Supply to SEZ- “Zero Rated” only when supplied for Authorised Operations-AAR


In recent ruling issued by Karnataka AAR in case of M/s Coffee Day Global Ltd, it is held that the supply of non-alcoholic beverages or ingredients of the beverages to the SEZ units by using coffee vending machines does not constitute as zero-rated supply as per Section 16 of the IGST Act, 2017.

In this case the applicant assessee is engaged in the supply of non-alcoholic beverages to SEZ units using coffee vending machines. For this, they undertakes two types of transactions:-

(i) installs vending machines inside the SEZ premises and prepares beverages using the vending machines & its ingredients, supplies to SEZ units which are consumed by the employees of SEZ units; or

(ii) installs the vending machines inside SEZ premises and supplies beverage ingredients to the SEZ units, the SEZ units then prepares the beverages using the vending machines and serve them to its employees.

The applicant contended that the ‘any supplies’ made to the SEZ units are in the nature of zero-rated supplies notwithstanding that they are not used for authorized operations and accordingly, eligible to claim the refund of input tax credit on inputs used for making supplies.

In this respect the Karnataka AAR, observed as follows:

  • The SEZ have the same meaning as assigned in terms of Section 2(za) of the SEZ Act, 2005. Further, Section 15(9) of the said Act, provides that the SEZ unit shall carry out only the authorized operations in the unit. Therefore, any special benefit accruing to the SEZ units shall be strictly available in respect of the authorized operations only.
  • Further, the words ‘any supply’ as used by the applicant in its contention has not been used anywhere in the law, and the words ‘any’ has been used in Section 16(1) of the IGST Act, 2017, only once to define the meaning of ‘Zero-rated supplies’. Such words has not been used in Clause(b) of the said Section. So therefore, it can’t be read as any supply of goods or services or both to a SEZ developer or SEZ unit.
  • Rule 89 of the CGST Act, 2017 related to refund provides that the benefit of refund for the supplies made to the SEZ unit or a SEZ developer shall be available to the supplier only when the goods or services or both has been provided to the SEZ units for the authorized operations as admitted by the Specified Officer of the Zone . Therefore,  in the event of the IGST Act, 2017, not explicitly using the term “authorised operations” in Section 16(1)(b), it is implicit that the supply of goods or services or both described in Section 16(1)(b) have to be read as in relation to authorized operations.

Hence, in the present case, since the applicant has not made out a case that the activity undertaken by them is certified as an authorized operation by the proper officer of the SEZ, therefore the activity undertaken by the applicant does not qualify to be a zero-rated supply.

Hence, it is set out that any supply made to SEZ for non-authorized operations is liable to tax under normal provisions of GST Act like other domestic supplies.

Find the complete set of ruling >>> AAR-CCD-SEZ

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