Service provided by SEZ developer to unit within the SEZ are exempt from service tax

The CESTAT, Mumbai in M/s. Hiranandani Builders v. Commissioner of Service Tax-VII, Mumbai [Service Tax Appeal No. 86258 of 2016 dated August 28, 2023] set aside the demand order and held that, the Revenue Department does not have authority of law to collect service tax on services provided by SEZ developer to units in SEZ within SEZ area.

Facts

M/s. Hiranandani Builders ("the Appellant") is a real estate builder in Mumbai. The Revenue Department conducted the audit for the period from October 2007 to March 2012 ("the Impugned period"), during the audit it noticed the Appellant was receiving amounts towards lease rent and maintenance.

On further scrutiny of the financial accounts it was noticed that the Appellant was receiving money for providing renting of immovable property and maintenance or repair services to various units which were categorized into three categories, viz. units not having SEZ status, units which did not have approved list of services and units availing services before the approval was accorded.

The Respondent contended that the Appellant had violated conditions of Notification No. 04/2004-ST dated March 31, 2004, Notification No. 09/2009-ST dated March 03, 2009 and Notification No. 17/2011-ST dated March 01, 2011 (cumulatively referred as "the exemption notifications") Which exempts taxable service of any description as defined in section 65(105) of the Finance Act, 1994 ("the Finance Act") provided to SEZ developer or a SEZ unit (including a unit under construction) by any service provider for consumption of the services within such SEZ, from the whole of service tax leviable thereon under the Finance Act.

Thus, the Appellant was not entitled for any exemption and was required to pay service tax of  INR 25,90,96,248/- for the period from October 2007 to March 2012 on renting of immovable property service.

A show cause notice dated March 22, 2013 ("the SCN") was issued to the Appellant demanding service tax of INR 25,90,96,248/- along with interest and penalty.

In response to the SCN the Appellant vide reply dated August 07, 2013inter alia stated that the Central Government granted permission to the Appellant to develop an SEZ area at Powai village in Mumbai and therefore, the amounts received from service receivers towards providing premises on lease and for installation of ATM machine and tower were not liable to service tax. 

The Original Authority passed vide an order in Original ("the Impugned Order"), has confirmed the demand of service tax of INR 25,90,96,248/- along with interest and penalty.

Aggrieved by the Impugned Order-in-Original the Appellant filed an appeal before the CESTAT, Mumbai.

The Appellant submitted that they are SEZ developer and have been developing and operating specific special economic zone for information technology and as per Rule 11 of the SEZ Rules, 2006 ("the SEZ Rules"). Since, a SEZ developer cannot sell the land in SEZ and can only allot the land on lease basis to a person desiring to create infrastructure facilities for use by prospective units.

The Respondent contended that the conditions of the above mentioned notifications were violated by the Appellant and therefore, the Appellant was not entitled for the benefits provided under Section 26(1) of the SEZ Act, 2005 ("the SEZ Act").

Issue

Whether services provided by SEZ developers to SEZ units within the SEZ area are exempt from service tax?

Held

The CESTAT, Mumbai in Service Tax Appeal No. 86258 of 2016 held as under:

• Noted that, the exemption notifications are not issued under Section 26(2) of the SEZ Act, but under the Finance Act.
• Further Noted that, Section26(1)(e) of the SEZ Act states that every developer and the entrepreneur will be entitled to the exemption from service tax under Chapter V of the Finance Act, on taxable services provided to a developer or units to carry on authorized operations in a SEZ.
• Opined that, plain reading of Section 26(2) and 26(1)(e) of the SEZ Act, provides that whenever any services are provided to a unit under SEZ, the said services are exempted from payment of service tax, provided no conditions imposed under said sub-section (2) are violated.
• Held that, the Respondent does not have authority of law to collect service tax on services provided by SEZ developer to units in SEZ. 
• Set aside the Impugned Original-in-Order.