SEZ Service Tax Refunds and Overriding Effect of SEZ Act: Analysis of SRF Limited vs Commissioner of Customs (CESTAT Delhi)

Background of the Dispute

M/s SRF Limited, operating a unit in the Indore Special Economic Zone (Pitampur, Madhya Pradesh), had obtained registration under service tax for its SEZ unit. The unit procured various input services for its authorised operations and paid service tax on those services, either directly or via distribution through an Input Service Distributor (ISD) located at its head office in Gurugram.

To recover this service tax, the assessee filed multiple refund applications under service tax exemption notifications Notification No. 40/2012-ST dated 20.06.2012 and Notification No. 12/2013-ST dated 01.07.2013, covering several periods between July 2012 and March 2016. The Department, however, granted only part of these refunds and rejected the balance on various grounds.

The Commissioner (Appeals) upheld most of these rejections, prompting SRF Limited to file five separate appeals before CESTAT Delhi. The Tribunal examined whether, despite alleged non-compliance with conditions of the service tax exemption notifications, the assessee was still entitled to refund in light of the overriding provisions of the Special Economic Zones Act, 2005 (SEZ Act).

The central question was:

Whether an SEZ unit, whose operations are duly authorised under the SEZ Act, can be denied refund of service tax on input services used for authorised operations solely on the basis of non-fulfilment of procedural/notification conditions under service tax exemption notifications, when Section 26(1)(e) and Section 51 of the SEZ Act provide an overriding, statutory exemption.

In other words, does the statutory exemption under Section 26 of the SEZ Act prevail over the conditions prescribed in notifications issued under the Finance Act, 1994?

Appeals and Periods Involved

CESTAT dealt with five appeals, all arising out of partial denial of refunds for different periods:

  1. Appeal No. ST/52449/2016

    • Order-in-Appeal No. 09/ST/LTU/DLH/2016 dated 09.05.2016
    • Period: July 2012 to September 2013

  2. Appeal No. ST/52466/2016

    • Order-in-Appeal No. 11/ST/LTU/DLH/2015 dated 30.05.2016
    • Period: January 2013 to March 2013

  3. Appeal No. ST/52488/2016

    • Order-in-Appeal No. 12/ST/LTU/DLH/2015 dated 30.05.2016
    • Period: April 2013 to June 2013

  4. Appeal No. ST/52490/2016

    • Order-in-Appeal No. 13/ST/LTU/DLH/2015 dated 30.05.2016
    • Period: July 2013 to September 2013

  5. Appeal No. ST/51804/2021

    • Order-in-Appeal No. IND-EXCUS-000-APP-144-19-20 dated 26.09.2019
    • Period: January 2016 to March 2016

Across these appeals, the Department’s objections clustered around similar themes:

  • Services not approved by the Unit Approval Committee (UAC)
  • Services received via ISD invoices from the head office
  • Storage and warehousing charges at the customs port
  • Outward Goods Transport Agency (GTA) services
  • Invoice address mismatches (non-SEZ address)
  • Refund claims not filed within the “same quarter” or within one year as per notification

Specific Grounds of Rejection and Assessee’s Contentions

1. Appeal No. ST/52449/2016 (July 2012 – September 2013)

Refund was refused in part regarding three categories of services:

a) Commercial Training Service – Rs. 3,708

  • Department’s ground: The service was not in the list approved by the UAC.
  • Assessee’s contention:
    • Training was organised for employees of the SEZ unit, as evidenced by Invoice No. 203 dated 19.07.2013.
    • The service was consumed wholly within the SEZ unit for authorised operations.
    • Non-inclusion in the approved list is a mere procedural lapse; it cannot defeat a substantive exemption granted under the SEZ Act.

b) Storage and Warehousing Service – Rs. 1,96,996

  • Department’s ground: Goods could have been moved directly to the SEZ unit without warehousing at the customs port; hence tax on warehouse charges is not eligible.
  • Assessee’s contention:
    • The warehousing related to raw materials imported for use in the SEZ unit, stored at the customs port before clearance.
    • Such warehousing was integrally connected to authorised SEZ operations; the Department cannot dictate how the assessee should structure its logistics and business.

c) Services Distributed Through ISD – Rs. 20,79,874

  • Department’s ground: Refund should have been claimed by the head office, which originally availed the credit; the notification does not recognize ISD-based distribution for such refund.
  • Assessee’s contention:
    • Under the CENVAT Credit framework, an ISD is merely a distribution mechanism; it cannot claim any refund itself.
    • Credits distributed to the SEZ unit via ISD invoices relate to services used in authorised SEZ operations; hence refund must be granted at the unit level.
    • Reliance was placed on Tribunal’s own earlier Final Order No. 51230/2019 dated 29.07.2019 in the assessee’s case.

2. Appeal No. ST/52466/2016 (January 2013 – March 2013)

Two sets of services were involved:

a) ISD-Distributed Services – Rs. 29,61,415

  • Department’s ground:
    • Credit was taken by the head office; if unutilised, the head office should claim the refund.
    • Notification No. 40/2012-ST does not contemplate ISD distribution.
    • UAC allegedly deferred approval of ISD-based mechanism.
  • Assessee’s contention:
    • ISD is not itself a service; it is a statutory route for proportionate allocation of common services (e.g., advertising, management consultancy, chartered accountancy, IT, courier, telecom, travel agent services).
    • Most such common services were already in the approved list dated 05.07.2013.
    • Para 2(b) of the notification itself envisages proportionate allocation where services are not consumed exclusively in the SEZ unit.
    • Tribunal’s earlier order dated 29.07.2019 had already accepted this position in the assessee’s favour.
  • Department’s ground: These services were approved by UAC only later on 05.07.2013; hence, for the earlier period refund cannot be allowed.
  • Assessee’s contention:
    • Subsequent approval does not nullify the statutory exemption under Section 26 of the SEZ Act.
    • Once operations are authorised, the SEZ exemption extends to all input services used for those operations, irrespective of when the services were added to an approved list.
    • The Tribunal’s order dated 29.07.2019 already decided this exact issue in favour of the assessee.

3. Appeal No.