AdminSince the provisions of the SEZ Act and the said notification No 4/ 2004-ST are inconsistent, the provisions of the SEZ Act would prevail in terms of section 51 of the SEZ Act. Accordingly, the services provided to SEZ developers or units shall be exempt from payment of service tax as long as the services are used in relation to authorized operations in SEZs. It is not necessary for the services to be consumed within the SEZ. For the purpose of exemption from payment of service tax under the SEZ Act read with the Rules and the Finance Act, the provisions must be interpreted liberally such that the object and purpose of the SEZ Act is not defeated.
Special Economic Zones (SEZs) are designated duty free enclaves which are considered as deemed foreign territories for the purpose of trade operations, duties and tariffs. Several exemption and concessions to SEZ developers and SEZ units from various taxes and duties have been granted by the Government with a view to boost exports and investments. Tax benefits promised to SEZs by the Government has never been free from ambiguities.
As regards service tax, the perception has been that SEZ developers and SEZ units enjoy complete exemption from service tax and that there are no service tax implications. However, it would be interesting to note that there are certain restrictions to this exemption and the provisions of SEZ Act and the Service Tax legislations are not in consonance with each other.
Service tax implication on services rendered by a DTA Unit to SEZ Unit/ Developer
Position under the Finance Act, 1994
Under section 93 of the Finance Act, the Government had issued Notification No. 4/2004 S.T., dated 31.3.2004 in respect of SEZs. In terms of the said Notification, taxable services provided to SEZ units or SEZ developers are fully exempt from service tax subject to certain conditions. Among other conditions, one such mandatory condition to avail service tax exemption under the said notification is that the services so provided must be consumed within the SEZ.
In view of the above notification it is construed that taxable services which are availed by the unit or the developer outside the SEZ (even though such services are related to authorized operations) are not exempt from service tax. For instance, rent-a-cab service or transport services provided to employees of SEZ to bring employees to and from place of work would not be entitled to exemption from service tax since the said service is partly provided outside the SEZ. Similarly, services provided by CHA to SEZ at customs port may be denied exemption on the ground that the service is provided outside SEZ.
Position under the SEZ Act, 2005
Under the SEZ Act, rendering of services from Domestic Tariff Area (DTA) to SEZ unit or SEZ developer is termed as export [section 2(m) (ii)]. The SEZ Act read with the SEZ Rules, 2006 provides specific provisions for exemption to SEZ developers and units from service tax. Section 26(1)(e) of the SEZ Act provides exemption to SEZ developers and units from service tax under Chapter V of the Finance Act, 1994 on taxable services provided to a developer or unit to carry out authorized operations in SEZs.
Further, rule 31 of SEZ Rules provides exemption from payment of service tax on all taxable services specified under section 65 of the Finance Act, 1994 as amended from time to time, rendered to a developer or unit by any service provider for the authorized operations in SEZs.
The conjoint reading of the above said section and rule clearly implies that the services rendered to SEZs shall be entitled to exemption from service tax if such services are received in relation to authorized operations within the SEZ. From the above provisions, it is evident that no such condition of consumption of services within the SEZ is required to be fulfilled for the availment of exemption of service tax by the SEZ units or developers.
SEZ Act versus Notification No. 4/2004-ST
The SEZ Act has an overriding effect by virtue of section 51 which provides that the said 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.
As discussed above, nowhere in the SEZ Act or the rules there under, is it provided that the exemption from service tax would be available to SEZ developers or units, only if the taxable services are consumed within the SEZ. Since the provisions of the SEZ Act read with the rules are inconsistent with the provision of the said notification, therefore, the provisions of SEZ Act should prevail over Notification No. 4/2004-ST issued under the Finance Act.
Purposive Interpretation
The rule of purposive interpretation was introduced by Lord Denning. According to the said rule, interpretation of statute should be done having regard to the purpose of the Statute. The provisions of the SEZ Act and the Service tax legislations should be interpreted according to the rule of purposive interpretation in order to fulfil the objective of these legislations.
In the backdrop of this rule of interpretation, it could be argued that the purpose of the exemptions provided under the SEZ Act read with the Rules is to enhance export. Hence, supplies to SEZ are to be treated as export and accordingly appropriate exemption must be made available to the SEZ units/ developers. This purpose cannot be defeated by any narrow interpretation.
Support can also be drawn from the decision of the Apex Court in the case of Nathi Devi vs Radha Devi Gupta and Prakash Kumar vs State of Gujarat (5-Member Bench) wherein it was held that if there exists some ambiguity in the language or the same is capable of two interpretations, it is trite that the interpretation which serves the object and purpose of the statute must be adopted. In such a case, the doctrine of purposive construction should be adopted.
The Supreme Court has also taken the view that the wordings of exemption notification have to be construed keeping in view the object and purpose of the exemption and an exemption notification cannot be read in a narrow manner so as to defeat the object of the notification. [Messrs Oblum Electrical Industrial vs Collector of Customs Bombay, Commissioner, Trade Tax vs DSM Group of Industries]
In relation to statutes enacted specifically for growth and development, the Supreme Court has taken the view that provision in the statute granting incentives for promoting growth and development should be construed liberally, so that real object of such encouragement is not frustrated. [Vadilal Chemicals vs State of Andhra Pradesh; State of Jharkhand vs Tata Cummins Ltd.; State of Orissa vs Tata Sponge Iron; CIT vs Baby Marine Exports]
Accordingly, the term consumption used in the Notification 4/2004-ST should also be interpreted liberally. It would be interesting to note that the words used in the said Notification are for consumption of the services within such Special Economic Zone. No phrase such as entire consumption or consumption only within the SEZ or services exclusively consumed within the SEZ has been used. Therefore, it can be construed that there are no restrictive clauses used in the said notification.
In the case of CC vs Shefali Arts, it was held that where notification made exemption from duty subject to imported machine being used for purpose of export, it was held that exemption is available even if part of production was sold locally, since the words exclusively, only or entirely were not used in the notification. Quoted with approval in Indian Charge Chrome vs CC, it was held that an EOU which imported power plant can transmit the surplus power to DTA as there is no restrictive clause in notification that imported goods must be used exclusively for manufacture of goods for export.
In view of the relevant legal provisions and judicial pronouncements, it is evident that for the purposes of exemption from payment of service tax under the SEZ Act read with the Rules and the Finance Act, the provisions must be interpreted liberally such that the object and purpose of the Statute i.e. SEZ Act is not defeated. Therefore, services provided to SEZ developers or units shall be exempt from payment of service tax as long as the services are used in relation to authorized operations in SEZs. It is not necessary for the services to be consumed within the SEZ.
Practical tips for DTA service providers
As explained above, exemption from service tax is available if it is established that the services are provided to SEZ developers/ units in relation to authorized operations in SEZs. It is not a mandatory requirement that the services should be provided within the SEZ or that services should be exclusively consumed (used) in SEZs. Therefore, in order to substantiate the fact that services rendered are in relation to authorized operations, it is advisable that the DTA suppliers should either obtain a certificate from the SEZ developers/ units on above lines or should have a specific clause on the above lines incorporated in the service agreements entered into with the SEZ developer/ unit.
Further, since the authorities usually take a narrow view of any provision, it is also advisable to inform the department suitably about rendering of services to SEZ developers/ units in relation to authorized operation in SEZs in advance, to avoid charge of suppression of facts etc.
Service tax implication on services rendered by a SEZ Unit to DTA Units
Taxable services rendered by SEZ unit to any unit in DTA are subject to service tax. The Ministry of Finance vide Circular No.105/08/2008-ST dated 16.9.2008 has confirmed this position. Service tax is applicable where SEZ units provide taxable services to units/ persons outside the SEZ.
It would be interesting to note that rendering of services from SEZ to DTA does not qualify as import in terms of section 2(o) of the SEZ Act. Therefore, service recipient i.e. the DTA unit would not be liable to deposit service tax under the Finance Act under the reverse charge method. Hence the liability of payment of service tax would be on the service provider, i.e., the SEZ Unit. Accordingly, in the said Circular it has also been clarified that the SEZ units providing technical services to any persons for consumption in DTA (or providing any taxable services which is otherwise not exempt) or is otherwise liable to pay service tax should take registration with the jurisdictional service tax authorities and discharge service tax liability in terms of the Finance Act 1994.
Rule 6 of the CENVAT Credit Rules
Rule 6 of the CENVAT Credit Rules, 2004 provides for obligation of manufacturers of dutiable goods and exempted goods and provider of taxable and exempted services. If service provider is taking CENVAT credit in respect of common input services, the service provider has following three options (with effect from 1 April 2008)
1. Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/ exempted output services – Rule 6(2) of CENVAT Credit Rules.
2. If the service provider opts not to maintain separate inventory and records, pay amount equal 8 per cent of value of exempted services Rule 6(3)(i) with effect from April 1, 2008.
3. Pay an amount equivalent to the CENVAT credit attributable to input and input services used is or in relation to provision of exempted services Rule 6(3)(ii) with effect from April 1, 2008.
The service provider should study its CENVAT credit pattern and decide which option is suitable. If proper care is not taken, the service provider may have to pay 8 per cent amount on exempted services provided to SEZ units.
Further, sub-rule (6) to Rule 6 provides exceptions to the above. In terms of the said sub-rule the provisions of sub-rule (1), (2), (3) and (4) shall not be applicable in case where the excisable goods are removed without payment of duty in certain situations. One such case is when the excisable goods are cleared to a unit in SEZ.
It is pertinent to note here that the said sub-rule mentions only about the exempted goods and not the exempted services. Further, it talks about the clearance of goods to SEZ units only and not the SEZ developers. The above uncertainty calls for necessary amendments in CENVAT Credit Rules, 2004.
[Source: www.indlawnews.com]
