Supplies to SEZ under Letter of Undertaking not treated as export under Rule 5; refund of Cenvat credit denied

CESTAT, MUMBAI - AT allowed the appeals and set aside the impugned order, holding the appellant entitled to deny refund of accumulated Cenvat credit. Supplies to SEZ units under Letter of Undertaking were not treated as "export" for purposes of rule 5 of the Cenvat Credit Rules, 2004; the definition of export must be taken from the Customs Act. The respondent failed to prove inability to utilize the Cenvat credit, so refund relief under rule 5 was denied.

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Issues Involved:
1. Definition and applicability of "export" under Rule 5 of the Cenvat Credit Rules, 2004.
2. Eligibility for refund of unutilized Cenvat Credit for supplies made to SEZ units.
3. Interpretation and relevance of SEZ Act and Rules in relation to Cenvat Credit Rules.

Detailed Analysis:

1. Definition and Applicability of "Export" under Rule 5 of the Cenvat Credit Rules, 2004:

The core issue revolves around whether the term "export" in Rule 5 of the Cenvat Credit Rules, 2004, includes supplies made to SEZ units. The respondent argued that their supplies to SEZ units should be considered "exports" based on the SEZ Act's definition. The SEZ Act, under Section 2(m)(ii), defines "export" to include supplying goods from the Domestic Tariff Area (DTA) to an SEZ unit. The Commissioner (Appeals) supported this view, relying on the SEZ Act and related provisions, which deem such supplies as exports.

However, the department contended that "export" for Rule 5 purposes should align with the Central Excise Act and the Customs Act, where "export" means taking goods out of India. The Tribunal sided with the department, emphasizing that the SEZ Act's deeming provisions are intended to benefit SEZ units, not DTA suppliers. The Tribunal concluded that the term "export" in Rule 5 should be interpreted as "physical export" out of India, as per the Customs Act's definition.

2. Eligibility for Refund of Unutilized Cenvat Credit for Supplies Made to SEZ Units:

The respondent claimed refunds under Rule 5 of the Cenvat Credit Rules, 2004, for inputs used in manufacturing goods supplied to SEZ units. The original authority rejected these claims, arguing that the goods supplied to SEZ units were capital goods, not inputs, and that such supplies did not constitute physical exports. The Commissioner (Appeals) overturned this decision, asserting that supplies to SEZ units qualify as exports under the SEZ Act, thus entitling the respondent to refunds.

The Tribunal, however, disagreed, stating that Rule 5's benefits are not applicable to deemed exports. It emphasized that the SEZ Act's deeming provisions do not extend to granting refunds of unutilized Cenvat Credit to DTA suppliers. The Tribunal highlighted that the SEZ Act and Rules are designed to benefit SEZ units, not DTA suppliers, and thus, the respondent's refund claims were not justified.

3. Interpretation and Relevance of SEZ Act and Rules in Relation to Cenvat Credit Rules:

The Tribunal examined the SEZ Act and Rules, noting that these provisions are meant to benefit SEZ units. The SEZ Act's definition of "export" creates a legal fiction for SEZ units, not for DTA suppliers. The Tribunal emphasized that deeming provisions should not be extended beyond their statutory purpose. It referenced the Supreme Court's judgments in Clariant International Ltd. and Swarn Rekha Cokes & Coals (P.) Ltd., which support the view that legal fictions should be limited to their intended scope.

The Tribunal also considered the High Court's decision in Essar Steel Ltd., which held that for the levy of export duty, goods must be physically exported out of the country. Applying this rationale, the Tribunal concluded that the SEZ Act's deeming provisions do not apply to Rule 5 of the Cenvat Credit Rules, 2004. It reiterated that the term "export" in Rule 5 should be interpreted in line with the Customs Act, meaning physical export out of India.

Conclusion:

The Tribunal set aside the Commissioner (Appeals)'s order, ruling that the respondent's supplies to SEZ units do not qualify as exports under Rule 5 of the Cenvat Credit Rules, 2004. Consequently, the respondent is not entitled to refunds of unutilized Cenvat Credit for these supplies. The Tribunal's decision underscores that the SEZ Act's deeming provisions are intended solely for the benefit of SEZ units and do not extend to granting benefits to DTA suppliers under the Cenvat Credit Rules.

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