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    Taxability of Services Undertaken by Sub-Contractors through Main Contractors for Units in SEZ

    In the recent times, controversy gloomed up over the applicability of service tax for services provided by Sub-Contractors on behalf of the Main Contractors to the SEZ units. Services provided by Main contractors to SEZ units are exempt from payment of service tax under Notification 12/2013-ST dated 01.07.2013. Majority of the Sub-Contractors are of the opinion that the services provided by them are consumed directly by the Developer or Co-developer or unit in SEZ unit and are exempted from payment of service tax. However, the Revenue Authorities are contending that these sub-contractors are liable to service tax especially in the absence of any specific exemption in this regard, as the services are directly provided to Main Contractors but not to SEZ units. 

    Analysis of the provisions in the Finance Act, 1994 and SEZ Act, 2005, 

    Section 26(1)(e) in CHAPTER VI of the SEZ Act - Special Fiscal Provisions for Special Economic Zones provides for “the exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone”. 

    On the other hand, Rule 10 of SEZ rules talks about exemption to sub-contractors of SEZ developer. “Provided further that exemptions, drawbacks and concessions on the goods and services allowed to a Developer or Co-developer, as the case may be, shall also be available to the contractors including sub-contractors appointed by such Developer or Co-developer, and all the documents in such cases shall bear the name of the Developer or Co-developer along with the contractor or sub-contractor and these shall be filed jointly in the name of the Developer or Co-developer and the contractor or sub-contractor, as the case may be:” 

    On combined reading of Section 26 with Rule 10, SEZ law carries the intention of providing exemption to services provided in SEZ whether provided by a Developer, Unit or a Main Contractor or a Sub-contractor. In order to give effect to the provisions section 26(1), exemption is given only to services provided to SEZ units under Notification 12/2013.

     

     


    • Furnishadeclaration in Form A1 along with approved list of services as required for the authorised operations by Approval commitee to the special Officer of the SEZ;
    • Authorisation for the services mentioned in Form A1 is provided by jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be to the SEZ Unit or the Developer, in Form A-2;
    • Copyofauthorisation is provided to the service provider, thereby an exemption is provided to Service Provider from charging of service Tax;
    • Aquarterlystatement to be filed with jurisdictional Superintendent of Central Excise furnishing the details of specified services received by it without payment of service tax;
    • IftheSEZfails to fulfill the conditions provided then, it shall pay to the government an amount that is claimed by way of exemption from service tax and cesses along with interest as applicable on delayed payment of service tax.

     

    Thus, it is evident from the above provisions that all the relevant documents i.e. Form A1 & Form A2 comprising the name of Developer or Co-developer and the contractor or sub-contractor has to be submitted with the authorities in order to claim exemption. 

    Incorporating the names of sub-contractors in forms A1 and A2 are not practically feasible. In most of the cases approval authorised operations would be obtained immediately after agreements for provision of services is entered into with Main contractors. Accordingly, Form A1 and A2 would also be processed by SEZ units to claim exemption. Whereas Sub-contractors are appointed by main contractors during the execution phase. 

    Services being intangible in nature, the basic intention of the Central Government to frame such procedure is to ensure that the consumption of services has been done in the SEZ unit. No undue tax benefit can be claimed by portraying the services used at DTA units as those used in SEZ units. But, if the Service Provider (Sub-Contractor) be able to prove that the services have been provided and consumed in the SEZ unit the requirement of such formalities may not be considered as substantial benefit of tax exemption on services received by SEZ cannot be denied for want of procedural compliances. 

    If Service Tax has to be charged on the services which are not covered by Form A1 and Form A2. Then the impact of the same is explained with the following example. 

    Illustration: Uday Ltd is planning to setup an automobile industry in the SEZ Zone in Hyderabad which requires contractors for construction of factory buildings, the contractors are purely engaged in providing services to the SEZ units. The Contractor has subcontracted the same to almost 120 subcontractors. Due to some unexpected reasons, he hasn’t registered some of his Sub-Contractors in Form A1 & Form A2. The different scenarios have been explained below

     

     

     

    If service Tax is charged

    If service Tax is not

    If services are

    Particulars

     

    by Sub-Contractor (SEZ

    charged by Sub-

    provided to Non-

     

    Unit)

    Contractor (SEZ Unit)

    SEZ unit

     

     

     

     

    Amount

    Amount

    Amount

     

     

     

     

     

    Cost to Subcontractor

     

    10,00,000

    10,00,000

    10,00,000

     

     

     

     

     

    + Profit of subcontractor

     

     

     

     

    (10% on cost)

     

    1,00,000

    1,00,000

    1,00,000

    Gross Bill

     

    11,00,000

    11,00,000

    11,00,000

     

     

     

     

     

    + Service Tax (15%)

     

    1,65,000

    0

    1,65,000

     

     

     

     

     

    Total bill to Main Contractor

     

    12,65,000

    11,00,000

    12,65,000

    (-) Input services eligible for

     

     

     

     

    credit

     

    1,65,000*

    0

    1,65,000

    Cost to Main Contractor

     

    11,00,000

    11,00,000

    11,00,000

     

     

     

     

     

    +Profit of Main Contractor

     

     

     

     

    (10% of cost)

     

    1,10,000

    1,10,000

    1,10,000

     

     

     

     

     

    Gross bill of Main Contractor

     

    12,10,000

    12,10,000

    12,10,000

     

     

     

     

     

    + Service Tax (@15%)

     

    0**

    0**

    1,81,500

    Total bill to the service receiver

     

    12,10,000

    12,10,000

    13,91,000

     

     

     

     

     

    (-) Input services eligible

     

    0

    0

    1,81,500

     

     

     

     

     

    Cost to the service receiver

     

    12,10,000

    12,10,000

    12,10,000

     

     

     

     

     

     

    *As the main contractor is providing a service to an SEZ unit, he would be eligible to take CENVAT Credit as per rule 6(6A)) of the CCR,2004. 

    ** Assuming that ab-initio exemption is claimed by the Main contractor. 

    Points to be carefully examined 

    • As the Main contractor is purely providing services to the SEZ units, then he would have an accumulated credit and would not be able to utilize the credit in any manner. 
    • There is no enabling provision which provides refund for the Service providers providing the service to the SEZ units. 
    • Thus, the accumulated CENVAT Credit of the Main Contractor will get lapsed. 
    • Ultimate burden of the service Tax is shifted to the Main Contractor which in turn be passed to the SEZ unit as a cost. This has been explained by the following scenario

     

    Particulars

    Amount

    Cost to Subcontractor

    10,00,000

    + Profit of subcontractor (10% on cost)

    1,00,000

    Gross Bill

    11,00,000

    + Service Tax (15%)

    1,65,000

    Total bill to Main Contractor/ cost to the Main contractor

    12,65,000

    +Profit of Main Contractor (10% of cost)

    1,26,500

    Gross bill of Main Contractor

    13,91,000

    + Service Tax (@15%)

    0

    Total bill to the SEZ unit

    13,91,500

    (-) Input services eligible

    0

    Cost to the SEZ

    13,91,000

     

    On comparing the above scenario with the example supra, it can be observed that the cost to the SEZ unit increased by (13,91,000 – 12,10,000) = 1,81,000. Thus, the burden of the tax charged by the subcontractor is passed on to the SEZ unit which defeats the basic intention of the government of not taxing the SEZ units. 

    Thus, ambiguity prevails over the applicability of service tax on services undertaken by sub-contractor to main contractor who in turn providing services to SEZ. This issue came up for consideration in the case of Shyam Engineers vs. CCE, 2014-TIOL-CESTAT-AHM, wherein it was held that – “On perusal of the records, we find that there is no dispute that the appellant is a sub-contractor and the main contractor has provided services in relation to the contract executed in a special economic zone. We also find that the main contractor has given a certificate indicating that the appellant is a subcontractor and has given the services which are consumed by the main contractor in a special economic zone. On perusal of notification no.09/2009-ST, we find that the said notification grants exemption to the services rendered in a special economic zone and does not distinguish between a contractor and subcontractor. When there is no dispute as to the fact that the services are rendered to 

    a unit in special economic zone, we find that appellant has made out a prima facie case of the waiver of the pre-deposit of the amounts involved. The concerns of Ld. Departmental Representative as to whether the services provided by the appellant would fall under authorized operations or not is a question which can be considered at the time of final disposal of the appeal and the Ld. Counsel for the appellant is directed to produce the entire list of authorized operations which has been approved by SEZ authorities, in this case.” 

    However, it is noteworthy to mention that this controversy is going to be rested under GST regime. 

    Section 16 of the IGST Act provides that supplies to SEZs are considered as zero rated and thereby the main contractors can provide services to SEZ units without charging GST. Further, with respect to GST if any charged by sub-contractors while providing services to main contractors, unlike the current regime, the main contractor is entitled to claim refund of ITC or setoff the ITC with GST liabilities on supplies other than to SEZ. where by the Service provider providing services purely to the SEZ units is now eligible to take refund of the ITC. 

    Conclusion: 

    Taking cognizance of the benefit extended under SEZ Act or the rules made there under, services provided to SEZ units are deemed as exports and accordingly exempted from service tax. However as discussed above, the exemption is benefit is taken away in situations where sub-contractors are involved due to procedural complexities. Hence ambiguity exists over the services of sub-contractor. It is welcoming move on the part of Government as this anamoly is fixed under GST regime.

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