SEZ works-contract exemption: invoice endorsement treated as procedural, and State tax levy failed under overriding SEZ protection.

In SEZ works-contract transactions, endorsement by Customs or SEZ authorities on the running invoice under rule 42(2A) of the Gujarat VAT Rules was treated as a procedural requirement, not a condition precedent, because such endorsement was impracticable after goods had entered the SEZ and were used in the work; endorsement on the purchase bills was accepted as sufficient compliance. The SEZ exemption framework under section 21 was treated as having overriding effect, so State VAT could not be levied on transactions within the SEZ. As the basic tax levy failed, interest and penalty also could not be sustained.

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Issues: (i) Whether endorsement by the Customs or SEZ authority on the running invoice was a mandatory condition for claiming exemption under section 5A of the Gujarat Value Added Tax Act, 2003 read with rule 42(2A) of the Gujarat Value Added Tax Rules, 2006 in respect of goods used in execution of a works contract in the SEZ. (ii) Whether tax, interest and penalty could be levied on the disputed transactions in view of the exemption regime under section 21 of the Gujarat Special Economic Zone Act, 2004.

Issue (i): Whether endorsement by the Customs or SEZ authority on the running invoice was a mandatory condition for claiming exemption under section 5A of the Gujarat Value Added Tax Act, 2003 read with rule 42(2A) of the Gujarat Value Added Tax Rules, 2006 in respect of goods used in execution of a works contract in the SEZ.

Analysis: The transactions arose in the course of a works contract, where goods were purchased for later use in execution of the contract and the running bills were raised only after the goods had entered the SEZ area and were used in the work. In that situation, endorsement of the running invoices by the Customs or SEZ authority was not practically possible. The endorsement obtained on the purchase bills was treated as sufficient compliance. Rule 42(2A) was therefore construed as prescribing procedure rather than a condition precedent for denial of exemption.

Conclusion: The requirement in rule 42(2A) was directory and not mandatory, and the assessee remained entitled to the exemption under section 5A.

Issue (ii): Whether tax, interest and penalty could be levied on the disputed transactions in view of the exemption regime under section 21 of the Gujarat Special Economic Zone Act, 2004.

Analysis: The Court applied the overriding effect of the SEZ legislation and the earlier binding view that State taxation cannot be levied on sales or purchases within the SEZ area in the absence of a clear statutory provision overriding the SEZ exemption. Since the transactions were within the SEZ framework, the levy of tax was not sustainable. Once the basic tax levy failed, interest and penalty could not survive.

Conclusion: Tax, interest and penalty were not leviable on the disputed transactions.

Final Conclusion: The exemption claim was upheld, the State's challenge was rejected, and the Tribunal's order was sustained on both issues.

Ratio Decidendi: A procedural endorsement requirement for SEZ-related zero-rated sales cannot be treated as mandatory where compliance is impracticable in a works contract, and State tax cannot be levied on SEZ transactions when the SEZ statute operates with overriding effect.

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