The Central Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has delivered a significant ruling affirming that procedural irregularities in documentation cannot override the substantive entitlement to service tax refunds under the Special Economic Zones Act, 2005. This judgment reinforces the principle that fiscal incentives granted to SEZ units must be interpreted liberally to achieve their legislative purpose.
Background & Facts
The Dispute
M/s Dr. Reddy's Laboratories Ltd., a pharmaceutical manufacturer, established an SEZ unit in Srikakulam District, Andhra Pradesh, for the production of active pharmaceutical ingredients. The unit was duly approved under the Special Economic Zones Act, 2005, and engaged in authorised operations as permitted by the SEZ authorities.
Key Facts
- The appellant received taxable services between January 2015 and November 2015, including:
- Customs House Agent (CHA) Services from M/s Mayuri Associates
- Transport Services from M/s Savani Carrying Pvt Ltd.
- Rent-a-cab Services
- Works Contract Services from M/s Afita Construction Pvt Ltd. for piling works related to the Hormone Block
- Service tax on these services was paid either by the service providers or by the appellant under the Reverse Charge Mechanism (RCM)
- The appellant filed a refund claim of Rs. 34,70,994/- under Notification No. 12/2013-ST dated 01.07.2013
- The Adjudicating Authority sanctioned part of the claim but rejected Rs. 33,98,949/- on grounds including:
- Mismatch in invoice details
- Non-submission of original invoices
- Incomplete addresses on invoices
- Services not explicitly listed in the approved list
- The Commissioner (Appeals) upheld this rejection on 22.03.2018
Procedural History
- January 2015 - November 2015: Period of receipt of taxable services
- December 2015: Refund claim filed under Notification No. 12/2013-ST
- 22.03.2018: Order-in-Appeal No. VIZ-EXCUS-001-APP-296-17-18 passed by Commissioner (Appeals), Visakhapatnam, upholding rejection
- 23.02.2026: Hearing before CESTAT Hyderabad
- 12.06.2026: Final order passed by CESTAT Hyderabad
Relief Sought
The appellant sought full refund of Rs. 33,98,949/- paid as service tax on services used for authorised operations in its SEZ unit, arguing that procedural defects in documentation should not defeat substantive entitlement under the SEZ Act.
The Legal Issue
The central question was whether refund of service tax paid on services used for authorised operations in an SEZ unit can be denied solely on account of procedural or technical deficiencies in invoice documentation, when the receipt of services, payment of tax, and nexus with authorised operations are undisputed.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the SEZ Act, 2005, particularly Section 26 (exemption from taxes) and Section 51 (overriding effect over other laws), mandates a liberal and purposive interpretation of benefits. The appellant submitted documentary evidence - including challans, accounting records, and payment proofs - establishing that:
- Services were received
- Service tax was paid under RCM or by service providers
- Services were utilised for authorised operations
Counsel relied on multiple precedents including Divi's Laboratories Ltd. v. Commissioner of Central Tax, GMR Aerospace Engineering Ltd. v. Union of India, and Intas Pharmaceuticals Ltd. v. Commissioner of Service Tax, all of which held that technical irregularities cannot override substantive eligibility.
For the Respondent
The Revenue contended that Notification No. 12/2013-ST is a conditional notification requiring strict compliance with all procedural requirements. It argued that:
- Invoices lacked original copies in some cases
- Addresses were incomplete or rubber-stamped
- Some services were not explicitly listed in the approved list
- Non-compliance with these conditions rendered the claim ineligible
The Revenue maintained that procedural compliance is mandatory and cannot be relaxed even if the underlying facts are undisputed.
The Court's Analysis
The Tribunal conducted a detailed review of the statutory framework under the SEZ Act, 2005, and the nature of the refund scheme under Notification No. 12/2013-ST. It emphasized that the primary objective of the SEZ regime is to promote export-oriented manufacturing by providing fiscal incentives, and that any interpretation defeating this purpose would be contrary to legislative intent.
"The purpose of invoice is to establish identity of recipient, nature of service and the payment of tax. These requirements stand substantially satisfied in the present case."
The Tribunal held that the Revenue had not disputed the core facts: receipt of services, payment of service tax, and their use for authorised operations. The objections raised were purely procedural - invoice formatting errors, use of rubber stamps, absence of original copies for minor portions, and minor mismatches in service descriptions.
Regarding Works Contract Services for piling works, the Tribunal rejected the Revenue’s narrow interpretation that only services explicitly named in the approved list qualify. It observed:
"Construction and piling activities undertaken for creation of infrastructure necessary for the approved manufacturing unit are intrinsically connected with authorised operations."
The Court distinguished between substantive eligibility and procedural compliance, citing Harman Connected Services Corporation India Pvt Ltd. v. Commissioner of Central Tax and Cummins Turbo Technology v. Commissioner of Customs, which held that denying benefits on hyper-technical grounds defeats the very purpose of the SEZ scheme.
The Tribunal further held that Section 51 of the SEZ Act, which gives overriding effect to its provisions, mandates that fiscal benefits be interpreted in favour of SEZ units, and that procedural formalities cannot override substantive entitlements.
The Verdict
The appellant succeeded. The Tribunal set aside the Order-in-Appeal dated 22.03.2018 and allowed the appeal. The appellant is entitled to a full refund of Rs. 33,98,949/- paid as service tax on the disputed services. The order directs the Revenue to process the refund within 45 days from the date of this order, without imposing any interest, as the claim was processed in good faith and the delay was attributable to procedural scrutiny rather than malafide conduct.
What This Means For Similar Cases
Procedural Deficiencies Cannot Override Substantive Eligibility
- Practitioners must now argue that where receipt of service, payment of tax, and nexus to authorised operations are established, minor invoice defects (e.g., rubber stamps, missing originals, address mismatches) are insufficient grounds for denial
- The burden shifts to the Revenue to prove actual non-compliance with statutory conditions, not merely procedural irregularities
Purposive Interpretation of SEZ Benefits Is Mandatory
- Any interpretation of SEZ-related exemptions must favour the legislative intent of promoting export manufacturing
- Courts and tribunals must avoid elevating form over substance, particularly where infrastructure development is integral to authorised operations
Works Contract Services Qualify as Authorised Operations
- Construction, piling, and infrastructure development services for SEZ units are now clearly covered under "used for authorised operations"
- Service providers need not match exact wording in approved lists; functional nexus is sufficient
- This applies equally to civil works, electrical installations, and other ancillary infrastructure services
Documentation Standards Are Clarified
- Copies of invoices, challans, and accounting records are sufficient if original documents are unavailable due to administrative reasons
- Payment under RCM is conclusive proof of tax discharge, even if service provider’s invoice is imperfect
- The Tribunal’s approach aligns with the broader trend in tax jurisprudence favouring substance over form
