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Facts
The assessee, engaged in manufacturing, filed an appeal against an order confirming the reduction of exemption claimed under Section 10AA. The dispute centers on the calculation of exemption related to SEZ unit sales and the allocation of common expenses.
Held
The Tribunal agreed with the assessee's contention that the authorities erred in not reducing the corresponding cost of sales for sales to other SEZ units and in the allocation of common expenses and software/sundry expenses. The AO was directed to verify figures and allow the additional exemption.
Key Issues
Whether sales to other SEZ units should be excluded from export turnover and whether common expenses and software/sundry expenses were correctly allocated for calculating Section 10AA exemption.
Sections Cited
10AA, 143(3), 32
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Income Tax Appellate Tribunal, ‘D’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 27/11/2024, passed by Addl. /JCIT (Appeals), Bhubaneshwar for the quantum of assessment passed u/s.143(3) for the A.Y.2015-16.
A.Y. 2015-16 Roop Ultrasonix Limited 2. In the grounds of appeal assessee has challenged the reduction in the claim made u/s.10AA for Rs.46,23,150/-. The relevant grounds reads as under:- “1.1 On the facts and circumstances of the case and in Law, the Additional/Joint Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Bhubaneswar, erred in confirming the reduction of exemption claimed U/sec 10AA by Rs.46,23,130/- ignoring the fact that the Assessing Officer erred in calculating the exemption amount U/sec 10AA based on original ratio as against the revised ratio after adjustment to profit of the SEZ unit. 1.2 The said C.I.T.(Appeals) erred in confirming and not reducing direct expenses of Rs.34,15,260/- being cost of sales allocable to sales of Rs.42,83,756/-being sales to other units and common expenses of Rs.5,34,828/- allocable to SEZ Unit at the Revised ratio of 24.85% as against the original ratio of26 10% while computing exemption allowable U/sec 10AA and therefore erred in reducing the exemption allowable U/sec 10AA by Rs.39,50,088/- 1.3. The said CIT (Appeals) also erred in confirming the allocation of computer software expenses and sundry expenses amounting to Rs.6,73,042/- (26.1% of Rs 9,50,000 16,28,706) to SEZ unit ignoring the fact that the same were exclusively incurred for non-SEZ units and therefore no allocation is warranted. 1.4. Without Prejudice, the said C.I.T.(Appeals) erred in not allocating the said computer software and sundry expenses at the Revised ratio of 24.85% as against the original ratio of 26.10% while computing exemption allowable U/sec 10AA.”
The brief facts are that Assessee Company is engaged in the business of manufacturing of ultrasonic equipment, transducers, plastic welding machine, flaw detectors, cleaners, etc. The A.Y. 2015-16 Roop Ultrasonix Limited assessee has one SEZ unit at Gandhinagar, Gujarat and 2 Domestic units. It has filed its return of income with a total income of Rs.89,21,600/- after claim of exemption U/sec 10AA of Rs.1,56,67,589/- against profit of its unit in SEZ as per Audit Report in Form No.56 dated 29/03/2016).
During the course of assessment proceedings, assessee filed revised computation of Exemption claimed u/sec 10AA by Rs.1,53,33,921/- by making following changes:- i. Reducing margin of Rs.8,68,497/- on sales to other SEZ units Rs.42,83,757/- which is derived after adjustment of cost of sales incurred on said sales which is derived at net margin of the SEZ unit @ 20.27% of said sales of Rs.42,83,757/-. ii. Allocation of common expenditure to SEZ Unit at the revised ratio of 24.85 % as against the original ratio of 26.10%.
The ld. AO on verification from the details furnished noted that following sales of SEZ cannot be included for the purpose of determination and deduction u/s.10A which were made to the Indian concerns as it is not part of export turnover:-
Sr. Name of the customer Amount in Rs. No. 1. Bholenath Metal 23,756 2. EOS Power India Ltd. 5,80,000 3. Wabco India Ltd. 36,80,000 Total 42,83,756 6. Ld. AO held that deduction u/s.10AA is applicable only for export sales and accordingly, the he issued show-cause notice as A.Y. 2015-16 Roop Ultrasonix Limited to why amount of Rs.42,83,756/- shall not be reduced from the turnover of SEZ for computing deduction u/s.10AA.
In response, assessee has filed its detail reply and explanation contending that sale of Rs.42,83,756/- was part of the export turnover only under the SEZ Act. However, the ld. AO rejected the explanation filed by the assessee and after referring to the various provisions contained under Special Economic Zone Act, 2005 and the provisions of Section 10AA r.w. Explanation 1, held that amount of Rs.42,83,756/- should be reduced from the claim of deduction u/s.10AA of Rs.1,75,32,293/-. He also rejected the assessee’s contention that in the event of exclusion on the said turnover from the export turnover, the corresponding expenditure including common expenditure allocated to such turnover should also be excluded while computing deduction u/s.10AA. Thereafter, he proceeded to allocate legal and professional expenses and sundry expenses between SEZ unit and Non-SEZ unit after observing as under:- 4.1 During the course of assessment proceedings the assessee was asked to submit the details of allocation of various expenses claimed in P&L A/c between SEZ unit and Non-SEZ unit. In response to the same, the assessee has furnished the details in this respect. On verification, of these details, it is found that assessee allocated various expenses to SEZ unit on turnover basis i.e. 26.10%. On further verification, it was found that assessee did not allocate certain expenses to SEZ unit. In view of this, vide notice dated 30.11.2017, assessee was asked to explain the same. In reply to this, assessee vide letter dated 08.12.2017 submitted the details of expenses which were not allocated to SEZ unit. On verification of the same, It is found that under the head Legal & Professional expenses, assessee has debited Rs. A.Y. 2015-16 Roop Ultrasonix Limited 9,50,000/- as monthly software subscription paid to Ramco Systems Ltd. During the assessment proceedings, the assessee has stated that these expenses are incurred for Monthly Software Subscription for ERP software. The nature of expenses is as such, the same should have been allocated between SEZ unit and Non- SEZ unit as these are clearly meant for company as a whole unit and not only for Non-SEZ unit. Further, it is found from the details that the assessee has also not allocated Sundry expenses of Rs. 16,28,706/-. To this, the assessee vide letter dated 30.11.2017 has submitted general remarks in respect of Sundry Expenses that this amount is incurred exclusively for our Non-SEZ units only and hence not offered for allocation, however, no supporting documents to establish the same has been filed. 4.2 In view of the above discussion, Sundry creditor expenses of Rs. 16,28,706/- and Legal and Professional expenses of Rs. 9,50,000/- aggregating to Rs. 25,78,706/- have been allocated towards SEZ unit @ 26.10% which comes to Rs. 6,73,042/- and the same has been reduced from deduction claimed u/s 10AA of the I. T. Act.
Accordingly, the claim of deduction u/s.10AA was reduced to Rs.1,07,10,791/- out of total claim of Rs.1,56,67,589/-. The First Appellate Authority has confirmed the said addition without giving any own reason and simply endorsed view taken by the ld. AO.
We have heard both the parties at length and perused the relevant finding given in the impugned order as well as material referred to before us. First and foremost it has been submitted on behalf of the assessee that both the authorities have ignored the revised computation of exemption u/s.10AA. Both ld. AO and First Appellate Authority have erred in not reducing the corresponding cost of sales incurred on sales to other SEZ units A.Y. 2015-16 Roop Ultrasonix Limited i.e. Rs.34,15,260/- which is derived at cost of sales of the SEZ unit @ 79.73% (100%-net margin @ 20.27% of SEZ unit) of said sales of Rs.42,83,757/-. He submitted that even if AO’s reasoning is accepted, nut both AO has erred in not appreciating the fact that there is a corresponding cost incurred towards goods sold to other SEZ units and therefore only net margin of Rs.8,68,497/- should have been reduced from profit of the SEZ unit. Thus, after reduction of sales to other SEZ units, the revised ratio of SEZ Turnover /Total Turnover will be reduced to 24.85% as against 26.1% and therefore, allocation of common expenses should have been in the revised to the ratio of 24.85%. Similarly, allocation of computer software expenses and sundry expenses should also be at the revised ratio of 24.85% as against 26.1% as allocated by the A.O. Accordingly, his claim before us is only restricted to remove the corresponding cost incurred towards goods sold to other SEZ units and for which he has given his detailed computation and working.
The ld. DR on the other hand submitted that, if assessee is not disputing that sale to other SEZ is not to be included as export turnover then for calculation of profit as per the submissions given by the assessee should be sent back to the ld. AO for the verification.
From the perusal of the assessment order it is seen that ld. AO has removed the sales incurred on the sales to other SEZ units, however, he has not reduced the corresponding cost. In other words, when ld. AO has taken the sales of Rs.42,83,757/- A.Y. 2015-16 Roop Ultrasonix Limited not covered under the export sales, then corresponding cost of Rs.34,15,260/- which is derived at the cost of sales of SEZ units should have been reduced. Before us following working has been given:-
Further, shared common expenditure and adjusted profit of SEZ unit after allocation works out in the following manner:-
As per ITR As per AO As per Assessee Share in common expenditure Total common 4,26,23,248 4,26,23,248 4,26,23,248 A.Y. 2015-16 Roop Ultrasonix Limited expenditure Add additions Computer software 9,50,000 9,50,000 expenditure Sundry expenses 16,28,706 16,28,706 Adjusted 4,26,23,248 4,52,01,954 4,52,01,954 common expenditure % Of SEZ turnover Total turnover 34,13,95,134 34,13,95,134 34,13,95,134 SEZ turnover 8,91,13,889 8,91,13,889 8,48,30,133 % Of SEZ 26.10% 26.10% 24.85% Turnover As per ITR As per AO Adjusted profit of SEZ unit 1,80,67,121 1,75,32,293 after allocation Less: proportionate reduction in profit Sale to non-SEZ Purchase to non- SEZ 8,68,497 due to SEZ to non- SEZ turnover 1,71,98,624 1,75,32,253 Add: depreciation of SEZ 34,30,791 34,30,791.00 unit as per books 2,06,29,415 2,09,63,084 Less depreciation of SEZ 52,95,494 52,95,494.00 unit as per IT Act Total exemption u/s 10AA 1,53,33,921 1,56,67,590
Thus, as per the working given by the assessee, the additional amount of exemption u/s.10AA would be worked out in the following manner:-
A.Y. 2015-16 Roop Ultrasonix Limited Nature of Adjustments As per AO As per Difference Assessee Reduction of 0 34,15,260 34,15,260 Proportionate Cost of Sales from Direct Expenses Allocation of Common 1,11,25,886 1,05,91,058 5,34,828 Expenses at Revised Ratio of 24.85% as against Old Ratio of 26.1% Allocation of 6,73,042 6,40,759 32,283 Computer Software Expenses & Sundry Expenses at Revised Ratio of 24.85% as against Old Ratio of 26.1% Additional amount of 39,82,371 Exemption U/sec 10AA 13. Accordingly, we agree with the contention of the ld. Counsel for the assessee and direct the ld. AO to verify the figures and allow the additional amount of exemption as per the working given above. With this direction, appeal of the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 22nd May, 2025.