2019 (8) TMI 748 - HC - Service Tax

Exemption to SEZ unit - authorised operations in a SEZ - Validity of conditions imposed - Board of approval refused to issue of Forms A1 and A2 on the ground that these forms cannot be issued with retrospective effect. - Assessee contended that Neither the SEZ Act nor the Rules framed thereunder make the exemption available under the Act subject to fulfilment of conditions stipulated in any other enactment including the Finance Act 1994. - section 26(1)(e) of the Special Economic Zones Act 2005 - availability of effective alternative remedy - maintainability of petition - HELD THAT - Since the refusal of a writ court to entertain a writ petition under article 226 of the Constitution of India is not out of a bar of jurisdiction but on account of a self-imposed restriction there is no impediment for this court to entertain a writ petition in cases (1) where the principles of natural justice are violated ; (2) where the impugned action is without jurisdiction ; and (3) where the impugned action is without the authority of law - If the petitioners succeed on this ground we need not drive them to the alternative remedy available under the statute. If they fail on this ground they can always be directed to avail the alternative remedy. Whether the availability of exemptions under section 26 of the SEZ Act would depend not only upon the terms and conditions prescribed under section 26(2) but also upon the terms and conditions prescribed in the notifications issued under various enactments such as Customs Act 1962 Customs Tariff Act 1975 Central Excise Act 1944 Central Excise Tariff Act 1985 Finance Act 1994 and Central Sales Tax Act 1956 etc.? - HELD THAT - The terms and conditions subject to which the exemptions are to be granted under sub-section (1) of section 26 should be prescribed by the Rules made by the Central Government under the SEZ Act 2005. Being conscious of this fact the executive has incorporated rule 22 in the SEZ Rules 2006 issued in exercise of the power conferred by section 55 of the SEZ Act. It is not necessary to extract rule 22 since there is no dispute about the fact (1) that the petitioners have complied with the prescriptions contained in rule 22 of the SEZ Rules 2006 and (2) that rule 22 of the SEZ Rules 2006 does not stipulate the filing of Forms A1 and A2 as prescribed in the three notifications issued under section 93 of the Finance Act 1994 - the fifth respondent does not dispute the fact that the petitioners have fulfilled the terms and conditions stipulated in rule 22 of the SEZ Rules 2006 and that if those Rules are considered on a stand alone basis the petitioners would be entitled to the exemptions. Sub-rule (5) was inserted under rule 47. Sub-rule (5) of rule 47 makes a reference to the provisions of the three enactments namely Customs Act 1962 Central Excise Act 1944 and Finance Act 1994 and the Rules made there- under and the notifications issued thereunder. It is by virtue of this sub- rule (5) that the authorities can fall back upon the Rules and notifications issued under those three enactments. The very fact that sub-rule (5) was inserted would show that but for its insertion the respondents cannot fall back upon the Rules framed under the Customs Act etc. for dealing with a question of refund demand adjudication etc. - If sub-rule (5) of rule 47 had also included the procedure for grant of exemption within its purview then the stand taken by the Department would be perfectly valid. The very fact that sub-rule (5) of rule 47 made the Rules and notifications issued under certain Acts applicable only to issues of refund demand etc. would show that rules 22 and 31 have independent legs to stand. Petition allowed.

Summary

The core legal questions considered in this judgment include:

1. Whether the exemptions from service tax under section 26(1)(e) of the Special Economic Zones Act, 2005 (SEZ Act) are subject only to the terms and conditions prescribed under subsection (2) of section 26 and the SEZ Rules, 2006, or also to the procedural conditions stipulated in notifications issued under section 93 of the Finance Act, 1994.

2. Whether the SEZ Act and the Rules framed thereunder constitute a self-contained code governing exemptions for developers and entrepreneurs in SEZs, or whether the Finance Act notifications operate concurrently and impose additional conditions for exemption.

3. Whether the non-filing of Forms A1 and A2, as required by the Finance Act notifications, disentitles the petitioners to the exemption from service tax on services rendered within the SEZ.

4. Whether the writ petition is maintainable in view of the availability of an alternative remedy of appeal against the order-in-original passed by the Commissioner of Central Tax.

5. The scope and effect of section 51 of the SEZ Act, which provides that the provisions of the SEZ Act shall have overriding effect over any other inconsistent law.

Issue-wise detailed analysis:

1. Availability and Scope of Exemptions under the SEZ Act versus Finance Act Notifications

The legal framework involves section 26 of the SEZ Act, 2005, which grants exemptions, drawbacks, and concessions to developers and entrepreneurs in SEZs, including exemption from service tax under Chapter V of the Finance Act, 1994 on taxable services provided to a developer or unit to carry on authorized operations. Subsection (2) of section 26 empowers the Central Government to prescribe the manner and terms and conditions subject to which these exemptions are granted, which, by definition under section 2(w) of the SEZ Act, means rules made under the SEZ Act.

The petitioners complied with rule 22 of the SEZ Rules, 2006, which prescribes terms and conditions for availing exemptions, and this rule does not require filing of Forms A1 and A2 mandated by the Finance Act notifications dated March 1, 2011, June 20, 2012, and July 1, 2013.

The respondents contended that the SEZ Act and Rules do not constitute a self-contained code and that the procedural conditions in the Finance Act notifications are sine qua non for exemption. The petitioners argued that the SEZ Act, being a later parliamentary enactment with an overriding effect under section 51, excludes the applicability of conflicting conditions in other laws, including the Finance Act notifications.

The Court examined the scheme of the SEZ Act, noting that section 7 exempts taxes on goods and services exported out of or imported into or procured from the Domestic Tariff Area (DTA) by SEZ units, but the Finance Act is not listed in the First Schedule to section 7, so section 7 does not apply here. Section 26, however, specifically grants exemptions from duties under various enactments, including the Finance Act, 1994, subject only to subsection (2) of section 26.

The Court emphasized that "prescribe" in subsection (2) of section 26 means rules made under the SEZ Act, not conditions in notifications under other enactments. Since the petitioners fulfilled the conditions under rule 22 of the SEZ Rules, they are entitled to exemption without needing to comply with the Finance Act notifications' procedural requirements.

Further, section 51 of the SEZ Act declares that the provisions of the SEZ Act will have overriding effect notwithstanding anything inconsistent in any other law. The Court rejected the respondent's contention that there was no inconsistency between the SEZ Act and the Finance Act notifications, holding that the Finance Act notifications cannot impose additional conditions beyond those prescribed under the SEZ Act and Rules.

The Court also distinguished the procedural aspects of refund, demand, adjudication, review, and appeal, which are governed by sub-rule (5) of rule 47 of the SEZ Rules, 2006, allowing reliance on the Customs Act, Central Excise Act, and Finance Act for these matters. However, this does not extend to conditions for grant of exemption, which are fully occupied by the SEZ Act and Rules.

Thus, the Court concluded that the availability of exemptions under section 26(1) of the SEZ Act is subject only to the terms and conditions prescribed by the SEZ Rules, and not to the procedural conditions in the Finance Act notifications.

2. Whether the SEZ Act and Rules Constitute a Self-Contained Code

The respondents argued that the SEZ Act and Rules do not constitute a complete code, relying on Supreme Court precedents that examined when a statute is a self-contained code.

The Court analyzed the parameters from the Supreme Court decision in Girnar Traders v. State of Maharashtra, which held that a statute is a self-contained code if it comprehensively deals with the purpose sought to be achieved and its dependence on other legislation is minimal or absent.

The Court found that section 26 of the SEZ Act clearly identifies the persons entitled to exemption, the duties exempted, the circumstances for exemption, and empowers the Central Government to prescribe terms and conditions by Rules. The SEZ Rules, 2006, fulfill this function, prescribing the conditions for exemption.

The Court held that the SEZ Act and Rules satisfy the test of a self-contained code regarding exemptions, and the Finance Act notifications cannot impose additional conditions.

3. Effect of Non-Filing of Forms A1 and A2

The Finance Act notifications require filing of Forms A1 and A2 for claiming exemption from service tax. The petitioners did not file these forms, contending that they were not required under the SEZ Act and Rules.

The Commissioner of Central Tax issued a show-cause notice and confirmed service tax demand and penalties, holding that failure to file Forms A1 and A2 disentitled the petitioners to exemption.

The Court rejected this reasoning, holding that since the SEZ Act and Rules prescribe the conditions for exemption, and the petitioners complied with those, the procedural requirements under the Finance Act notifications do not apply. Therefore, non-filing of Forms A1 and A2 cannot be a ground to deny exemption.

4. Maintainability of the Writ Petition in View of Alternative Remedy

The respondents contended that the petitioners have an effective alternative remedy of appeal against the order-in-original and hence the writ petition should not be entertained.

The Court reiterated settled law that the refusal to entertain a writ petition on account of alternative remedy is a self-imposed restriction and that writ jurisdiction can be exercised where natural justice is violated, the action is without jurisdiction, or without authority of law.

The petitioners challenged the jurisdiction and authority of the Commissioner to apply the Finance Act notifications to deny exemption. The Court held that if the petitioners succeed on this ground, there is no need to direct them to the alternative remedy. If they fail, they can be directed to avail the alternative remedy.

5. Interpretation and Effect of Section 51 of the SEZ Act

Section 51 of the SEZ Act provides that the provisions of the Act shall have overriding effect notwithstanding anything inconsistent in any other law.

The Court held that this provision supports the petitioners' contention that the SEZ Act and Rules override conflicting provisions or conditions in other enactments, including the Finance Act notifications.

The Court rejected the respondent's argument that there was no inconsistency, emphasizing that the Finance Act notifications impose additional procedural conditions not found in the SEZ Act or Rules, thus conflicting with the exclusive prescription under the SEZ Act.

Significant holdings:

"The availability of exemptions under section 26 of the SEZ Act would depend not only upon the terms and conditions prescribed under section 26(2), but also upon the terms and conditions prescribed in the notifications issued under various enactments such as Customs Act, 1962, Customs Tariff Act, 1975, Central Excise Act, 1944, Central Excise Tariff Act, 1985, Finance Act, 1994 and Central Sales Tax Act, 1956, etc., enlisted in clauses (a) to (g) of sub-section (1) of section 26 of the Act" - rejected by the Court.

"The word 'prescribed' appearing in sub-section (2) of section 26 has to be understood with reference to the definition of the word 'prescribed' appearing in section 2(w) of the SEZ Act, 2005, which means prescribed by rules made by the Central Government under this Act."

"The fifth respondent cannot read section 26(1) to mean that the exemptions listed therein are subject not only to sub-section (2) of section 26 but also to the terms and conditions prescribed in the notifications issued under other enactments."

"The SEZ Act, 2005 and the Rules framed thereunder constitute a self-contained code for the grant of exemptions to developers and entrepreneurs in SEZs."

"Section 51 of the SEZ Act, 2005 declares that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."

"The benefit of exemptions granted under notifications issued under section 93 of the Finance Act, 1994 are available to any person and not necessarily confined to a unit in a SEZ. But section 26(1) of the SEZ Act is a special power of exemption under a special enactment dealing with a unit in a SEZ. Therefore, the notifications issued under section 93 of the Finance Act, 1994 cannot be pressed into service for finding out whether a unit in a SEZ qualifies for exemption or not."

"Sub-rule (5) of rule 47 of the SEZ Rules, 2006, which makes provisions of Customs Act, Central Excise Act, and Finance Act applicable only to matters relating to refund, demand, adjudication, review, and appeal, does not extend to conditions for grant of exemption."

Final determinations:

The Court allowed the writ petition, set aside the order-in-original dated February 20, 2018 confirming service tax demand and penalty, and quashed the notifications issued under the Finance Act, 1994, insofar as they relate to special economic zones. The Court held that the petitioners, having complied with the SEZ Act and Rules, are entitled to exemption from service tax without fulfilling the procedural conditions in the Finance Act notifications. The Court also held that the SEZ Act and Rules constitute a self-contained code for exemption and that the Finance Act notifications cannot impose additional conditions inconsistent with the SEZ Act.