2025 (3) TMI 1505 - AT - Service Tax

Refund of service tax paid - input services - non-production of Form A-1 and Form A-2 - non-fulfilment of conditions prescribed in the notifications issued by the department under the Customs/Central Excise/Finance Acts - eligibility from exemption from payment of service tax in respect of disputed services provided to developers / units of Special Economic Zones (SEZ) under the provisions of Finance Act 1994; Special Economic Zones (SEZ) Act 2005 and the rules made thereunder read with exemption notifications along with various conditions laid down in respective notifications issued in this regard or the appellants are liable to pay service tax on said services provided to developer or units or SEZ. HELD THAT - The legal provisions of the SEZ Act 2005 and the Customs Act 1962 it transpires that the Chapter X-A providing for special provisions relating to SEZ were omitted or removed from the Customs Act 1962 consequent to the Parliament enacting a special legislation viz. SEZ Act 2005. Moreover in order to provide more clarity and purpose of such separate legislation for SEZ a specific Section 51 of the said Act of 2005 has provided a non obstante clause stating that the provisions of SEZ Act 2005 shall have the overriding effect notwithstanding anything inconsistent therewith if any contained in any other law for the time being in force. Thus if an exemption is provided under Section 26 of the SEZ Act 2005 then the same cannot be taken away by prescribing certain conditions elsewhere in any other law or notification issued thereunder which is contrary to the legal provisions made therein. The dispute in respect of similar issue relating to exemption from payment of service tax in respect of services provided to SEZ have been dealt with in the case of GMR Aerospace Engineering Limited 2019 (8) TMI 748 - TELANGANA AND ANDHRA PRADESH HIGH COURT by the Hon ble Andhra Pradesh High Court by holding that standalone exemptions under Section SEZ law are not subject to provisions of any other law including Finance Act 1994 and therefore such exemption cannot be denied for mere non-filing forms as these are not required under SEZ law. The Co-ordinate Bench of the Tribunal in the case of Cummins Turbo Technology 2023 (11) TMI 1077 - CESTAT NEW DELHI have held that there is no legal authority to levy and collect central excise duty customs duty or service tax for goods or services supplied for authorised operations of SEZ developers and units covered by Section 26 of the SEZ Act 2005. Without such legal authority no tax or duty can be either levied or collected in view of Article 265 of Constitution of India 1950. Therefore the Tribunal have held that there is no need for exemption notifications under Central Excise Act 1944 Customs Act 1962 and Finance Act 1994 nor is it necessary to fulfil of conditions under exemption notifications if any issued. The Tribunal in the case of Eclerx Services Ltd. 2022 (9) TMI 166 - CESTAT MUMBAI have held that SEZ unit was eligible for exemption from service tax on services received by it and in view of the overriding effect of SEZ law denial of exemption on the grounds of procedural infirmities is not sustainable. The exemption benefits by way of refund extended to taxable services provided to SEZ under Section 26 of the Special Economic Zones Act 2005 cannot be denied on the ground that certain procedures have not been followed or certain conditions prescribed in the notification have not been fulfilled. The impugned order is liable to be set aside to the extent it had rejected the refund of service tax claimed by the appellants on account of the services having been rendered to SEZ which was initially paid and subsequently claimed as refund under the notifications issued by the Ministry of Finance under the Finance Act 1994 - Appeal allowed.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

1. Whether the appellants, being service providers to Special Economic Zone (SEZ) units and developers, are entitled to exemption from payment of service tax under Section 26 of the SEZ Act, 2005, read with the SEZ Rules, 2006, despite procedural non-compliances and conditions prescribed in notifications issued under the Finance Act, 1994.

2. Whether the service tax paid on input services used in authorized operations within SEZs, which was claimed as refund under Notification Nos. 17/2011-ST and 40/2012-ST, can be denied on grounds such as:

• Input invoices not issued in the name of the SEZ unit or developer;
• Refund claims declined on the basis of Section 66 of the Finance Act, 1994, whereas claims were made under Section 66A;
• Input services not approved by the SEZ Approval Committee;
• Services not actually performed within the SEZ as per Rule 4 of the Place of Provision of Services Rules (POPS Rules);
• Non-production of prescribed forms (Form A-1 and A-2) or non-fulfillment of conditions under exemption notifications.

3. The interplay between the SEZ Act, 2005, which contains a non obstante clause in Section 51, and other enactments including the Finance Act, 1994, particularly whether the SEZ Act's provisions override inconsistent provisions or conditions in other laws or notifications.

4. The legal effect of procedural deficiencies or non-compliance with conditions prescribed in exemption notifications on the entitlement to exemption under the SEZ Act.

5. The applicability and relevance of exemption notifications issued under Section 93 of the Finance Act, 1994, in the context of service tax exemption claims by SEZ developers and units.

Issue-wise Detailed Analysis

Issue 1: Entitlement to Service Tax Exemption under SEZ Act, 2005 and SEZ Rules, 2006

Legal Framework and Precedents: Section 26 of the SEZ Act, 2005 grants exemptions, drawbacks, and concessions to SEZ developers and entrepreneurs, including exemption from service tax under Chapter V of the Finance Act, 1994, on taxable services provided to SEZ developers or units for authorized operations. Section 51 of the SEZ Act provides that its provisions shall have overriding effect notwithstanding anything inconsistent in any other law.

The SEZ Rules, 2006, particularly Rule 31, prescribe that exemption from service tax on taxable services rendered to SEZ developers or units shall be available for authorized operations. Rule 10 clarifies that contractors and sub-contractors appointed by developers or co-developers are entitled to exemptions, provided documentation bears the name of the developer or co-developer.

Judicial precedents, notably the Andhra Pradesh High Court decision in GMR Aerospace Engineering Ltd. v. Union of India, upheld by the Supreme Court, have held that the SEZ Act's exemption provisions are self-contained and override inconsistent provisions or conditions in other laws or notifications. The Supreme Court has dismissed Special Leave Petitions challenging this interpretation, affirming the overriding effect of the SEZ Act.

Court's Interpretation and Reasoning: The Court emphasized that the entitlement to exemption under Section 26(1) of the SEZ Act is subject only to the terms and conditions prescribed under Section 26(2), which authorizes the Central Government to prescribe such conditions through rules under the SEZ Act. The term "prescribed" is defined within the SEZ Act to mean rules made under the SEZ Act itself, not conditions imposed under other statutes or notifications.

The Court rejected the Revenue's contention that conditions and procedural requirements under exemption notifications issued under Section 93 of the Finance Act, 1994, are applicable to SEZ units. It held that the Finance Act's notifications are general in nature and cannot override the specific and later-enacted SEZ Act provisions.

Application of Law to Facts: The appellants had complied with the prescriptions contained in the SEZ Rules, 2006, and were engaged in providing taxable services to SEZ units. The Court found no merit in denying exemption on grounds of procedural non-compliance with conditions in notifications under the Finance Act, 1994, since such conditions are irrelevant and overridden by the SEZ Act.

Treatment of Competing Arguments: The Revenue argued for strict compliance with conditions in exemption notifications, relying on Supreme Court decisions emphasizing strict interpretation of tax exemptions and the necessity of approval and documentation in the name of SEZ units. The Court distinguished these precedents, noting that the SEZ Act's overriding clause and special provisions create a distinct legal regime for SEZs, which cannot be subjected to general conditions applicable to other taxpayers.

Conclusion: The appellants are entitled to exemption from service tax on taxable services provided to SEZ developers and units under Section 26 of the SEZ Act, 2005, read with SEZ Rules, 2006, irrespective of procedural deficiencies or non-compliance with conditions in notifications issued under the Finance Act, 1994.

Issue 2: Validity of Denial of Refund Claims on Specific Grounds

Legal Framework and Precedents: The appellants' refund claims were partly rejected on grounds including:

• Input invoices not issued in the name of SEZ address;
• Refund claims under Section 66A of the Finance Act, 1994, whereas notifications allow refund only under Section 66;
• Input services not approved by the SEZ Approval Committee;
• Services not actually performed within SEZ as per Rule 4 of POPS Rules;
• Non-production of prescribed forms A-1 and A-2.

Relevant judicial authorities, including the Tribunal and High Courts, have held that procedural or technical deficiencies such as non-issuance of invoices in the exact name of SEZ units, or non-filing of prescribed forms, do not defeat the substantive right to exemption under the SEZ Act. The Supreme Court has upheld these views, emphasizing the overriding effect of the SEZ Act and the principle that tax exemptions should not be denied on mere procedural grounds when the substantive conditions are met.

Court's Interpretation and Reasoning: The Court noted that the original authority and Commissioner (Appeals) rejected refund claims on technical grounds, including invoice naming and approval committee sanction. However, the Court found that such conditions are not mandated by the SEZ Act or Rules, which are the governing legal instruments for exemption. The Court observed that the SEZ Act's provisions are self-contained and that the procedural requirements under other laws or notifications are not applicable to SEZ units.

Regarding refund claims under Section 66A, the Court noted that the appellants claimed refund of service tax paid under Section 66A, but the notifications provided refund only under Section 66. The Court relied on the principle that the SEZ Act overrides such provisions and that the appellants are entitled to exemption irrespective of the charging section under the Finance Act.

Application of Law to Facts: The appellants had paid service tax on input services used for authorized operations within SEZs and filed refund claims. The Court held that denial of refund on grounds such as invoice naming, lack of approval, or location of service performance within SEZ is unsustainable, as these are procedural or technical issues not prescribed under the SEZ Act or Rules for exemption.

Treatment of Competing Arguments: The Revenue relied on strict compliance with exemption notifications and procedural requirements, citing Supreme Court rulings that exemptions must be strictly construed. The Court distinguished those cases by emphasizing the special legislative regime under the SEZ Act and its overriding effect, which precludes applying general procedural conditions to SEZ exemptions.

Conclusion: The denial of refund claims on grounds of invoice naming, approval committee sanction, service location, or non-production of prescribed forms is not sustainable. The appellants are entitled to refund of service tax paid on input services used for authorized operations in SEZs.

Issue 3: Applicability of Exemption Notifications under Section 93 of Finance Act, 1994

Legal Framework and Precedents: Notifications under Section 93 of the Finance Act, 1994, grant general exemptions from service tax subject to conditions. However, the SEZ Act, 2005, enacted later, contains an overriding clause (Section 51) and provides specific exemptions under Section 26(1)(e) for taxable services provided to SEZ developers or units.

The Andhra Pradesh High Court in GMR Aerospace Engineering Ltd. held that the SEZ Act's exemptions are not subject to conditions prescribed in notifications under the Finance Act. The Supreme Court dismissed the Special Leave Petition challenging this view, affirming the primacy of the SEZ Act exemptions.

Court's Interpretation and Reasoning: The Court held that the SEZ Act's exemption provisions constitute a special power of exemption for SEZ units, distinct from the general power under Section 93 of the Finance Act. The term "prescribed" in Section 26(2) of the SEZ Act refers exclusively to rules framed under the SEZ Act, not to notifications under other laws.

Therefore, the conditions and procedural requirements in notifications issued under the Finance Act cannot limit or override the exemption granted by the SEZ Act.

Application of Law to Facts: The appellants' claims based on the SEZ Act's exemption cannot be denied or limited by conditions in Finance Act notifications. The Court found that the appellants complied with the SEZ Act and Rules, and the Finance Act notifications' conditions are irrelevant.

Treatment of Competing Arguments: The Revenue contended that exemption notifications under the Finance Act govern the entitlement to exemption. The Court rejected this, emphasizing the later enactment and overriding effect of the SEZ Act.

Conclusion: Exemption notifications under the Finance Act, 1994, are not applicable to SEZ units' service tax exemption claims under Section 26 of the SEZ Act, 2005.

Issue 4: Effect of Procedural Deficiencies on Entitlement to Exemption

Legal Framework and Precedents: The principle that tax exemptions should not be denied on procedural or technical grounds when substantive eligibility exists is well established. The SEZ Act's overriding clause and the Tribunal's decisions, including Eclerx Services Ltd., support this principle.

Court's Interpretation and Reasoning: The Court held that procedural deficiencies such as non-filing of forms, non-issuance of invoices in SEZ name, or lack of approval from committees do not defeat the substantive right to exemption under the SEZ Act. The Court observed that the SEZ Act and Rules provide the exclusive framework for exemption, and procedural non-compliance under other laws or notifications cannot be used to deny exemption.

Application of Law to Facts: The appellants' procedural lapses do not negate their entitlement to exemption. The Court found that the appellants had used the services for authorized operations within SEZs, fulfilling the substantive condition for exemption.

Treatment of Competing Arguments: The Revenue's strict approach was rejected in light of the overriding nature of the SEZ Act and the principle of substantive compliance.

Conclusion: Procedural deficiencies do not justify denial of exemption under the SEZ Act.

Issue 5: Legal Authority to Levy Service Tax on Services Provided to SEZ Units

Legal Framework and Precedents: Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by authority of law. The SEZ Act, 2005, by virtue of Section 26 and Section 51, exempts services provided to SEZ developers and units from service tax, overriding charging provisions in the Finance Act, 1994.

The Tribunal in Cummins Turbo Technology held that no legal authority exists to levy service tax on goods or services supplied for authorized operations of SEZ developers and units due to the overriding provisions of the SEZ Act.

Court's Interpretation and Reasoning: The Court reiterated that since the SEZ Act overrides the charging provisions of the Finance Act, there is no legal authority to levy or collect service tax on services provided for authorized operations within SEZs. Consequently, exemption notifications under the Finance Act are redundant, and conditions therein irrelevant.

Application of Law to Facts: The appellants' services fall within the scope of authorized operations in SEZs, and thus no service tax is leviable on such services by virtue of the SEZ Act's overriding provisions.

Treatment of Competing Arguments: The Revenue's reliance on exemption notifications and procedural conditions was dismissed as irrelevant in the face of the SEZ Act's overriding effect and constitutional mandate requiring legal authority for tax levy.

Conclusion: There is no legal authority to levy service tax on services provided to SEZ developers or units for authorized operations; hence, the appellants are exempt.

Significant Holdings

"Section 26(1) of the SEZ Act, 2005, read with Rule 31 of the SEZ Rules, 2006, grants exemption from service tax on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone, and such exemption has overriding effect over any inconsistent provisions in other laws, including the Finance Act, 1994."

"The provisions of the SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act." (Section 51 of SEZ Act, 2005)

"Procedural or technical deficiencies such as non-issuance of invoices in the name of the SEZ unit, non-approval by the SEZ Approval Committee, or non-filing of prescribed forms under notifications issued under the Finance Act, 1994, cannot be used to deny exemption under the SEZ Act."

"The exemption notifications issued under the Finance Act, 1994, are redundant in respect of services provided to SEZ developers and units, as the SEZ Act itself exempts such services from service tax."

"No legal authority exists to levy or collect service tax on services supplied for authorised operations of SEZ developers and units by virtue of the overriding provisions of the SEZ Act and Article 265 of the Constitution of India."

"The appellants' refund claims for service tax paid on input services used for authorised operations within SEZs cannot be denied on grounds of procedural non-compliance or conditions prescribed in exemption notifications issued under the Finance Act, 1994."

"The Tribunal and the Hon'ble High Courts have consistently held that the SEZ Act and Rules constitute a self-contained code for exemption in respect of SEZ developers and units, and general exemption notifications under the Finance Act cannot restrict or override such exemption."

"The Special Leave Petition filed by the department challenging the High Court's decision affirming the overriding effect of the SEZ Act was dismissed by the Supreme Court, confirming the legal position."

Accordingly, the impugned order rejecting the appellants' refund claims to the extent of denial on the above grounds is set aside, and the appeals are allowed with consequential relief as per law.