CESTAT Sets Aside ₹5.31 Crore Service‑Tax Demand on SEZ Sub‑Contractor: Remands Cenvat Credit Issue for Verification [Read Order]

In a recent ruling, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Bangalore, has partly allowed the appeal and set aside a ₹5.31 crore service‑tax demand raised on works contract services rendered as a sub‑contractor to Special Economic Zone (SEZ) units.

The case arose when the Revenue had alleged that the appellant failed to discharge service tax under Works Contract Services and Supply of Tangible Goods Services, confirming demands totalling over ₹7 crore along with interest and penalties. The Commissioner also denied Cenvat credit of ₹71.97 lakh.

The appellant Dix Engineering Project Services Pvt. Ltd. contended that the major portion of the work was executed within the Mangalore SEZ for ONGC Mangalore Petrochemicals Ltd. (OMPL) as a sub‑contractor to approved main contractors, including ANS Constructions Ltd., Vishal Structurals Pvt. Ltd., and IVRCL Infrastructures & Projects Ltd.

It argued that services consumed within an SEZ are exempt under the Notification and that denial of exemption merely because the provider was a sub‑contractor was unsustainable.

The Tribunal observed that the notification exempts “any taxable service provided to a developer or unit of a Special Economic Zone for consumption within such SEZ.” It held that the Commissioner’s reasoning excluding sub‑contractors from the scope was “absurd,” noting that Rule 10 of the SEZ Rules 2006 extends exemptions and concessions to contractors and sub‑contractors appointed by developers or co‑developers.

The bench comprising  D.M. Misra (Judicial Member) and R. Bhagya Devi (Technical Member), citing the precedent in CST v. Fedco Paints & Contracts (2017), ruled that services rendered for consumption within an SEZ remain exempt irrespective of whether provided directly or through a sub‑contractor. Consequently, the ₹5.31 crore demand was set aside.

Accordingly, the Tribunal partly allowed the appeal, remanding issues of Cenvat‑credit eligibility and tax appropriation for fresh adjudication after providing the appellant a reasonable opportunity of hearing.

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