification for ascertaining the actual service which has been used in the export of goods. In the case of refund under Rule 5, (i) so far as the nature of the service which has been received by the exporter can be ascertained; (ii) tax paid therein is clearly mentioned; and (iii) other details as required under rule 4(a) are mentioned, the refund should be allowed if the input service has a nexus with the service/goods as discussed earlier. In any case, the suggested Chartered Accountant’s certificate should clearly bring out the nature of the service and this will assist the officer in taking a decision. The Ministry has directed that the instructions contained in the circular should be implemented with immediate effect and the pending claims may be disposed of accordingly. It is expected by the Ministry that with the clarifications provided and liberalization of procedure, most of the impediments to smooth and expeditious disposal of exporters' claims for refund of accumulated credit would be removed and that the concerned refund sanctioning authorities decide al the claims of exporters within 30 days of their receipt.

This circular which has clarified a number of issues regarding refund of accumulated cenvat credit to exporters of services needs to be applauded in letter and spirit for its intent in facilitation and creation of a conducive business atmosphere for the viable functioning of BPO’s/Call Centers. The illustration given in the circular clarifies that when an exporter avail Rs.1 crore as input credit in the April – June quarter and there are no exports in that quarter, so no refund is claimed. The input credit is thus carried over to the July-September quarter, when exports of Rs.50 lakh and domestic clearances of Rs.25 lakh are made. The exporter should be permitted a refund of Rs.66 lakh (as his export turnover is 66% of the total turnover in the quarter) from the Cenvat credit of Rs.1 crore availed in April-June quarter. This circular has not clarified whether the balance Rs. 33 lakhs of Cenvat Credit can be accumulated with the Cenvat credit taken during July-September and claimed as refund against exports made during October-December quarter. But problem in co-relation of input and output in respect of common input service directly or indirectly used for providing an output service which is partially exported and partially rendered indigenously is not clarified in the said circular. The clarity on this issue assumes paramount importance where the output service provider taking cenvat credit on input services like renting of premises, right to use software, maintenance and repair of equipment, telecommunication facilities, transportation and food to employees etc where the input service is of a general nature, does not get exhausted after rendering of an output service and cannot be co-related to a specific consignment of output service either exported or rendered indigenously.