1. Authority on Advance Rulings (“AAR”) in Karnataka held in the case of Gogte Infrastructure Development Corporation Ltd (Advance Ruling No. KARADRG-2/2018) that the supply of hotel accommodation services by a hotel situated outside the SEZ to a unit in SEZ shall not enjoy the benefits of zero-rating and hence will be taxed. It further held that such supply shall be regarded as an intra-state supply and hence CGST & SGST shall be payable. Logic advanced by the AAR is that such hotel accommodation services are not for the authorized operations and are also not consumed inside the SEZ. Place of supply has also been determined by applying Sec. 12(3)(b) of the IGST Act, 2017, i.e. the location of such hotel, and hence regarded as an intra-state supply.
2. We humbly submit that the AAR has got this thing completely wrong. Let us understand why.
3. 16(1) of the IGST Act, 2017 provides as under:
“Sec. 16. Zero rated supply. — (1) “zero rated supply” means any of the following supplies of goods or services or both, namely :-
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.”
4. A bare reading of the above provision would entail that the supply of all kinds of goods or services to a SEZ shall be regarded as a zero-rated supply.
5. Further third proviso to Rule 46 of the CGST Rules 2017 stipulates that the invoice shall carry an endorsement “Supply meant for export / Supply to SEZ unit or SEZ Developer for authorised operations on payment of Integrated Tax” or “Supply meant for Export / Supply to SEZ unit or SEZ Developer for authorised operations under Bond or Letter of Undertaking without payment of Integrated Tax” as the case may be.
6. Can a Rule which only stipulates the manner of preparing an invoice override the express provisions of law which clearly provides that the benefit of zero-rating is available to all kinds of supplies to SEZ ?
7. Answer seems to be no. Benefit of zero-rating accorded by Sec. 16(1) is in the nature of a concession. It is trite law that a subordinate legislation (in the form of Rules) has to conform to the parent statute and any subordinate legislation inconsistent to the provisions of the parent statute is liable to be set aside.
8. Apex Court in the case of K. Garad v. Nasik Merchants Co-op. Bank Ltd. – AIR 1984 SC 192 held that if there is any conflict between a statute and the subordinate legislation, the statute shall prevail over the subordinate legislation and if the subordinate legislation is not in conformity with the statute, the same has to be ignored.
9. Similarly Apex Court in the case of Additional District Magistrate (Rev.), Delhi Administration Shri Ram AIR – 2000 SC 2143 held that it is a well-recognized principle that conferment of rulemaking power by an Act does not enable the rule making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.
10. Division bench of Hon. Delhi High Court in the case of Federation of Indian Airlines Union of India – [WP (C) No. 8004/2010] has elaborately discussed the above proposition of law and held as under:
“The basic test is to determine whether a rule to have effect must have its source of power which is relatable to the rule making authority. Similarly, a notification must be in accord with the rules, as it cannot travel beyond it. In this context, we may refer with profit to the decision in General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav, AIR 1988 SC 876 wherein it has been held that before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void.”
11. Hence we submit that the AAR has not appreciated the judicial precedents while holding that the benefit of zero-rating shall be available only for authorized operations merely on the ground that Rule 46 provides for a certain declaration on the invoice despite the fact that the express provisions contained u/s 16(1) of the IGST Act, 2017 do not have any such restrictions.
12. Even assuming that the benefit of zero-rating shall be available only for “authorized operations” we submit that the supply of hotel accommodation services to the employees of SEZ unit is indeed for “authorized operations”. The term “authorized operations” means the operations authorized by the Board (see Sec. 2(c) of the SEZ Act, 2005).
13. Authorized operations generally includes all operational activities such as construction of factory building, manufacturing of goods, etc. Accommodation services in respect of employees staying in a hotel for the business purpose related to authorized operations is clearly a supply for carrying out the said operations.
14. SEZ Act, 2005 (Central Act 28 of 2005) was enacted providing for SEZ within the territory of India and for providing inter alia immunities/exemptions from taxes/duties/cesses. Section 7 of the 2005 Act enjoins that any goods or services exported outside, or imported into, or procured from the domestic tariff area, by a unit in SEZ or a developer shall, subject to such terms and conditions and limitations, as may be prescribed be exempted from payment of taxes/duties/cesses under all enactments specified in the First Schedule. The First Schedule does not enumerate the Act (Finance Act, 1994) as among the enactments in respect of which exemption from taxes/duties or cesses is available under Section 7 of the 2005 Act. However, Section 26(1)(e) enacts that subject to the provisions of subsection (2) thereof, every developer and entrepreneur shall be entitled to exemption from Service Tax under Chapter (V) of the Act on taxable services provided to a developer or unit to carry on the authorised operations in a SEZ (it is surprising that the SEZ Act, 2005 has not been amended to provide for the benefits under GST although the benefits are being granted and hence we shall read the said provisions as applicable to GST also).
15. In view of the legislated exemption (supra) and since provisions of the 2005 Act are provided an overriding effect vide Section 51; and absent any provision in the Act which eclipses the overarching trajectory of the 2005 Act, the immunity to GST in respect of supply of goods and services to SEZ is a legislatively enjoined immunity.
16. Thus we submit that provisions contained u/s 16(1) of the IGST Act, 2017 merely contours the process by which the benefit of exemption/immunity to tax granted by the SEZ Act is operationalized. Thus said provisions cannot be interpreted in a sense to impose any restrictions on the benefit granted by the SEZ Act.
17. Now coming to the SEZ Act we submit that benefit/concession is available for the authorized operations in a Special Economic Zone (see Sec. 26 of SEZ Act read with Rule 31 of the SEZ Rules). An issue arose in a similar context before the Hon. Delhi High Court in the case of Jindal Stainless Limited v. Union of India 2017 (51) S.T.R. 130 (Del.).
18. In this case petitioner availed services of a Charted Accountant for SEZ operations. Petitioner requested the Chartered Accountant not to levy any service tax on the invoice since the services are for SEZ. Said Chartered Accountant relied on Letter (F. No. DGEP/SEZ/473/2006, dated 3-4-2008) issued by the Additional Director General, Directorate General of Export Promotion, and submitted that he cannot claim the benefit since services have not been provided “in” the SEZ. Said Circular provided that the expression “authorised operations in a Special Economic Zone” would only include those services that are rendered and consumed in a SEZ and hence services provided outside SEZ though to SEZ unit for the authorized operations cannot enjoy the benefit. It was contended by the petitioner before the Court that the only condition required for availing exemption from payment of Service Tax by a developer/Entrepreneur is that the taxable service should be used for the carrying on the authorized operations by the Developer/Entrepreneurs. The location of the service provider or the place of service is entirely irrelevant for the purpose of this exemption. It was also submitted that the Circular cannot override the statutory provisions. Court setting aside the said Circular held as under:
“32. A plain grammatical reading of Section 26(1)(e) of the SEZ Act, 2005 makes it clear that taxable services provided by a service provider to a Developer or a Unit/entrepreneur to carry out authorised operations in a Special Economic Zone are exempted from levy of service tax. Similarly, a bare perusal of Rule 31 of the SEZ Rules, 2006 make it abundantly clear that the exemption from service tax is available on services rendered to a developer or a unit/entrepreneur for carrying out authorised operations. Further, from a combined reading of Section 26(1)(e) with Rule 31 makes it evident that the only condition that is required to be satisfied to avail the service tax benefit under the said provisions is that the services must be rendered for the purpose of carrying out the “authorised operations in a special economic zone”. Had it been the intention of the legislature that only those services are exempted from levy of service tax that are rendered within the special economic zones, the legislature would have categorically and clearly stated so in the statute. In the absence of such express intention, the court cannot add words to the statute to lead to an interpretation which could not have been the intention of the legislature.”
19. Hence we submit that the hotel accommodation services for authorized operations in the SEZ qualifies for the benefit of zero-rating even though physically such services are provided outside the SEZ.
20. AAR has again failed to rely on the above ruling while deciding the application.
21. Lastly AAR has held that such hotel accommodation services shall be an intra-state supply. Attention is invited to provisions of Sec. 7(5) of the IGST Act, 2017. Same are reproduced below:
“Sec. 7. Inter-State supply. —
(5) Supply of goods or services or both, –
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.”
22. Further proviso to Sec. 8(2) of the IGST Act, 2017 provides as under:
“Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.”
23. Hence clearly provisions of Sec. 7(5)(b) read with proviso to Sec. 8(2)of the IGST Act, 2017 shall override Sec. 12(3)(b) of the said Act, 2017 and hence any supply to SEZ shall be regarded as an inter-state supply only.