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Issues: (i) whether taxable services supplied to SEZ units or developers for authorised operations, and wholly consumed within the SEZ, were eligible for exemption under the SEZ regime and the service tax notifications; (ii) whether the exemption was unavailable merely because the services were routed through contractors or sub-contractors of the SEZ units or developers.
Issue (i): whether taxable services supplied to SEZ units or developers for authorised operations, and wholly consumed within the SEZ, were eligible for exemption under the SEZ regime and the service tax notifications.
Analysis: Section 26(1)(e) of the Special Economic Zones Act, 2005 grants exemption from service tax on taxable services provided to a Developer or Unit for carrying on authorised operations in a Special Economic Zone, and Rule 31 of the Special Economic Zone Rules, 2006 operationalises that benefit. The later service tax notifications were held to be procedural in character and could not curtail the substantive exemption flowing from the SEZ Act, which has overriding effect under Section 51. On the facts, the invoices, log sheets, contracts and declarations showed that the services were used in the SEZ for authorised operations and were wholly consumed there. The Court applied strict construction of fiscal provisions and accepted substantial compliance with the notification conditions.
Conclusion: The exemption was admissible; the demand was unsustainable on this issue and was decided in favour of the assessee.
Issue (ii): whether the exemption was unavailable merely because the services were routed through contractors or sub-contractors of the SEZ units or developers.
Analysis: The exemption depends on the nature and end use of the taxable services for authorised operations in the SEZ, not on the mere presence of an intermediate contractor in the contractual chain. The Court treated the issue as covered by the SEZ framework and prior tribunal reasoning, and held that routing through contractors did not by itself defeat the exemption where the services were in substance rendered for and consumed in the SEZ.
Conclusion: The exemption could not be denied solely because the services were provided through contractors or sub-contractors; this issue was also decided in favour of the assessee.
Final Conclusion: The appeal succeeded on merits and the service tax demand, along with the connected interest and penalties, could not survive.
Ratio Decidendi: Taxable services provided for authorised operations in an SEZ are exempt when the statutory SEZ conditions are substantially satisfied, and a procedural notification cannot narrow the substantive exemption conferred by the SEZ Act with overriding effect.
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