Service Tax Refund For SEZ Can't Be Denied If Services Were Used For Authorised Operations: CESTAT Chennai

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a Special Economic Zone (SEZ) unit cannot be denied a refund of service tax merely because the services were not consumed within the geographical limits of the SEZ, so long as they were used for authorised operations.

A single-member tribunal of Technical Member Rajeev Tandon allowed an appeal filed by ATC Tires Private Limited.

"It is clear from a bare reading of Section 26(1)(e) that the exemption is available, for the conduct of an authorized operation in a Special Economic Zone. Clause (2) of the Notification ibid. states that the exemption shall be provided by way of refund of Service Tax paid on the specified services received by the SEZ unit or developer and used for the authorized operations. It is clear from the above Section as well as Notification that there is no specific warrant that the services are required to be only consumed in a SEZ to avail the benefit of Notification No. 17/2011 – ST dated 01.03.2011 ibid. As long as the said service is consumed in an “authorised operation”, there can be no dispute on its admissibility to credit.", the tribunal ruled.

ATC Tires, an SEZ unit engaged in manufacturing tyres, had sought a refund of service tax paid on input services used for its authorised operations under a 2011 notification. The adjudicating authority sanctioned a substantial portion of the claim but rejected about ₹22.49 lakh.

On appeal, the Commissioner (Appeals) granted further relief but upheld the rejection of about ₹14.69 lakh. Of this, around ₹13.37 lakh was disallowed on the ground that services such as payroll processing, insurance, legal consultancy, recruitment, statutory compliance, software development, and inspection services were not wholly consumed within the SEZ and were not connected with manufacturing activity.

The company argued that the disputed services had been approved by the Unit Approval Committee for authorised operations and were used for the functioning of its SEZ unit. It contended that neither the SEZ Act nor Notification No. 17/2011-ST required services to be consumed only within the SEZ and that the authorities had read into the notification a condition that did not exist.

The Revenue defended the Commissioner's order, maintaining that the refund was unavailable because the services had not been wholly consumed within the SEZ.

The tribunal rejected that contention. It held that the Commissioner (Appeals) had conflated the concept of services being "wholly consumed" within the SEZ with the option available under the notification to obtain an upfront exemption from service tax. The tribunal observed that the refund mechanism under the notification remained available where specified services were used for authorised operations.

It also noted that the notification itself contemplates situations where services are shared between SEZ and Domestic Tariff Area operations by prescribing a formula for proportionate refunds. According to the tribunal, this itself shows that consumption within the SEZ is not an absolute precondition for claiming the benefit.

“The impugned notification does not provide that the said service should be consumed in the SEZ alone and as long the specified service on which exemption and/or refund is claimed, and shown to have been actually used for authorised operations, the notification would not cease to be applicable and the SEZ Unit cannot be deprived of its benefit.”, the tribunal opined.

The tribunal found that the Commissioner (Appeals) had not recorded any finding that the disputed services were unrelated to the company's authorised operations. It also observed that services such as legal consultancy, insurance, recruitment, payroll processing and statutory compliance would not necessarily be rendered within the geographical boundaries of an SEZ, even though they were intrinsically connected with its authorised operations.

The tribunal further noted that the revenue had not contended that the services in dispute were not used for authorised operations. It held that, for the benefit of the notification to be denied, the authorities had to establish that the services were not used for authorised operations, which they had failed to do.

The tribunal referred to its earlier decision in the company's own case, as well as the decisions in GMR Aerospace Engineering and Jindal Stainless. It observed that the substantive exemption available to SEZ units for authorised operations cannot be curtailed by importing conditions that do not exist in the notification or the SEZ law.

It also noted that the requirement of services being consumed within the SEZ had existed under earlier notifications but was omitted from Notification No. 17/2011-ST, indicating a conscious change in the legal position.

The tribunal held that the company had established that the disputed services were used for authorised operations. Noting that the lower appellate authority had recorded no finding to the contrary, it set aside the rejection of the refund claim relating to about ₹13.37 lakh and allowed the appeal to that extent.

For Appellant: Advocate Raghav Rajeev, 

For Respondent: Ms. G. Krupa, Authorized Representative