Input tax credit on SEZ supplies remains admissible where zero-rated sales are distinct from exempt sales.

Reversal of input tax credit on supplies to Special Economic Zone units was found unsustainable where the assessment treated such sales as exempt and relied on an audit objection not supported by the records, including Form WW. The governing position is that zero-rated sales under Section 18 of the Tamil Nadu Value Added Tax Act, 2006 are distinct from exempt sales, input tax credit remains admissible for such supplies, and Section 19(5) does not apply to zero-rated sales. On that basis, the assessment orders could not stand as framed and were remanded for fresh consideration by the assessing authority.

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Issues: Whether reversal of input tax credit on sales made to Special Economic Zone units was justified and whether the assessment orders required to be set aside and remanded for fresh consideration.

Analysis: The challenge arose from the attempted reversal of input tax credit on the footing that supplies to SEZ units in other States were exempt sales. The assessment was founded on Section 8(6) of the Central Sales Tax Act, 1956, but the records, including the Form WW produced by the petitioner, did not support the audit objection on which the reversal was based. The legal position governing SEZ supplies and zero-rated sales had already been clarified by the Division Bench, which held that zero rating under Section 18 of the Tamil Nadu Value Added Tax Act, 2006 is distinct from exemption, that input tax credit remains admissible for such sales, and that Section 19(5) does not apply to zero-rated sales. In view of that binding position and the erroneous factual basis adopted in the assessment, the impugned orders could not be sustained as they stood.

Conclusion: The assessment orders were remanded to the assessing authority for fresh consideration, and the petitioner succeeded in challenging the reversal of input tax credit.

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