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Supply of services by SEZ entities to non-SEZ entities

MAY 27, 2019

By Anandram Sankar

GENERALLY, SEZ entities export goods/services or supply goods/services to entities in

DTA or supply goods/services to other SEZ entities within the same SEZ or in some
other SEZs. However, there are situations where a SEZ entity (unit or developer) has to
make supplies to a non-SEZ entity, including individuals and where the goods/services
are consumed within the same SEZ.

Following are few examples -

a) SEZ entity provides food in their canteen for the employees, contract labours / workmen
etc., which is the taxable supply in the hands of the SEZ entity

b) SEZ entity provides gym, clubhouse facilities to their employees (which is taxable in
terms of entry 2 of Schedule I of Sec.7 of CGST Act)

What is the place of supply and which taxes are to be charged in such cases?

To understand this, let us see the relevant statutory provisions of IGST Act.

Sec. 7 (5) of IGST Act provides that supply of goods or services or both to or by a SEZ unit or
Developer shall be treated as inter-state supply.

The extract of above provision is as under:

(5) Supply of goods or services or both,-

(a) when the supplier is located in India and the place of supply is outside India;

(b) to or by a Special Economic Zone developer or a Special Economic Zone unit;

or

(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in
this section,

shall be treated to be a supply of goods or services or both in the course of inter-

State trade or commerce.

However, Sec.12 of IGST Act is a specific provision, explains the place of supply of services for specific
cases, wherein location of both the supplier and the recipient of services are in India.

In terms of Sec.12 (2) ibid, the place of supply of services, except the services specified in sub-
sections (3) to (14), shall be, if it is made to a registered person would be the location of the such
person and in respect of supply of services made to a un-registered person, shall be the location of the
recipient, if the address on record exists or the location of the supplier of services, in other cases.

The extract of the relevant provision is as under:

(2) The place of supply of services, except the services specified in sub-sections (3) to
(14),-

(a) made to a registered person shall be the location of such person;

(b) made to any person other than a registered person shall be,-

(i) the location of the recipient where the address on record exists; and

(ii) the location of the supplier of services in other cases.

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Sub-Sections (3) to (14) of Sec.12 ibid, provides the place of supply for specific services. Some of the
services provided under the said sub-sections cannot be supplied within SEZ to a non-SEZ entity, which
are not of interest to us for this discussion. However, some of the services can be supplied within SEZ
to a non-SEZ entity or individuals i.e natural persons, either from the processing zone or from the non-
processing zone, such as guesthouse, clubhouse, catering services, canteen, gym, fitness, health
services, scientific or educational event, conference, fair etc.,

The relevant provisions are as below:

(3) The place of supply of services,-

(a) …

(b) by way of lodging accommodation by a hotel, inn, guest house, home stay,

club or campsite, by whatever name called, and including a house boat or any other
vessel; or

(c) ….

shall be the location at which the immovable property or boat or vessel, as the
case may be, is located or intended to be located:

(4) The place of supply of restaurant and catering services, personal grooming, fitness,
beauty treatment, health service including cosmetic and plastic surgery shall be the
location where the services are actually performed.

Majority of the above services are provided by the SEZ entities to the employees/workmen working in
the SEZ zone or to individuals visiting the zone for business reasons i.e un-registered persons.

All the above three provisions are parallel provisions, without one provision overriding the others, i.e
none of the above provisions is a non-obstante provision.

Summarizing the above provisions:

I. Sec.7(5) provides any goods/services supplied by SEZ entity is an inter-state supply.

II. Whereas Sec.12(2) provides, that if the same services are received by un-registered
persons, whose address on record does not exist, the place of supply would be the location
of the supplier, which is an intra-state supply.

III. Sec.12 (3) provides, if the services such as guesthouse, clubhouse, catering services,
canteen, gym, fitness, health services are provided, the place of supply would be the
location where the services are provided, which are intra-state supply.

The question arises now is, in a situation, where a SEZ unit has to charge their employees/individuals,
who are un-registered persons, for usage of gym or clubhouse (entry 2 of Schedule I of Sec.7 of CGST
Act), which of the above provision is application and what is the place of supply?

If the provision mentioned under para I above applies, it would be inter-state supply and IGST has to
be charged. If the provision under para III applies, it would be intra-state supply and exigible to CGST
+ SGST. The provision under para II may also be applicable in the rarest case, if the said individuals'
address record does not exist with SEZ entity, in which case, it would be intra-state supply and exigible
to CGST+SGST.

There are no clarifications issued by CBIC till now on this matter and there is no AAR decision also on
the facts and circumstances of the issue under discussion. However, let us analyse the position of law
in light of decision of Karnataka AAR in GOGTE INFRASTRUCTURE DEVELOPMENT CORPORATION case -
2018-TIOL-29-AAR-GST, wherein it was held that place of supply of the services by way of lodging
accommodation by a hotel, shall be the location at which the immovable property (hotel) is located or
intended to be located, as per Section 12 (3)(b) of the Integrated Goods and Services Tax Act, 2017.
Also the place of supply of restaurant and catering services shall be the location where the services are
actually performed.

In the above case, the hotel is located outside SEZ, but provided service to SEZ entities. The
authorities have taken the view that the place of location of the hotel/restaurant is the place of supply.
The facts and situations of the above case is actually converse to the case, which we are discussing.
Nevertheless, applying the same principle, in our case if the canteen/catering services are provided to
the employees / individuals by the SEZ entities, the place of supply would be the location of the
canteen which is situated in the SEZ and the supply would be intra-state supply.

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Contrary to the above ruling of AAR, CBIC has clarified, vide Circular no. 48/22/2018-GST dated
14th Jun 2018, that It is an established principle of interpretation of statutes that in case of an
apparent conflict between two provisions, the specific provision shall prevail over the general provision
and therefore, Section 7(5)(b) of IGST Act providing that supplies to SEZ developer / unit shall be
treated as 'inter-state supplies'.

The principle mentioned in the above circular is expressed in the legal maxim Generalia specialibus non
derogant, which means 'General things do not derogate from special things 1' i.e If a special provision
is made on a certain matter that matter is excluded from the general provision. However, the question
as to the relative nature of the provisions, general or special, has to be determined with reference to
the area and extent of their application either generally or specially in particular situations2.

Hence, a view may be taken, in light of the principles mentioned above, that the specific provision shall
prevail over the general provision and, therefore, in terms of Section 7(5)(b) of IGST Act, supplies by
SEZ developer / unit shall be treated as 'inter-state supplies'.

However, application of the above principle could be questioned on the ground as to which is the
specific provision in this case - whether the provision under Sec.7(5) is the specific provision for SEZ
entities or the provision under Sec.12(3). Hence, the possibility of the other view in line with the ruling
in the above AAR, cannot be ruled out.

Government should step in and issue clarifications in this regard to settle the issue.
1 p 161 - Principles of Statutory Interpretation by Justice GP Singh
2 Collector of Central Excise, Jaipur Vs Raghuvar (India) Ltd - 2002-TIOL-71-SC-CX-LB

(The author is working as a Tax Professional with a reputed Pharma Major and the views
expressed are strictly personal.)

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