2016 (7) TMI 307 - HC - Service Tax

High Court: SEZ & DTA units separate for tax. No service tax due on intra-unit services.

The High Court concluded that the appeal against the CESTAT judgment was maintainable before it under section 35F of the Central Excise Act. Regarding the ... Taxability of services provided by the SEZ unit to the DTA unit of the same assessee - principle of mutuality - Maintainability of appeal before the High Court - whether the appeal would lie before the Honble Supreme Court as provided under section 35(L) of the Act? - Demand of service tax with interest and penalty - The assessee opposed such proposal mainly on the ground that one unit of a company cannot provide service to another unit since for providing taxable service, it is necessary that there should be two separate entities. Held that:- the Special Economic Zones Act was enacted to provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto. - All the statutory provisions indicate separate and artificially created independent existence of a SEZ unit of a company whether it has another unit situated in Domestic Tariff Area or not. In particular, Rule 19(7) of the Special Economic Zones Rules, 2006 while recognising that the same legal entity may have two units, one in SEZ and another in DTA, mandates that the two would have distinct identities with separate books of accounts. For various purposes, thus a SEZ unit of an enterprise which also has an additional unit in Domestic Tariff Area, therefore, has a distinct identity. Its accounts are separate, its accounting would be separate. This artificial creation of separate accounting of a unit or an industry of a common enterprise or a company, is not a new or unknown phenomena. In number of cases, where Income Tax Act provides profit linked incentives such as deductions under sections 80HHC, 80I, 80IA, 80IB, etc., the industry or unit engaged in such eligible business is treated separate and distinct for the purpose of accounting so that deductions of the assessee out of its eligible business can be separately worked out. Under the circumstances, in view of statutory scheme noticed in the Finance Act, 1994 and Special Economic Zones Act, 2005, the contention of the respondent company that on the principle of mutuality, the services rendered by its SEZ unit to a Domestic Tariff Area unit, would not be chargeable to service tax, cannot be accepted. Valuation - free services - Held that:- When the service is provided but no value thereof is charged, there would be no question of collecting service tax. No provision has been brought to our notice in the Finance Act, 1994 under which though the service provider has not charged any value for service, service tax thereon still can be levied on its deemed value, be it market value or fair value. - if the department proceeds on the premise that a certain service though otherwise a taxable service, the service provider did not collect any charge for the same from the service recipient, in our opinion, it would simply not be possible for the authority to collect any service tax on such service. For such reasons, while therefore, dismissing the Revenue's appeal against the judgement of the Tribunal, on the grounds different from which appealed to the Tribunal, we answer the question clarifying that in the present case, no service tax was leviable since the SEZ unit of respondent assessee had not charged for the services provided to its DTA unit. - Decided against the revenue. Issues Involved:1. Maintainability of Appeal: Whether the appeal against the CESTAT judgment is maintainable before the High Court or should lie before the Supreme Court under section 35(L) of the Central Excise Act.2. Service Tax Liability: Whether the SEZ unit and DTA unit of the respondent company can be considered a single legal entity for the purpose of levy of service tax, thereby exempting the respondent from paying service tax.Issue-wise Detailed Analysis:1. Maintainability of Appeal:The primary issue addressed was whether the appeal against the CESTAT judgment was maintainable before the High Court. The Division Bench, through a detailed judgment on 25.9.2014, concluded that the appeals were maintainable before the High Court under section 35F of the Central Excise Act, 1994. This resolved the first question affirmatively, making the appeal maintainable before the High Court.2. Service Tax Liability:The core issue was whether the Tribunal erred in holding that the respondent was not liable to pay service tax. The background facts reveal that the respondent company had units in both SEZ and DTA. The SEZ unit provided various business support services to the DTA unit, which were taxable under the Finance Act, 1994. The adjudicating authority issued a show cause notice for service tax, penalty, and interest, which the respondent opposed, arguing that one unit of a company cannot provide service to another unit due to the principle of mutuality.The adjudicating authority, however, considered the SEZ and DTA units as separate entities based on Rule 4 of the Service Tax Rules, 1994, and Rule 19(7) of the Special Economic Zones Rules, 2006, which mandates maintaining separate books of accounts for SEZ and DTA units. Consequently, the authority ordered recovery of service tax with interest and imposed penalties.The Tribunal, however, allowed the respondent's appeal, holding that the SEZ and DTA units cannot be considered separate persons for service tax purposes. It emphasized that service tax requires a transaction between two persons, which was not the case here.Arguments by the Department:The department contended that the Tribunal misinterpreted the Finance Act, 1994, and that the SEZ unit was a distinct entity providing taxable services to the DTA unit. The department argued that the principle of mutuality was wrongly applied and cited Rule 19(7) to assert the distinct identity of SEZ units.Arguments by the Respondent:The respondent argued that the services were for the entire company's benefit, and expenses were apportioned for convenience. They cited various judgments supporting the principle of mutuality, asserting that one unit cannot provide taxable services to another unit of the same company.Court's Analysis:The court examined the relevant statutory provisions, including sections 66 and 65(105) of the Finance Act, 1994, and sections 2(za), 2(zc), 7, and 30 of the Special Economic Zones Act, 2005. It noted that SEZ units receive special tax considerations and must maintain separate accounts and identities as per Rule 19(7) of the SEZ Rules, 2006.The court concluded that the SEZ and DTA units have distinct identities for accounting and taxation purposes. However, it emphasized that service tax is levied on the value of taxable services. Since the respondent did not charge any value for the services provided by the SEZ unit to the DTA unit, no service tax could be levied. The court stated that service tax requires a chargeable value, which was absent in this case.Conclusion:The court dismissed the Revenue's appeal, holding that no service tax was leviable as the SEZ unit did not charge for the services provided to the DTA unit. This conclusion was based not on the principle of mutuality but on the absence of any charge for the services, thus negating the applicability of service tax.Final Judgment:The tax appeals were dismissed, affirming that no service tax was leviable since the SEZ unit of the respondent company had not charged for the services provided to its DTA unit.