By TIOL News Service

MUMBAI, JUNE 17, 2016: THE disputes relate to claim for exemption from tax on services rendered to M/s Nokia India Pvt. Ltd. a unit in a Special Economic Zone, in connection with import and export of goods during the period from December 2005 to July 2007 and the taxability of surplus generated by advance booking of space for air freight.

Demand of Service Tax of Rs.2,56,896/-

Revenue Allegation: The tax was liable on an amount of Rs.20,98,826 being income that was formerly recorded in the books of accounts as 'airline incentive' and now as 'expense reimbursement' which, according to Revenue, was a dressing up of commission received for 'marketing of service provided by client' within the ambit of section 65 (19) of Finance Act, 1996 defining 'business of auxiliary service'.

Assessee submission: According to the assessee, this being surplus generated by trading of space purchased from airline operators in advance, was booked correctly in the accounts- it is an industry practice to offer competitive rates for such bulk booking of space in advance. The airlines would, thereby, surrender that space to such freight intermediaries who, in turn, would allocate space to their exporting customers.

Observation of Tribunal:

++ No effort has been taken to ascertain whether the said amount was a consideration, whether the airline was a client and whether any marketing had indeed been undertaken. The demand of tax on rendering of 'business auxiliary service' is liable to be set aside on this ground alone.

++ Space, being pre-booked, is offered by airlines at reduced rates and the logistics entity bills its customers at a different price and the differential is booked as incentive or profit.

++ It is the consignor who is the client of the appellant and not the airline. Space offered by the airlines is not being marked by the appellant, on the contrary, pre-booked space is sold to consignors by the appellant.

++ No record of any receipts from airlines has been brought on record to evince the flow from them as clients. On the contrary, the appellant pays the airlines for booking of space in aircraft. The airlines, therefore, lack the distinguishing characteristics of a client. The excess reimbursement is the true market price paid by the consignor to the appellant over and above the price at which slot was pre-booked from the airline.

++ As no commission is involved in this trading of 'freight slots', the appellant can hardly be designated as commission agent. The demand of Rs. 2,56,896 fails the test of authority of law and is set aside. [Greenwich Meridian Logistics (India) Pvt. Ltd. - 2016-TIOL-869-CESTAT-MUM relied upon.]

Demand of Service Tax of Rs.2,07,44,989/-

Revenue Allegation: Services valued at Rs.17,42,63,809/- rendered by appellant to Nokia India Pvt. Ltd., a unit in a Special Economic Zone between December 2005 and July 2007, had not been consumed within the zone which was a necessary condition for availing the exemption extended by notification no. 4/2004-ST dated 31 st March 2004.

Assessee submission: Services rendered by the appellant are arrangement of transportation of goods to the airport and port with attendant documentation, clearance formalities and movement by road to the zone - Norasia Container Lines - 2011-TIOL-574-CESTAT-DEL & Maersk India Pvt Ltd. - 2011-TIOL-2022-CESTAT-MAD relied upon in support.

Observations of Tribunal:

++ It is amply clear from the decision [Norasia Container Lines - 2011-TIOL-574-CESTAT-DEL] as well as from the expressions used in the impugned notification 4/2004-STthat the consumption of services within such Special Economic Zone is intended to cover the utilization by the entities within the Special Economic Zone holding a letter of approval. By no stretch can it be stated that it intents to restrict such exemptions only to the extent that it is perceived to be within the boundaries of the Special Economic Zone.

++ With the produce of Special Economic Zone entities being exported out of the country, the mechanism for neutralization of all the indirect taxes incurred on the goods was extended to service tax also.

++ With effect from 11th May 2004, the hitherto existing exemption notifications relating to Special Economic Zones issued under section 5A of CEA, 1944 were substituted and the hitherto existing exemption notifications issued under section 25 of Customs Act, 1962 were rescinded.

++ The Special Economic Zones Act, 2005 was notified on 10 th February 2006 to provide a legal framework for a self-contained, comprehensive and compact scheme to bring about industrial expansion without multiple supervisory jurisdictions.

++ With the coming into force of the Special Economic Zones Act, 2005 exemption from customs, central excise, service tax and other similar levies were statutorily provided for in section 26 of the said Act.

++ The question that begs an answer is whether an unconditional exemption granted in a statute can be restricted by a statutory instrument issued in exercise of delegated authority under another statute that is hierarchically not even its equal in the event of a conflict.

++ The conflict between the exemption under section 26 of Special Economic Zones Act, 2005 and the notification relied upon in the impugned order viz. notification 4/2004-ST is resolved in favour of the former with the latter relegated to redundancy since 10 th February 2006. Such would be the fate of any superfluous notification issued under section 93 of Finance Act, 1994 that saddles the availing of exemption in section 26 of Finance Act, 1994 with conditions.

++ We find that there is no conflict in the application of notification no. 4/2004-ST for the period prior to February 2006 when the Special Economic Zones Act, 2005 came into force.

++ We hold that for the period from February 2006, section 26 of Special Economic Zones Act, 2005 shall govern exemption in supply of services for units or developers in Special Economic Zones for their 'authorized operations' and the exemption notification 4/2004-ST dated 1st March 2004 is not valid for implementation to the extent that it imposes conditions not enacted in section 26 of Special Economic Zones Act, 2005 or contemplated in Rule 31 of Special Economic Zones Rules, 2006.

++ The demand on the appellant in relation to services provided after January 2006 is set aside. For the two preceding months, the appellant shall be accorded the exemption if it cannot be established that services were rendered to a facility of the SEZ promoter outside the Zone.

++ Penalties are also set aside.

The appeal was disposed of.

(See 2016-TIOL-1455-CESTAT-MUM)