SEZ exemption and reverse charge dispute over external borrowing services supported waiver of pre-deposit and stay of recovery.

External commercial borrowing services arranged for setting up a unit in a Special Economic Zone were treated as supporting a strong prima facie case for SEZ exemption under Notification No. 4/2004-S.T. The demand had been raised under the reverse charge mechanism on the footing that the arrangement constituted Banking and Financial Services, but the record showed that the borrowing was linked to an SEZ project and the transaction did not ultimately materialise. On that basis, waiver of pre-deposit was granted and recovery of the disputed service tax, interest and penalties was stayed pending disposal of the appeal.

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Issues: Whether the appellant made out a prima facie case for waiver of pre-deposit of service tax, interest and penalties on the ground that the impugned service related to external commercial borrowings for setting up a unit in a Special Economic Zone and was covered by the SEZ exemption notification.

Analysis: The amount demanded had been confirmed under the reverse charge mechanism on the premise that the arrangement for external commercial borrowings constituted Banking and Financial Services. The record showed that the borrowings were contracted for setting up a unit in a Special Economic Zone, and that the transaction did not ultimately materialise. Notification No. 4/2004-S.T. exempted taxable services of any description provided to a developer of a Special Economic Zone or a unit therein for consumption within the Special Economic Zone. On that basis, the claim to exemption was found to support a strong prima facie case.

Conclusion: The appellant was entitled to waiver of pre-deposit and recovery of the disputed amount was stayed pending disposal of the appeal.

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