By TIOL News Service

AHMEDABAD, JULY 11, 2016 : THESE are tax appeals filed by the department before the Gujarat High Court challenging the judgement of CESTAT.

The substantial question of law is -

(i) Whether the HonbleCESTAT Bench, Ahmedabad has erred in holding that for the purpose of levy of Service Tax, the Respondent and L&TEPC unit as a single legal entity in the fact and circumstances of the case, and hence Respondent is not liable to pay Service Tax?"

The respondent has various units in the country. One of its units is situated in the Special Economic Zone. This Special Economic Zone unit had carried out project management activities including planning and controls, technical support, supply chain management, contracts management, engineering and design and back operations for finance and accounts and human resources functions and such services were availed by units of assessee situated in Domestic Tariff area. These were in the nature of Business Support Services and were taxable services under the FA, 1994.

The adjudicating authority was of the opinion that the SEZ and DTA units of the assessee company were separate and distinct units; that assessee'sSEZ and DTA units are maintaining separate books of accounts, are separately and independently registered commercial organisations, have separate manpower, distinct identity, separate objectives and expertise;that SEZ unit had raised invoices for covering the charges for providing project management services monthwise and such transactions were recorded in their books; that the respondent assessee had not paid service tax though liable; therefore, ordered recovery of service tax with interest and also imposed penalties.

The Tribunal, while setting aside the order and allowing the appeal held that SEZ unit and DTA unit of the assessee cannot be considered as separate persons; that merely because they are required to maintain separate books of account in terms of rule 19(7) of the SEZ Rules, would not mean they are separate entities. The Tribunal was of the opinion that service tax would be levied on a transaction between a person and another person and levy of service tax, therefore, would require a transaction between two persons.

It is this judgement that the department is aggrieved with.

After considering the submissions made by both sides, the High Court extracted various provisions of the SEZ Act, 2005, SEZ Rules, 2006 & section 65(104c) of the FA, 1994 and observed -

++ In view of statutory scheme noticed in the Finance Act, 1994 and Special Economic Zones Act, 2005, the contention of the respondent company that on the principle of mutuality, the services rendered by its SEZ unit to a Domestic Tariff Area unit, would not be chargeable to service tax, cannot be accepted. If this principle is applied, the very artificial creation of treating a SEZ unit separate and distinct for accounting, consumption of raw materials, production and clearance purposes would shatter. The concept of mutuality is essentially based on the principle that where certain services or facilities are created by group of persons for themselves, as in the case of a club for recreation, any excess or residue, from out of the funds collected, would not become the income of the club chargeable to tax.

++ If the value of service provided is nil, there would be no occasion for charging the service tax. In essence, thus section 66 aims at collecting service tax when a certain service is provided for a value. To put it conversely, when the service is provided but no value thereof is charged, there would be no question of collecting service tax. No provision has been brought to our notice in the Finance Act, 1994 under which though the service provider has not charged any value for service, service tax thereon still can be levied on its deemed value, be it market value or fair value.

++ Explanation to section 65 states as under: "For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons, to a member thereof, for cash, deferred payment or any other valuable consideration."

Thus the term taxable service has a direct relation to the consideration either paid in cash or by way of deferred payment or by mentioning of any other valuable consideration. This would reinforce our belief that when no charge was collected for providing the service, there would be no question of applying a rate of tax on the value of such service.

++ According to the assessee, providing of service by its SEZ unit to its DTA unit was merely for the purpose of convenience and SEZ unit had not collected any charge for such service from its DTA unit. Though the Assessing Officer in his order has made a brief reference to the SEZ unit receiving consideration for such service, we do not find any basis for such a conclusion. In fact, the case of assessee all along has been that invoices were raised for such services merely for the purpose of convenience and in fact, since promotional programmes were being organised, which would benefit the entire company and its different units, there was no question of charging a particular unit by SEZ unit for such service and that raising of invoices was merely for the purpose of convenience. If that be so, in our opinion, no service tax could be levied not on the principle of mutuality but, as noted, on the ground that service provided carried no actual value.

The High Court, therefore, dismissed the Revenue's appeal against the judgement of the Tribunal.

It is made amply clear by the High Court that the appeal is dismissed on the grounds different from which appealed to the Tribunal inasmuch as it was held that no service tax was leviable since the SEZ unit of respondent assessee had not charged for the services provided to its DTA unit.

(See 2016-TIOL-1337-HC-AHM-ST)