Inter-unit services within the same enterprise were not liable to service tax where SEZ and DTA units were not separate legal persons.

Service tax was held inapplicable to services rendered by an SEZ unit to its DTA unit where both operated as parts of the same enterprise and were not separate legal persons. Separate registrations and invoices were insufficient to treat the units as distinct entities for tax purposes. Rule 19(7) of the SEZ Rules recognises a single enterprise operating in both SEZ and DTA, requires distinct identities and separate books of account, but does not make the SEZ unit a separate legal entity. On that basis, the Tribunal concluded that a tax charge requiring a service between one person and another could not be sustained, and the related demand, interest and penalties were unsustainable.

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Issues: Whether service tax was leviable on services rendered by SEZ units to DTA units of the same enterprise on the footing that the units were separate persons or legal entities.

Analysis: The units had separate registrations and invoices were issued, but that by itself did not make them separate legal entities. Rule 19(7) of the Special Economic Zones Rules, 2006 applies to a single enterprise operating both in DTA and SEZ and requires distinct identities with separate books of account, while expressly stating that the SEZ unit need not be a separate legal entity. The definition of person in the Special Economic Zones Act and the overriding provision of that Act did not compel a contrary conclusion. The Tribunal held that service tax, which is attracted to a service between one person and another, could not be levied on services provided by one arm of the same enterprise to another when the SEZ and DTA units were not separate legal persons.

Conclusion: Service tax was not leviable on the inter-unit services in the facts of the case, and the demand, interest and penalties were unsustainable.

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