CESTAT Sets Aside ₹5.31 Crore Service Tax Demand on SEZ Sub-Contractor Due to SEZ Exemption

Dix Engineering Project Services Pvt. Ltd. Vs Commissioner of Central Excise and Service Tax (CESTAT Bangalore)

SEZ Services Through Main Contractors Still Eligible for Tax Exemption, Rules CESTAT;  CESTAT Deletes Service Tax Demand on SEZ Sub-Contract Works Due to Authorized SEZ Operations; No Time Limit for Availing Cenvat Credit Before September 2014; CESTAT Remands Cenvat Credit Issue After Rejecting Delay-Based Denial of Credit.

The appeal before CESTAT Bangalore arose from an Order-in-Original dated 01.05.2015 confirming multiple service tax demands against the appellant under “Works Contract Services” and “Supply of Tangible Goods Services.” The Commissioner had confirmed service tax demands of Rs.1.39 crore under Works Contract Services, Rs.4.56 lakh under Supply of Tangible Goods Services, Rs.5.31 crore relating to services rendered as a sub-contractor to SEZ units, and Rs.14.24 lakh relating to road construction services for MRPL. The order also denied Cenvat credit of Rs.71.97 lakh and imposed penalties.

The appellant contended that it had predominantly executed composite works contracts for setting up infrastructure in Special Economic Zones (SEZs) as a sub-contractor to principal contractors such as ANS Constructions Ltd., Vishal Structurals Pvt. Ltd., IVRCL Infrastructures and Projects Ltd., and SKE & C-KCT-JV. It was argued that the services were rendered within SEZ units and therefore qualified for exemption under Notification No. 4/2004-ST. The appellant also relied on certification issued by the Development Commissioner confirming that ONGC Mangalore Petrochemicals Pvt. Ltd. was an approved SEZ unit.

The Revenue argued that the appellant was not directly providing services to SEZ developers or SEZ units, but to contractors engaged by them, and therefore exemption was unavailable.

The Tribunal rejected the Revenue’s objection and held that the notification exempted taxable services provided for consumption within an SEZ. It observed that the services were admittedly rendered to SEZ units through main contractors and that the Commissioner himself had acknowledged that the SEZ units had actually used the services for authorized operations within the SEZ. The Tribunal held that denial of exemption merely because the appellant acted as a sub-contractor was unsustainable. Accordingly, the service tax demand of Rs.5.31 crore under Works Contract Services was set aside.

Regarding Works Contract Services rendered outside SEZ units, the appellant did not dispute the demand of Rs.1.39 crore. The Tribunal upheld this demand along with interest, subject to verification of payments already made and adjustment of eligible Cenvat credit.

The Tribunal also upheld the service tax demand of Rs.14.24 lakh collected in relation to road construction services for MRPL and confirmed the demand of Rs.4.56 lakh under Supply of Tangible Goods Services along with interest.

On denial of Cenvat credit of Rs.71.97 lakh, the Tribunal held that during the disputed period from April 2008 to December 2012 there was no statutory time limit for availing Cenvat credit. It observed that the six-month limitation for availing credit was introduced only from 01.09.2014. Therefore, denial of credit solely on the ground of delayed availment was unsustainable. However, since the Commissioner had pointed out discrepancies in invoices and documents, including invoices issued in names other than the appellant, the Tribunal remanded the issue for verification of supporting documents and quantification of eligible credit.

The Tribunal further held that the issue relating to adjustment of tax liabilities against admissible Cenvat credit also required reconsideration after verification. Since the final quantification of tax and credit was yet to be determined, the Tribunal set aside penalties and remanded the matter for limited verification and recomputation.

Accordingly, the Tribunal partly allowed the appeal, set aside the Rs.5.31 crore demand relating to SEZ sub-contract services, confirmed certain undisputed demands, remanded the Cenvat credit issue for verification, and directed that reasonable opportunity of hearing be provided during remand proceedings.

FULL TEXT OF THE CESTAT BANGALORE ORDER

This appeal is filed by the appellant M/s. Dix Engineering Project Services Pvt. Ltd. against Order-in-Original No.MLR-EXCUS-000-COM-MS-002-15-16 dated 01.05.2015 passed by the Commissioner of Central Excise, Mangalore.

2. Briefly the facts are that the Revenue on investigation and based on various records found that the appellant was rendering services under the category of ‘Works Contract Services’ and ‘Supply of Tangible Goods Services’ but was not discharging any service tax on these services; hence, notice was issued and the Commissioner in the impugned order confirmed the demand of service tax under the above categories and confirmed an amount of Rs.1,39,50,173/- under the category of ‘Works Contract Services’ and Rs.4,56,404/- under the category of ‘Supply of Tangible Goods Services’ along with interest and various penalties. In addition, an amount of Rs.5,31,33,963/- was also confirmed under the category of ‘Works Contract Services’ for services rendered as sub-contractor to the SEZ units. The impugned order also confirms an amount of Rs.14,24,728/-liable to be paid for the road construction services undertaken by the appellant for MRPL. The Commissioner also denied the cenvat credit amount of Rs.71,97,381/- claimed by the appellant. Aggrieved by this order, the appellant is in appeal before us.

3. The Learned Counsel submits that during the period of dispute, the appellant was predominantly executing composite works contracts in relation to setting-up of Special Economic Zone (SEZ) unit as a sub-contractor and also executed road construction works. For the Financial Year 2008-2009 And 2009­2010 self-assessed the value of taxable services and also disclosed non-taxable or exempted services such as road work etc. It is also submitted that for the financial years 2010-2011 and 2012-2013, the appellant was facing financial constraint and crisis on account of non-receipt of consideration by his customers and for the said reasons, they could not discharge service tax and could not file periodical returns. It is submitted that as a sub-contractor, they have rendered services to ONGC Mangalore Petro Chemicals Ltd. a SEZ unit and the construction/works contract services rendered within the SEZ unit as subcontractor is eligible and entitled for exemption from payment of service tax and therefore, the demand of Rs.5,31,33,963/- cannot be sustained. It is also submitted that during the period of dispute, the appellant was a sub-contractor with three main contractors namely (i) M/s. ANS Constructions Ltd., New Delhi, (ii) M/s. Vishal Structurals Pvt. Ltd., Mumbai and (iii) M/s. IVRCL Infrastructures and Projects Ltd. for setting-up infrastructure within the Special Economic Zone unit. Further, it is submitted that the Development Commissioner, Mangalore SEZ vide letter dated 12.09.2009 certified that ONGC Mangalore Petrochemicals Pvt. Ltd. is an approved unit in Mangalore SEZ. Relied on the following decisions:

a. CST v. Fedco Paints & Contracts, 2017 (3) GSTL 364 (Tri-Mum.) maintained by Honorable Supreme Court in 2018 (10) GSTL J207 (SC).

b. Rishabh Construction Co v. CCE&ST, (2024) 24 Centax 180 (Tri-Ahmd.).

c. Shyam Engineers v. CCE&ST, (2024) 21 Centax 445 (Tri-Ahmd.).

d. Randhwa Construction v. CCE&ST, (2024) 18 Centax 276 (Tri-Ahmd.).

e. Anjani Excavation Operation v. CCE&ST, (2024) 21 Centax 344 (Tri-Ahmd.).

f. Shyam Engineers v. CCE&ST, (2024) 21 Centax 445 (Tri-Ahmd.).

3.1 With regard to construction under the Works Contract Services rendered to various other parties outside the SEZ unit, it is submitted that the amount demanded and confirmed is Rs.1,39,50,173/- which is not contested by the appellant. However, it is submitted that the appellant had filed ST-3 returns belatedly for the period from April 2010 to March 2013 and paid an amount of Rs.50,59,336/- towards the tax payment and interest of Rs.4,74,211/- during investigation and paid an amount of Rs.36,58,426/- after the issuance of the impugned order. It is contended that they are eligible for the credit of input services used in the taxable output services and if the same is allowed, the entire service tax demand confirmed in the impugned order gets discharged.

3.2 With regard to demand of tax of Rs.14,24,728/- in respect of road construction work undertaken for MRPL, it is submitted that there was no liability to pay service tax on the said road work since they have opted to pay service tax on the gross value and accordingly, they have charged service tax of Rs.14,24,728/- and paid the same partly by cash and partly by utilizing cenvat credit of Rs.7,65,970/- availed on Bitumen which was exclusively used for the said project. Hence, the demand in this regard cannot be sustained. With regard to road construction work undertaken for Larsen & Turbo, service tax was discharged on the value of service portion determined as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

3.3 With regard to Supply of Tangible Goods and the demand of service tax of Rs.4,56,404/- is not disputed and it is submitted that Rs.1,74,550/- along with interest of Rs.66,861/- was paid during investigation and the balance amount of Rs.2,81,854/-was paid at a later date, hence claimed the benefit of waiver of penalty as per Section 80 of the Finance Act, 1994.

3.4 It is further stated that the show-cause notice proposed for denial of cenvat credit without quantifying the same but the Order-in-Original quantified the cenvat credit amount of Rs.71,97,381/- and denied the same. Since the show-cause notice did not quantify the irregular availment of cenvat credit, such quantification is beyond the scope of the show-cause notice and hence, cannot be sustained.

3.5 With regard to limitation, it is submitted that the appellant has filed ST-3 returns though belatedly but had disclosed all the facts in their returns and since the issue relates to statutory interpretation, they cannot be alleged with suppression or misdeclaration of facts; hence, the demand beyond the normal period cannot be sustained. Relied on the decisions of Continental Foundation Joint Venture versus CCE. 2007 (216) ELT 177 (S.C.) and Jaiprakash Industries Ltd. versus CCE. 2002 (146) ELT-481 (S.C.).

4 . The Authorised Representative (AR) for the Revenue reiterated the findings of the impugned order and stated that the demands confirmed by the Commissioner in the impugned order are to be sustained for the reasons recorded therein. It is also submitted that the appellant had rendered the construction of road to MRPL though not liable to service tax, it was noticed that the appellant had collected an amount of Rs. 14,24,728/-representing service tax, hence, liable to be paid.

5. Heard both sides. At the outset, with regard to service tax demand of 14,24,728/- which has been collected by the appellant and confirmed by the Commissioner, the same is not being disputed and since the appellant has discharged the service tax, the same is upheld along with interest.

6. With regard to service tax demand of 4,56,404/-confirmed against Supply of Tangible Goods Services is also not disputed; hence, we uphold the demand along with interest. The appellant claims to have paid the entire amount; however, we find that at para xi of the ‘order’, the Commissioner appropriates only an amount of Rs.1,74,550/- in the impugned order hence same is discharged by the appellant.

7. With regard to demand of service tax of Rs.5,31,33,963/-, it is not in dispute that the services have been rendered by the appellant as a sub-contractor to the main contractor who are the authorised contractor to render services to the SEZ units. The only objection by the Revenue is that the appellant has provided services to ANS Constructions Ltd., New Delhi, Vishal Structurals Pvt. Ltd. Mumbai, IVRCL Infrastructures and Projects Ltd. and M/s. SKE & C-KCT-JV, who are neither SEZ developers nor SEZ units but the contractors for SEZ unit/developer. Therefore, the services rendered by the appellant are not received by SEZ unit/developer, hence the exemption contained in the Notification No. 4/2004-S.T., dated 31-3-2004 is not applicable to the appellant as they have not provided services directly to a SEZ unit. For convenience of our understanding, the relevant Notification is reproduced below:

Notification No. 4/2004-S.T., dated 31-3-2004

Service tax exemption to services provided to a Developer or units of Special Economic Zone — Notification No. 17/2002-S.T. superseded

In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) and in supersession of the notification of the Government of India in the erstwhile Ministry of Finance and Company Affairs (Department of Revenue), No. 17/2002-Service Tax, dated the 21st November, 2002, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) dated the 21st November, 2002, vide, G.S.R. 777(E), dated the 21st November, 2002, except as respects things done or omitted to be done before such supersession, the Central Government being satisfied that it is necessary in the public interest so to do, hereby exempts taxable service of any description as defined in clause (90) of sub-section (1) of section 65 of the said Act provided to a developer of Special Economic Zone or a unit (including a unit under construction) of Special Economic Zone by any service provider for consumption of the services within such Special Economic Zone, from the whole of service tax leviable thereon under section 66 of the said Act, subject to the following conditions, namely :-

i. the developer has been approved by the Board of Approvals to develop, operate and maintain the Special Economic Zone;

ii. the unit of the Special Economic Zone has been approved by the Development Commissioner or Board of Approvals, as the case may be, to establish the unit in the Special Economic Zone;

iii. the developer or unit of a Special Economic Zone shall maintain proper account of receipt and utilisation of the said taxable services.

Explanation. – For the purposes of this notification, –

1. “Board of Approvals” means the combined Board of Approvals for export oriented unit and Special Economic Zone units, as notified in the Official Gazette, from time to time by the Government of India in the Ministry of Commerce and Industry;

2. “developer” means a person engaged in development or operation or maintenance of Special Economic Zone, and also includes any person authorised for such purpose by any such developer;

3. “Special Economic Zone” means a zone specified as Special Economic Zone by the Central Government in the notification issued under clause (iii) of Explanation 2 to the proviso to sub-section (1) of section 3 of the Central Excise Act, 1944 (1 of 1944).

7.1 The above Notification only warrants that the services should be rendered to the SEZ unit which is not under dispute. The main contractors are rendering services to the SEZ units and the appellant is a sub-contractor. Moreover, the Commissioner in the impugned order observes that the proviso to Rule 10 of the Special Economic Zone Rules, 2006 describes that the exemptions, drawbacks and concessions on the goods and services allowed to a developer or Co-developer, as the case may be, shall also be available to the contractors including subcontractors appointed by such developer or Co-developer but continues to deny the benefit stating that it does not speak of services provided to the SEZ unit, which appears to us as absurd since the Commissioner in the impugned order noted that ‘the appellant had enclosed a copy of the list of services specified in clause (105) of Section 65 of the Finance Act, 1994 as approved by the Development Commissioner of MSEZ for M/s. OMPL Ltd.’ and stated that the units in the SEZ actually used the above services and maintained the proper accounts in relation to the authorized operations in the SEZ. The Table below clearly establishes the fact that the Main contractors were service providers to the respective SEZ units.

Therefore, the impugned order to the extent of denying the benefit of the Notification only because the appellant happens to be a sub-contractor cannot be sustained and the same is set aside.

7.2 In similar circumstances, the Tribunal in the case of Commissioner of Service Tax, Mumbai-I vs. Fedco Paints and Contracts 2017 (3) G.S.T.L. 364 (Tri. – Mumbai) dated 8-3-2017 held as follows:

“6. It can be seen from the above reproduced notification that the said notification exempts any taxable service provided by any service provider for consumption of the service within a Special Economic Zone, subject to following/adhering to the conditions. It is also undisputed that all the conditions mentioned in the notifications are satisfied by the SEZ developer i.e. M/s. Reliance Industries Ltd. On the face of such factual matrix, we find that the adjudicating authority was correct in coming to the conclusion that the proceedings initiated by show cause notice issued needs to be dropped. We also find as regards taxability of the service rendered to the SEZ developer was in dispute before this Tribunal in the case of Sujana Metal Products Ltd. v. Commissioner of Central Excise – 2011 (273) E.L.T. 112 (Tri.-Bang.) and this Tribunal came to a conclusion that where the services are rendered to SEZ or a unit in SEZ, as long as it is rendered for consumption in a Special Economic Zone, the services are exempt. We also note that the provisions of Section 26 of the Special Economic Zone overrides provisions of other law and exempts any services or taxes if the same are consumed in Special Economic Zone.”

8. With regard to denial of cenvat credit of Rs.71,97,381/-, the Commissioner in the impugned order denies the cenvat credit on the ground that they claimed belatedly i.e., after 18 months and also on the ground that discrepancies in the cenvatable documents such as invoices wherein it mentions the name of the persons other than the name of the appellant and there were various other discrepancies, for which necessary documents were not placed before the authorities concerned. Countering the above observations, the learned counsel has submitted that during the period of dispute, there is no time limit for taking cenvat credit and the limitation was introduced only from 01.09.2014; hence, rejection of cenvat credit on this account cannot be sustained. With regard to invoices addressed to persons other than the appellant, it is submitted that they had paid for the input services and rendered output services to KNR Constructions; hence, credit cannot be denied on the ground that the invoice mentions the name of KNR Constructions instead of the appellant’s name. With regard to all other discrepancies, it is submitted that the appellant has all duty-paying documents in support of their claim, which will be produced for verification.

8.1 The Cenvat Credit Rules, 2004 for allowing cenvat credit the relevant Rule reads as follows:

RULE 4. Conditions for allowing CENVAT credit. – (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service [or in the premises of the job worker, in case goods are sent directly to the job worker on the direction of the manufacturer or the provider of output service, as the case may be] :

(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:

[Provided that in respect of input service where whole or part of the service tax is liable to be paid by the recipient of service, credit of service tax payable by the service recipient shall be allowed after such service tax is paid:

Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9 is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service, except an amount equal to the CENVAT credit of the tax that is paid by the manufacturer or the service provider as recipient of service, and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules :

8.2 The phrase ‘may be taken immediately’ is being read as 18 months by the Commissioner in the impugned order to avail the cenvat credit; however, as rightly pointed out by the learned counsel, we do not find any time limit for taking cenvat credit. We also note the fact that an amendment was inserted vide Notification No.21/2014-CE-NT dated 11.07.2014, wherein the restriction of 6 months was introduced which was later amended to one year as seen from the following amendment to the Cenvat Credit Rules, 2004.

“3. In the said rules, in rule 4, –

(a) in sub-rule (1), after the second proviso, the following proviso shall be inserted with effect from first day of September 2014, namely:

“Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub- rule (1) of rule 9.”

8.3 Since, the period of dispute is from April 2008 to December 2012, we are in agreement with the learned counsel that there was no time limit for availing cenvat credit during the disputed period. Accordingly, the ground on time limit alleged by the Revenue is rejected and cenvat credit to be allowed. However, the issue is being remanded to verify the payment of cenvat credit by the appellant in all the cases listed at Para 30.12 of the impugned order, wherein the invoices are addressed to a person other than the appellant. The Commissioner has also noted some of the discrepancies in the documents which are placed before him for availment of cenvat credit, which now the appellant claims that for these discrepancies, they have necessary documents to prove the eligibility of cenvat credit, which will be placed before the adjudicating authority for necessary verification. Accordingly, we remand the issue of eligibility of cenvat credit only to the extent of verification of documents as long as there is no dispute that tax has been paid by the appellant on the service.

9. With regard to Works Contract Services rendered to various parties outside SEZ, the demand confirmed by the Commissioner in the impugned order is to extent of 1,39,50,173/- which is not disputed by the appellant is upheld. The impugned order also appropriates an amount of Rs.50,59,336/- towards the above demand, therefore the balance amount of Rs.88,90,837/- is liable to be paid by the appellant. The appellant has now submitted that an amount of Rs.36,58,426/- was also paid by the appellant on 27.12.2014 and 19.02.2015 which needs verification. Since the appellant admits that due to financial constraints, they failed to pay service tax on time and filed returned belatedly, the question of invoking extended period of limitation is upheld. It is the contention of the appellant that if the eligibility of the cenvat credit is considered in their favour, they will be entitled to utilize the cenvat credit towards the balance payment of service tax of Rs.52,32,411/- against the above demand. Since the issue regarding the eligibility of quantum of cenvat credit is being remanded to the original authority for verification of documents, the adjustment of cenvat credit towards the duty amount will have to be decided only after the eligibility of cenvat credit is finalized. In view of the above, the payment of duty of Rs.36,58,426/- also needs to be verified and the balance payment of Rs.52,32,411/- to be adjusted against the eligible cenvat credit will have to be looked into. Hence, this issue also stands remanded to the original authority for confirmation and appropriation of the tax amount.

10. The quantum of interest and the question of penalty will arise only after the quantification of the eligibility of cenvat credit and appropriation of the confirmed tax amounts. Therefore, we set aside the penalties and allow the appeal by way of remand in above terms.

11. Summing up, we pass the following order:

i. Service Tax demand of Rs.1,39,50,173/- is confirmed along with interest for the services rendered under the Works Contract Services but remand the issue for verification of the payments along with interest.

ii. Service Tax demand of Rs.5,31,33,963/- under Works Contract Service on the appellant as a sub-contractor is set aside.

iii. Service Tax demand of Rs.4,56,404/- under the ‘Supply of Tangible Goods Service along with interest is confirmed.

iv. Service Tax demand of Rs.14,24,728/- is confirmed along with interest.

v. Service Tax demand of Rs.71,97,381/- on account of denial of cenvat credit is remanded for quantification after verification of the documents placed before the adjudicating authority.

It is needless to mention that a reasonable opportunity of hearing be provided to the appellant before finalization of the remand proceedings.

Appeal is disposed of on above terms.

(Order pronounced in Open Court on 06.05.2026.)