APRIL 06, 2020

By S Narayanan, Advocate

FACTS in brief :

1. DTA unit, when they establish their own units in SEZ having same PAN Number, are regarded as "distinct entity" and are required to take separate registration, as per 2nd proviso u/s 25 of CGST Act, 2017, whether located in same State or any other State.

2. Further, u/s 25 (5), such establishments shall be treated as "establishments of distinct persons" for the purposes of this Act.

3. U/s 20 (v) of IGST Act, 2017, provisions relating to registration i.e Section 25 of CGST Act, 2017, is also applicable to IGST Act, 2017.

4. Hence, any Supply of goods or Services by DTA unit to SEZ unit is subject to assessment of tax, though such supplies to SEZ, are to be treated at par with physical exports u/s 16(1)(b) r/w 2(23) of IGST Act, 2017 as "Zero rated supply".

5. The above Export Supplies to SEZ Unit can be made either on payment of IGST by claiming refund u/r 96 of CGST Rules, 2017 or exported without payment of tax under LUT u/ r 96 A of CGST Rules, 2017, subject to fulfilment of conditions also specified u/s 2 (6) of IGST Act, 2017.

6. Such goods or services exported, are also subjected to Valuation as per Rule 28 of CGST Rules, 2017 as the said transactions are between distinct and related persons, in terms of Clause (2) of SCHEDULE-I of Section 7 which covers, "where activities to be treated as supply even if made without consideration".

7. The transactions between such DTA unit to their own Unit located in SEZ do not involve any physical payment of money, either in rupee currency or in the form of receipt of convertible foreign currency and there will only be debit and credit entries passed, in the respective books of accounts, between two units.

8. SEZ units are not to avail ITC credit.

2. Hence, the question is, whether DTA unit can effect "Supply of Services" to their own unit located in SEZ as "Export Supplies to SEZ Unit" either on payment of IGST by claiming refund u/r 96 of CGST Rules, 2017 or export without payment of tax under LUT u/ r 96 A of CGST Rules, 2017.

3. The bottleneck faced in the above situation is that such DTA units effecting cross charges for the Services to Unit located in SEZ, are treated as Supply between two distinct and also related person and, therefore, are subjected to "compliance under Export of Services ", as regulated u/r 96 on payment of IGST by claiming refund of such tax or without payment of tax u/r 96 A of CGST Act, 2017 r/w Section 2 (6) of IGST Act, 2017, which defines "export of services". Section 2 (6) prescribes fulfilment of certain conditions, so as to regard such Supply of Services as "Export of Services".

4. According to the provisions of Section 2 (6) to qualify for "Export of Services", in the instant case, under reference, two key conditions as per following clauses, are to be fulfilled viz.

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by the Reserve Bank of India ]; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8 ;

And the said Explanation 1 in section 8 of IGST Act, 2017 reads as under

Explanation 1. - For the purposes of this Act, where a person has, -

(i) an establishment in India and any other establishment outside India;

(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or

(iii) an establishment in a State or Union territory and any other establishment [* * *] registered within that State or Union territory,

then such establishments shall be treated as establishments of distinct persons.

5. Due to the fact that the said DTA unit rendering Supply of Service to their own unit located in SEZ area, in terms of 25 (5) of CGST Act, 2017 r/w Explanation 1 in Section 8 of IGST Act, 2017 are to be regarded as "establishments of distinct persons", firstly, the benefit of Export of Services is not available, in terms of Section 2 (6) Clause (v) of IGST Act, 2017 and, secondly, due to the fact that the payment in convertible foreign currency or under Indian currency, will not be received for such Export of services by DTA unit to their own unit located in SEZ area, as required under Section 2 (6) Clause (iv) of IGST Act, 2017.

6. The above results in denial of benefit of Export of Services, in the above situation, causing huge financial burden, though there may not be any intent of legislature to deprive such benefit of Export of services, as the objective of the Government is to ensure that any supply of goods or services from DTA to unit located in SEZ has to be "Zero rated supplies" u/s 16(1)(b) r/w 2(23) of IGST Act, 2017. Needless to mention, Government policy needs to render support to SEZ unit established by such DTA units, to ensure that they are economically viable, so that they remain competitive, in ever challenging Export market.

Suggestion:

Taking in to account the intention of Government, which is to promote and boost export, which inter-alia, include promotion of SEZ units (no matter whether it is an independent unit or such SEZ unit established by another DTA unit), it is inevitable for the Government to make amendments so as to ensure that unintended financial loss does not occur.

Hence, it is a humble suggestion to the Government to make an exception in the above situation, by amending the definition of Export of services, when services rendered by DTA unit to their own SEZ unit, in such a manner that the conditions specified u/s 2 (6) clause (iv) and clause (v) of IGST Act, 2017, are not applicable, by inserting a suitable proviso to Section 2 (6) which, I suggest, may be read as -

"Provided in a case when "Supply of Services or Goods" is made by DTA unit to their own SEZ unit established in SEZ area, conditions mentioned at Clause (iv) and (v) are not applicable, notwithstanding anything contained in any of the provisions this Act or Rules made thereunder or under any other Act or rules under CGST or State provisions relating to GST".

[The views expressed are strictly personal.]