Issues faced by SEZ

developers/units for claiming

service tax refunds along with
recommendations to CBEC

1.
1. Introduction
1.1 In response to the industry’s long-standing demand of addressing difficulties faced
by SEZ developers and units in seeking service tax refund, the Export Promotion
Council (EPCES) organized a meeting for export-oriented units (EOUs) and SEZs
on 17 September 2010 at Santa Cruz Electronics Exports Processing Zone
(SEEPZ), Mumbai. Mr. J.M. Kennedy, Director (TRU), chaired the meeting. His aim
was to solicit feedback from SEZ developers and units regarding the issues faced
in the refund of service tax. Additionally, CBEC representatives from SEZ
developers, SEZ units, the Development Commissioner’s Office and field officers of
CBEC dealing with refunds for SEZ developers or units attended this forum.
1.2 Mr. Kennedy suggested that Ernst & Young, based on its experience and
interactions with the industry representatives, should compile a document listing
down the issues faced by the industry and its recommendations and forward it for
the government’s consideration.
1.3 In this document, Ernst & Young has compiled the key issues faced by the industry
and provided its recommendation with respect to the difficulties faced with
reference to service tax refunds under notification no. 9/2009-ST dated 3 March
2009 (as amended by notification no. 15/2009-ST dated 20 May 2009), hereinafter
referred to as ”notification.”
2. Legislative history
2.1 Notification no. 4/2004-ST, dated 31 March 2004, provided an exemption to taxable
services provided by any service provider to an SEZ developer/unit, subject to a
primary condition that taxable services are provided for consumption within the
SEZ and the SEZ developer/unit as the case may be, receiving such taxable
services, maintains a proper account of receipt and utilization of the specified
taxable services.
2.2 The above referred notification caused substantial concerns in the industry related
to the exemption of service tax on services provided to the SEZ developer/unit.
1 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
Thus, based on industry representation, and at the same time, to maintain a control
on such exemption, the Central Government superseded the above notification with
notification no. 9/2009-ST dated 3 March 2009 and provided an exemption to
taxable services, which are provided related to the authorized operations in an SEZ
and received by a developer or units, whether or not the taxable services are
provided inside the SEZ, from the entire service tax. However, the exemption was
provided by way of refund, subject to the fulfillment of conditions given in the
mentioned notification.
2.3 Thus, on account of the above notification, all the specified services provided to the
SEZ developer/unit in relation to authorized operations, whether or not provided
inside or within the SEZ, were exempt by way of a refund.
2.4 As a consequence, the input service providers were required to collect service tax
from the SEZ developers and units and remit the same with the government, and
thereafter, the SEZ entities would be required to file a refund claim with the
jurisdictional Assistant Commissioner of Excise, subject to the compliance of
certain conditions.
2.5 As the above notification resulted in cash outflow, higher documentation and
extensive compliance requirements for the SEZ developers and units to claim
service tax refunds, considering various representations from the trade and
industry, the Central Government then modified the directions vide notification no.
15/2009-ST dated 20 May 2009 (amending notification no. 9/2009-ST dated 3
March 2009), which provided an upfront/unconditional service tax exemption for the
input services (provided in relation to the authorized operations ) that are wholly
consumed within the SEZ. The above notification is issued along with a circular (no
114/08/2009 dated 20 May 2009) of the TRU, which clarifies that the exemption by
way of refund would be limited to situations only when taxable services provided to
SEZ are consumed partially or wholly outside the SEZ.
2.6 This document lists down key issues faced by the industry and Ernst & Young’s
recommendations to resolve those issues.
3. Compilation of legal and procedural issues
Legal issues:
S.No. Issue Analysis
1. Exemption available to 1. Typically, the exemption notification 1.
service providers or (whether conditional or unconditional)
SEZ developers and issued under section 93 (1) of the
units
Finance Act, 1994, as in the current
case, is applicable to the service
providers.
2. However, this exemption is based on
various conditions to be complied by
the service receivers, i.e., SEZ
developers and units and the usage
of services in relation to the
authorized operations of SEZ
developers and units.
2 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
Effects of the issue Recommendations Related judicial
precedents/remarks
Service providers take a 1. If the satisfaction of the
conservative stance and charge condition of ”wholly
service tax without relying on any consumed within SEZ” is to
documents/declarations provided be determined on the basis
by the SEZ developers and units. of certification by the
2. In addition, Rule 6(6) of the Cenvat Approval Committee, then
Credit Rules, 2004, does not service providers can be
provide any relief from the reversal suitably instructed that the
of the central value-added tax exemption should be
(cenvat) credit/payment of service exercised based on the
tax on the provision of exempt certified list of specified
services as is applicable in the case services by the Approval
of suppliers of excisable goods to Committee without any
SEZ developers and units. exceptions.
Therefore, service providers charge 2. Upfront exemption can
service tax; otherwise it would entirely be provided if the
trigger the reversal of the cenvat services are used for
credit availed by them. authorized operations.
3. The provision of services to
SEZ developers and units
can be considered as
physical exports. Rule 6(6) of
the Cenvat Credit Rules
2004 can be amended to
provide no reversal of the
cenvat credit of service
providers offering services to
SEZ developers and units
(being treated as exports).
 S.No. Issue Analysis Effects of the issue Recommendations Related judicial
precedents/remarks
2 Legal interpretation of The word ”consumption” has always 1. In the absence of clarity about the 1. The meaning of the phrase Refer to the CESTAT
the phrase ”wholly been a center of dispute as to whether to condition of ”wholly consumed ”wholly consumed within judgment in the case of
consumed within SEZ” interpret the term as ”use” by SEZ or within SEZ,” service providers SEZ” needs to be clarified or Laxmi Metal Pressing
physical performance within the SEZ is charge service tax to an SEZ Works Limited 2009-
aligned to categorization
mandatory. developer/unit. Due to inadequate TIOL-2002-CESTAT-
prescribed under the ”Export MUM, wherein the
guidelines to interpret the phrase, of Services Rules, 2005.” CESTAT held that even
service tax authorities treat most 2. It should also be clarified as though the service
services as “wholly consumed to what is the way forward, provider (job worker) was
within SEZ” and deny the refund with respect to the refund exempt from the
claims to SEZ developers and payment of service tax
claim of service tax already
units by taking an argument that by virtue of exemption
charged by service notification issued under
the services were exempt at the providers and duly paid by section 93 of the Finance
first place without providing the an SEZ unit, which is Act, 1994, once the
rationale around how these rejected by the service tax service receiver has paid
services are wholly consumed authorities as it is the service tax, cenvat credit
within an SEZ. For example, in is available and the
cardinal principle that
case of services provided by assessment of input
exports should not carry any services cannot be done
Chartered Accountants, some part taxes. at the service receiver’s
of the services are provided within
end.
an SEZ (such as stock verification
of goods), while some services are
provided from their own office to
the SEZ developers or units.
2. SEZ developers and units have
invested time and resources on
litigation and exports are likely to
carry additional costs on account
of this dispute.

3 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
 S.No. Issue Analysis Effects of the issue Recommendations Related judicial
precedents/remarks
3 Availability of the The notification for the claim of refund by 1. Currently, the authorities are It needs to be clarified that 1. Refer to the Mumbai
cenvat credit of service SEZ developers and units is a treating this notification as the SEZ units can avail other CESTAT decision in
tax charged by service “conditional notification,” which sole notification to claim refund notifications available the case of Nikita
provider to SEZ unit provides exemption on the satisfaction of exemption by SEZ units, which to DTA exporters if they are Transphase
various conditions. One of the conditions restrict these entities to use not able to fulfill all the Addducts Private
(Para 1(e) of the notification) is that no refund alternatives that are conditions of notification no. Limited [2007(7)
cenvat credit of service tax paid of relatively more settled with less 9/2009. This would also STR 182 where the
specified services used in relation to stringent compliance norms. enable SEZ units catering to tribunal held that the
authorized operations in the SEZ has the domestic market to use “assessee has an
2. This disparity does not offer a
been taken under the Cenvat Credit the service tax paid on input option to avail the
level-playing field for domestic
Rules, 2004. Due to the existence of this services against their exemption or he/she
tariff area (DTA) exporters and
specific notification, authorities hold the domestic service tax liability. can opt to pay duty.
SEZ exporters and blocks options
opinion that SEZ developers and units Exemption
for the SEZ units to neutralize
can claim exemption (including by way of notification (even
taxes paid through other relevant
a refund) only under this notification and though
notifications in place.
they cannot claim cenvat credit, and unconditional)
accordingly, the other refund/rebate cannot be forced
options are not available. upon an assessee.”
2. Refer to the
judgment delivered
by Delhi CEGAT in
the case of Modi
Xerox Ltd.
[1997(94)ELT 139]
where the tribunal
held that “when
there are two
different exemptions
available to the
assessee, it is
entirely his/her
decision to avail the
one, which is more
beneficial.”

4 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
 S.No. Issue Analysis
4 Availability of refund The notification provides an exemption,
where the SEZ unit including by way of a refund, where the
provides services both specified services are used by the SEZ
outside India as well as units in relation to their ”authorized
within the country operations.” In accordance with the
provisions of SEZ regulations, SEZ units
can also undertake the supply of
authorized operations in India on the
payment of duty/taxes. As such, any
provision of goods/services by SEZ units
in India should not reduce or bar them for
taking exemption, including by way of
refund for input services, under
notification no. 9/2009.
Effects of the issue Recommendations Related judicial
precedents/remarks
Currently, the authorities are not There can be suitable
granting claims where the SEZ unit clarification issued pertaining
undertakes domestic supply as the to the provision of authorized
notification does not include any operations in India, which
provision/clarity around this aspect. would not reduce/bar the
refund. Alternatively, there
can be a provision that
common services used for
both types of supplies are
eligible for cenvat credit and
the service tax paid on them
can be used against the
output liability and on balance
services, the tax paid can be
available as a refund.

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5 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
Procedural issues:
S.No. Issue Analysis
1 Approval for the list of 1. The approval for claiming exemption
input services used in either ”upfront” or through ”refund” is
relation to authorized typically required for all the services,
operations which are used with respect to
authorized operations.
2. Typically, the approval takes a
minimum time period of one month
from the date of application, which can
extend to three months depending on
when the Approval Committee meets,
additional clarifications requested from
the assessee, etc., along with the
views of service tax officials taken
internally.
6 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
Effects of the issue Recommendations
1. As the approval is received for all the services that are 1. The approval for the list of
used in relation to authorized operations, approval from the input services granted by the
Approval Committee does not mean that the services Approval Committee should
approved are those services only that can be classified as specifically mention the
“wholly consumed within SEZ,” and therefore, vendors effective date of the
charge service tax despite furnishing the list of services approval, which can be taken
certified by the Approval Committee. as the date of application.
2. There is no clarity on:
What would be the effective date of approval for the list of 2. With respect to approvals
input services from the following: that are already granted,
► Date of letter of approval issued to SEZ clarification should be issued
developer/unit or 3 March 2009, whichever is later to determine the effective
► Date of application for the approval of the list of date of approval.
input services
► Date of approval granted by the Approval
Committee
In case the approval is effective from the date it is granted
by the Approval Committee, then:
► What if the service tax is charged by the service
provider for services received prior to that date?
3. As there is ambiguity about the effective date of approval
for the list of input services, SEZ units have been denied
the refund claim for services received prior to the date of
approval. The delay in approval to some extent is also
attributable on account of the government’s administrative
set up, which results in refund disputes with the service tax
authorities.
 S.No. Issue Analysis Effects of the issue Recommendations
2 Jurisdiction where The notification provides that the SEZ In case SEZ developers and units are covered under the Suitable clarifications can be
refund claim is to be developers or units will file the claim for centralized service tax registration, wherein the centralized issued to help determine who the
filed under the refund to the jurisdictional Assistant premises are other than an SEZ location, then what would the jurisdictional officer should be in
notification Commissioner (AC) or Deputy Commissioner jurisdiction for filing the refund claim be? order to grant refunds in the case
(DC) of Central Excise as the case may be. of SEZ developers/units with a
► Jurisdictional excise division of area where SEZ unit is
centralized service tax registration.
located?
► Jurisdictional service tax cell of area where SEZ unit is
located?
► Jurisdictional excise division of area where the centralized
premises are located?
► Jurisdictional service tax cell of area where the centralized
premises are located?
SEZ developers and units are facing difficulties in filing the
refund claim as authorities are not ready to accept the refund
claim in the absence of clarity about relevant jurisdiction, which
makes the application time barred. Such cases result in the
provisions of refund not followed with a befitting and appropriate
approach.

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7 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
 S.No. Issue Analysis Effects of the issue Recommendations
3 Time limit to file the The notification provides that the SEZ 1. The AC or DC does not consider any grounds for delay 1. Suitable clarifications can be
claims developers or units will file the claim for even in the case where the issue of the certified list of issued to condone any
refund within six months or such an specified services is delayed on account of the plausible delay in reasonable
extended period (from the date of payment of government’s administrative set up. cases and/or where the
service tax to service providers) to the 2. As the invoices by the service providers to the delay is on account of the
jurisdictional Assistant Commissioner or developers and units are not issued correctly, it takes government’s administrative
Deputy Commissioner of Central Excise as additional time to file refund claims that are rejected on set up to issue the certified
the case may be. grounds of being time barred. list of services in a given
time frame.
2. The time limit for filing the
claims may be extended to
one year as is the case for
other refund claims to avoid
blockage of taxes that
become time barred.
3. It can be recommended that
no further documentation be
asked from the assessees
except that mentioned in the
notification to implement the
provisions in the most
appropriate and effective
manner.

Some of the grounds on which refund claims have been rejected in the past are:

1. Services providers have issued invoices after 14 days (as required under Rule 4A 3. If the service tax is not correctly paid by the service providers, they should claim
of Service Tax Rules, 1994) of the provision of services, and therefore, service the refund, and in such a case scenario, SEZ developers/units cannot claim the
tax paid on those invoices is inadmissible. refund.

2. Input services provided after 20 May 2010 are ”consumed wholly within SEZ” 4. SEZ developers/units cannot claim refund under Section 11B of the Central
(without giving any reasoning), and therefore, no refund is eligible. Excise Act, 1944, which is a legal provision that is not applicable to them.

8 Issues faced by SEZ developers/units for claiming service tax refunds along with recommendations to CBEC
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EYIN1010-113

This publication contains information in summary form and is

therefore intended for general guidance only. It is not intended to
be a substitute for detailed research or the exercise of
professional judgment. Neither EYGM Limited nor any other
Disclaimer: member of the global Ernst & Young organization can accept any
responsibility for loss occasioned to any person acting or
This report has been prepared not only on the basis of Ernst & Young’s experience in assisting their clients for refunds, but is also based on the interactions refraining from action as a result of any material in this
the firm has had with representatives from SEZ developers/units and officials, including field officials of CBEC, dealing with such refund matters, during a publication. On any specific matter, reference should be made to
meeting organized by EPCES under the Chairmanship of Mr. J.M. Kennedy, Director (TRU), CBEC, at Mumbai. The recommendations outlined in this report the appropriate advisor.
are specifically intended for consideration by CBEC and should not be quoted or used as ”defense” material for claiming any refund by SEZ developers/units.
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