SKP Tax Alert
Volume 9 Issue 12 | 25 July 2016
Principle of Mutuality, rejected by the Gujarat High Court, for services provided by an SEZ unit to a DTA unit of the same legal entity

In a recent judgment delivered by the Gujarat High Court (HC), in the case of Commissioner versus Larsen & Toubro Ltd, 2016-VIL-355-GUJ-ST, the Principle of Mutuality was held not applicable when services are provided by SEZ unit to DTA unit of same legal entity. However, service tax levy was set aside on a different ground that the service provided carried no actual value.

Facts of the case
  • L&T Ltd is a company (respondent or Company), which has its presence in Domestic Tariff Area (DTA) as well as in Special Economic Zone (SEZ).
  • The SEZ units of the Company entered into an agreement (for convenience purpose) with the DTA units of the Company for the provision of Business Support Services in the nature of project management activities including planning and controls, back operations for finance and accounts, etc. and such services were availed by the DTA units of the Company.
  • The SEZ units of the Company raised invoices (for convenience purposes) for the above mentioned services provided to the DTA units on a monthly basis and such transactions were recorded in their books of accounts. However, there was no actual flow of consideration.
Issue before the Court
  • The question raised was, whether the department is legally correct in levying service tax on the provision of service by an SEZ unit to its DTA unit, although both are a part of the same legal entity.
Ruling of the Court
  • In the instant case, the Ahemdabad Tribunal held that, no service tax can be levied when services are provided by one unit of the Company to another unit of the Company, both being part of the same legal entity i.e. no service tax can be levied on service to self. Accordingly, the Tribunal upheld the principal of mutuality (i.e. service tax can be levied where there is a provision of service by one person to another for the consideration i.e. existence of two separate persons) and stated that no service tax would be levied on services rendered by the SEZ unit to the DTA unit of the same Company.
  • When the above order was challenged and the question was placed before the HC, the HC referred to the definition of person as defined in the Special Economic Zones Act, 2005 since the term person was not defined in erstwhile Service Tax law i.e. before 1 July 2012. Furthermore, among the other provisions referred, the HC mainly referred to Rule 19(7) of Special Economic Zones Rules, 2006 and observed that the SEZ unit of an enterprise has additional unit in DTA, therefore has distinct identity with separate books of accounts.
  • Furthermore, the HC noted that, the contention of the Company regarding  the principle of mutuality cannot be accepted, and if this principle is applied, then the very artificial creation of treating an SEZ unit separate and distinct for accounting, consumption of raw materials, production and clearance purpose would shatter.
  • The HC mentioned in its order that, service tax is levied on the value of taxable service at a prescribed percentage. In the instant case, no service tax would be levied, not because of the reason of principle of mutuality which the Court denied but since there is no actual flow of consideration for the provision of service. Furthermore, there was no separate mechanism provided in the Finance Act, 1994 for charging service tax on the deemed value. Accordingly, it would not be possible for the authority to collect any tax on the provision of service where there is no actual flow of consideration.
  • The High Court took a contrary view from that of Tribunal, thereby setting aside the liability of service tax on a different ground, since no consideration was received for the provision of service.
SKP's comments
  • Given the above ruling, when an entity has units in an SEZ as well as in a DTA and if the SEZ unit provides services to the DTA unit for which it receives consideration, then it could be exposed to the levy of service tax by the authorities.
  • Nonetheless the above ruling pertains to the erstwhile service tax law where the terms ‘person’, ‘service’ and such other relevant terms were not defined by the law. However, such terms have been defined in the new service tax regime with effect from 1 July 2012, hence, new contentions can be evaluated based on such changes in the law, especially with respect to the definition of the term ‘person’.
  • It must also be noted that the deeming fiction created under the new service tax regime as provided under the definition of ‘service’ does not create distinct identities between SEZ units vis-a-vis the DTA unit of the same legal entity. In this regard, reference can be made to judicial pronouncement of M/s India Exports versus the State of Uttar Pradesh and Others wherein the Allahabad High Court noted that deeming fiction cannot be inferred in law and the fiction should be created by law itself. Furthermore, the Supreme Court in the case of Imagic Creative Pvt Ltd (2008-09 STR-337-SC) noticed that the legal fiction should be applied only to the extent for which it was enacted and contemplated by the legislature.
  • Accordingly, it is important to analyse the various definitions and provisions under the prevalent service tax law including clarifications issued along with case laws ruled as per the current laws in order to determine the applicability of the case in the present day scenario.
  • Separately, it is interesting to note that under the Model GST Law released by the central government in the public domain on 14 June 2016, suggests that the supply to self may become taxable under the GST regime. Given this, it is possible that the concept of mutuality may also be revisited under the current regime.

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