CESTAT sets aside service tax demand on reimbursable expenses and grants notification benefits for SEZ services

CESTAT Bangalore allowed the appeal, setting aside the demand for service tax on reimbursable expenses and denial of notification benefits. The tribunal held that reimbursable expenses cannot be included in taxable value for service tax purposes, citing SC precedent in Intercontinental Consultants case that such inclusion is only valid from May 2015 onwards. Additionally, the appellant was entitled to notification benefits under N/N.15/2009 for services wholly consumed in SEZ, following CESTAT Ahmedabad's decision in Neo Structo Construction case. Both demands were ruled unsustainable and the impugned order was completely set aside.

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The core legal questions considered in this appeal are:

1. Whether the appellant is eligible for refund of CENVAT credit on goods consumed wholly within the Special Economic Zone (SEZ).

2. Whether the service tax demand on reimbursable expenses charged by the appellant is sustainable for the period prior to the amendment of Section 67 of the Finance Act, 1994 with effect from 14.05.2015.

3. Whether the exemption notifications issued under the Finance Act, 1994, particularly Notification No.9/2009-ST dated 03.03.2009 and its amendment by Notification No.15/2009-ST dated 20.05.2009, apply retrospectively and entitle the appellant to exemption on services consumed wholly within the SEZ.

4. The interplay and overriding effect of the SEZ Act, 2005, particularly Section 51, over other taxing statutes such as the Central Excise Act, Customs Act, and Finance Act, 1994 in relation to services and goods supplied for authorized operations within SEZ.

Issue 1: Eligibility for Refund of CENVAT Credit on Goods Consumed in SEZ

The appellant, a manufacturer operating within an SEZ, claimed CENVAT credit on goods consumed wholly in the SEZ and sought refund of service tax paid on specified services used in relation to authorized operations. The legal framework involves Notification No.9/2009-ST dated 03.03.2009 and its amendment by Notification No.15/2009-ST dated 20.05.2009, which provide exemption or refund of service tax for services used in SEZ authorized operations, except for services consumed wholly within the SEZ.

The Tribunal referred to the decision in Neo Structo Construction Pvt. Ltd. vs. CCE, which held that the amendment by Notification No.15/2009-ST substituting sub-paragraph (c) of Notification No.9/2009-ST applies retrospectively from the date of the original notification. The substituted clause exempts services consumed wholly within SEZ from payment of service tax without requiring refund claims.

Further, the Tribunal relied on the decision in SRF Ltd. vs. CCE, which interpreted Section 26 and Section 51 of the SEZ Act, 2005. Section 51 explicitly states that the provisions of the SEZ Act override any inconsistent provisions of other laws, including the Finance Act, 1994. Thus, the charging provisions of service tax do not apply to goods or services supplied for authorized operations in SEZ. This statutory override negates the need for exemption notifications or conditions therein.

Applying this legal framework, the Tribunal concluded that the appellant's services, being wholly consumed within the SEZ for authorized operations, are exempt from service tax under the overriding provisions of the SEZ Act and the amended exemption notifications. Therefore, the demand for service tax on such services is unsustainable.

Issue 2: Levy of Service Tax on Reimbursable Expenses Prior to 14.05.2015

The appellant contested the inclusion of reimbursable expenses in the taxable value for service tax purposes for the period before the amendment of Section 67 of the Finance Act, 1994 effective from 14.05.2015. The appellant argued that prior to this amendment, reimbursable expenses were not includible in the taxable value and thus no service tax was payable on such amounts.

The Tribunal examined the Supreme Court's ruling in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. UOI, which held that Section 67, prior to amendment, did not include reimbursable expenses in the valuation of taxable services. The amendment in 2015 explicitly included reimbursable expenditure or cost incurred by the service provider as part of the taxable value, making this a substantive change with prospective effect only.

The Court reasoned that since the amendment was substantive and not declaratory, it cannot be applied retrospectively. Therefore, any service tax demand based on reimbursable expenses prior to 14.05.2015 is unsustainable. The Tribunal accordingly set aside the demand on reimbursable expenses.

Issue 3: Retrospective Application of Notification No.15/2009-ST and Exemption for Services Consumed in SEZ

The appellant contended that the amendment to Notification No.9/2009-ST by Notification No.15/2009-ST dated 20.05.2009, which exempts services consumed wholly within SEZ, applies retrospectively from the date of the original notification (03.03.2009). This contention was supported by the Tribunal's decision in Neo Structo Construction Pvt. Ltd., which held that substitution of sub-paragraph (c) of the notification carries retrospective effect.

The Tribunal analyzed the language of the substitution, which explicitly provides exemption for services consumed wholly within SEZ without requiring refund claims. The Court emphasized that such retrospective substitution is settled law and must be applied to services provided during the period 03.03.2009 to 20.05.2009.

Applying these principles, the Tribunal found that the appellant's services, including erection, commissioning, and installation, were wholly consumed within the SEZ and thus qualify for exemption under the amended notification retrospectively. Consequently, the service tax demand for this period is not sustainable.

Issue 4: Overriding Effect of SEZ Act, 2005 on Service Tax and Other Levies

The Tribunal examined the interaction between the SEZ Act, 2005, and other taxing statutes. Section 51 of the SEZ Act provides that its provisions prevail notwithstanding any inconsistent provisions in other laws. Section 26(1) of the SEZ Act exempts supplies for authorized operations in SEZ from central excise duty, customs duty, and service tax.

The Tribunal relied on the decision in SRF Ltd. vs. CCE, which held that the charging provisions of the Central Excise Act, Customs Act, and Finance Act, 1994 are overridden by the SEZ Act for supplies made to SEZ developers and units for authorized operations. As a result, no legal authority remains to levy or collect these taxes on such supplies, and exemption notifications become redundant.

This principle was applied to the appellant's case, affirming that service tax cannot be levied on services consumed wholly within the SEZ for authorized operations due to the overriding effect of the SEZ Act.

Conclusions and Significant Holdings

The Tribunal concluded that:

1. The inclusion of reimbursable expenses in the taxable value for service tax purposes prior to 14.05.2015 is unsustainable, as the amendment to Section 67 of the Finance Act, 1994 is substantive and prospective. The Tribunal quoted the Supreme Court's observation:

"Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with 'consideration' is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax."

2. The appellant is entitled to exemption under Notification No.9/2009-ST as amended by Notification No.15/2009-ST dated 20.05.2009 for services wholly consumed within the SEZ, with retrospective effect from 03.03.2009. The Tribunal emphasized:

"If the service provided is for use in authorized operations in the SEZ shall be exempted without opting for the refund by the service provider subject to the condition the services are consumed wholly within the SEZ."

3. The SEZ Act, 2005, by virtue of Section 51, overrides the charging provisions of other laws including the Finance Act, 1994, thereby precluding levy of service tax on goods and services supplied for authorized operations in SEZ. The Tribunal observed:

"The charging sections, having been overridden by the SEZ Act passed by the Parliament, no legal authority to levy and collect central excise duty, customs duty or service tax for goods or services supplied for authorised operations of SEZ developers and units covered by Section 26 remains."

4. Consequently, the demand for service tax, interest, and penalties confirmed by the adjudicating authority is unsustainable and is set aside.

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