Service-tax exemption for authorised SEZ operations extends to subcontractors despite procedural Form A-1 non-compliance.

Randhawa Construction provided erection, commissioning, installation and other construction services.

During 2009–10 to 2013–14, it acted as a subcontractor for Samsung Engineering Company Ltd., which had been engaged by ONGC Petro Additions Ltd., a unit in the Dahej Special Economic Zone (“SEZ”), for construction and allied services.

Randhawa claimed exemption from service tax under Notification No. 9/2009-ST dated 3 March 2009, as amended.

Following an audit, the Department alleged that Randhawa had not furnished the requisite Forms A-1 and A-3 and was therefore ineligible for the exemption.

The adjudicating authority confirmed a service-tax demand of Rs. 3,85,72,267/- with interest and penalty by order dated 16 May 2016.

The Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) allowed Randhawa’s appeal, holding that the exemption could not be denied to a subcontractor on the basis of a procedural lapse, particularly where the services were rendered for authorised SEZ operations.

The Revenue challenged the CESTAT’s decision under Section 35G of the Central Excise Act, 1944.

1. Whether a subcontractor providing services through the main contractor to an SEZ unit is entitled to the exemption under Notification No. 9/2009-ST, as amended, when the services are provided in relation to authorised SEZ operations.

2. Whether the exemption is unavailable merely because the services were provided by a subcontractor to the contractor, rather than directly to the SEZ developer or unit, having regard to Rule 10 of the SEZ Rules, 2006.

3. Whether failure to furnish Forms A-1 and A-3, particularly after the amendments introduced by Notification Nos. 17/2011-ST and 12/2013-ST, disentitles the assessee from claiming the exemption.

4. Whether Randhawa could claim the exemption when the authorisation certificate issued by the Development Commissioner named Samsung Engineering Company Ltd., and not Randhawa, as the entitled contractor.

The Court applied Section 93(1) of the Finance Act, 1994, under which the Central Government may exempt taxable services from service tax, and Notification No. 9/2009-ST, which exempts taxable services provided in relation to authorised operations in an SEZ and received by an SEZ developer or unit, subject to the prescribed conditions.

The notification requires, inter alia, approval of the specified services by the Approval Committee, actual use of those services for authorised SEZ operations, payment of service tax where applicable, and compliance with the refund procedure.

The Court treated the Form A-1 requirement introduced by Notification No. 17/2011-ST as procedural and held that substantial exemption benefits should not be denied for a minor procedural lapse where the substantive conditions are fulfilled.

It relied on the CESTAT decisions in Shyam Engineers, Final Order No. 12201/2023 dated 7 August 2023, and Rishabh Construction Company, 2023 (10) TMI 596 (CESTAT Ahmedabad), which recognised the eligibility of subcontractors where the services were connected with authorised SEZ operations.

The Court also distinguished the Department’s reliance on decisions concerning the general liability of subcontractors to service tax, as the present case concerned a specific exemption notification.

The Court found that the decisive test under Notification No. 9/2009-ST was whether the services were provided in relation to authorised SEZ operations and received for the benefit of the SEZ unit, rather than whether the immediate service provider was the principal contractor or a subcontractor.

It was undisputed that Randhawa’s services were rendered for ONGC Petro Additions Ltd., an SEZ unit, through Samsung, and that the services related to operations approved by the competent SEZ authority.

The fact that the authorisation certificate was issued in Samsung’s name did not defeat the exemption because Randhawa performed the approved work as Samsung’s subcontractor.

Further, the Form A-1 requirement was introduced only through the 2011 amendment, whereas the relevant demand covered the period beginning in 2009–10; in any event, the requirement was procedural and could not override fulfillment of the substantive exemption conditions.

Accordingly, the CESTAT correctly held that the exemption could not be denied solely because Randhawa was a subcontractor or because of a procedural deficiency.

It held that a subcontractor is entitled to the benefit of Notification No. 9/2009-ST where its services are provided in relation to authorised operations of an SEZ unit, notwithstanding that the principal contract and authorisation certificate stand in the name of the main contractor.

The Court further held that the alleged non-submission of Forms A-1/A-3 constituted, at most, a procedural lapse and did not justify denial of the substantive exemption.

Finding no legal infirmity or substantial question of law arising from the CESTAT’s order, the Court dismissed the Revenue’s tax appeal.