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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI ABY T VARKEY & SHRI GAGAN GOYAL
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 1737/Mum/2021 (A.Y. 2013-14) M/s Solitaire Diamond, Room No. 2, First Floor, A. Wing, Nagindas Mansion Building, Opera House, Mumbai-400004 PAN: ABXFS1928F ...... Appellant Vs. ITO-19(3)(4), Second Floor, Matru Mandir, Tardeo Road, Mumbai-400007. ..... Respondent
Appellant by : Sh. Dharmesh Shah, C.A. with Sh. Dhaval Shah, Adv. Respondent by : Sh. Anil S. Sant, Sr. DR Date of hearing : 27/04/2022 Date of pronouncement : 13/05/2022 ORDER PER ABY T VARKEY, J.M: This is an appeal preferred by the assessee against the order of Ld. Commissioner of Income Tax, Appeals-30, Mumbai [hereinafter referred to as ‘the CIT(A)’] dated 06.09.2019 for the Assessment Year (AY) 2013-14.
At the outset, the Ld. Authorized Representative (AR) of the assessee submitted that he is not pressing ground no. 1 to 3 (legal grounds). Therefore, the same stands dismissed. Ground No.4, 6 & 7 are against the action of the Ld. CIT(A)
2 ITA No. 1737/Mum/2021 (A.Y. 2013-14) in not granting deduction under section 10AA of the Income Tax Act, 1961 (hereafter referred to as ‘the Act’).
Brief fact is that the assessee is a Diamond Trader and does its activities from its unit situated in the Special Economic Zone (SEZ), Surat. During the course of assessment, the Assessing Officer (AO) observed that the assessee had declared income of Rs. 1,20,08,272/- which was claimed as deduction under section 10AA of the Act, however, the AO did not allow the same, since his predecessor had disallowed the claim for AY 2012-13. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the same. Aggrieved by the action of Ld. CIT(A), the assessee is in appeal before us.
We have heard both the parties and perused the records. We note that Assessee is engaged in the import and export of diamonds after sorting and grading which is in the nature of trading activities and has set-up a registered unit in the SEZ, Surat. In this assessment year, the Assessee claimed deduction u/s 10AA of the Act which was denied by AO on the plea that Assessee is neither manufacturing any goods nor producing any goods for export [which was the view of AO’s predecessor which the present AO has followed]. On appeal, the Ld. CIT(A) confirmed the action of AO. Before us the Assessee challenges the denial of deduction u/s 10AA of the Act in respect of its trading activities (import & export of diamonds) from its SEZ Unit. So we need to examine as to whether the activity of trading income from its SEZ Unit is eligible for deduction u/s 10AA of the Act. There is no dispute that the assessee is engaged in the import and export of the diamonds (after sorting & grading) which is in the nature of trading activities. As per the Income-tax Act, the trading activity as such is not entitled for the exemption under section 10AA of the Act. However the claim of the Assessee is
3 ITA No. 1737/Mum/2021 (A.Y. 2013-14) that its activity is an eligible activity [‘services’] u/s 10AA of the Act. So we need to see whether on facts the Assessee’s claim that its activity is ‘ Services’ for claiming deduction u/s 10AA of the Act. However, we note that the SEZ Rules have been framed by Central Government by virtue of the delegated Rule making power given to it by the Special Economic Zone Act 2005. As per Rule 76 of the SEZ Rules 2006 the term “service” includes trading activities if it relates to the import of the goods for the purposes of export in terms of its explanation to Rule 76 of 2006. The relevant provisions of SEZ Rules 2006 read as under:-
“76. The “services” for the purposes of [1] [clause] (z) of section 2 shall be the following, namely:- Trading, warehousing, research and development services, computer software services, including information enabled services such as back- office operations, call centres, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal 5 ITA No.2666/Kol/2013 M/s. Midas DFS (P) Ltd., AY- 2009-10 data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centres and web-site services, off- shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport. [1] [Explanation: The expression “trading”, for the purposes of the Second Schedule of the Act, shall mean import for the purposes of re-export.]
From a plain reading of the aforesaid provision, it is clear that the term ‘service’ is given an inclusive definition which includes ‘trading activity.’ As per the first
4 ITA No. 1737/Mum/2021 (A.Y. 2013-14) explanation trading will be treated as “service” if it is related to the import of the goods for the purpose of the export. In this case there is no dispute that goods imported by the assessee are in fact exported to other countries from its unit at Special Economic Zone.
We note that the exemption provided u/s. 10AA which are special provision in respect of newly established units in Special Economic Zone are for income received by providing any services. The other activity entitled for exemption is income from manufacturing and production of article or thing. So what has to be seen is whether the “service” definition given in the SEZ Rules as above reproduced can be read into for the purpose of claiming exemption u/s. 10AA of the Act; so that assessee can avail the benefit envisaged u/s. 10AA of the Act. We note that sec. 51(1) of The Special Economic Zones Act, 2005 gives an overriding provision over other laws which read as under: “51.(1) 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.”
From the reading of the provisions it is clear that the provisions as specified under The Special Economic Zones Act, 2005 would have overriding effect on the Income Tax Act because Special Economic Zone Act, 2005 is a Special Act and a later Act of the Parliament.”Be that as it may be, it has been brought to our notice by the Ld. AR that in the previous year (AY 2012-13), the AO had disallowed the deduction claimed by the assessee under section 10AA of the Act. (1st year) which was confirmed by the Ld. CIT(A). However, this Tribunal vide order dated 30.10.2009 in assessee’s own case (ITA No. 3128/Mum/2019) was pleased to allow the same and drew our attention to page nos. 9 to 16 of the Paper Book
5 ITA No. 1737/Mum/2021 (A.Y. 2013-14) (PB) wherein we find that in assessee’s own case this Tribunal for AY 2012-13 has decided these grounds of appeal in assessee’s favour by holding as under:
“6. We have considered the rival submissions and perused the material on record. We have also carefully examined the decisions cited before us. Insofar as the factual aspect of the issue is concerned, there is no dispute that the assessee is importing diamond for re-export after sorting and grading. It is also not disputed that for carrying out such activity, assessee has a registered unit in SEZ, Surat. So it is governed under the SEZ Act. Section 10AA of the Act, which is introduced in the statute by virtue of SEZ Act, provides exemption for a specified period to SEZ units in respect of profits and gains derived from export of articles or things manufactured or produced or from services. It is the claim of the assessee from the very inception that import of diamonds for re-export is in the nature of services. Admittedly, the expression 'services' has not been defined either under Section 2 or Section 10AA of the Act. Therefore, we have to look to the meaning of 'services' as defined under the SEZ Act and the rules framed thereunder since the provision of Section 10AA of the Act was introduced by the SEZ Act. As per the definition of 'services' under the SEZ Rules, 2006, trading also comes within its ambit. Section 51 of the SEZ Act has Solitaire Diamond Exports an overriding effect to the extent that it makes clear that if there is any inconsistency between the SEZ Act and rules framed thereunder and any other law, the provisions of SEZ Act and rules framed thereunder would prevail. In the aforesaid circumstances, in the absence of definition of 'services' under Section 10AA of the Act, 'services' as defined under the SEZ Act and rules framed thereunder would be relevant. As discussed earlier, the definition of 'services' under the SEZ Act and rules framed thereunder encompasses trading activity also. Therefore, import of diamonds for re-export though, may be in the nature of a trading activity, but is certainly in the nature of 'services', hence would qualify for deduction under Section 10AA of the Act. In the case of Goenka Diamonds & Jewellers Ltd. (supra), the Tribunal, after examining the provisions of Section 10AA of the Act vis- à-vis the SEZ Act and rules framed thereunder, had concluded that since the definition of 'services' under the SEZ Act also includes trading activity, the activity relating to import of diamonds for re-export would qualify for deduction under Section 10AA of the Act. The aforesaid decision of the Tribunal was upheld by the Hon'ble Rajasthan High Court while discussing a batch of appeals filed by the Revenue against the decision of the Tribunal. The judgment of the Hon'ble Rajasthan High Court was delivered on 24.08.2017 in Income Tax Appeal no. 222 of 2012 and others. It is relevant to observe, in the aforesaid case also, the assessee had its unit in Surat SEZ. Similar view was again expressed by the Mumbai Bench of the Tribunal in the case of the same assessee in ITA No. 153/JP/2014 and
6 ITA No. 1737/Mum/2021 (A.Y. 2013-14) 216/JP/2014 dated 10.01.2018. The other decisions cited by the learned AR also express similar view. Therefore, consistent with the view taken by the different Benches of the Tribunal, we are of the view that assessee is eligible to claim deduction under Section 10AA of the Act, since, the activity of import of Solitaire Diamond Exports diamonds for re-exporting comes within the nature of 'services' as provided under Section Section 10AA of the Act.
Before parting, we must observe that learned Commissioner (Appeals), while sustaining the disallowance of deduction claimed by the assessee under Section 10AA of the Act, has referred to the decision of the Hon'ble Supreme Court in the case of M/s. Dilip Kumar and Company & Ors. (supra). However, the ratio laid down in the said decision rather supports the claim of the assessee, since, the assessee has fulfilled the basic conditions of Section 10AA of the Act and comes within the framework of the provision. As discussed earlier, the activity of the assessee comes within the expression 'services' as per Section 10AA of the Act, as per the definition of 'services' under the SEZ Act and rules framed thereunder. Therefore, in our considered opinion, reference to the decision in the case of M/s. Dilip Kumar and Company & Ors. (supra) would be of no help to the Revenue. In view of the aforesaid, we direct the Assessing Officer to allow assessee's claim of deduction under Section 10AA of the Act. In view of our aforesaid decision, there is no need to adjudicate ground no. 2 raised by the assessee.”
In the light of the aforesaid decision of this Tribunal on the issue of deduction claimed under section 10AA of the Act, we respectfully following the same, allow the claim of assessee. Therefore, these grounds of appeal of assessee are allowed.
Coming to ground no.5 which is against the action of the Ld. CIT(A) in not granting deduction under section 10AA of the Act in respect of Foreign Exchange Gains.
Brief facts is that the AO noted that the assessee had shown Net Profit of Rs. 1,20,08,272/- mainly because of Foreign Exchange Gains on outstanding debtors and creditors. The AO was of the opinion that since the assessee did not have any business of trading (no purchase and sale transaction) of Diamonds in the relevant year under consideration, the assessee was not eligible for deduction
7 ITA No. 1737/Mum/2021 (A.Y. 2013-14) under section 10AA of the Act. On appeal, this view of the AO was confirmed by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us.
We have heard both the parties and perused the records. It is admitted fact that the assessee is a trader in Diamonds which imports Diamonds for re-export after sorting and grading. It is also an admitted position that the assessee has set up a registered unit in the Special Economic Zone, (SEZ) Surat which is governed by the SEZ Act. Section 10AA of the Act has been inserted by virtue the SEZ Act, 2005 which is a special provision for newly established units is SEZ Zones and it provides exemption for specified period to SEZ units in respect of profits and gains derived from export of articles or things manufactured or produced or from services. We have already held in respect of ground no. 4, 6 & 7 that the assessee is eligible to claim deduction under section 10AA of the Act on its activity of import of Diamonds for re-export ( after sorting and grading) from its SEZ unit comes within the nature of “Services” as provided under section 10AA of the Act.
This year the assessee has shown net profit of Rs. 1,20,08,272/- which was on account of Foreign Exchange Gains earned by the asssessee consequent to increase in the rate of USD against the Indian rupees during the FY 2012-13. According to the assessee, though there was no import or export of Diamonds this AY, however, the assessee had realized from the debtors the receivables (sale consideration) of the Diamonds already exported in the previous year which were remitted to it in foreign exchange. According to the assessee, Foreign Exchange Gains is nothing but sale consideration from its activity of export of diamonds. According to the assessee, the Foreign Exchange Gains or loss is derived from the sale consideration and has first degree nexus with the sale consideration/export turnover. According to the assessee, the issue as to whether the gain from Foreign Exchange can be claimed as deduction under section 10AA of the Act is no
8 ITA No. 1737/Mum/2021 (A.Y. 2013-14) longer res-integra. According to the Ld. AR, this Tribunal in the case of Renaissance Jewellery Pvt. Ltd. Vs. ITO [ 104 TTJ 382] held that the Foreign Exchange Gain would be eligible for deduction under section 10AA of the Act. In that case (Renaissance Jewellery Pvt. Ltd.) the facts were that the assessee had earned Foreign Exchange Gains amounting to Rs. 2,51,70,300/- which was included in the gross sales credited in the Profit & Loss A/c. On the aforesaid income, the assessee claimed deduction under section 10A of the Act. Though, the AO allowed such deduction when the matter came up before the CIT(A), he issued a notice on enhancement on the ground that with regard to the profits derived by the assessee on account of fluctuation in foreign exchange rate, the assessee is not entitled to deduction under s. 10A. And the Ld. CIT(A) after considering the reply of Assessee came to the conclusion that the assessee was not entitled to deduction under s. 10A in respect of foreign exchange gain of Rs. 98,38,801/- which pertained to the sales made by the assessee in the previous year (i.e. AY 1999-2000) relevant to the AY 2000-01 [Relevant assessment year before the Ld. CIT(A)]
On appeal before the Tribunal, the Tribunal held in favour of the assessee (Renaissance Jewellery Pvt. Ltd.) by holding as under:
“We have carefully considered the submissions made before us by both the sides and have gone through ‘the provisions of law ‘and the precedents relied upon by the learned counsel for the assessee. In our view, this issue is covered’ in assessee’s favour by several cases relied upon by the learned counsel for the assessee and discussed above. There is no material difference between the requirement of s."80HHC and s. 10A. The profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are therefore in the same nature as the sale proceeds and there is no reason while
9 ITA No. 1737/Mum/2021 (A.Y. 2013-14) deduction, under s. 10A should not be allowed in respect of such exchange gain. Therefore, we vacate the order of the learned CIT(A) on this issue.
Further, the Ld. AR drew our attention to the Hon’ble Madras High Court in the case of Pentasoft Technologies Ltd. [347 ITR 578]. In this case, question of law that was framed by the Hon’ble High Court was as under:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that gains on account of foreign exchange fluctuation held to have direct nexus with the export sales of the assessee and, hence, is eligible for deduction under section 10A of the Income-tax Act, 1961, is valid in law ?”
And the Hon’ble High Court decided the case held in favour of the assessee by upholding the order of the Tribunal as under: “In order to allow a claim under section 10A of the Act, what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. In other words, the assessee does not determine the exchange value of the Indian rupee. It has to be remembered but for the fact that the assessee is an export house, there was no question of edrning any foreign exchange. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value’ was earned by virtue of such exports carried out by the assessee, there is no reason why the benefit of section 10A should not be allowed to the assessee.”
In the light of the aforesaid decisions and other decisions brought to our notice, we find that the Assessee which has set-up its registered unit at SEZ and which is eligible for claiming deduction u/s 10AA of the Act, is in receipt of Foreign Exchange Gain which is derived from the export business. Then according to us, Foreign Exchange Gain derived from the export business has be given the benefit
10 ITA No. 1737/Mum/2021 (A.Y. 2013-14) of deduction u/s 10AA of the Act. The reasons is that when the profit and gains are allowable as deduction under section 10AA of the Act, the Foreign Exchange Gain which is derived/related to the export/sale consideration and which has first degree nexus with the export/sale consideration must get the benefit of deduction under section 10AA of the Act. Therefore, we allow the claim of the assessee and ground no.5 stands allowed.
Coming to ground no.8 is concerned, it is consequential in nature and ground no.9, 10, & 11 are general in nature, so stands dismissed.
In the result, appeal of assessee is partly allowed.
Order pronounced in the open court on 13 day of May, 2022.
Sd/- Sd/- (GAGAN GOYAL) (ABY T VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, दिन ांक/Dated: 13/05/2022 SK, Sr.PS Copy of the Order forwarded to : अपील र्थी/The Appellant , 1. प्रदिव िी/ The Respondent. 2. आयकर आयुक्त(अ)/ The CIT(A)- 3. आयकर आयुक्त CIT 4. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्ड फ इल/Guard file. 6.
BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai