C I T JAIPUR vs. M/S GOENKA DIMOND AND JEWELLERS LTD

1 HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 222 / 2012 Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj) ----Appellant Versus M/s Goenka Diamond & Jewellers Ltd., 40, Panchratana, MSB Ka Rasta, Jaipur ----Respondent Connected With D.B. Income Tax Appeal No. 151 / 2015 Principal Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj) ----Appellant Versus M/s Goenka Diamond & Jewellers Ltd., 401, Panchratana, MSB Ka Rasta, Jaipur ----Respondent D.B. Income Tax Appeal No. 66 / 2016 Principal Commissioner of Income Tax-I, New Central Revenue Building , Statue Circle, Jaipur-(raj) ----Appellant Versus M/s Goenka Jewellers, 401, Panchratna, MSB Ka Rasta Jaipur ----Respondent D.B. Income Tax Appeal No. 68 / 2016 Principal Commissioner of Income Tax-I, New Central Revenue Building , Statue Circle, Jaipur-(raj) ----Appellant Versus M/s Goenka Jewellers, 401, Panchratna, MSB Ka Rasta Jaipur ----Respondent D.B. Income Tax Appeal No. 69 / 2016

2 Principal Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur Raj ----Appellant Versus M/s Goenka Jewellers, 401, Panchratna, MSB Ka Rasta, Jaipur ----Respondent D.B. Income Tax Appeal No. 70 / 2016 Principal Commissioner of Income Tax-I, New Central Revenue Building Statue Circle, Jaipur Raj ----Appellant Versus M/s Goenka Jewellers, 401, Panchratna, MSB Ka Rasta, Jaipur ----Respondent D.B. Income Tax Appeal No. 115 / 2016 Principal Commissioner of Income Tax-I, New Central Revenue Building Statue Circle, Jaipur Raj ----Appellant Versus M/s Goenka Jewellers, 401, Panchratna, MSB Ka Rasta, Jaipur ----Respondent _________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay For Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 24/08/2017 1. In these appeals, common question of law and facts are involved therefore, they are decided by the common judgment. 2. By way of these appeals, the appellant has challenged the

3 judgment and order of the tribunal whereby the tribunal has dismissed the appeal. 3. This court while admitting the appeals has framed following substantial questions of law:- D.B. Civil Income Tax Appeal No.222/2012 admitted on 05.05.2014 “Whether the Tribunal as well as CIT(A) were justified in granting deduction to the assessee under Section 10AA of Rs.12,26,32,018/- by holding that trading of goods is a service, eligible for deduction u/s 10AA?” D.B. Civil Income Tax Appeal No.151/2015 admitted on 05.07.2016 “Whether the Tribunal as well as CIT(A) were justified in granting deduction to the assessee under Section 10AA of Rs.25,37,14,968/- by holding that trading of goods is a ‘Service’, eligible for deduction u/s 10AA of the Act?” D.B. Civil Income Tax Appeal No.66/2016 admitted on 13.04.2016 (i) “Whether the Tribunal was justified in quashing the order of CIT passed under Section 263 of the Income Tax Act, 1961? It is by applying the order of Coordinate Bench of IT (Appeals) in the case of Commissioner of Income Tax-I Vs. M/s. Goenka Diamond & Jewellers Ltd. in ignorance of Section 10AA of the Act of 1961 which applies if assessee is involved in manufacturing or service.” (ii) Whether trading can be treated to be service so as to apply Section 10AA of the Act of 1961?” D.B. Civil Income Tax Appeal No.68/2016 admitted on 31.01.2017 “(i) Whether the Tribunal was justified in not adjudicating the appeal on its merits and dismissing the same merely by relying upon its

4 own order passed in the case of the assessee for the assessment year 2007-08 itself, without at all considering the specific findings recorded by Assessing Officer as per which the assessee was not entitled for deduction u/s 10AA of the Act of Rs.3,49,54,102/-?” D.B. Civil Income Tax Appeal No.69/2016 admitted on 30.05.2017 “(i) Whether the Tribunal was justified in not adjudicating the appeal on its merits and dismissing the same merely by relying upon its own order passed in the case of the assessee for the assessment year 2007-08 itself, without at all considering the specific findings recorded by Assessing Officer as per which the assessee was not entitled for deduction u/s 10AA of the Act of Rs.7,07,51,730?” (ii) Whether the assessee is entitled for deduction u/s 10AA of the Act, ignoring that the assessee failed to fulfill the conditions provided under section 10AA of the Act and expanding the scope of the definition of ward “Services” from Section 2(z) and Second Schedule of SEZ Act, 2005 and Rules, 76 of SEZ Rules, 2006, ignoring that deliberately the same was not defined by the legislators under the Income Tax Act, and a literal meaning of word “Service” was rightly taken by the Assessing Officer?” D.B. Civil Income Tax Appeal No.70/2016 admitted on 30.05.2017 (i) Whether the Tribunal was justified in quashing the order of CIT(A) passed u/s 263 of the Income Tax Act, 1961, by holding that the assessment order is not holding that the assessment order is not erroneous in so far as it is prejudicial to the interest of revenue, ignoring that the assessment order was passed ignoring the provisions of Section 10AA , without holding proper examination and inquiry and the assessee was not entitled for deduction of Rs.7,07,51,730/- u/s 10AA of the act on purely trading activity? (ii) Whether the Tribunal has erred by quashing the order of CIT and thereby enhancing the scope of the word “Service” by adopting the definition of word “Service” from Section 2(z) and second Schedule of SEZ Act, 2005 and Rules, 76 of SEZ Rules, 2006, ignoring that deliberately the same was not defined by the legislators

5 under the Income Tax Act and a literal meaning of the word “Service” was rightly taken by the CIT?” D.B. Civil Income Tax Appeal No.115/2016 admitted on 08.11.2016 "1. Whether the Tribunal was justified in allowing the deduction of Rs. 6,71,89,986/- u/s 10AA of the act without at all considering the specific findings recorded by Assessing Officer as per which the assessee was not entitled for the said deduction?" 4. Counsel for the appellant has taken us to the provisions of section 10-AA and contended that the intention of the legislation was to allow the manufacturing activities which are carried out under the special economy zone. The activity which has been carried out by the assessee was not manufacturing activities and rather it was trading which was never contemplated by the legislation while giving the benefit to the assessee. 5. He also contended that the activities which have been referred by the Tribunal and services will not include manufacturing. 6. However, counsel for the respondents contended that both the authorities namely CIT (Appeals) as well as the tribunal after taking into consideration the law on the point has discussed the matter in detail and while considering the instructions issued by the Ministry of Commerce and Industry under the SEZ Rules, 1976, observed as under:- “As per INSTRUCTION NO. 4/2006 In respect of SEZ Rules (Issued by Department of Commerce) Dated 24.5.2006 (F. No. F.5/1/2006-EPZ) which states as follows: “Subject: Modification in Instruction No. 1/2006 dated 24th March, 2006

6 of the Department of Commerce regarding setting up of trading units in the Special Economic Zones – Reg. This Department has been receiving representations on difficulties faced by the existing SEZ units holding approval to do trading, that their exports are adversely affected and also that several of their orders are held up due to the restriction on trading on account of the above instruction. Taking cognizance of these representations, in partial modification of the abovereferred Instruction dated 24th March, 2006, it has been decided that while units in the Special Economic Zones who hold approval to do trading activities will be allowed to carry out all forms of trading activity, the benefits under Section 10AA will exclude trading other than trading in the nature of re- export of imported goods. Appropriate amendments in this regard are being issued. 2. In the meantime, sourcing from domestic area may be permitted by units in the SEZs which are allowed to do trading, subject to this circular being cited and on production of an undertaking by the concerned unit that no Income tax benefits will be availed by the unit for trading, except in the nature of re-export of imported goods. 3. Development Commissioners are requested to note the above and take appropriate action.” The instruction specifies that the activity of trading in the nature of re-export of imported goods is eligible for benefit under section 10AA. The assessee company on the activity of trading in the nature of reexport of imported goods claims benefit under Section 10AA justifying its classification under service (referred to as “provide any service” under the said section). As the Income Tax Act does not define the term “service”, the assessee company has to take reference to the definition of service referred to in the SEZ Act, 2005 (given that the Section 10AA was introduced by SEZ Act, 2005 and referred to in the Second Schedule to the said Act) and furthur the SEZ Act, 2005 has overriding effect on all other enactments by virtue of section 51 of SEZ Act, 2005 which reads as under: - The provisions of this Act shall have

effect

notwithstanding

anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.” The Ld. A.O. has taken a stand on the issue which is not a logical interpretation, instead every effort has been made by him to overlook and misinterpret the

7 meaning and logic behind the introduction of Section 10AA. The term “Service” has been examined by Ld. A.O. on the basis whether mere purchase & sale with no value addition as done by the assessee can be termed services. However there is no reason to deviate far from the immediately available definition of “Services” under the SEZ Act. (given that the Income Tax Act, 1961 does not define the term “services”) and, therefore in accordance with Section 51 of SEZ Act, 2005 the definition given in SEZ Act, 2005 will apply moreso when explanation to rule 76 clearly provides Trading for the purposes of the second schedule of the Act, (by which Section 10AA inserted in I. T. Act, 1961) shall mean import for the purposes of re-export. The Ld. A.O. in assessment order discussed irrelevant references to case laws and decisions that bear no relevance to case specifically on the fact that unit of assessee is established in the SEZ in accordance with section 10AA of I. T. Act, 1961 and SEZ Act, 2005. Thus the discussions references and decisions used in assessment order are not at all applicable in the case. It will be thus clear that trading activity in the nature of re-export of imported goods is falling under the head service u/s 10AA of I. T. Act, 1961 r/w section 2(z) of SEZ Act, 2005 r/w rule 76 of SEZ Rules, 2006 and above referred notification. We also submit herewith clarification issued by Development Commission SEZ, Sachin, Surat issued to the assessee company which is self explanatory and states that assessee company is entitled to the benefit of section 10AA of I. T. Act, 1961 in respect to import of goods which are re-exported to buyers in other countries in view of provisions of section 2(z) of SEZ Act, 2005 r/w Section 27 and section 51 of SEZ Act, 2005 r/w rule 76 of SEZ Rules, 2006. (P.B. Page 8). In view of the above it is evident that not only profits and gains of manufactured goods but also trading of goods are allowed for getting the exemption u/s 10AA of the I.T. Act, 1961 if imported goods are reexported by a unit duly approved by development commissioner of concerned SEZ. The assessee company’s entire purchases are import in SEZ unit. The entire goods are exported to foreign country. Further the assessee company also fulfills all other terms & conditions laid down in 25 section 10AA of the I.T.Act, 1961 and as such deduction is claimed as per provisions of law and allowable as such. The Ld. A.O. is wrong and has erred in law in disallowing the entire claimed deduction u/s

8 10AA which was allowed by him in A.Y. 2007-08 and in accordance with Section 10AA (i) (i) the assessee company was entitled to hundred percent exemption of its profit and gains from the said business for a period of five consecutive years as there is absolutely no change in any of the facts of the case. The Ld. CIT (A) after examining all the above provisions has allowed the claimed deduction u/s 10AA which order is in accordance with law having no infirmity and deserves to be confirmed. The appeal of department has no merit which deserves to be dismissed.’’ 6. In that view of the matter he contended that no interference is called. 7. We have heard counsel for the parties. 8. Taking into consideration, the activity which was carried out comes within the area of manufacturing and trading will go together; in 8. In that view of the matter, taking into consideration the circular issued by the Ministry of Commerce of Industry as referred above the view taken by the authorities is required to be confirmed. 9. Accordingly, the issue are answered in favour of the assessee against the department. 10. The appeals stand dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Jyoti/63-69