Cenvat Credit to Special Economic Zones

Dr. Sanjiv Agarwal

W.e.f. 1.3.2011, Rule 6(6A) had been inserted in Cenvat Credit Rules, 2004 to allow provision of services without payment of service tax to a unit in Special Economic Zones (SEZ) or to a developer in SEZ for their authorized operations, without requirement of reversal of any Cenvat credit on this account. This will help in tax-free receipt of services by units and developers in SEZs.

Rule 6(6A) of Cenvat Credit Rules, protects the service providers located in domestic tariff area from the reversal of Cenvat Credit, when they supply taxable services under exemption, to the authorized operations of SEZ.

Finance Act, 2012 inserted a provision (clause 144) to give retrospective effect to sub-rule 6A of Rule 6 of Cenvat Credit Rules, 2004 inserted w.e.f. 1.3.2011 from 10th February 2006.

The amendments have the following effect – 

In the Cenvat Credit Rules, 2004, made by the Central Government in exercise of the powers conferred by section 37 of the Central Excise Act, 1944, sub-rule (6A) of rule 6 as inserted by clause (ix) of rule 5 of the Cenvat Credit (Amendment) Rules, 2011, published in the Official Gazette vide notification of the Government of India in the Ministry of Finance (Department of Revenue) number G.S.R. 134(E), dated the 1st March, 2011 shall stand amended and shall be deemed to have been amended retrospectively, in the manner specified in column (2) of the Eighth Schedule, on and from the date specified in column (3) of that Schedule, against the rule specified in column (1) of that Schedule.

(1)      Notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, any action taken or anything done or purported to have been taken or done, on and from the 10th day of February, 2006, relating to the provisions as amended by sub-section (1), shall be deemed to be and deemed always to have been, for all purposes, as validly and effectively taken or done as if the amendments made by sub-section (1) had been in force at all material times.

(2)   For the purpose of sub-section (1), the Central Government shall have and shall be deemed to have the power to make rules with retrospective effect as if the Central Government had the power to make rules under section 37 of the Central Excise Act, 1944, retrospectively, at all material times.’

This had the impact to neutralize the demands / investigation for reversal of credits in respect of services provided to SEZ’s for the past period.

The following judicial pronouncements are relevant –

In Sobha Developers Ltd v. CCE, LTU, Bangalore (2012) 25 STR 136 (Cestat, Bangalore), where services were provided to SEZ unit or developers, it was held that services provided to SEZ developer does not mean that SEZ Act becomes applicable and provisions of Finance Act, 1994, Central Excise Act, 1944 and rules thereunder would not be applicable. Rule 6 of Cenvat Credit Rules 2004 and Export of Services Rules did not provided for any exemption to service provider or developer from restriction regarding utilization of cenvat credit or payment of 8% of value of goods. There is no inconsistency between SEZ Act, 2005 and Finance Act, 1994 and Cenvat Credit Rules, 2004. It was held that supplies to SEZ were free of all the taxes considering them at par with exports. As such, the restriction under Rule 6 of Cenvat Credit Rules would not apply [Also see Bajaj Tempo Ltd v. Collector (1994) 69 ELT 122; Sterlite Industries Ltd. (2009) 244 ELT A 89 (Bombay)].

In Cummins India Ltd v. CCE, Pune-III (2011) 32 STT 181 (Cestat, Mumbai), where assessee was engaged in manufacture of diesel generating sets and it cleared the products to SEZ developers during June 2007 to December 2008, where revenue raised demand on non reversal of 10% amount of value of goods cleared under Rule 6 of Cenvat rules and where the assessee submitted that rule 6(6) was amended vide Notification No. 50/2008-CE (NT) dated 31.12.2008 by extending exemption from reversal of the cenvat credit to SEZ developers and said amendment being by way of substitution, had to be retrospective in nature and, hence, it would apply even to the relevant period. According to the assessee, since it was supplying the products to SEZ developer it would amount to export and, hence question of denying the credit on the ground on which it was sought to be denied could not arise. It also held as under –

“From the amendment which has been brought to rule 6(6)(i), it is apparent that during the relevant period the benefit was essentially available only to the SEZ Units and not to the Developer of the Units. The same was sought to be extended to the Developer of the SEZ Units and that too for their authorized operations and not for any other purpose, by way of an amendment which came into force from 31-12-2008, which was much after the relevant period. Merely because the amending notification stated that the clause was substituted for the original clause, it could not be construed that it had come into operation retrospectively. Neither the notification itself disclosed the same nor any other material had been placed on record from which the intention of the Government could be disclosed that extension of the benefit to the Developer of SEZ was to be effective retrospectively. Mere word substitution cannot amount to extending the benefit retrospectively.

The contention that such extension was to be construed to be retrospective as raised by the assessee, the burden in that regard was squarely upon the assessee to prove the same. In the absence of any material which could reveal the intention and purpose behind the Notification which could disclose that the same was intended to be retrospectively operative, it was difficult to accept the contention sought to be canvassed on behalf of the assessee.

Nothing had been placed on record to show that addition of SEZ Developer to be the beneficiaries under the provisions of rule 6(6) was on account of any omission in the earlier notification. Extension of a benefit by addition of certain grounds cannot be construed itself to be retrospective in operation, rather the person claiming retrospectivity has to establish the same by placing on record cogent materials in support of such contention and in the absence thereof, the presumption as stated above would stand non-rebutted”.

Export under SEZ Act

The term ‘export’ has been defined under section 2(m) of the Special Economic Zones Act, 2005. Considering the said definition, supply of goods to a Unit or a Developer of an Unit would amount to export. It is equally true that under section 51, the provisions of the said Act give an overriding effect. However, the said definition is in relation to the words used in the said Act and not the words used in some other Act and this is also clear from the opening expression in section 2 itself. It has been stated therein that in ‘this Act, unless the context otherwise requires———’ and thereafter, the words have been defined. Apparently, the definitions are for the purpose of understanding those words which appear in the said Act itself and not in relation to the similar expressions used in some other statutes. The definition of the term ‘export’ under the Special Economic Zones Act, 2005 cannot be imported either in the Central Excise Act or even in the Customs Act, 1962. Those words will have to be understood in the context in which they are used in respect of statutes.

Section 51 of the SEZ Act, 2005 discloses that the overriding effect is in relation to implementation of the provisions of law comprised under the SEZ Act, 2005 and not in relation to the provisions of any other statute.