2026 (3) TMI 15 - AT - Central Excise

SEZ Act exemption prevails over external notification formalities, so substantive entitlement cannot be defeated by procedural non compliance.

Whether SEZ Act exemptions under Section 26 can be denied for failure to comply with Finance Act notifications was addressed: the Tribunal held that the ... Overriding effect of Section 26 of the SEZ Act over other tax laws - procedural non compliance cannot defeat SEZ exemption Procedural non compliance cannot defeat SEZ exemption - overriding effect of Section 26 of the SEZ Act over other tax laws - Whether denial of exemption and confirmation of service tax demand on account of non submission of Form A 2 is sustainable where services were supplied for authorised operations of an SEZ unit - HELD THAT: - The Tribunal held that exemption afforded by Section 26 of the Special Economic Zones Act, 2005 has overriding effect over charging provisions and notification conditions under other tax laws, and therefore failure to comply with procedural formalities under the Finance Act notifications (such as non submission of Form A 2) cannot defeat the substantive entitlement to exemption. The Tribunal relied upon its earlier decisions and the reasoning of higher courts which recognise that Section 26 and the SEZ Rules occupy the field for grant of exemptions to SEZ developers and units and that procedural conditions in general exemption notifications under the Finance Act are redundant insofar as supplies for authorised operations are concerned. The Tribunal further recorded that the appellant had produced Form A 1 and that issuance of Form A 2 was a function of the tax authorities (not within the appellant's control), so that denial of benefit on this procedural ground was not justified. Applying these principles to the facts, the Tribunal concluded that the adjudicating authority erred in denying the notification benefit and confirming the demand. [Paras 9, 12, 13] Impugned demand set aside in respect of supplies to SEZ unit; exemption benefit upheld notwithstanding non production of Form A 2 and appeal allowed. Final Conclusion: The Tribunal set aside the adjudicating order confirming service tax demand for the period October, 2013 to March, 2014, holding that the SEZ exemption under Section 26 cannot be denied for procedural non compliance (non submission of Form A 2) and allowed the appeal with consequential relief. Issues: Whether exemption from service tax under Section 26 of the Special Economic Zones Act, 2005 for services provided to SEZ units/developers can be denied on the ground of procedural non-compliance with notifications (including failure to obtain Form A-2) issued under the Finance Act, 1994.Analysis: The Tribunal examined the statutory scheme in which Section 26 of the Special Economic Zones Act, 2005 grants exemptions to Developers and Units and Section 51 declares the SEZ Act to have overriding effect over inconsistent provisions of other laws. The Court considered the interplay between the SEZ Act and exemption notifications issued under the Finance Act, 1994, and noted authority holding that where the SEZ Act provides exemption and prescribes terms by rules (including Rule 22 and Rule 47(5) of the SEZ Rules, 2006), the exemptions under Section 26 are not made subject to additional conditions in notifications under other statutes. The Tribunal relied on precedents (including decisions upheld by the Supreme Court) establishing that (a) charging provisions in other statutes cannot operate where Section 26 and Section 51 operate to exempt supplies for authorized SEZ operations, and (b) procedural deficiencies in complying with notification formalities do not defeat the substantive entitlement to exemption under the SEZ law. The analysis also recognised Article 265 (taxes to be levied only by authority of law) and Section 66B of the Finance Act, 1994 as the charging provision that is rendered inapplicable by the overriding SEZ statute in respect of authorised operations.Conclusion: The denial of exemption on the ground of procedural non-compliance (including non-production of Form A-2) is not sustainable where the substantive entitlement under Section 26 of the Special Economic Zones Act, 2005 exists. The adjudged demand of service tax confirmed on that ground is set aside and the appeal is allowed in favour of the assessee.