SEZ and VAT - H D Desaihddesai.com/Articles/SEZ_and_VAT.pdf · SEZ and VAT Article by: ... ‘Act, 2003’) as well as the Central Sales Tax Act, 1956 ... Salient feature is, input

Article by Mr. Hemant Desai – Advocate – VAT – Surat | www: hddesai.com | Page 1

SEZ and VAT

Article by: Mr. Hemant Desai

B.Com.,LL.B.

Advocate – VAT- SURAT

E-mail: [email protected]

1) Dealer who desire to execute indivisible works contract has to obtain

registration under the Gujarat Value Added Tax Act, 2003 (for short as

‘Act, 2003’) as well as the Central Sales Tax Act, 1956 (for short as ‘Act,

1956’). Such dealer also has to approve their name as developers from

the competent authority of Union of India legislation, Special Economic

Zone Act, 2005 (for short as ‘Act, 2005’) vide sub section (10) of section

3 than they become eligible to execute the work in Special Economic

Zone (for short as ‘SEZ’). After the said formality assuming such dealer

in the State of Gujarat has entered into SEZ unit in written agreement

for a price in lump sum, for execution of work various materials they

have to procure i.e. cement, steel, electrical goods, sanitary ware,

paints, bricks, building materials, etc. All these materials are mostly

available within local domestic market as well as outside State. The

local domestic vendors charge VAT separately in their commercial

invoices also called ‘tax invoice’, while as out State vendors do not

charge CST against strength Form I. With regard to the Act, 2003 the

activity of the dealer is deemed sales, it attract VAT liability. The Act,

2003 provides option, composition scheme and normal scheme. Such

dealer should not opt for composition and prefer to remain in normal

scheme. Under the indivisible works contract the transfer of property

only takes place during execution of contract. The legal fiction is

created on such transfer is a deemed sale, hence of those goods is legal

fiction has been created to tax sale or purchase of goods involved in the

execution of a works contract. In other words such deemed sale are

relatable to ‘those’ goods, i.e. each individual goods transfer of property

in which takes place in the execution of a works contract. The transfer

of property in goods will takes place on the principle of accretion in the


case of immovable property. Such transfer of property in goods will

takes place only in respect of goods belonging to the contractor. In the

normal circumstances any dealer carrying such activity shall be liable

to pay tax but being in the SEZ area which is designated tax and duty

free enclave they apprehend that such tax does not attract. Therefore

they desirous to know the statutory obligation for deposit of tax and/or

refund of tax for purchases to be affected from registered dealer of State

Government as such vendors’ shall collects tax in the invoices at the

time of sales of goods and very goods shall be used in the execution of

indivisible works contract.

2) Perusal to the facts stated herein above, it is crystal clear that the

matter is interconnected, with SEZ Law of State and Union as well as

VAT Law. Merely referring to provisions of VAT Law answer would not

justify. Therefore to avoid the clash, conjoin reading of relevant

provisions under all the three Laws is very much essential. Prima facie,

refer to the head note ‘overriding effect of Act’, under the Gujarat

Special Economic Zone Act, 2004 (for short as ‘Act, 2004’), expression

‘this act shall have effect notwithstanding anything contained in any

other law’ conveying the idea of a provision yielding place over the other

Law to which it is made. In unfold fact the language of Act, 2003 is

controlled by Act, 2004 which has come into force on the 10th February,

2004. Its cardinal principle that the fiscal statute shall have to be

interpreted on the basis of the language used therein, and it must be

enforced. Legislatively Act, 2003 and Act, 2004 stand of same State,

under the juxta position which would prevail over other needs to be

answer. Under the statutory interpretation non obstante clause

expression ‘notwithstanding anything contained in any other law’

enumerated in Act, 2004 has significant role to play and the scope for

levy of VAT becomes limited. It confers the jurisdiction over the Act,

2003. The said Act, 2003 does not have the similar non obstante

clause.


3) Before I make attempt to deal with the query in interpretation of taxing

statute, the well settled principle is that the scheme and spirit of the

Act need to be understood first, taxing statue has a fiscal philosophy

without a feel of which a correct perspective to gather the intent and

effect of various clauses cannot be gained. This view is fortified by the

apex court decision in Controller of Estate Duty v. Kantilal Trikamlal

(1974) 4 SCC 643 at 649 - 650. It is further well settled that in order to

ascertain the true meaning of the terms and phrases employed, it will

be legitimate to call in aid other well-recognised rules of construction.

Such as legislative history, the basic scheme and framework of the

statute as a whole, each portion throwing light on the rest, the purpose

of the legislation, the object sought to be achieved, and the

consequences that may flow from the adoption of one in preference to

the other possible interpretation. It is settled principle of law that

wherever the inference arises for the purpose of interpretation of a

statute the entire statute is to be read in its entirety. The purport and

object of the Act must be given its full effect and in case of this nature,

principles of purposive construction must come into play. The

fundamental principle in the construction of statutes is that the whole

and every part of the statute must be considered in the determination of

the meaning of any of its parts. In construing a statute as a whole two

principle results to clear up obscurities and ambiguities in the law and

to make the whole of the law and every part of it harmonious and

effective. It is presumed that the Legislature intend that the whole of

the statute should be significant and effective. Different sections,

amendments and provisions relating to the same subject must be

construed together and read in the light of each other. Every statute

must be construed ex vigoenibus actus, that is, within the four corners

of the Act. When the taxing authority is called upon to construe the

term of any provision found as a statute, they should not confine its

attention only to the particular provision, which falls for consideration.

But the authority should also consider other parts of the statute, which

throw light on the intention of the Legislature and serve to show that


the particular provision ought not to be construed as if it stood alone

and apart from the rest of the statute. Every clause of a statute should

be construed with reference to the context and other clauses of the

statute so as, as far as possible, to make a consistent enactment of the

whole statute. This is the settled position of law in CIT v. Amin (1972)

ITJ 300, 307 SC (Bhagwati, C.J.); also in Vaddeboyina Tulasamma v.

Vaddeboyina Sesha Reddi, AIR 1977 SC 1977 at p. 1948: (1977) 3 SCC

99. Warren, C.J. observed in Richards v United States, 7L Ed 2d 492,

499: 359 US 1.

"We believe it is fundamental that a section of a statute should not be read in isolation

from the context of the whole Act, and that in fulfilling our responsibility in interpreting legislation we must not be guided by a single sentence or a number of

sentence, but should look to the provisions of the whole law and do its object and

policy".

4) The object of the Act, 2005 is to provide development and management

for promotion of exports and for matters connected therewith or

incidental thereto. Such law has been thought with a view to

augmenting world class infrastructural facility and hassle free

environment for export production like separate iceland within country.

This legislation has strong root in economic reality of this century. In

the reform process SEZ concept has been conceived from China, our

Country has adopted model of SEZ to attract the export related foreign

direct investment and offered level playing filed. It has been viewed as

vehicles for growth of Indian exporter. Concessions and tax exemptions

are offered to the operations in SEZ that has appeal businessmen in the

Country and abroad to set up manufacturing hubs in country. In

succinct facts SEZ is a one stop shop for the exporters, to avail the

various fiscal benefits which include exemption from duties of Central

Excise, duties of Customs, Income Tax, Service Tax, Central Sales Tax

and various State levies. Most of these exemptions are available also to

those exporters who are located in the Domestic Tariff Area (for short as

‘DTA’) but they are the procedural simplifications regarding availment of

fiscal incentives enumerated above and also the very conscious,


deliberate and positive attempt and attitude of the Central Government

which make SEZ very attractive destination for the exporters. The

desirous of developing SEZ shall benefit to the nation from view point of

international trade. Because of the SEZ, other units manufacturing

products would be benefited. The infrastructure facilities and amenities

like development of land, roads, buildings, railways, port, water supply,

entertainment facility, multi-media, transport, production facility, and

information technology would be established of international standard.

The law provides that the Development Commissioner of SEZ shall

ensure speedy development. To set up unit in SEZ, the applicant shall

submit a proposal to the said authority with required particulars. In

time bound schedule the Approval Committee shall inform the

entrepreneur. On approval of proposal the Development Commissioner

shall issue Letter of Approval for setting up unit. The entrepreneur or

developer than shall execute bond cum legal undertaking with regard to

obligations regarding proper utilization and accounts of goods,

including capital goods, spare, raw materials, consumables, fuel, and

achievements for positive of positive net foreign exchange. In the

context of Government of India guideline for establishment of SEZs, the

Government of Gujarat also decided to implement the same policy in

the similar sprit passed the resolution no. SEZ-2001-1456-G dt.

17.7.2002 and promulgated the Ordinance, also upon receiving the

assent of the Hon’ble President of India the State Government

published the Gazette on 30.03.2004 for the Gujarat Act no. 11 of 2004

i.e. Act, 2004.

5) The reason for the Act, 2003 welfare State requires money for running

the administration as well as for implementation of welfare policies of

the Government. The major contribution is raised through indirect

taxation. To meet with the object it has been introduced in order to

bring uniformity throughout the country with regards to taxation on

sales, and also introduced in the State of Gujarat from 01.04.2006.

Salient feature is, input tax credit (for short as ‘ITC’) of tax paid on


purchase is to be given against the tax liability incurred on the sale.

Briefly the effective tax would become leviable on value addition at every

stage of sale transactions. Thus, the ITC is available at the point of

purchase of goods itself, if the purchased goods are intended for the

specified purposes stated in section 11(3)(a) of the Act, 2003. Thus the

ITC available in relation to purchases of taxable goods purchased for

the intended purposes is neither dependant nor related either to sale of

very goods purchased or to the sale of manufactured from the goods

purchased. On bare perusal of section 11(3)(a) of the Act, 2003 one will

find that the ITC is available only to registered dealer on his sales or

deemed sales of any taxable goods. Therefore precisely, there is no

pyramiding effect of tax in trade and commerce.

6) Relevant statutory provisions of Act, 2005 reads as under:

2. Definitions

In this act, unless the context otherwise requires,

(g) ‘Developer’ means a person who, or a State Government which, has been garnted by the Central Government a letter of a approval under sub section (10) of section

3 and includes an authority and a co-developer.

(h) ‘Development Commissioner’ means the Development Commissioner appointed fo

one or more Special Economic Zones under sub section (1) of section 11.

(m) ‘Export’ means,

(i) taking goods, or providing services, out of India from a Special Economic Zone,

by land, sea or air or by any other mode, whether physical or otherwise, or

(ii) supplying goods, or providing services, from the Domestic Tariff area to a Unit

or Developer, or (iii) supplying goods, or providing services, from one Unit to another Unit or

Developer, in the same or different Special Economic Zone,

(o) ‘Import’ means,

(i) brining goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode,

whether physical or otherwise, or

(ii) receiving goods, or receiving services by a Unit or Developer from another zone

or a different Special Economic Zone,

(za)‘Special Economic Zone’ means each Special Economic Zone notified under the proviso to sub section (4) of section 3 and sub section (1) of section 4 (including

Free Trade and Warehousing Zone) and includes an existing Special Economic

Zone.

55. Power to make rules.


The Central Government may, by notification, make rules for carrying out the

provisions of this Act.

58. Savings –

All rules made or purporting to have been made or all notifications issued or

purporting to have been issued under any Central Act relating to the Special

Economic Zones shall, insofar as they relate to matters for which provisions is made

this Act or rules made or notification issued there under and are not inconsistent therewith, be deemed to have been made or issued under this Act as if this Act had

been in force on the date on which such rules were made or notifications were

issued had shall continue to be in force unless and until they are superseded by nay

rules made or notifications issued under this Act.

7) Relevant statutory provisions of Union SEZ Rules, 2006:

5. Requirement for establishment of a Special Economic Zone.

Before recommending any proposal for setting up of a Special Economic Zone, the

State Government shall endeavour that the following are made available in the State

to the proposed Special Economic Zone Units and Developer, namely:

a) exemption from the State and local taxes, levies and duties, including stamp duty,

and taxes levied by local bodies on goods required for authorised operations by a

Unit or Developer, and the goods sold by a Unit in the Domestic Tariff Area except

the goods procured from domestic tariff area and sold as it is.

8) Relevant statutory provisions of the Act, 2004 reads as under:

21. State taxes and Levies.

(1) All sales and transactions within the processing area of the Zone shall be exempt

from all taxes, cess, duties, fees or any other levies under any State law to the

extent specified below:

Stamp duty and registration fees payable on transfer of land meant for approval units in the Zone.

Levy of Stamp duty and registration fees on loan agreements, credit deeds and mortgages executed by the unit, industry or establishment set up in the

processing area of the Zone.

Sales Tax, Purchase Tax, Motor Spirit Tax, Luxury Tax, Entertainment Tax and other taxes and cess payable on sales and transactions.

(2) Inputs (goods and services) made to Zone Units from Domestic Tariff Area shall

be exempted from sales tax and other taxes under the State laws.

(3) The Developer shall also be entitled to the benefits of exemption provided in sub-sections (1) and (2) for the entire Zone.

(the above clause has been amended on 16.08.2007 wherein the motor sprit specified in schedule III of the Act, 2003 has been excluded – as the hard copy of text is not available the prior to amended section is reproduced).

22. Overriding effect of Act.

The provisions of this Act shall have effect notwithstanding anything

contained in any other Law for the time being in force.


9) Relevant statutory provisions of the Act, 1956 reads as under:

Section 8,

(6) Notwithstanding anything contained in this section, no tax under this Act shall be

payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of

setting up, operation, maintenance, manufacture, trading, production, processing,

assembling, repairing, reconditioning, reengineering, packaging or for use as

packing material or packing accessories in an unit located in any special economic

zone by the developer of the special economic zone, if such registered dealer has

been authorised to establish such unit to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this

behalf.

(7) The goods referred to in sub-section (6) shall be the goods of such class or classes of

goods as specified in the certificate of registration of the registered dealer referred to in that sub-section.

(8) The provisions of sub-sections (6) and (7) shall not apply to any sale of goods made

in the course of inter-State trade or commerce unless the dealer selling such goods

furnishes to the prescribed authority referred in sub-section (4) a declaration in the

prescribed manner on the prescribed form obtained from the authority specified by the Central Government under sub-section (6) duly filled in and signed by the

registered dealer to whom such goods are sold.

Explanation: For the purpose of sub section (6), the expression ‘special economic zone’

has the meaning assigned to it in clause (iii) to Explanation 2 to the proviso to section 3 of the Central Excise Act, 1944 (1 of 1944).

10) Relevant statutory provisions of the GVAT Rule, 2006:

Proviso in Rule 37, to sub rule (5),

‘Provided that the Commissioner may grant provisional refund for an amount not

exceeding ninety percent of the amount claimed in the return furnished by the

specified dealer, developer or co-developer of the Special Economic Zone in the

circumstances specified above’.

11) Perusals to above enactments which are in field, except the Act, 2003

the enactment of the Act, 2005 and Act, 2004 contain non obstante

clause stating that ‘notwithstanding anything contained in any other

law’. The centred controversy can be resolved by looking at purpose and

policy. The test be applied is that of the two enactments of same State,

Act, 2004 is special one, therefore cardinal principle of law is that for

answer the special law will prevail over general law. Another test is

object and policy of the relevant statute be observed. Refer to the

preamble of the policy regarding establishment of SEZ in Gujarat it has

been announced with view to augmenting infrastructure facilities for

export production. To meet the object, rules are farmed by the Union

Government, precisely it is framed by virtue of section 55. Rule 5, refers


that before recommending the proposal the State Government shall

endeavour the exemption from State taxes in determined

circumstances. Abide by the said Rule the State Government in

enacting the Act, 2004 vide section 22 provided a non obstante clause,

it is drawn out by a section with a view to give the enacting part of the

section in case of conflict, an overriding effect over other Acts is

mentioned. It is equivalent to say that besides two Acts, the Act in

which mentioned of the non obstante clause, the provision shall have

full operation or the provisions embraced with the non obstante clause

will not be an impediment for the operation of the enactment or the

other Act as there is no clause occurs of non obstante. Refer to

Principles of Statutory Interpretation—11th Edition 2008—page 364,

Justice G.P. Singh; O.N.Bhatnagar V. Rukibai Narsindas (Smt), AIR

1982 SC 1097 the Court had occasion to resolve the conflict of Rent Act

and Society Act. Section 28 of Rent Act, which opens with the words

‘notwithstanding anything contained in any law’, which confers

jurisdiction over small causes Bombay to entertain any try suits for

recovery of rent and possession between a landlord and tenant. Section

91 of the Co-operative Society Act, which also open with similar non

obstante clause, provides that any dispute touching the business of

society shall be referred to the Register if both the parties thereto are

one or other of the following namely, a present or past member, or a

person claiming through member. Construing the provisions of two

Acts, it has been held that even in respect of tenant co-partnership type

the housing society whose business includes acquiring and letting out

building to its members, a claim by society to eject a deemed tenant

who was let in by a member would be entertain able by court of small

causes under the Rent Act and not by the Registrar under Co-operative

Societies Act was the latter Act, the Rent Act was special law relating to

protection and eviction or tenants and so must prevail over the

provisions of the Co-operative Society Act. The said settled principle

would squarely apply to the case in hand as the facts and

circumstances are quite parallel.


12) Normally the use of a phrase by the Legislature in a statutory provision

like ‘notwithstanding anything contained in any other law’ is very rare.

Use of such expression is another way of saying that the provision in

which the non obstante clause occurs would wholly prevail over other

provisions of the other Acts. Non obstante clauses are to be regarded as

clauses which remove all obstructions which might arise out of the

provisions of any other law in the way of the operation of principle

enacting provision to which the non obstante clause is attach.

13) On a natural and ordinary meaning being accorded and on a fair

construction of the words used in the enacted section 21of the Act,

2004 it is clear even after the amendment all sales and transactions

within the processing area of zone or in demarcated area or between the

inter unit of zone be exempted from all taxes, cess, duties, fees, or any

other levies under the State Law. It is true that implementation of Act,

2003 in the present case, the levy of tax, on the deemed sale attracts

schedule rate of tax but reading together with the Act, 2004 the

exemption has also been declared by non obstante clause. In view of

conjoin reading of the parallel Laws the non obstante clause contained

in Act,2004 the enacted part of section 21 of the Act, 2004 shall, in the

case of conflict, have an overriding effect over the provisions of section 7

of the Act, 2003. As stated supra the scheme and spirit of the Act need

to be understood first, taxing statue has a fiscal philosophy. In order to

ascertain the true meaning of the legislative history, the basic scheme

requires to be kept in mind otherwise the object will be defeated. To

avoid the clash, both the statutes are to be read in harmonious manner

in its entirety together the purport and object of the Act, the expression

used in overriding effect must be given its full effect to reach to

purposive. In parameter the SEZ policy is aimed to provide

internationally competitive and hassle free environment for export

production. SEZ is meant to be a designated duty free enclave. It is

universal knowledge that exporters have to export in a competitive


foreign market even by incurring loss, even then to encourage them

they needed incentives. Duty and tax is one of the areas which only

allow them hassle free environment and by relief they will concentrate

to produce quality product with lower cost.

14) Keeping in mind the above stated principles and refer to above

statutory position of law, in order to give full meaning and to determine

a correct legislative intent, SEZ has been specifically delineated duty

free enclave. It has been deemed to be foreign territory for the purpose

of manufacturing operations, duties and tariffs. Goods going into SEZ

area from DTA shall be treated as exports. Similarly, the goods coming

from the SEZ area into DTA shall be treated as if these are being

imported in India. In important feature zone shall be set up by private

sector or by State Government in association with private sector. State

Government shall have lead role in setting up of SEZ.

15) Another way of looking is that where there is an apparent conflict

between two Acts, one must try to ascertain the pith and substance or

the true nature and character of the conflicting provisions. It is a

fundamental canon of law that whilst it is possible for both the Centre

and the State to interpret upon and explain certain words or

expressions used in taxing statutes amongst others, a certain

uniformity should prevail in order to avert inconvenience and

harassment resulting to the persons affected by such an interpretation

or ruling. Article 261 of the Constitution of India is a pointer to this

effect and provides that full faith and credit shall be given throughout

the territory of India to public acts of the Union. It cannot be disputed

that the opinions and the decisions taken by the Government of India

under the Indian Tariff Act and the Excise Acts are such public acts

then it is not open to State to treat it otherwise. This view is fortified by

decision reported in (1968) 21 STC 367 - Kishanchand Chellaram and

Others v. JCTO and others. That the goods namely fabrics are subject

to the additional duty of excise under the Additional Duties of Excise


(Goods of Special Importance) Act, 1957, and there has not been any

controversy about the character of the goods at any time. The appellant

were of the view that by virtue of the agreement between the State and

the Central Government, the Centre is collecting the additional excise

duty on the fabrics and distributing a portion of the same out of the

consolidated fund to the State, and that in respect of these fabrics the

State cannot levy sales tax. It is also significant to note that the

Additional Duties of Excise (Goods of Special Importance) Act was

passed after a deep consideration of the mutual interests and benefits

the Centre and the States should and ought to derive by such an

imposition. This can be seen from the Finance Commission's Report

preceding the passing of the Additional Duties of Excise (Goods of

Special Importance) Act and this has been referred in the counter-

affidavit filed on behalf of the Central Government. Such being the

essence of the bargain between the Centre and the States, when the

additional excise duty was imposed on artificial silk, it is not ordinarily

open to the State, who did not at any time choose to impose a levy on

the products under consideration ever since the passing of the Madras

General Sales Tax Act, 1959, to take up a view contrary to that practice

and understanding and arbitrarily decide to levy sales tax on the goods

in question on the foot that they are not artificial silk. The Court relying

upon the referred Constitution held that levy of tax is illegal. Herein Act,

2005 is public Act enacted by Union, hence as per Constitution Article

261 effect thereof is must and full faith be given that the object of it not

frustrated. If the State intended to levy tax than it becomes contrary to

the nations object. It is true that after implementing the Act, 2003 the

State Government till date has failed to issue corresponding necessary

notification to grant exemption and provide deduction for claming

smooth refund. In absence of such amendment it will be ridiculous to

demand tax from SEZ Unit.

16) On 30th August 2007 GVAT Rule 2006 has been amended. A proviso

has been added to Rule 37, to sub rule (5), thereby the intention can be


gathered of State Government that specified dealer, developer or co-

developer of the SEZ in the circumstances specified like tax credit

remains unadjusted in the return continuously in each month of the

quarter than such dealer shall make application in Form 306 for

claiming refund. Though the rule speaks for refund but in absence of

necessary amendment in section 5(2) of the Act, 2003 granting of

refund is not simple, the amendment in rule cannot fasten the liability.

It appears that the rule making authority has misinterpreted the Act,

2003. It has been vitiated. The basic thing is that Rule cannot override

the Act, hence for granting the exemption or refund the Act must spell

something, that in absence of amended under the existing provisions of

law the deduction from sales or deemed sale cannot be given effect and

taxable balance is not reduced the claim of refund can not be asked or

authority would not pass any order. For the implementation of rule to

avail the refund, deemed sales deduction be granted under the Act,

2003 is must. By amendment in Rule only clear intention of the

Government becomes transparent that positive sign is indicated and

nothing more.

17) To give effect to the above Rule till the desired amendment is not made

in the present circumstances the statutory compliance be made by

asking deduction under section 5(2) of the Act, 2003. A shelter is

possible, certificatory letter of understanding of the provisions of Law

and sought deductions in tax returns be filed to avoid the consequences

of offences and penalties. Such application will avoid allege statement of

falsely, knowingly, fails to furnish returns incorrect return or pay tax.

Briefly, the understanding of Law must reflect on paper. To resolve the

issue early the poser also can be made through asking question vide

section 80 (e) of the Act, 2003. Since there being no proceeding at the

movement under section 33, 34 or 35 or before the Court the

Commissioner shall pass order determining such question.


18) In exercise of powers conferred by sub-section (1) of section 40 of the

Act, 2003 the State Government issued notification which authorise the

Commissioner to grant refund to SEZ developer or co-developer of the

amount of tax separately charged by a registered dealer. A glance

towered the GNFD (GHN-09) VAT-2010-S.40(1)(6)-TH dated 31.03.2010

would make the situation clear that, developer or co-developer have

been made entitle for refund for a period from 1st April, 2005 to 31st

March 2008 can make an application in Form 306 for refund of tax.

Such refund amount shall be made of tax paid on his purchases of the

goods used to develop, build, design, organize, operate or maintain or

manage a part or whole of the infrastructure facilities and amnesties of

the SEZ in the State. The said notification was issued as the law has

been amended on 1st April 2008 by zero rated sales the State

Government being in promissory of estoppels necessitate it.

19) Here the SEZ entrepreneur may not be developer or co-developer but

they cannot be put into disadvantage position then that of developer or

co-developer. A developer and co-developer in the normal circumstances

shall be liable to pay tax for goods involved in execution of works

contract, in such circumstances the tax is obviated to recover from

contractee, here it is a SEZ unit. That would have attract in present case

to a developer but through Legislation the Government of Gujarat has

offered facility and concession for units in SEZs by which they would not

pay tax and as such to avoid the burden in chain have been facilitated

for refund.

20) Therefore, when a developer and co-developer have been made entitle for

refund than by analogy the unit who is in SEZ cannot be deprived of

their right to enjoy of similar facility and concession as the burden of tax

is verifiable. The legislature vide section 40(1) of the Act, 2003 itself

proclaims that tax paid on purchases of the goods used to develop SEZ

unit will be given refund of under tax invoices. Therefore authority

should not adopt stand which frustrate the object for which the entire


scheme of SEZ has been framed. The endeavour must be to ensure that

the scheme is made effective. In other words by disallowing of ITC it

would defeat the object and purpose intended by legislature.

21) The negative conditions as stated in GNFD apply only to developer and

co-developer and not to SEZ units. However for claiming ITC they are

abided by certain conditions like, commodity restriction of Schedule III

which they have not purchased, consignment or dispatch of goods, raw

materials for used in manufacture of exempted goods or notification vide

section 5(2), fuel to be used for motor vehicles and dealings involved in

collusion to defrauded government revenue. As far as expressions

develop, build, infrastructure facility and amenities are concern they are

material words used in notification serve the purpose of refund amount

and are capable of bearing for purposive construction enables

consideration for construing an object of Act provides remedy. Also as

could be seen the period stated in GNFD i.e. 1st April 2005 to 31st March

2008 which is prior to repeal of Act, 1969 and enactment of section 5A

in the Act, 2003. These shows the sole purpose of period and enactment

is to keep promissory of estoppels nothing else.

22) The principle of interpretation according to the legislative intent which is

acceptable as more logical be accepted. For this purpose decision of

Hon’ble Apex Court in the case of National Insurance Co Ltd v. Laxmi

Narain Dhut reported at 2007 (3) GLR 2565 SC is worth to take note. In

that case the issue was concerned with the interpretation of section 149

of the Motor Vehicle Act, 1988 and in that context considered sections

149, 165 and 169 of the said Act.

7. Hon’ble Apex Court observed the plea of purposive construction.

“Golden Rule of interpretation of statutes is that statutes are to be interpreted

according to grammatical and ordinary sense of the word in grammatical or liberal

meaning unmindful of consequence of such interpretation. It was the predominant

method of reading statutes. More often than not, such grammatical and literal


interpretation leads to unjust results which the Legislature never intended. The golden

rule of giving undue importance to grammatical and literal meaning of late, gave place

to ‘rule of legislative intent’. The world over the principle of interpretation according to

the legislative intent is accepted to be more logical.”

8. Ultimately the Court observed as under:

“When the law to be applied in a given case prescribes interpretation of statute, the

Court has to ascertain the facts and then interpret the law to apply to such facts.

Interpretation cannot be in a vacuum or in relation to hypothetical facts. It is the

function of the legislature to say what shall be the law and it is only the Court to say

what the law is”.

23) In Jt. Registrar of Co-op Societies v. T. A. Kuttappan, 2000 (6) SCC 127,

Associated Timber Industries v. Central Bank of India, 2000 (7) SCC 73,

Allahabad Bank v. Canara Bank, 2000(4) SCC 406, K. Duraiswamy v. State of

tamil Nadu, 2001 (2) SCC 538, Reserve Bank of India v. Peerless General

Finance and Investment Co. Ltd 1987 (1) SCC 424, Chief Justice of A. P. v.

L. V. A. Dikshitulu, AIR 1979 SC 193, Kehar Singh v. State (Delhi Admn), AIR

1988 SC 1883, and Indian Handicrafts v. Union of India, 2003 (7) SCC 589,

the Apex Court applied the principle of purposive construction.

Dikshitulu’s case, supra a Constitution Bench observed as under:

“The primary principle of interpretation is that a constitutional or statutory provision

should be construed ‘according to the intent of they that made it’ (Code). Normally,

such intent is gathered from the language of the provision. If the language of the

phraseology employed by the legislation is precise and plain and thus by itself,

proclaims the legislative intent in unequivocal terms, the same must be given effect to,

regardless of the consequences that may follow. But if the words used in the provision

are imprecise, protean, or evocative or can reasonably bear meaning more than one,

the rule of strict grammatical construction ceases to be a sure guide to reach at the

real legislative intent. In such a case, in order to ascertain the true meaning of the

terms and phrases employed, it is legitimate for the Court to go beyond the arid literal

confines of the provision and to call in aid other well – recognized rules of construction

such as its legislative history, the basic scheme and framework of the statute as a

whole, each portion throwing light on the rest, the purpose of the legislation, the


object sought to be achieved and the consequences that may flow from the adoption of

one in preference to the other possible interpretation.”

In Kehar Singh v. State (Delhi Admn.), AIR 1988 SC 1883, it was held:

“During the last several years, the ‘golden rule’ has been given a goby. We now look for

the ‘intention’ of the legislature or the ‘purpose’ of the statute. First, we examine the

words of the statute. If the words are precise and cover the situation on hand, we do

not go further. We expound those words in the natural an ordinary sense of the

words. But if the words are ambiguous, uncertain any doubt arises as to the terms

employed, we deem it as our paramount duty to put upon the language of the

legislature rational meaning. We then examine every word, every section and

provision. We examine the Act as a whole. We examine the necessity which gave rise

to the Act. We took at the mischief’s which the legislature intended to redress. We look

at the whole situation and not just one-to-one relation. We will not consider any

provision out of the framework of the statute. We will not view the provisions as

abstract principles separated from the motive force behind. We will consider the

provisions in the circumstances to which they owe their origin. We will consider the

provisions to ensure coherence and consistency within the law as a whole and to avoid

undesirable consequences.”

24) A statute is an edict of the Legislature and in construing a statute, it is

necessary to seek the intention of its maker. A statute has to be construed

according to the intent of those who make it and the duty of the Court is to act

upon the true intention of the Legislature. If a statutory provision is open to

more than one interpretation, the Court has to choose that interpretation

which represents the true intention of the Legislature. This task very often

raises difficulties because of various reasons, inasmuch as the words used

may not be scientific symbols having any precise or definite meaning and the

language may be an imperfect medium to convey one’s thought or that the

assembly of Legislatures consisting of persons of various shades of opinion

purport to convey a meaning which may be obscure. It is impossible even for

the most imaginative Legislature to foresee all situations exhaustive and

circumstances that may emerge after enacting a statute where its application

may be called for. Nonetheless, the function of the Courts is only to expound

and not to legislate. Legislation in a modern State is actuated with some policy

to curb some public evil or to effectuate some public benefit. The legislation is


primarily directed to the problems before the Legislature based on information

derived from past and present experience. It may also be designed by use of

general words to cover similar problems arising in future. But, from the very

nature of things, it is impossible to anticipate fully the varied situations

arising in future in which the application of the legislation in hand may be

called for, and words, chosen to communicate such indefinite referents are

bound to be in many cases lacking in clarity and precision and thus giving

rise to controversial questions of construction. The process of construction

combines both literal and purposive approaches. In other words, the

legislative intention i.e. the true or legal meaning of an enactment is derived

by considering the meaning of the words used in the enactment in the light of

any discernible purpose or object which comprehends the mischief and its

remedy to which the enactment is directed.

25) It is also well settled that to arrive at the intention of the legislation depending

on the objects for which the enactment is made, the Court can resort to

historical, contextual and purposive interpretation leaving textual

interpretation aside. Francis Bennion in his book “Statutory Interpretation”

described “purposive interpretation” as under:

“A purposive construction of an enactment is one which gives effect to the legislative

purpose by- (a) following the literal meaning of the enactment where that meaning is

in accordance with the legislative purpose, or (b) applying a strained meaning where

the literal meaning is not in accordance with the legislative purpose.”

26) More often than not, literal interpretation of a statute or a provision of a

statute results in absurdity. Therefore, while interpreting statutory provisions,

the Courts should keep in mind the objectives or purpose for which statute

titled as Some Reflections on the Reading of Statutes (47 Columbia Law

Reports 527), observed that, “legislation has an aim, it seeks to obviate some

mischief, to supply an adequacy, to effect a change of policy, to formulate a

plan of Government. That aim, that policy is not drawn, like nitrogen, out of

the air; it is evidenced in the language of the statutes, as read in the light of

other external manifestations of purpose. (Emphasis Supplied)


27) The contention raised is also supported in the principle of making

interpretation based on the text and the context of the provisions. In that

connection we rely upon the Judgment of the Hon’ble Apex Court in the case

of RBI v. Peerless General Finance and Investment Co. Ltd reported at (1987)

1 SCC 424 observed as under:

“Interpretation must depend on the text and the context. They are the bases of

interpretation. One may well say if the text is the texture, context is what gives the

colour. Neither can be ignored. Both are important. That interpretation is best which

makes the textual interpretation match the contextual. A statute is best interpreted

when we know why it was enacted. With this knowledge, the statute must be read,

first as a whole and then section by section, clause by clause, phrase by phrase and

word by word. If a statute is looked at in the context of its enactment, with the glasses

of the statute-maker, provided by such context, its scheme, the Section, clauses,

phrases and words may take colour and appear different than when the statute is

looked at without the glasses provided by the context. With these glasses, we must

look at the Act as a whole and discover what each Section, each clause, each phrase

and each word is meant and designed to say as to fit into the scheme of the entire Act.

No part of a statute and no word of a statute can be construed in isolation. Statutes

have to be construed so that every word has a place and everything is in its place. It is

by looking at the definition as a whole in the setting of the entire Act and by reference

to what preceded that enactment and the reasons for it that the Court construed the

expression ‘Prize Chit’ in Srinivasa and we find no reason to depart from the Court’s

construction.”

28) Section 5A is remedial provision. Its main object is to give relief to units in

SEZ, that the sales made from DTA be made exempted. The Legislature does

not intent it as charging section. In interpreting such a provision with

notification issued vide section 40(1) of the Act, 2003 construction yield by

assessing authority would defeat its purpose and in effect obliterate it from the

statute should be eschewed. The construction which is possible to developer

or co-developer for refund is equally applicable to unit of SEZ when they

purchases goods for to be used in unit itself. That shall preserves its

workability and efficacy is to be preferred to the one which would render it

otiose. This view harmonies with intents expressed in the statute section 5A of

the Act, 2003 as well as section 21 of the Act, 2004.


29) To extend the benefit of exemption from payment of CST to individual

units in SEZ for setting up, operation, repairing, reconditioning,

packing and maintenance of such units and also to developers of SEZ

who develop, operate and maintain such SEZ sub section (6) of section

8 of the Act, 1956 has been brought in to statute by Clause 118 of

Finance (No.2) Act, 2004. By this amendment dealer selling goods in the

course of inter State trade or commerce to registered dealer under the

aforesaid sub section or sub section (8) of section 8 or under sub

section (1) of section 5 of the Act, 1956 shall obtain Form I duly signed

by SEZ dealer himself. This is the position after the rule 12(11) which

has been amended on 07.06.2005 read with section 8(8) of the Act,

1956. ( Prior to said amendment Form I was to be issued countersigned and certified

by the authority specified by the Union Government authorising the establishment of the

unit in the SEZ under section 76A of the Customs Act, 1962 that the sale of goods is for

the purpose of establishing a unit in such zone). Goods which the developer or

SEZ unit requires are to be specified in the registration certificate vide

section 8(7) of the Act, 1956. This clause also begins with

‘notwithstanding anything contained in this Act’. This with view to give

effect over other provisions of Act. This is non obstante clause. Such

enacted part cannot cut down the scope and ambit when phrase is used

by non obstante clause. Its legislative devise to modify the ambit of the

provision.

30) However in case of doubt or dispute, it is well settled, that construction

has to be made in favour of the taxpayer and against the revenue. See –

Sneh Enterprises v. CC, New Delhi (2006) 7 SCC 714. In Ispat Ind. Ltd.

v. CC Mumbai, (2006) 12 JT 379; (2006) 9 SCALE 652, the Supreme

Court opined that:

‘if there are two possible interpretations of rule, one which sub serve the object of a

provision in the present statute and the other which does not, we have to adopt the

former, because adopting the latter will make the rule ultra vires the Act.’

In the backdrop of above, through sufficient guideline for determination of

turnover in the hands of dealer, my answer is an emphatic that they shall


not be liable to pay VAT. Section 21 and 22 of the Act, 2004 is of wide

amplitude, it confers powers over the Act, 2003 and hence scope of levy of

VAT becomes limited, if demanded shall be ultra vires.

Documents

SEZ and VAT - H D Desaihddesai.com/Articles/SEZ_and_VAT.pdf · SEZ and VAT Article by: ... ‘Act, 2003’) as well as the Central Sales Tax Act, 1956 ... Salient feature is, input