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    DTA Turnover Vs DTA Unit – SEZ Exemption

    We all are aware that the services provided to a unit located in SEZ or a developer of SEZ are exempted from service tax by way of Notification No 12/2013-ST dated 01.07.2013 subject to certain conditions, limitations and safeguards as specified in the said notification. 

    The notification provides for ab intio exemption from service tax for such specified services received by SEZ unit or developer which are exclusively used for authorised operations of the SEZ. Further, the service tax pertaining to such services which are not used exclusively for authorised operations of the SEZ shall be allowed by way of refund subject to certain conditions as mentioned below. 

    The said notification vide Para III (a) states that the services which are common to the authorised operations of the SEZ and the operation in the DTA Unit shall be distributed among the SEZ Unit and the DTA Unit in the manner as prescribed in Rule 7 of Cenvat Credit Rules, 2004. That is to say the SEZ unit or developer can only claim refund of the service tax which is in proportion to the turnover of the SEZ Unit and credit of service tax in proportion to the turnover of DTA Unit shall not be allowed. 

    The question for the consideration in this article is whether the credit of service tax/input service tax has to be restricted even the developer or unit of SEZ does not have a DTA unit but has DTA Turnover? 

    To answer the above, one has to keep in the mind both the intention, spirit of the SEZ Scheme and the benefit granted by said Notification. It is also important to bear in mind, the rule of strict interpretation when it comes for interpreting an exemption notification passed on by judicial precedents. Hence, we shall proceed to examine the above issue in light of the provisions of SEZ Act, SEZ Rules and the subject notification. 

    As stated above, the Notification No 12/2013-ST dated 01.07.13 grants ab intio exemption from service tax for the services which are received by SEZ Unit or developer and used for authorised operations of the SEZ. The phrase ‘authorised operations’ has not been defined by the said Notification, however vide Para 6, the words and expressions used in the notification and defined in SEZ Act or rules shall apply to the understanding of the said notification. Hence, a peek into the SEZ Act, 2005 along with Rules is required for consideration. 

    The phrase ‘authorised operations’ has been defined vide 2 (c) of the SEZ Act to mean operations as authorised under Section 4(2) and Section 15(9) ibid. As per Section 4(2) and Section 15(9), the operations which are approved by the Development Commissioner after obtaining the Letter of Approval can be understood as ‘authorised operations’. Hence, technically, the activities which are authorised to be carried on by unit of SEZ or developer can be understood to be authorised operations. There is nothing to state that if the SEZ unit or developer is engaged in the sale of goods/services to the DTA apart from their regular export, the same shall not be called as authorised operations. 

    Hence, by implying the above definition of the ‘authorised operations’ into the Notification No. 12/2013-ST dated 01.07.13, all activities done by developer or unit of SEZ can be called as ‘authorised operations’ irrespective of their status of sales (Exports or DTA). Therefore, the developer or unit of SEZ can claim ab intio exemption vide proviso to Para 2 since the services are used for authorised operations of the SEZ and need not claim refund of the service tax vide Para 3 (III). 

    However, before concluding the above, it is also relevant to examine the phrase ‘exclusively’ used in the proviso to Para 2. The proviso to Para 2 states that ab intio exemption is available only if such services are used exclusively for the authorised operations. However, the phrase ‘exclusively’ has not been defined in the said notification to understand the depth/ambit of the same. Hence, it can be safely concluded that all the services procured by the developer or unit of SEZ are used exclusively for the authorised operations of the SEZ.

     

    While introducing the Finance Bill, 2014, a notification vide 07/2014- ST dated 11.07.14 has been issued for making certain changes to Notification No 12/2013-ST dated 01.07.13. Vide said notification, an explanation has been introduced to clarify when a service is treated as exclusively used for authorised operations as under: 

    Explanation- For the purposes of this notification, a service shall be treated as used exclusively for the authorised operations if the service is received by the SEZ Unit or the Developer under an invoice in the name of such Unit or the Developer and the service is used only for furtherance of authorised operations in the SEZ. 

    However, after the insertion of the explanation also, the problem still appears to be exists since it does not address situation where the developer or unit of SEZ has DTA turnover but not DTA unit. It can be very well argued by the developer or unit of SEZ that the services are used only for the furtherance of the authorised operations in the SEZ, where the resultant of said operation is export or DTA sales. 

    Let us proceed further to examine whether there is an embargo in law vide Para III restricting the credit of service tax pertaining to DTA turnover without a DTA Unit. On a detailed perusal of Para 

    • of the notification, there is no mention of DTA turnover and the discussion is restricted to developer or unit of SEZ who is having a DTA Unit. Further, the Form A vide Table I specifies that the developer or unit of SEZ shall mention the particulars pertaining to DTA Unit and no reference has been made to DTA Hence, it can be concluded that there is no requirement to restrict the credit pertaining to the DTA turnover when the developer or unit of SEZ does not have a DTA Unit but has DTA Turnover. 

    Further, the phrase ‘domestic tariff area’ has not been defined vide the Notification No 12/2013-ST dated 01.07.13. Hence, vide Para 6, the reference has to be made to SEZ Act, 2005 which states vide Section 2 (i) "Domestic Tariff Area" means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones. Hence, the developer or unit of SEZ shall have a strong ground that the sales made by them cannot be called as DTA Unit sales since there is no unit in DTA because the unit is located in SEZ which cannot be called as DTA in light of the above definition. 

    Further, the Rule 7 of Cenvat Credit Rules, 2004 which is referred by Para III (a) of the Notification No 12/2013-ST dated presumes that there are more than one unit and hence there cannot be any solution to the present situation in Rule 7, ibid. 

    From the above, it can be concluded that the credit of service tax need not be restricted in proportion to the DTA turnover of developer or unit of SEZ since the later does not have any DTA Unit and Notification No 12/2013-ST dated 01.07.13 does not provide for such instance. As stated above, it was now a settled matter that the exemption notifications has to be strictly construed as held by the Apex Court in the case of Commissioner of C. Ex, New Delhi vs. Hari Chand Shri Gopal 2010 (260) ELT 3 (SC) and majority of other cases, hence there cannot be a denial of service tax credit when the notification does not provide for. 

    However, it is important to note that when the goods are removed by SEZ unit to DTA, it has to comply with Section 30 of SEZ Act, 2005 read with Rule 48 of SEZ Rules, 2006 which specifies that such sale of goods by SEZ unit to buyer in DTA shall attract the customs duty in a manner as they were imported by the buyer into India from a place outside India. That is to say, when the goods manufactured by SEZ unit are sold to DTA, the SEZ act requires paying the customs duty since the underlying intention of the SEZ scheme i.e., the benefit of SEZ status shall be available only if the sales are exported and convertible foreign exchange is earned. 

    Applying the same rationale to the issue in the hand, since the SEZ unit is expected to export the goods/services and where the same is not achieved in full since of the reason of DTA Turnover, the claiming of service tax pertaining to such DTA Turnover is not possible despite the Notification No 12/2013-ST dated 01.07.13 does not provide for such a situation. Further, borrowing the intention of Rule 6 of Cenvat Credit Rules, 2004 which states that when the entire turnover is not subjected to either service tax or excise duty, the common input credit has to be restricted to such non-excisable or serviceable turnover, it can be concluded that the common input service tax has to be restricted since the entire turnover has been earned from both the export and DTA. 

    Hence, it is requested that CBEC comes with an explanation in this regard to provide a solution to the instant case, so that it puts an end to the unwanted litigation.

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