JULY 02, 2018

By Anupama Ravindran, Advocate, Lakshmikumaran & Sridharan, Bangalore

RECENTLY, in the Advance Ruling No. KARADRG-2/2018 dated 21st March, 2018 issued for GOGTE Infrastructure Development Corporation Ltd, reported at 2018-TIOL-29-AAR-GST, the question of whether the Hotel Accommodation and Restaurant Services provided within the premises of the Hotel to employees and guests of SEZ unit is to be treated as supply of goods and services to SEZ units was raised.

The Authority for Advance Ruling (AAR) stated that vide Section 16(1)(b) of the IGST Act and Rule 46 of CGST Rules read together, it is clearly evident that the supplies of goods or services or both towards the authorized operations only shall be treated as zero rated supplies to SEZ developer / SEZ Unit. Otherwise, supplies to SEZ by way of Accommodation Service and Restaurant service is an intra-state supply.

Section 16 of the IGST Act states that "Zero rated supply" means supplies of goods or services or both inter alia to SEZ developer or SEZ Unit and a registered person making zero rated supply shall be eligible to claim refund under the following options:

++ Supply of goods or services or both under bond or LUT without payment of IGST and claim refund of unutilized Input Tax Credit

++ Supply of goods or services or both on payment of IGST and claim refund of such tax paid.

Section 16 of IGST Act does not make any limitation of supplies of goods or services only for authorized operations to SEZ developer or SEZ Unit.With regard to refund of tax for zero rated supplies made without payment of tax, Section 54 of CGST Act also does not make any reference to supplies made only for authorised operations of the unit or developer.

Rule 89 of the CGST Rules with regard to refund of tax states that any person claiming refund of tax, other than IGST paid on goods exported out of India, may file an application electronically in Form GSTRFD-01 provided that in respect of supplies to SEZ unit or SEZ developer, the application for refund shall be filed by supplier of goods after such goods or services have been admitted for authorized operations.

In the instant case, the Rule has travelled beyond the intention of the legislation as enshrined under the relevant Sections referred above. Rule 89 refers to authorized operations, but the Act does not bear any such references. In Officer Commanding-in-Chief v. Subhash Chandra Yadav [(1988) 2 SCC 35], the Honorable Supreme Court has held that although rules have statutory force, two conditions must be fulfilled for a rule to have effect. One condition is that it must conform to the provisions of the statute under which it is framed and secondly it must also come within the scope and purview of the rule making power of the authority framing the rule. It was further held that if the conditions are not fulfilled, the Rule so framed would be void.

In Union of India v. S. Srinivasan - (2012) 7 SCC 683 the Honorable Supreme Court reiterating the principle held that if a rule going beyond the rule making power conferred by the statute, the same has to be declared ultra vires . A rule must be in accord with the parent statute and cannot travel beyond it.

In the instant case, therefore, the Rule inserting a condition that refund of unutilized Input Tax Credit will be available only for zero rated supplies that are made for authorized operations is going beyond the intention in Section 16 and Section 54. To the extent that the Rule discusses about Authorized operation, it goes beyond the intention of legislation and can possibly be held as ultra vires , if the issue is brought up in a court of law.

It is to be noted that according to Section 26 of the SEZ Act, 2005 developers and units shall be entitled to exemptions of duties for goods imported into or services provided in a SEZ to carry on the authorised operations.

However, the issue we are referring to herein is with regard to nature of GST supply to SEZ units and not with respect to any exemption being provided for supplies made to a SEZ unit or developer. Therefore, Rule 89 of CGST Act with regard to refund or Section 26 of SEZ Act is not relevant for determining the nature of supply.

Further, the AAR also held that the place of supply of services by way of lodging accommodation by a hotel shall be the location at which the immovable property is located or intended to be located, under Section 12(3)(b) of the IGST Act. The AAR held that Hotel Accommodation and restaurant services provided to SEZ developers or units are intra state supplies (CGST/SGST Supplies) and are taxable accordingly. Hence it is necessary to understand the legal position on what is the place of supply for those supplies which are made to SEZ units.

Supplies made to SEZ have been discussed under Section 7 and Section 8 of the IGST Act. Section 7(5) of the IGST Act states that supply of goods or services or both, to or by a SEZ developer or a SEZ unit shall be treated to be a supply of goods or services or both in the course of interstate trade or commerce.

Section 8(1) of the IGST Act states that, subject to provisions of Section 10 (Place of supply of goods other than supply of goods imported into, or exported from India) supply of goods where the location of supplier and the place of supply of goods are in the same state shall be treated as an intra-state supply, provided supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit shall not be treated as intra-state supply.

To start with, there is no condition in Section 16 or Section 7 with regard to authorised operations in a SEZ. Secondly, even if we were to liberally accept that the Rules can travel beyond the Act, the uniform list of services is to be noted. In the uniform list of services for authorized operations for SEZ provided vide F. No. D.12/19/2013-SEZ dated 2nd January, 2018 by the Under Secretary to the Government of India to all the Development Commissioners, SEZ,Sl. No. 66 of the authorized services list covers "Accommodation Services". The AAR does not go into this issue.

The order of Advance Ruling Authority is a little unsettling, and leaves SEZs in a state where there is no clarity on the mode of their operations. If the AAR conceded that it is for authorized operations, then would we consider as IGST transaction under Section 7? Can the intention of a supply under SEZ Act determine the nature of the supply under CGST / IGST Act? To rephrase, can an authorized operation decide the nature of supply viz. Inter-state / Intra-state.

It appears that the Government intends to set right the anomaly created by the AAR and hence, issued Circular No. 48/22/2018-GST dated 14-06-2018 which clarifies that the services of short term accommodation, conferencing, banqueting, etc., provided to a SEZ unit/developer is an inter-state supply. The Circular also states that zero rated supply benefit is available to the supplier if the SEZ unit/ developer receives the goods / services for Authorized Operations.

Section 103 of the CGST Act states that the Advance Ruling pronounced by the Authority or the Appellate Authority shall be binding on the applicant, unless the law, facts or circumstances supporting the ruling have changed.

In the instant case, a clarificatory Circular was issued which was contradictory to what the Authority has held. The law and circumstances have not changed.

In this situation, what is the advise to the assessee - To follow the Advance Ruling or to follow the circular. The rest of the industry is sure to follow the Circular. If the assessee follows the AAR, he is in trouble with the nature of tax and if he does not follow the AAR, he is in trouble of not following the order. Thankfully, the recourse to appeal is still pending with him.

(The views expressed are strictly personal.)