2025 (5) TMI 2097 - AT - Service Tax

Refund of service tax paid on the specified services used in relation to the authorized operations in the SEZ - main plank of the appellants reply is that as per decison in M/s. ATC Tires Private Limited 2023 (8) TMI 659 - CESTAT CHENNAI which is the appellants own case it was held that exemption from payment of Service Tax granted by the SEZ Act cannot be denied on the ground that a procedural requirement under Service Tax Exemption Notifications was not fulfilled - HELD THAT - The complexity involved in implementation of the SEZ Act requires a diligent adherence to the provisions and procedures of the said Act and Rules so that there is no leakage of revenue. The burden of proving applicability of an exemption notification and that his case comes within the parameters of the exemption clause or exemption notification is on the assessee. Considering the detailed verification to be done for a large number of objections raised by revenue with the records and explanation now being provided in the appeal it is deemed fit to set aside the impugned order and remand the matter to the Original Authority to re-examine the issue afresh in the interest of justice. The judgments above have laid out the principles that have to be adhered to. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

• Whether the appellant, a unit in a Special Economic Zone (SEZ), is entitled to refund of service tax paid on specified services used in relation to authorized operations in the SEZ under Notification No. 40/2012-ST and No. 12/2013-ST.
• Whether procedural irregularities such as misdeclaration of services, incomplete documentation, wrong description of taxable services, and alleged non-submission of documents justify partial rejection of the refund claim.
• The scope and applicability of exemptions provided under Section 26 of the SEZ Act, 2005, particularly whether exemptions can be denied on grounds of procedural non-compliance under service tax exemption notifications.
• The interpretation of the territorial jurisdiction and the "deemed outside customs territory" status of SEZ under Sections 26, 51, and 53 of the SEZ Act and its impact on tax exemption claims.
• The applicability of the doctrine of substantial compliance in cases of procedural lapses in claiming tax exemptions under the SEZ Act and allied laws.
• The extent to which procedural requirements under exemption notifications can be relaxed or must be strictly adhered to, especially in light of judicial precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Refund of Service Tax under SEZ Exemption Notifications

Relevant Legal Framework and Precedents: The appellant filed refund claims under Notification No. 40/2012-ST and No. 12/2013-ST for service tax paid on specified services used in authorized operations within the SEZ. Section 26 of the SEZ Act, 2005, provides exemption from service tax on taxable services provided to developers or units to carry on authorized operations in the SEZ. The Tribunal referred to the Hon'ble Telangana High Court's decision which analyzed Section 26 in detail, emphasizing that exemptions are available only to specified persons (developers and entrepreneurs), on specified duties, and under specified circumstances.

Court's Interpretation and Reasoning: The Tribunal highlighted that the SEZ Act grants exemptions only within the parameters of authorized operations and to eligible entities. It is not a blanket exemption for all activities within the SEZ. The appellant must demonstrate compliance with the conditions of the exemption. The Tribunal also noted that the SEZ is deemed to be outside the customs territory of India only for authorized operations, per Sections 26 and 53 of the SEZ Act.

Key Evidence and Findings: The appellant claimed refund for service tax paid on various services, including management consultancy, technical inspection, transport, banking charges, legal consultancy, and others. The revenue raised multiple objections citing misdeclaration, wrong service descriptions, and non-submission of documents.

Application of Law to Facts: The Tribunal observed that the appellant's refund claim was partially rejected due to procedural and documentary deficiencies. However, the appellant cited a recent Final Order in its own case which held that exemption under the SEZ Act cannot be denied solely on procedural grounds under service tax exemption notifications.

Treatment of Competing Arguments: The appellant argued for refund eligibility based on the nature of services being specified and used for authorized operations. The revenue emphasized the widespread non-compliance with rules and procedures as grounds for rejection. The Tribunal balanced these views by acknowledging the need for procedural compliance but also recognizing the principle of substantial compliance.

Conclusion: The Tribunal held that while the exemption under the SEZ Act is substantive, procedural compliance is necessary to prevent misuse and leakage of revenue. The appellant must prove entitlement and comply with procedural requirements unless substantial compliance is demonstrated.

Issue 2: Procedural Non-Compliance and the Doctrine of Substantial Compliance

Relevant Legal Framework and Precedents: The doctrine of substantial compliance was examined in the Constitutional Bench decision in Commissioner Vs Hari Chand Shri Gopal, which clarified that substantial compliance applies where minor procedural lapses do not affect the essence or substance of statutory requirements. The Tribunal also referred to the Supreme Court's ruling in Commissioner of Customs (Import) Vs M/s Dilip Kumar and Company emphasizing the burden of proof on the assessee to show applicability of exemption notifications.

Court's Interpretation and Reasoning: The Tribunal recognized that procedural violations should not be a carte blanche for tax evasion. However, it also acknowledged that procedural lapses that do not affect the core requirements or the purpose of the exemption may be excused under the doctrine of substantial compliance. The Tribunal stressed that such leniency should be the exception, not the rule, to prevent laxity in compliance.

Key Evidence and Findings: The appellant's refund claim was partially rejected on grounds including misdeclaration, incomplete addresses, wrong service descriptions, and alleged non-submission of documents. The appellant countered by producing documents and explaining the nature of services.

Application of Law to Facts: The Tribunal found that the appellant had made efforts to comply and that some procedural objections could be considered minor or directory rather than mandatory. However, given the number of issues raised by the revenue, a detailed re-examination was warranted.

Treatment of Competing Arguments: The appellant urged the Tribunal to apply the principle of substantial compliance and set aside the rejection. The revenue insisted on strict adherence to procedural requirements to safeguard revenue and prevent misuse of exemptions.

Conclusion: The Tribunal concluded that procedural non-compliance must be examined carefully, distinguishing between substantive and procedural requirements. Substantial compliance may be accepted where appropriate, but strict compliance is necessary for essential statutory mandates.

Issue 3: Interpretation of Territorial Jurisdiction and Application of SEZ Act Provisions

Relevant Legal Framework and Precedents: Sections 26, 51, and 53 of the SEZ Act were analyzed. Section 53 deems the SEZ to be outside customs territory for authorized operations, but within customs territory for unauthorized operations. Section 51 provides the SEZ Act's overriding effect over inconsistent laws. The Tribunal relied on its own earlier decision in M/s RPP Infra Projects Ltd., which emphasized strict interpretation of the SEZ Act to prevent misuse and leakage of revenue.

Court's Interpretation and Reasoning: The Tribunal explained that the SEZ Act's exemption applies only to authorized operations within the SEZ. Unauthorized activities remain subject to customs and other laws. This "deeming fiction" creates complexity, necessitating strict adherence to conditions and territorial limits of exemptions.

Key Evidence and Findings: The appellant's refund claim pertained to services used for authorized operations within the SEZ. The revenue's objections partly stemmed from concerns about services shared with Domestic Tariff Area (DTA) or improper classification.

Application of Law to Facts: The Tribunal observed that exemptions cannot be extended beyond authorized operations or persons entitled under the SEZ Act. The appellant must demonstrate that the services for which refund is claimed were used strictly for authorized operations within the SEZ.

Treatment of Competing Arguments: The appellant relied on the SEZ Act's provisions and prior favorable orders to claim exemption. The revenue highlighted the potential for misuse and the need for strict territorial and procedural compliance.

Conclusion: The Tribunal reaffirmed that the SEZ Act's exemptions are limited to authorized operations and persons, and strict compliance with territorial and procedural requirements is essential to prevent revenue loss.

Issue 4: Treatment of Specific Service Descriptions and Documentation Deficiencies

Relevant Legal Framework and Precedents: The refund claim was partially rejected on grounds such as misdeclaration of service, wrong description of taxable service (e.g., professional services, inspection charges, inward freight), and alleged non-submission of documents. The appellant contended that these services fall within specified services eligible for refund under the SEZ Act and related notifications.

Court's Interpretation and Reasoning: The Tribunal noted that the revenue's objections indicated widespread non-compliance with procedural requirements. However, the appellant produced documents and explanations asserting that the services were indeed specified and used for authorized operations. The Tribunal emphasized the need for proper documentation and accurate service classification to substantiate refund claims.

Key Evidence and Findings: The appellant submitted invoices, letters, and clarifications to counter the revenue's objections. The Tribunal found that some procedural objections, such as incomplete addresses or invoice copies, were minor and could be remedied.

Application of Law to Facts: The Tribunal held that the appellant's entitlement to refund depends on demonstrating that the services are specified under the exemption notifications and were used for authorized operations. Procedural deficiencies that do not affect the substance of the claim may be overlooked under substantial compliance.

Treatment of Competing Arguments: The appellant argued for refund eligibility based on the nature of services and documentary evidence. The revenue insisted on strict procedural compliance and rejected claims where documentation was incomplete or service descriptions were inaccurate.

Conclusion: The Tribunal directed a re-examination of these issues by the original authority, allowing the appellant an opportunity to rectify procedural deficiencies and substantiate the refund claim.

3. SIGNIFICANT HOLDINGS

"Section 26(1) of the SEZ Act indicates (1) persons who are entitled to exemptions; (2) the duties in respect which exemption is available; (3) the circumstances under which exemption is available and (4) the provisions of law subject to which the exemptions are available."

"The SEZ Act clearly indicates the persons who are entitled to the benefit of exemptions. The Act also lists out the duties from which exemption is granted. The Act enlists the operations or activities in respect of which exemption is available."

"Section 51 of SEZ Act does not negate all laws of the land within the SEZ. By virtue of section 51, SEZ Act overrides other laws only to the extent there is any inconsistency between the SEZ Act and other laws. If the other laws are not inconsistent with SEZ Act, they will continue to be operational."

"To the extent of authorised operations, SEZ will be treated as 'outside the Customs territory of India' - no more and no less."

"The doctrine of substantial compliance means actual compliance in respect to the substance essential to every reasonable objective of the statute... Substantial compliance means the statute has been followed sufficiently so as to carry out the intent of the statute and accomplish the reasonable objectives for which it was passed."

"The discretion of Government to regulate the manner in which the tax exemption is availed cannot be held to be redundant. Regulation helps ensure that the exemption achieves its intended goal. It also ensures that no injury is caused to the trade in the domestic tariff area (DTA), due to inadvertence or by wrongful acts of the beneficiaries of the exemption in the SEZ enclave and is founded upon the fundamental principle of justice and good sense."

Final determinations:

• The appellant's appeal against partial rejection of refund claims is set aside and remanded to the original authority for fresh examination.
• The original authority is directed to follow principles of natural justice, afford opportunity to the appellant to present their case, and issue a speaking order within a reasonable time frame.
• The appellant is entitled to consequential relief if found eligible upon re-examination.
• Strict compliance with procedural and substantive requirements under the SEZ Act and exemption notifications is essential, but the doctrine of substantial compliance may be applied in appropriate cases.
• The SEZ Act exemptions apply only to authorized operations and eligible persons within the SEZ, and unauthorized activities remain subject to customs and other laws.