LOTUS FOOTWEAR ENTERPRISES LIMITED-INDIA BRANCH,TIRUVANNAMALAI vs. DCIT, INTERNATIONAL TAX 1(2), CHENNAI

The facts and circumstances are exactly identical in all the four years and grounds raised are also identical. Hence, we will take the facts and grounds from assessment year 2016-17 in IT(TP)A No.20/Chny/2021 and will decide the issue. The relevant grounds raised in assessment year 2016-17 reads as under:-

The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed.

The lower authorities have finalized their order with improper adjustments to the total income of the Appellant, as a result of misapplying the provisions of the Act without considering the information, arguments and evidence provided by the Appellant.

The lower authorities have erred in restricting the claim of deduction under 10AA of the Act made by Unit 2 (“LU2”) to INR 1,63,10,312 by erroneously concluding that LU2 was formed by splitting up or reconstruction of LU1 without appreciating substantial investment in plant and machinery made by LU2 and set up of a new unit after obtaining an approval as a separate unit from the concerned Authorities under the Special Economic Zones Act, 2005 ('SEZ Act').

The lower authorities have failed to appreciate that LU2 is a separate unit recognized under the SEZ Act and was set up consequent to LU1 achieving near full capacity in production process.

The lower authorities have failed to examine the overall increase in turnover of LU1 and LU2, which indicates a new undertaking being set up, and has erred in adopting a narrow product based approach to conclude that there is splitting up of business.

The lower authorities erred in not appreciating the legal requirement relating to transfer of machinery and erroneously concluded that the Appellant has violated the conditions prescribed in section 10AA of the Act.

The lower authorities misapplied the provisions of the Act and circulars issued by the Central Board of Direct Taxes in holding that LU2 is an extension of LU1 merely because there was transfer of certain employees to LU2. 8. The lower authorities erred in concluding that LU1 and LU2 are interdependent without appreciating the evidences and documents provided during the assessment proceedings demonstrating their independence.

The lower authorities have erred in concluding that LU2 is only an expansion of LU1, when there is no such treatment by the SEZ authorities and as such, the approval for a new unit, i.e. LU2 is binding on the lower authorities.

The lower authorities erred in law in setting off the brought forward loss and unabsorbed depreciation before allowing deduction under section 10AA of the Act without giving any specific opportunity to the Appellant.

The lower authorities did not consider the judicial precedents, as rendered in the Assessee's own case by the Hon'ble Tribunal, wherein it has been held that deduction under section 10AA of the Act shall be granted prior to set off of brought forward business loss and unabsorbed depreciation.

The lower authorities have erred in not allowing the credit of taxes paid under section 115JB of INR 46,54,86,95 as disclosed in the return of income of the Appellant. V. Consequential Relief

The respondent erred in charging interest under Section 234B of the Act which is consequential in nature.

The brief facts of the case are that the assessee company M/s.Lotus Footwear Enterprises Limited – India Branch (“the Assessee”) is a branch of Lotus Footwear Enterprises Limited, a Company incorporated in British Virgin Islands. The assessee holds a certificate for establishment of place of business in India and is engaged in the business of manufacturing of footwear namely leather sports shoes, synthetic sports shoes, and textile sports shoes. The assessee has 2 units, Unit I and Unit II (“LU1” and “LU2” respectively) and operates out of a Special Economic Zone (‘SEZ’) situated in SIPCOT Industrial Park, Vembakkam Taluk, Tiruvannamalai, Tamilnadu. LU1 commenced its operations from 04.08.2008, and LU2 commenced its operations from 02.04.2014. The assessee had filed its Return of Income (“ROI”) inter-alia after claiming deduction u/s.10AA of the Income Tax Act, 1961 (‘the Act’) under the normal provisions of the Act and paid taxes u/s.115JB of the Act on the book profit computed as per the provisions of section 115JB of the Act.

A survey proceeding u/s.133A of the Act was conducted in the premises of the assessee on 31.10.2018. Following the survey, assessment was concluded u/s.143(3) of the Act for the AY 2016-17, wherein the Assessing Officer (‘AO’) had computed the taxable income by making the following adjustment –

The above adjustment of restriction of deduction u/s.10AA of the Act was made by the AO in the AYs 2017-18, 2018-19 and 2019-20 also. Further, the claim of deduction u/s.10AA of the Act before setting off of losses and unabsorbed depreciation was denied by the AO in AYs 2017-18 and 2018-19 also.

Against the above adjustments made by the AO, the assessee filed the captioned appeals before us.

The assessee made detailed submissions against the above adjustments during the hearing dated 10.09.2024 and the captioned appeals were disposed of by this Tribunal vide order dated 20.11.2024 by concluding that assessee is not entitled to the deduction u/s.10AA of the Act to the extent of 100% pertaining to LU2, on the ground that the assessee had violated the statutory condition of transfer of plant and machinery to Unit 2. While concluding so, the Bench had erroneously held that the assessee has not been able to substantiate its arguments related to capitalization of CWIP by accounts to prove that the statutory condition to test if 20 percent of machinery has been transferred or not must be tested as on 31.3.2014 either before the :-6-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

Against the above order of this Tribunal, the assessee filed its four separate Miscellaneous Applications in MA No. 4, 7 to 9/CHNY/2025 for the A.Ys.2016-17 to 2019-20 on the basis that:

The MA filed by the assessee was disposed of by this Tribunal vide order dated 11.06.2025, wherein the earlier order of the Tribunal was recalled for fresh adjudication of the captioned appeal in respect of deduction u/s.10AA of the Act by holding as under: “We have heard the rival submissions, and perused the materials available on record. We observe that the Tribunal, while dismissing grounds 3 to 9, held that LU2 was formed by transfer of previously used machinery and hence not eligible for deduction u/s. 10AA of the Act. However, we note that the AO/DRP has denied deduction also on the grounds that LU2 was formed by splitting up or reconstruction of LU1, a distinct statutory condition under the law and assessee has raised them as grounds. As these grounds have not been adjudicated by the Tribunal, we are of the considered opinion that the order requires recall for adjudication on this aspect.”

In the above background, the assessee submits their detailed contentions against the adjustments made by the AO in the ensuing sections.

Claim of deduction under Section 10AA of the Act – Grounds 3 to 9:

It is submitted that LU1 was manufacturing various shoe models and was operating at almost full capacity (95%). Given the fact that in FY 2013- 14, LU1 was almost operating at full capacity and further no expansion was possible due to the space constraint (copy of layout enclosed in Page 192 of paperbook), the assessee decided to set-up LU2 and commenced operations on 02.04.2014 with one production line (Upper line + Assembly unit) and Rubber Bottom (‘RB’) department for the production.

Further, the ld.AR stated that the LU2 was set-up as a new unit after making an application before the Development Commissioner, MEPZ as per Rule 17 of SEZ Rules, 2006 for a second facility which was estimated to produce 4,80,000 pairs of footwear per month. LU2 was setup as a large- scale industrial undertaking with an export potential of about INR 178 crores

It may be relevant to note that LU2 operates from an adjacent but different leased premise on 33.44 acres of land and an agreement to this effect was executed with Cheyyar SEZ Developers Private Limited (Page 186 of the paperbook).

Deduction under Section 10AA of the Act

The ld.AR submitted that the first condition regarding the splitting up or reconstruction of business has been judicially interpreted by multiple High Courts and the Hon’ble Supreme Court in a catena of rulings, few of which is listed below: a. Ruling of the Hon’ble Supreme Court in the case of Textile Machinery Corporation Ltd. vs CIT (107 ITR 195) – Page 27 of Case Law Compilation b. Ruling of the Hon’ble Supreme Court in the case of CIT vs Indian Aluminum Co Ltd (108 ITR 167) – Page 37 of Case Law Compilation c. Ruling of the Hon’ble Supreme Court in the case of Sociedade De Fomento Industrial (P.) Ltd. (443 ITR 34) – Page 57 of Case Law Compilation d. Ruling of the Hon’ble Juri ictional High Court in the case of CIT vs. Premier Cotton Mills (240 ITR 434) – Page 60 of Case Law Compilation e. Ruling of the Hon’ble Juri ictional High Court in the case of Super Spg. Mills Ltd. vs CIT (265 ITR 233) – Page 66 of Case Law Compilation f. Ruling of the Hon’ble Delhi High Court in the case of CIT vs Hindustan General Industries Ltd (137 ITR 851) – Page 71 of Case Law Compilation

The Hon’ble Supreme Court in its recent decision in the case of Sociedade De Fomento Industrial (P.) Ltd. (443 ITR 34 – Page 57 of Case Law Compilation) had reproduced the tests formulated by the Hon’ble Supreme Court for the entitlement of deduction u/s.10AA of the Act, which is reproduced below for your ready reference: "i. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter.

The ld.AR submitted that in the case of assessee, all the above conditions have been fulfilled and accordingly, he submitted that the new unit, LU2 is not formed by splitting up or reconstruction.

Further, it is also submitted that as long as the integrity of the existing undertaking is not impacted adversely by the setting up of the new unit, the setup of the new unit cannot be concluded to be a reconstruction of business and the deduction u/s.10AA of the Act cannot be denied.

From the above settled principles arising out of the judicial precedents, it is evident that the production of similar products or movement of goods between the units or transfer of employees between the units are not relevant for the purpose of examining whether the units are set up by splitting up or reconstruction of the existing business. As long as the integrity of the existing business is maintained and the new business is formed to independently exit wherein fresh capital is invested and fresh plant and machinery is installed for production, the new unit cannot be stated to have come into existence upon splitting up or reconstruction of the existing business.

It is also submitted that this Tribunal in the case of DSM Soft (P) Ltd (115 TTJ 469) – (Page 1 of Case law compilation) has held that a unit which has otherwise been validly formed and meets the formative conditions as prescribed under the Act, should not be disentitled to the deduction u/s.10AA of the Act which is otherwise statutorily available merely based on the shift of some of employees from the existing unit, which is not restricted by the provisions of the Act.

With the above legislative framework, the ld.AR submitted that below are the assessee’s contentions against the allegations of the AO.

1 The AO, and the DRP (hereinafter referred to as ‘lower authorities’) held that LU2 is an extension on LU1 and is formed by splitting up and :-12-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

There was transfer of employees from LU1 to LU2 2. Same product, viz., Young Athletes shoes manufactured in LU1 are manufactured in LU2 3. Transfer of machinery from LU1 to set up LU2 4. Interdependence of LU1 and LU2

2 The ld.AR submitted that the provisions of section 10AA of the Act do not envisage any condition with respect to movement of employees between the units to deny benefit u/s.10AA of the Act.

Further, he also submitted that the Circulars 12/2014 and 14/2014, relied upon by the AO, is applicable only in case of assesses engaged in the development of software or in providing information technology enabled services (Refer Para 6 of Circular 14/2014) and is not applicable to manufacturing companies, which are labour intensive and requires adequate training. Accordingly, the AO’s conclusion by applying the above circular is fallacious and contrary to the provisions of the Act.

In this regard, the ld.AR further submitted that the following table substantiating the satisfaction of alternative condition prescribed under Circular 14/2014 (A Larger chart of the entire data of turnover and employment between LU1 and LU2 has already been placed and relied upon during the hearing, and this is an extract from that chart):

Since the net addition of new technical manpower in both units (i.e., 2011 employees – refer ‘C’ above) is more than 50% of the total technical manpower of new unit, i.e., LU2 (i.e., 1025 employees – refer ‘E’ above), the deduction under Section 10AA of the Act cannot be denied as prescribed under Para 4 of Circular 14/2014 (Refer Page 8 of Final Assessment order for AY 2016-17).

Further, the ld.AR relied upon Instruction No.70 dated 09.11.2010 issued by the Department of Commerce (SEZ Division), wherein it is concluded that there is no limitation on the transfer of manpower to the SEZ units. Accordingly, he submitted that the contention of the AO is baseless and arbitrary.

Further, the ld.AR submitted that Section 51 of the Special Economic Zones Act 2005 overrides all provisions of all laws and has primacy on matters of SEZ units.

Act to have overriding effect 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.

Hence, he stated that the instruction No. 70 above is clear on this position and is binding on the tax authorities.

Based on the above submission, the ld.AR submitted that a unit which has otherwise been validly formed and meets the formative conditions as prescribed under the Act, should not be disentitled to the deduction u/s.10AA of the Act which is otherwise statutorily available merely based on the shift of some of employees from the existing unit, which is not restricted by the provisions of the Act. In this connection, the ld.AR relied upon the following rulings: - Juri ictional Chennai ITAT in the case of DSM Soft (P) Ltd (115 TTJ 469) – Page 1 of Case law compilation - Juri ictional Chennai ITAT in the case of Servion Global Solutions Ltd (115 ITD 95) – Page 7 of Case Law Compilation

Issue 2 – Same Product, i.e., Young Athletes shoes manufactured in LU1 and LU2:

It may also be noted that after the formation of LU2, a more complex model of shoe, i.e., Nike Sportswear was largely produced in LU1, and accordingly, the turnover of LU1 has increased on yearly basis even after the formation of LU2. It is a simple case of a product mix in production being changed.

This allowed LU1 to take up more value adding products and allowed it to achieve more turnover in terms of the value, and this is evident from significant expansion in the turnover in LU1. It is important to note that this has led to a significant increase in taxable profits of LU1, which has already exhausted its first block of 100% profit deduction and was running the second

The ld.AR submitted that from the above table, the following is evident (on comparison of year of formation and the last year on the table – i.e. FY 2014-15 and FY 2017-18) that: a. Increase in turnover of the existing unit LU1 has become 126% b. Increase in profits of the existing unit LU1 has become 183% c. Increase in no of employees of the existing unit LU1 has become – 107% d. Investments in existing unit LU1 has become 135%

Further, the ld.AR stated that there is not even a reduction in anyone parameter. At any rate, section 10AA(4) of the Act is an anti-avoidance provision which should be strictly construed and when the taxable profits have :-17-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

In this regard, the ld.AR relied upon the ruling of the Hon’ble Delhi High Court in the case of Macquarie Global Services (P.) Ltd. (102 taxmann.com 272 – Page 97 of Case law compilation), the relevant extracts of which is reproduced below:

In the factual background, the Tribunal has accepted that the new unit was a separate identity for its income to qualify for exemption under Section 10AA for it was not formed and created by 'splitting up' or 'reconstructing' the existing business. The new unit was also not formed by transferring any machinery or plant previously used. Fresh investment was made in the new unit. The revenue earning and profits generated were clearly attributable to the new unit.”

The ld.AR also relied upon the ruling of Hon’ble Delhi Tribunal in the case of American Express (India) (P) Ltd. v. CIT (44 taxmann.com 389), wherein it was held as follows: “Turnover of both the units have increased over the years even after expiry of tax holiday under section 10B of the Act to sufficiently demonstrate that two units are separate and function independently of each other. Therefore, it cannot be said that new unit is formed by split up of the old unit.”

The ld.AR further submitted that there was no impact on the turnover and profitability of the existing business of LU1 after setting up of LU2. It may in fact be noted that the total turnover of LU1 had increased on a yearly basis even after the formation of LU2, thus evidencing that the integrity of the business of LU1 is not impacted by the formation of LU2. It is reiterated that the mere fact that products manufactured by both the units are one and the same (shoes) cannot lead to a conclusion that new unit is formed by splitting up or reconstruction of existing business, as settled by a catena of rulings.

Further he stated that the lower authorities have failed to appreciate that the splitting up or reconstruction condition needs to be evaluated considering the business as a whole and cannot be concluded based on the product-wise turnover. The lower authorities, in this regard, has failed to appreciate the commercial decision of the assessee to change the product mix of the model of shoes manufactured in LU1 considering that the :-19-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

Basis the above, the ld.AR stated that the commercial decision of the assessee to transfer a particular model of production to LU2 had not affected the turnover or the profitability of LU1, despite utilizing the similar capacity of LU1 as it existed before the set-up of LU2. Further, he also stated that the profits of LU1, producing a more complex model of shoe, i.e., Nike Sportswear, and eligible only for a deduction of 50% u/s.10AA of the Act is higher than the profits of LU2 as evidenced from the above table.

It is also relevant to note that the assessee is a cost-plus entity and offers arm’s length remuneration, as agreed in the Unilateral Advance Price Agreement (“UAPA”) dated 20.05.2016 (enclosed in Page 63 of paperbook). In this regard, the ld.AR stated that the assessee had made a fresh investment of around Rs.128 crores over a span of 5 years in the new unit LU2. It is also relevant to note that the cumulative turnover over a span of 5 years in LU2 amounts to Rs.1000 crores approximately, on which the assessee is mandated to offer to tax an income of 6.25% as per the UAPA signed with the Central Board of Direct Taxes (‘CBDT’). • From the table above:

Issue 3 - Transfer of Machinery

The AO alleged that the ratio of transferred machinery as on 31.03.2014 is 22.10% and accordingly, concluded that the condition prescribed u/s.10AA(4) of the Act is not fulfilled. While LU2 had commenced production only on 02.04.2014, the AO without any basis concluded that the unit was ready for production on 31.03.2014 and accordingly, considered the ratio of transferred machinery based on the value of machinery as on 31.03.2014. :-21-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

The ld.AR submitted that the formative condition specified u/s.10AA(4) of the Act must be tested for the year when the assessee was ready to commence production, if not actual commencement of production. In the present case, since the assessee had commenced production only on 02.04.2014, the ld.AR submitted that the said condition must be tested at the end of the year of commencement of production, which is Financial Year 2014-15, which has also been acceded by the AO (Page 17 of the Final Assessment Order). Below is an extract from page 17 of the final assessment order for your ready reference.

The reason why the assessee claims that the Unit was formed in FY 2014-15 is that the assessee had capitalized the Capital WIP only in this year. When the plant and machinery are in Capital WIP, it means that the plant and machinery are NOT usable as fixed assets. Those assets became to be USABLE only after capitalization. This fact has been brought to the notice of the AO in Page 157 of paperbook.

In this regard, ld.AR submitted that the transfer of machinery as on 31.03.2015 is only 9.60% and thus, the assessee had duly satisfied the condition prescribed u/s.10AA(4) of the Act.

Further, the ld.AR stated that the assessee had made an application for set up of new unit LU2 in May 2013, against which an approval for setting up was granted by the SEZ authorities in June 2013 (Page 166 and 163 of paperbook). Subsequent to the approval, the assessee had entered into a lease agreement with Cheyyar SEZ Developers Private Limited in November 2013 (Page 176 of paperbook).

The assessee subsequent to taking the land on lease, started making investments in the new unit and all the relevant assets were finally capitalized thereby making the unit ready for production, only on 01.04.2014. The new unit LU2 had accordingly, commenced production on 02.04.2014 and the first tranche of exports were shipped on 25.04.2014, which was duly intimated to the SEZ authorities vide letter dated 03.06.2014. (Page 186 of paperbook)

The AO had arbitrarily considered FY 2013-14 for the purpose of computing the ratio of transferred plant and machinery alone, while considering FY 2014-15 as the year of formation for evaluation of the other conditions.

In fact, Instruction No. 70 dated November 9, 2010 issued by the Department of Commerce (SEZ Division), categorically provided that the ratio of 80:20 of new:used capital goods shall be reckoned on the date the unit starts to produce goods or services. Thus, in the assessee’s case, considering that the commencement of production was in FY 2014-15, which is also considered as the 1st year of operation by the AO, the ratio of transferred machinery at the end of FY 2014-15, constituting 9.60% must be considered for evaluation of the condition u/s.10AA(4)(iii) of the Act.

In this regard, the ld.AR relied upon Section 51 of the SEZ Act, 2005, which mandates that the SEZ law shall prevail over any other Act in case of inconsistencies. The relevant provision is extracted below for your ready reference: 51. Act to have overriding effect.— 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.

Thus, the ld.AR stated that based on the Instruction No.70 wherein after interpretation of the SEZ Act, 2005 it has been held that the ratio of transferred machinery shall be computed on the date on which the unit starts production of goods and services, the AO ought not to have considered the investment at the end of FY 2013-14 for the purpose of evaluation.

While the AO had not disputed the fact that LU2 had commenced production on 02.04.2014, it is however, arbitrarily concluded that the unit should be ready for production in FY 2013-14 to arrive at the ratio of transfer of machinery at the end of FY 2013-14. While doing so, the AO also failed to note that the assessee had a large amount of Capital Work-in-progress as on 31.03.2014 (Note 8b of the Financial Statements for the year ending 31.03.2014), which was not considered while computing the ratio of transfer by the Ld. AO: 8b.Capital Work In progress : Balance as on 01.04.2013

There was no dispute on the existence of CWIP as on 31.03.2014 which was also evidenced through the audited financial statements, which was submitted before us (enclosed as Annexure 1 for your ready reference) and the lower authorities also has not contested this argument that if CWIP is included, the percentage of second hand machinery to total value of machinery would be less than 20 percent.

Additionally, it may also be relevant to note that a portion of CWIP, comprising newly purchased machinery, was capitalized on 01.04.2014, i.e., prior to the commencement of production in LU2, and if the WIP capitalized on 01.04.2014 is included in the newly purchased machinery, the assessee

The above alternate contention of the assessee was not dealt by the lower authorities and was for the first time dealt with by this Tribunal in the order dated 20.11.2024, wherein the Bench had held that the assessee has NOT been able to substantiate this claim either before the DRP or before the Tribunal. The relevant extracts are reproduced below: “The Ld AR’s argument that AO has not included the capital WIP in new purchase of machinery for LU2 while arriving the 22.10 % of transferred machinery and if WIP is included the percentage of transferred machinery would be 14.57% is rejected as, the Ld AR has not been able to substantiate the above claim by accounts either before the A.O or DRP or before us.”

In this connection, the ld.AR submitted the certified copy of the unit- wise financials for the year ending 31.03.2014 capturing the value of CWIP of LU2, which is enclosed as Annexure 1 to the Additional Evidence Petition dated 01.09.2025. From the said financials, it would be evident that as on 31.03.2014, i.e., prior to the commencement of production in LU2, there was a CWIP of Rs.6.52 crores, out of which Rs.5.19 crores represent ‘plant and machinery’ (Annexure 2 to the Additional Evidence Petition dated 01.09.2025). The detailed break-up of the capital WIP (plant and machinery) is also enclosed vide Annexure 3 to the Additional Evidence Petition dated 01.09.2025. To further support the break-up of the capital WIP, the assessee has collated supporting documents viz. corresponding invoices, which is enclosed as Appendix 2 to the Additional Evidence Petition dated 01.09.2025. :-26-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

Thus, without prejudice to the primary contention that F.Y.14-15, which is the year of formation, should be taken for computing the ratio of transferred machinery, the ld.AR submitted that even if F.Y.2013-14 is to be taken, the assessee would satisfy the ratio of 20 percent if the CWIP which represents fresh investments is also considered.

Further to the above, he also submitted that a portion of the CWIP as appearing in the financial statements for the year ending 31.03.2014, was capitalized on 01.04.2014, i.e., prior to the commencement of production in LU2. The details of the same are enclosed as Annexure 4 to the Additional Evidence Petition dated 01.09.2025. Even if the CWIP capitalized on 01.04.2014 is considered, the ratio of transferred machinery in LU2 will be less than 20%. In this connection, the assessee tabulates below the relevant details, to substantiate that the ratio of second-hand machinery is less than 20% as on the date of commencement of production:

Since the ratio of machinery transferred from LU1 to LU2 as on the date of commencement is well within the prescribed statutory limits, it cannot be said that LU2 is formed as a split up of a business already in existence. Further, it is pertinent to note that the company has made significant investments in plant and machinery in the LU2 on year-on-year basis, which is also accepted by the Ld. AO (Page 19 of the Final Assessment order dated February 26, 2021). Thus, he submitted that since the transfer of machinery is less than 20%, the condition u/s.10AA(4)(iii) of the Act is duly satisfied by the assessee.

Issue 4 – Interdependence of LU1 and LU2 :

Moreover, the layout of LU1 and LU2 (Page 182 of paperbook) clearly shows they are separated by compound walls, have a separate entrance and exit, and have separate earmarked RB & IP departments, ETP, sub-station for power, warehouse, parking lots, administration building etc.

The AO had alleged that both the units are interdependent merely on the basis that there is transfer of machinery and employees during the period of survey. It may be noted that in the commercial world, for efficiency and better utilization, there may be sharing of resources, which does not impede with the characterization of integrity of the business. The AO failed to appreciate that inter-unit transfers are envisaged by the statute in sub-section (9) of Section 10AA of the Act read with sub-section (8) Section 80-IA of the Act, wherein it has been held that such transfers must be done at arm’s length price and hence, such transfers cannot be a basis for denying the claim for deduction u/s.10AA of the Act. The relevant provisions are reproduced below for your ready reference: Section 10AA of the Act “(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.” Section 80IA of the Act “(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any :-29-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

Thus, the stand of the lower authorities that the interdependence of units for machinery and materials cannot be a basis for concluding that LU2 is set-up by splitting or reconstruction of LU1. 65. In view of the above facts and judicial precedents, the ld.AR prayed for allowing the 100% deduction u/s.10AA of the Act, as the assessee’s LU2 was set-up after satisfying the conditions specified u/s.10AA of the Act to qualify for 100% deduction u/s.10AA of the Act and was not formed by splitting up or reconstruction of LU1 as alleged by the AO.

Per contra the ld.DR supported the orders of the lower authorities and submitted that the assessee’s used plant and machinery has crossed the 20%

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with the judicial precedents relied on by both the parties. The assessee is a branch of Lotus Footwear Enterprises Limited, a Company incorporated in British Virgin Islands. The assessee is engaged in the business of manufacturing of footwear namely leather sports shoes, synthetic sports shoes, and textile sports shoes. The assessee has LU1” and “LU2” units and operates out of a Special Economic Zone (‘SEZ’) situated in SIPCOT Industrial Park, Vembakkam Taluk, Tiruvannamalai, Tamilnadu. LU1 commenced its operations from 04.08.2008, and LU2 commenced its operations from 02.04.2014. The assessee had filed its Return of Income inter-alia after claiming deduction u/s.10AA of the Act under the normal provisions of the Act and paid taxes u/s.115JB of the Act on the book profit computed as per the provisions of section 115JB of the Act. A survey proceeding u/s.133A of the Act was conducted in the premises of the assessee on 31.10.2018. Following the survey, assessment was concluded u/s.143(3) of the Act for the AY 2016- 17, wherein the AO had computed the taxable income by making the following adjustment - o LU2 was considered to have been formed by splitting up of LU1. Accordingly, the AO considered LU2 to be an extension of LU1 and restricted the deduction claimed for LU2 u/s.10AA of the Act to 50%, as against the 100% deduction claimed by the assessee

The above adjustment of restriction of deduction u/s.10AA of the Act was made by the AO in the AYs 2017-18, 2018-19 and 2019-20 also. Further, the claim of deduction u/s.10AA of the Act before setting off of losses and unabsorbed depreciation was denied by the AO in AYs 2017-18 and 2018-19 also. Against the above adjustments made by the AO, the assessee filed the appeals before this Tribunal.

The Tribunal vide order dated 20.11.2024 by concluding that assessee is not entitled to the deduction u/s.10AA of the Act to the extent of 100% pertaining to LU2, on the ground that the assessee had violated the statutory condition of transfer of plant and machinery to Unit 2, observing that the assessee has not been able to substantiate its arguments related to capitalization of CWIP by accounts to prove that the statutory condition to test if 20 percent of machinery has been transferred or not must be tested as on 31.3.2014 either before the AO / DRP or before us.

Against the above order, the assessee filed its four separate Miscellaneous Applications in MA No. 4, 7 to 9/CHNY/2025 for the A.Ys.2016- 17 to 2019-20 on the basis that the Bench had failed to consider the financial statements as on 31.03.2014 submitted to substantiate the existence of CWIP as on 31.03.2014, which satisfies the ratio of 20 percent if CWIP is included.

The Tribunal recalled the said order of this Tribunal for fresh adjudication of the captioned appeal by disposing of the MA dated 11.06.2025 in respect of the grounds raised on deduction u/s.10AA of the Act. The only issue raised by the assessee was ‘the tribunal which has not adjudicated the ground no. 3 to 9(excluding 6) and also rejecting the claim of deduction u/s.10AA for the reason that the assessee has not produced any evidence in support of existence of used plant and machinery of less than 20%’.

In this regard, we find that the assessee has entered into a contract with M/s.Growth-Link Overseas Company Limited (“GLO”), whereby the assessee is a contract manufacturer of NIKE brand shoes of various models on behalf of GLO and supplies it to NIKE, as per the instance of NIKE and gets paid from GLO as per the agreed price. On perusal of the submissions, we note that the LU1 was manufacturing various shoe models and was operating at almost full capacity (95%). The LU2 was set-up as a new unit after making an application before the Development Commissioner, MEPZ as per Rule 17 of SEZ Rules, 2006 for a second facility which was estimated to produce 4,80,000 pairs of footwear per month with total proposed investment for LU2 was approximately Rs.76.44 crores with infrastructural requirements comprising of a total land area of 1,35,313 sq.mt. (SEZ application enclosed

We find that the industrial units satisfying the conditions stipulated in Sub-section (4) of Section 10AA of the Act, eligible to get benefit of deduction u/s.10AA of the Act. The statutory conditions as prescribed under clause (ii) and (iii) of sub-section(4) of Section 10AA of the Act are as follows: o unit should not be formed by 'splitting up' or 'reconstruction' of a business already in existence; o unit should not be formed by transfer to a new business, of machinery or plant previously used. However, as per Explanation to Section 10AA(4) read with Explanation 2 to Section 80-IA(3) of the Act, in case the total value of plant or machinery so transferred does not exceed 20% of the total value of plant and machinery used in the business, then the above condition shall be deemed to have been complied with.

We find that in the case of assessee, all the above conditions have been fulfilled and accordingly, the new unit, LU2 is not formed by splitting up or reconstruction.

The above view is supported by the decision of the Hon’ble Supreme Court in its recent decision in the case of Sociedade De Fomento Industrial (P.) Ltd. (443 ITR 34 – Page 57 of Case Law Compilation) had reproduced the tests formulated by the Hon’ble Supreme Court for the entitlement of deduction u/s.10AA of the Act, which is reproduced below:

Further, as observed by the lower authorities to deny the deduction u/s.10AA claimed by the assessee, we find that there is no condition/restriction for shift of employees from existing unit to the new unit established. The following table substantiating the satisfaction of alternative conditions prescribed under Circular 14/2014 though the same is not :-35-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

Since the net addition of new technical manpower in both units (i.e., 2011 employees – refer ‘C’ above) is more than 50% of the total technical manpower of new unit, i.e., LU2 (i.e., 1025 employees – refer ‘E’ above), the deduction under Section 10AA of the Act cannot be denied as prescribed under Para 4 of Circular 14/2014 (Refer Page 8 of Final Assessment order for AY 2016-17).

We also find that as per Instruction No.70 dated 09.11.2010 issued by the Department of Commerce (SEZ Division), wherein it is concluded that there is no limitation on the transfer of manpower to the SEZ units.

1 It is also relevant that section 51 of the Special Economic Zones Act 2005 overrides all provisions of all laws and has primacy on matters of SEZ units. 51. Act to have overriding effect 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.

Therefore, we are of the view that instruction No.70 above is clear on this position and is binding on the tax authorities.

The other aspect the AO had alleged that the assessee has produced the same product i.e., “Young Athlete” model of Footwear in LU1 and LU2 during the year of formation and further, alleges that there is decrease in the production of “Young Athlete” model of Footwear in LU1. 81. We noted that as explained by the ld.AR “Young Athlete” model is a basic shoe model produced by the assessee catering to the requirements of kids and is the simplest model of shoes manufactured, and it does not require significant skilled labour for production. Accordingly, the said model was initially produced by LU2 in the year of formation, since LU2 was a newly set- up unit and the skills of new workers would be maturing only over time. WE find that the above reason was also communicated during the course of survey u/s.133A of the Act by Shri.Narasimhan Rajagopal, General Manager (Finance) (Page 199 of paperbook).

On perusal of the details of the turnover, we noted that after the formation of LU2, the turnover of LU1 has increased on yearly basis even after the formation of LU2. 83. The below table summarizes the turnover of the units as per the data collected during the survey (Table 2 and 3 in Page 136 of paperbook) and the unit-wise profits as per Form 56F: Amount (INR) FY LU1 LU2 Turnover (in INR crores) Profits (in INR crores) No. of employees Cum. Capital Investme nt (Rs. In crores) Turnover (in INR crores) Profits (in INR crores) No. of emplo yees Cum. Capital Investme nt (Rs.in crores) 2013-14 356.47 29.30 5318 104.50 - - 346 11.99 2014-15 463.89 37.70 6685 132.09 59.14 - 2049 67.22 2015-16 501.76 36.24 7155 150.91 186.32 3.48 4206 108.39 2016-17 548.46 54.72 6793 167.25 328.86 31.24 4853 122.68 2017-18 584.75 68.23 7179 174.67 356.60 48.44 5295 128.02

The above observation was well supported by the ruling of the Hon’ble Delhi High Court in the case of Macquarie Global Services (P.) Ltd. (102 taxmann.com 272 – Page 97 of Case law compilation), the relevant extracts of which is reproduced below: “12……………..There was increase in revenue from taxable business of 31%, 7%, 9%, 21% and 17% in the assessment years 2011-12, 2013-14, 2014-15, 2015-16 and 2016-17 respectively. In :-38-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

In the factual background, the Tribunal has accepted that the new unit was a separate identity for its income to qualify for exemption under Section 10AA for it was not formed and created by 'splitting up' or 'reconstructing' the existing business. The new unit was also not formed by transferring any machinery or plant previously used. Fresh investment was made in the new unit. The revenue earning and profits generated were clearly attributable to the new unit.”

The reliance is also placed on the decision of Hon’ble Delhi Tribunal in the case of American Express (India) (P) Ltd. v. CIT (44 taxmann.com 389), wherein it was held as follows: “Turnover of both the units have increased over the years even after expiry of tax holiday under section 10B of the Act to sufficiently demonstrate that two units are separate and function independently of each other. Therefore, it cannot be said that new unit is formed by split up of the old unit.”

The main contention of the assessee is that the denial of deduction by the AO, though the assessee has not transferred used plant and machinery to the new unit exceeding 20% of the total plant and machinery of the new unit. Section 10AA(4)(iii) read with Explanation 2 to Section 80-IA(3) of the Act provides that the deduction u/s.10AA of the Act is available only to such units, wherein the ratio of used plant and machinery transferred from an existing unit does not exceed 20% of the total plant and machinery used in the new unit.

We find that the AO without any basis concluded that the unit was ready for production on 31.03.2014 and accordingly, considered the ratio of transferred machinery based on the value of machinery as on 31.03.2014. The AO alleged that the ratio of transferred machinery as on 31.03.2014 is 22.10% and accordingly, concluded that the condition prescribed u/s.10AA(4) of the Act is not fulfilled. On perusal of the submissions and records, we find that the assessee had commenced production only on 02.04.2014 of unit LU2. 88. As rightly argued by the ld.AR the formative condition specified u/s.10AA(4) of the Act must be tested for the year when the assessee was ready to commence production, if not actual commencement of production. In the present case, since the assessee had commenced production only on 02.04.2014, the said condition must be tested at the end of the year of commencement of production, which is Financial Year 2014-15, which has :-40-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

We find that the assessee claims that the Unit was formed in FY 2014- 15 is that the assessee had capitalized the Capital WIP only in this year. When the plant and machinery are in Capital WIP, it means that the plant and machinery are NOT usable as fixed assets. Those assets became to be USABLE only after capitalization.

We find that the assessee had made an application for set up of new unit LU2 in May 2013, against which an approval for setting up was granted by the SEZ authorities in June 2013 (Page 166 and 163 of paperbook). Subsequent to the approval, the assessee had entered into a lease agreement with Cheyyar SEZ Developers Private Limited in November 2013 (Page 176 of paperbook).

On perusal of the records, we find that the assessee subsequent to taking the land on lease, started making investments in the new unit and all the relevant assets were finally capitalized thereby making the unit ready for production, only on 01.04.2014. The new unit LU2 had accordingly, commenced production on 02.04.2014 and the first tranche of exports were :-41-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

We note that the AO has erred and arbitrarily considered FY 2013-14 for the purpose of computing the ratio of transferred plant and machinery alone, while considering FY 2014-15 as the year of formation for evaluation of the other conditions.

It is further supported that the Instruction No.70 dated 09.11.2010 issued by the Department of Commerce (SEZ Division), categorically provided that the ratio of 80:20 of new:used capital goods shall be reckoned on the date the unit starts to produce goods or services. While the AO had not disputed the fact that LU2 had commenced production on 02.04.2014, it is however, arbitrarily concluded that the unit should be ready for production in FY 2013-14 to arrive at the ratio of transfer of machinery at the end of FY 2013-14. We have observed that the assessee had a large amount of Capital Work-in-progress as on 31.03.2014 (Note 8b of the Financial Statements for the year ending 31.03.2014), which was not considered while computing the ratio of transfer by the AO: 8b.Capital Work In progress : Balance as on 01.04.2013

There was no dispute on the existence of CWIP as on 31.03.2014 which was also evidenced through the audited financial statements, which was submitted before us (enclosed as Annexure 1 for your ready reference) and the lower authorities also has not contested this argument that if CWIP is included, the percentage of second hand machinery to total value of machinery would be less than 20 percent.

Additionally, it may also be relevant to note that a portion of CWIP, comprising newly purchased machinery, was capitalized on 01.04.2014, i.e., prior to the commencement of production in LU2, and if the WIP capitalized on 01.04.2014 is included in the newly purchased machinery, the assessee would satisfy the ratio of 20 percent threshold prescribed u/s.10AA(4)(iii) of the Act.

We find that the above alternate contention of the assessee was not dealt by the lower authorities and was for the first time dealt with by this Tribunal in the order dated 20.11.2024, wherein the Bench had held that the assessee has NOT been able to substantiate this claim either before the DRP or before the Tribunal.

On perusal of the submissions made by the ld.AR, the certified copy of the unit-wise financials for the year ending 31.03.2014 capturing the value of CWIP of LU2, which is enclosed as Annexure 1 to the Additional Evidence Petition dated 01.09.2025 it is evident that as on 31.03.2014, i.e., prior to the :-43-: IT(TP)A.No.:20 /Chny/2021 & ITA Nos. 798, 799 & 800/Chny/2022

We find that a portion of the CWIP as appearing in the financial statements for the year ending 31.03.2014, was capitalized on 01.04.2014, i.e., prior to the commencement of production in LU2. Even if the CWIP capitalized on 01.04.2014 is considered, the ratio of transferred machinery in LU2 will be less than 20%. The table below give details to substantiate that the ratio of second-hand machinery is less than 20% as on the date of commencement of production:

We find that the identical issues are involved in assessee’s appeals for Assessment Years 2017-18, 2018-19 & 2019-20 also and accordingly, our adjudication above in A.Y. 2016-17 is mutatis mutandis applies therein also. Therefore, for the similar reasons, the appeals filed by the assessee in ITA Nos.798, 799 & 800/Chny/2022 are also allowed accordingly.

In the result all the four appeals of the assessee are allowed.

अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु3त/CIT– Chennai/Coimbatore/Madurai/Salem 4. 1वभागीय (तन ध/DR 5. गाड% फाईल/GF