The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a Special Economic Zone (SEZ) unit cannot be denied refund of service tax on input services merely because such services were not wholly consumed within the geographical limits of the SEZ, so long as they were used for authorised operations. 

The bench of  Rajeev Tandon (Technical Member) allowed the appeal filed by an SEZ-based tyre manufacturer and directed grant of a refund of ₹13.37 lakh, setting aside the contrary findings of the lower authorities. 

The appellant, ATC Tires Private Limited, an SEZ unit engaged in the manufacture of excisable goods under Chapter 40 of the Central Excise Tariff Act, had filed a service tax refund claim of ₹1.27 crore under Notification No. 17/2011-Service Tax dated March 1, 2011. The adjudicating authority sanctioned ₹1.03 crore, while rejecting part of the claim.

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On appeal, the Commissioner (Appeals) granted further relief but continued to reject ₹14.69 lakh, primarily on the ground that several input services had not been “wholly consumed” within the SEZ and, therefore, were allegedly ineligible for refund. Dissatisfied with this partial rejection, the company approached the CESTAT. 

The disputed refund related to a wide range of services used by the SEZ unit, including:

• Construction of factory building within the SEZ;
• Insurance brokerage and insurance services;
• Payroll processing services;
• Legal consultancy;
• Statutory compliance and advisory services;
• Architectural services;
• Recruitment services;
• Testing and inspection of coal used in manufacturing;
• Software development services;
• Telephone services; and
• Brokerage services for procurement of electricity.

The appellant argued that all these services had been approved by the SEZ Approval Committee and were directly connected with its authorised manufacturing operations, even if some services were performed or sourced outside the SEZ premises. 

The Tribunal examined Section 26(1)(e) of the Special Economic Zones Act, 2005 along with Notification No. 17/2011-ST and observed that the statutory exemption is linked to authorised operations, not to the physical location where the service is consumed.

It noted that neither the SEZ Act nor the notification mandates that every eligible service must be wholly consumed within the geographical boundaries of the SEZ for refund eligibility. The expression “wholly consumed” under the notification merely provides an option for obtaining exemption upfront without payment of service tax and does not restrict the refund mechanism where tax has already been paid. 

The Bench further observed that if services are shared between an SEZ unit and a Domestic Tariff Area (DTA) unit, the notification itself provides a proportionate refund mechanism. However, in the present case, the Revenue had produced no evidence that the disputed services were shared with any DTA operations. 

A significant factor weighed by the Tribunal was that the Commissioner (Appeals) had never recorded a finding that the disputed services were unrelated to the authorised operations of the SEZ unit.

Instead, the refund was denied solely on the premise that the services were not wholly consumed within the SEZ. According to the Tribunal, such reasoning was legally unsustainable because the notification requires the Revenue to establish that the services were not used for authorised operations, which it had failed to do. 

The Tribunal relied extensively on the Andhra Pradesh High Court’s judgment in GMR Aerospace Engineering Ltd. v. Union of India, wherein it was held that the exemption available under Section 26 of the SEZ Act overrides inconsistent provisions under the Finance Act. The Tribunal also noted that the Supreme Court had dismissed the Revenue’s challenge against that judgment.

The Bench also referred to the Delhi High Court’s decision in Jindal Stainless Ltd. v. Union of India, which held that service tax exemption cannot be denied merely because services are consumed outside the SEZ, provided they are used for authorised operations.

Additionally, the Tribunal observed that in the appellant’s own earlier case, the Chennai Bench had already granted similar relief for another period by following the GMR Aerospace ruling. 

The Tribunal emphasized that procedural requirements under the notification cannot override the substantive exemption granted under the SEZ Act. It observed that several services—such as legal advice, insurance brokerage, recruitment, statutory compliance, payroll processing, and testing services—may naturally be rendered outside the SEZ premises but are nevertheless indispensable for carrying out authorised operations of an SEZ unit.

Consequently, such services cannot be excluded from the benefit of service tax exemption merely because they are not physically consumed within the SEZ. 

Allowing the appeal, CESTAT held that the appellant had successfully demonstrated that the disputed services were used for authorised operations of its SEZ unit. Since there was no finding that the services were unrelated to authorised operations, the denial of refund on the ground that they were not wholly consumed within the SEZ was held to be without merit.

The Tribunal accordingly set aside the impugned orders to the extent of ₹13,37,485 and directed grant of the refund, disposing of the appeal in favour of the assessee.

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