26 July 2016 EY Tax Alert Services provided by SEZ unit to the DTA unit of the same legal entity held liable to Service tax, however no tax payable in absence of consideration Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This tax alert summarizes a recent ruling 1 of Gujarat High Court (HC) wherein, the court has held that the Service tax is leviable in case where the services are provided by the unit in SEZ to the DTA unit of the same legal entity. Overruling the findings of CESTAT, HC observed that concept of principle of mutuality cannot be applied. Indeed, if the same is applied the very purpose of artificial creation of treating a SEZ unit separate and distinct for accounting, consumption of raw materials, production and clearance purpose would shatter. The HC however dismissed the Revenue s appeal holding that no Service tax was leviable in the absence of any consideration, since SEZ unit of the assessee had not charged for the services provided to its DTA unit and the raising of invoices was merely for the purpose of convenience. 1 TS-280-HC-2016
Background and facts Assessee is a company registered under the Companies Act and has various units established in the country. One of its units is situated in the Special Economic Zone (SEZ) 2. The SEZ unit had carried out project management activities including planning and controls, technical support, supply chain management, contracts management, engineering and design and back operations for finance and accounts and human resource functions. The aforesaid services were availed by the units of assessee situated in Domestic Tariff area ( DTA ). The Adjudicating authority passed an order treating the services provided by SEZ unit to its DTA unit as Business Support Service 3 and the two units of the same legal entity as separate and distinct units. In so doing, adjudicating authority referred to Rule 19(7) of the SEZ Rules, 2006, and stated that assessee s SEZ and DTA units are maintaining separate books of accounts, are separately and independently registered commercial organisations, have separate manpower, distinct identity, separate objectivities and expertise. Aggrieved by the order passed, assessee filed an appeal before the CESTAT. After hearing both the parties, CESTAT allowed the appeal and set aside the order of the adjudicating authority by holding that SEZ and DTA unit cannot be considered as separate persons/ entities. It was of the opinion that to levy Service tax would require a transaction between two persons. 2 Sec 65B(45) of the Finance Act has meaning assigned to it in clause(za) of section 2 of SEZ Act, 2005 3 Sec 65B(104C) of Finance Act defines Support Services Of Business Or Commerce and Sec 65(105)(zzzq) pertains to service provided to any person in relation to support services of business or commerce in any manner Being aggrieved by the order passed by the CESTAT, an appeal was filed by the department before the High Court. Revenue Contentions SEZ unit was distinct and separate entity and provided taxable services to DTA unit of the same company. Merely because both the units were under the same company, would not mean that the services provided are not taxable. Principle of mutuality is wrongly been applied by the Tribunal and emphasized on Rule 19(7) of SEZ Rules. Counsel placed reliance on the decision of Gujarat High Court; Sintex Industries Ltd Vs. Commissioner of Central Excise 4 ; wherein, the Division Bench observed that the assessee having obtained separate registration was estopped from contending that the two were not separate factories, simply because they were situated within a common boundary wall. Further as per the Counsel, the SEZ unit raises invoices which cover the charges for providing project management services month-wise and the same are recorded in their books. Assessee Contentions One unit of a company cannot provide taxable services to another unit of the same company. In order to provide taxable services it is necessary that there should be two separate persons/entities. Emphasis in this regard was placed on the principle of mutuality. The assessee company conducted various promotional activities and services for the purpose and benefit of the entire company. Services were apportioned to the SEZ unit only for the convenience purpose. Reliance was placed by the Counsel of assessee on the below listed cases 4 2013 (287) ELT 261
CCE., Meerut-I Vs. Janardan Plywood Industries Ltd 5 Wherein the Uttarakhand High Court has held that the manufacturer of both the units is a single legal entity and therefore, aggregate value of clearances of both the units must be taken into account for determining the eligibility of SSI exemption. Sahney Steel and Press works limited and another Vs. Commercial Tax Officer and others 6 The Apex court held that the registered office and the branch office are offices of the same company. UP State Cement Corporation Ltd Vs. Commissioner of Sales Tax, UP 7 The Allahabad High Court has observed that before a transaction can be taxed and included in the turnover of a dealer, it has to be a sale. In order to constitute sales within the definition of Sales Tax Act, there must be two different persons in ordinary sense of the term person. Commissioner of IT Vs. Prabhukunj Co-op Housing Society Ltd 8 The Gujarat High Court applied a principle of mutuality in context of a part of the surplus retained by the society from the sale of a plot by its members. Notwithstanding the aforesaid, it was further contended that there was no consideration been charged for the services provided. In fact, the invoices were raised for such services merely for the purpose of convenience. The promotional programmes were being organised for the benefits of the entire company and its different units. High Court Ruling After hearing the contentions of both the parties; High Court decided the issues involved in the appeal of the department as under: Services are in nature of Business Support Services and would be levied to Service tax. To decide on the issue whether the services provided by SEZ unit to its DTA unit will be liable to Service Tax, High Court has placed reliance on various statutory provisions as under: Sec 30 of the SEZ Act, 2005; states that any goods removed from a SEZ to the DTA would be chargeable to duties of customs including anti-dumping, CVD and safeguard duties under Custom Tariff Act, as leviable on such goods when imported into DTA. Like-wise, under sub-rule (7) of Rule 19, it is provided that if enterprise is operating both DTA unit as well as a SEZ unit, it shall have two distinct identities with separate books of accounts, but it shall not be necessary for the SEZ unit to be a separate legal entity. Sub-rule (2) and (3) of Rule 22 of the SEZ Rules, 2006 pertains to terms and conditions for availing exemptions, drawbacks and concessions to every developer and entrepreneur for authorised operations. As per Sec 7 of SEZ Act, 2005 exports, imports or procurements by SEZ developer or SEZ unit would get the benefits of exemption and accordingly receive a special consideration. All the aforesaid statutory provisions indicate separate and artificially created independent existence of a SEZ unit of a company whether it has another unit situated in DTA or not. 5 2015 (323)ELT 46 6 Reported in (1985)4 SC 173 7 1979 (43)STC 475 (ALL) 8 377 ITR 13 (GUJ) High Court has observed that it is just because of the special concessions in taxation, including duty drawbacks and exemptions that the SEZ unit has to
maintain scrupulously accounts of all imports and procurements from DTA. collected for such service, Service tax could not be levied on it. It further states that this artificial creation of separate accounting of a unit or an industry of a common enterprise or a company is not a new or unknown phenomena. In numerous cases, where the IT act provides profit linked incentives such as deductions under sections 80 HHC, 80-I, 80-IA, 80-IB, etc. the industry or unit engaged in such eligible business is treated separate and distinct for the purpose of accounting so that the deductions of the assessee out of its eligible business can be separately worked out. Similar principle is applied in other special deductions also whether area based or investment based. In view of the statutory scheme, contention of the assessee on the principle of mutuality cannot be accepted as the very purpose of artificial creation of treating a SEZ unit separate and distinct for accounting, consumption of raw materials, production and clearance purpose would be shattered. The aforesaid issue needs to be looked at from different perspective. Sec 65(105) of the Finance Act, also states that for applicability of the charging section, the value of the taxable service should be ascertained. Service Tax can only be levied if the service is provided and it carries a certain value. In cases if the Service tax value is nil, there would be no occasion for charging the Service tax. No provision is there in Finance Act, 1994 which states that Service tax can be levied on its deemed value, be it market value or fair value. Thus, the term Taxable Service has a direct relation to the consideration either paid in cash or by way of deferred payment or by mentioning of any other valuable consideration. In light of the above, HC upheld the order of the Tribunal; but on different grounds that no Service tax can be levied in case where no charges for the services provided are levied by the SEZ unit to its DTA units while rendering services. Comments This ruling of HC which has held the services provided within the same legal entity by SEZ unit to the unit in DTA as taxable, has the potential to impact cases where activities in the form of support services are shared internally between SEZ and DTA for a consideration. The decision has not dwelled into relevant provisions of Service tax, particularly on levy of tax, chargeability, definition of person and deeming fiction as an exception. The decision has inferred that Service tax should apply for service transactions between SEZ and DTA based on the provisions of SEZ Act/Rules and has equated the activity with that of removal of goods from SEZ attracting duties of customs when imported. This ruling is likely to trigger action from Service tax department on the said issue, atleast till the HC ruling is stayed or overruled by the Apex court. Since the invoices raised for such services were merely for the purpose of convenience as no charge were been
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