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Facts
YCH Logistics India Private Limited, an SEZ unit providing warehousing and logistics services, filed its Return of Income for AY 2012-13 admitting a loss. The Assessing Officer made two adjustments: a Transfer Pricing adjustment of Rs. 5,21,07,179/- for management support services from Associated Enterprises (AEs) by rejecting the Transactional Net Margin Method (TNMM) and adopting the Comparable Uncontrolled Price (CUP), and a disallowance of deduction of Rs. 5,72,73,875/- under Section 10AA of the Income Tax Act for its SEZ operations, contending that the services were rendered in India and did not qualify as 'export'. The CIT(A) upheld both additions.
Held
Regarding the Transfer Pricing adjustment, the Tribunal observed that in the assessee's own case for AY 2010-11, TNMM was accepted, and the issue was remanded. Thus, the Tribunal remitted the matter back to the AO for fresh consideration, directing verification of evidence. For the Section 10AA disallowance, the Tribunal held that the services provided from the SEZ unit to foreign customers qualified as 'export' under Section 2(z) of the SEZ Act read with Rule 76 of the SEZ Rules, and Section 51 of the SEZ Act has an overriding effect. Noting that the AO had previously allowed the deduction in other assessment years, the Tribunal directed the deletion of the disallowance under Section 10AA.
Key Issues
1. Whether the Transactional Net Margin Method (TNMM) or Comparable Uncontrolled Price (CUP) is the most appropriate method for benchmarking management support services from Associated Enterprises for transfer pricing purposes. 2. Whether warehousing and logistics services provided by an SEZ unit to foreign customers qualify as 'export' for claiming deduction under Section 10AA of the Income Tax Act, considering the definitions in the SEZ Act and the overriding effect of Section 51 of the SEZ Act.
Sections Cited
250, 92D, 10D, 92C(3), 92CA(3), 10AA, 80-O, 143(3), 144C(5), 263, 142(1), SEZ Act 2(m), SEZ Act 2(m)(i), SEZ Act 2(m)(iii), SEZ Act 2(z), SEZ Act 27, SEZ Act 51
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K, HON’BLE & SHRI S.R. RAGHUNATHA, HON’BLE
आदेश /O R D E R
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), Chennai-16, dated 22.09.2023 and pertains to assessment year 2012-13.
The assessee has raised the following grounds of appeal: Grounds of Appeal
1. YCH Logistics India Private Limited ('YCH' or 'the Appellant') submits that the order passed by the Learned Commissioner of Income Tax (Appeals)- 16, Chennai ('CIT(A)') dated 22 September 2023 under section 250 of the Income-tax Act, 1961 ('the Act') is bad in law and is contrary to the facts and circumstances of the present case.
:-2-: ITA. No: 1330/Chny/2023 The detailed grounds of appeal
, Including the position in law and facts is set out in the ensuing paragraphs.
2. Grounds relating to Transfer pricing - Adjustment of INR 5,21,07,179/- 2.1. The Hon'ble CIT(A) and the Learned TPO erred in law and on facts in disregarding the Transactional Net Margin Method adopted by the Appellant for determining the arm's length nature of the management support services received from its Associated Enterprises ('AEs') in its Transfer Pricing "documentation maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('Rules'). Further erred in not satisfying the conditions mentioned u/s.92C(3) of the Act before making an adjustment to the income of the Appellant. 2.2. The Hon'ble CIT (A) and the Learned TPO erred in law and on facts in adopting the Comparable Uncontrolled Price method without bringing on record any comparable transaction I data to Justify the methodology adopted. 2.3. The Hon'ble CIT(A) and the Learned TPO erred in not following the directions of the Honorable Chennai Tribunal in the Appellant's own case for the AY 2010-11 vide order dated 30 August 2022 wherein it was held that TNMM shall be adopted as the most appropriate method in the absence of any CUP data brought in by the TPO on record. 2.4. The Hon'ble ClT(A) and the Learned TPO failed to appreciate that, based on the TNMM applied by the Appellant in its Transfer Pricing documentation, its operating profit margin (as arrived at after factoring its entire management support services cost) were concluded at arm's length, thereby evidencing the arm's length nature of its international transactions; 2.5. The Hon'ble CIT(A) and the learned TPO erred in not considering that, the TPO adopted aggregated TNMM approach in earlier years and concluded that the Appellant's international transaction are at arm's length. Thus, TPO erred in disregarding the principle of consistency, although the facts of the relevant AY 2012-13 is similar to the previous AY 2009-10. 2.6. The Hon'ble CIT(A) and Learned TPO erred on facts in not understanding the business of the Appellant and further TPO failed to appreciate the need for management support services from AEs which are critical for pretending the logistics services to customers in India. 2.7. The Hon'ble CIT(A) and Learned TPO erred in and on facts in not appreciating that the management support services received from the AE are closely linked to the logistics services rendered by the Appellant and erred in determining ALP separately;
:-3-: ITA. No: 1330/Chny/2023 2.8. The Hon'ble CIT(A) and Learned TPO erred in law and on facts by considering the management support services received by the Appellant, as in the nature of 'shareholding activity' and concluding that the management support services received did not confer any benefit to the Appellant 2.9. The Hon'ble CIT(A) and Learned TPO erred in concluding that the Appellant has not been able to show that it has derived any economic benefit commensurate with the volume of the services rendered. 2.10.The Hon'ble CIT(A) and Learned TPO failed to appreciate the fact that the Appellant has received services from its AEs and disregarded the submissions made by the Appellant establishing the receipt of services. Grounds relating to Corporate Tax 3. Disallowance of deduction under section 10AA of the Act -INR 5,72,73,875/-. 3.1 The Learned CIT(A) and AO erred in law and on facts by disallowing the deduction claimed under section 10AA of the Act amounting to INR 5,72,73,875/- on the ground that the Appellant has not rendered or provided services outside India and the services were rendered in India. The Learned CIT(A) and AO failed to appreciate that the Appellant rendered warehousing and logistics services to foreign customers located outside India. 3.2 The Learned CIT(A) and AO failed to appreciate that the agreement for provision of warehousing and logistics services was between the Appellant and the foreign customers and the said services were provided to the foreign customers and there was no delivery of services in India. 3.3 The Learned CIT(A) and AO erred in law and on facts in concluding that the business activity of the SEZ unit of the Appellant falls within the purview of section 2(m)(iii) of the Special Economic Zones Act, 2005 ('the SEZ Act'). 3.4 The Learned CIT(A) and AO erred in law in not appreciating that the services rendered by the Appellant to the foreign customers outside India falls within the purview of section 2(m)(i) of the SEZ Act. 3.5 The Learned CIT(A) and AO failed to appreciate that warehousing and logistics services were rendered to foreign customers outside India and the Appellant has incurred telecommunication charges, etc. to export such services outside India. The Appellant submits that it has rendered services to customers outside India and hence, such service is export of service. 3.6 The Learned CIT(A) and AO erred in relying on the ruling of Andhra Pradesh High Court in the case of Swayam Consultancy (P) Ltd. vs. ITO [2012) (20 taxmann.com 803), which is not applicable to the facts of the Appellant
:-4-: ITA. No: 1330/Chny/2023 3.7 The Learned CIT(A) and AO erred in law and on facts in disregarding the following: The term 'export' defined in the Act is derived from the SEZ Act. Accordingly, an activity that qualifies as export under the SEZ Act would qualify as export under section 10AA of the Act. If any 'services' as defined under the SEZ Rules, 2006 are provided by a person located in the SEZ by any mode to a person outside India, then the same shall be regarded as export of services for the purpose of section 10AA of the Act When the services performed by the Appellant fall Within the ambit of 'export' as defined under Foreign Exchange Management Act, 1999 ('FEMA'), then the same shall be export for the purposes of section 10AA of the Act. 3.8 The Learned CIT(A) and AO erred in law and on facts In disallowing deduction under section 10AA of the Act without realizing the legal interpretation that the said section was occasioned with a modification of the SEZ Act and therefore, bound by the provisions of the SEZ Act. 3.9 The Learned CIT(A) and AO erred in not considering the principles laid down in the Hon'ble ITAT in the case of M/s.Midas DFS (P) Ltd. vs. ITO (ITA No.30/Kol/2012) and Zaveri & Co Pvt Ltd. vs. CIT [2014] 32 ITR(T) 250, which would squarely apply in the instant case of the Appellant 3.10 The Learned CIT(A) and AO erred in law by not appreciating that section 10AA of the Act has to be construed liberally so as to advance the objective of the provision and not to frustrate it since the same has been introduced to grant incentives for promoting growth and development. Further, the Learned CIT(A) and AO failed to appreciate that a benefit conferred under a statute should not be defeated by an unduly narrow interpretation of the language used in the statute. Further, the Learned CIT(A) and AO failed to appreciate that the object for granting concession/ exemption should not be lost sight of and a purposive interpretation must be adopted. 3.11 The Learned CIT(A) and AO erred in law and in principle by denying the claim of deduction under section 10AA of the Act, when the same was allowed for the earlier AYs by the Learned AO. The Learned CIT(A) and AO failed to follow the settled principle that positions which were sustained bythe parties in a particular AY cannot be changed ln subsequent AYs, when there is no change in the fact pattern. 3.12 The Learned CIT(A} and AO erred in law In appreciating that the formative conditions for claim of deduction under section 10AA of the Act have to be satisfied in the year in which the unit begins to provide :-5-: ITA. No: 1330/Chny/2023 services and failed to appreciate that such conditions need not be tested year on year.
4. Initiation of Penalty Proceedings 4.1 The Learned CIT(A) erred on facts and in law in upholding the penalty proceedings initiated by the AO.
5. Consequential Relief 5.1 The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto, including and not limited to reinstatement of appropriate amount of taxable income.
6. Prayer 6.1 The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, and to submit such statements, documents and papers as may be considered necessary either at or at any time before the hearing of this appeal.
Brief facts of the case are that the assessee YCH Logistics (India) Private Limited is a wholly owned subsidiary of YCH Group Pte. Limited, Singapore. The Company is engaged in the business of providing services of warehousing, transportation, supply chain management and vendor managed inventory services from a unit set up in the Special Economic Zone (‘SEZ’). The Company has obtained an approval from the SEZ authorities to perform “end to end supply chain management services and warehousing”. The assessee has filed its Return of Income (‘RoI’) electronically on 24.11.2012 for the Assessment Year (‘AY’) 2012-13 admitting a total loss of Rs. 6,45,33,354/-. The case was selected for scrutiny and the ACIT, Corporate Circle – 3(2), Chennai in his order dated
:-6-: ITA. No: 1330/Chny/2023 29.03.2016 made the following adjustments for the AY 2012-13 u/s.143(3) of the Income-tax Act, 1961 (‘the Act’) r.w.s. 144C(5) of the Act:
Sl. Nature of Disallowance Amount Reference No. (in Rs.) (A) Transfer Pricing (‘TP’) 1 Downward adjustment with respect to 5,21,07,179 TP Order – Page No.67 of TP transactions the paper book 2 (B) Other than Transfer Pricing Adjustment 1 Disallowance of deduction under 5,72,73,875 AO Order – Page 38 of the section 10AA of the Act paper book 2 Total 10,93,81,054 The TPO in his order u/s.92CA(3) of the Act dated 29.01.2016 has recommended downward adjustment of Rs.5,21,07,179/- from the AE cost stating that the benefits said to be received are incidental to the nature of business.
Aggrieved by the above order, the assessee filed an appeal before the Learned Commissioner of Income Tax (Appeals)-16, Chennai (‘CIT(A)’) on 27.04.2016, which was disposed by the ld.CIT(A) on 22.09.2023 and the order was passed by confirming the additions made by the AO in favour of the Revenue.
Aggrieved by the aforementioned order, the assessee filed an appeal and brief submissions filed are reproduced as under:
:-7-: ITA. No: 1330/Chny/2023 Brief submissions in relation to Ground no. 2 – Transfer Pricing adjustment: The ld.AR for the assessee submitted that there is no separate adjustment warranted if Transactional Net Margin Method (‘TNMM’) is considered as the most appropriate method and the assessee has adopted an aggregated approach in its TP Study, which has been accepted by the TPO for other international transactions.
The payment for the support services are inextricably linked to the principal business of the assessee (warehousing, transportation, supply chain management and vendor managed inventory services) and are essential to maintain a continuing relationship with the assessee’s vendors and customers.
The ld.AR submitted that the basis of cost allocation, email evidence to substantiate the receipt of services, inter-company agreement, etc. before the Ld. TPO and Ld. CIT(A). The email evidence submitted by the assessee are part of the Paperbook (Pages 104 to 428 of Paper Book).
The ld.AR submitted that nowhere does the law require the assessee to demonstrate the need & benefits of availing such services. The law only requires the TPO/ Ld.CIT(A) to ascertain as to whether the price paid for such services is at arm’s length or not.
:-8-: ITA. No: 1330/Chny/2023 The TPO and Ld.CIT(A), have disregarded the submission of the assessee with respect to benchmarking the said transactions using the TNMM and have failed to identify any comparable uncontrolled transaction for the purpose of determination of arm’s length price, thus violating the provisions of the Income Tax Act.
Use of TNMM for the said transaction has been upheld by the Hon’ble Chennai Tribunal in the assessee’s own case for the A.Y.2010-11 and the case was remanded back to the TPO. The assessee requests that the principle of consistency should be followed in the current A.Y.2012-13. (Page. No 246 of the PaperBook).
Per contra, the ld. DR supported the orders of the lower authorities.
We have heard the rival contentions perused the material available on record gone through the orders of the lower authorities along with the paper books filed and case laws relied upon. The TPO has rejected the claim of the assessee and suggested the downward adjustment of Rs.5,21,07,179/- to the value of international transactions entered into by the assessee with its AEs. While suggesting the downward adjustment the TPO has rejected the TNMM method followed by the assessee as the most appropriate
:-9-: ITA. No: 1330/Chny/2023 method to arrive at Arm’s Length Price only for Support services. However, we note that the TPO has accepted the TNMM method followed by the assessee in other 9 kinds of International transactions. Further, the TPO has rejected the TNMM method followed by the assessee and recommended the CUP is to be adopted as Most appropriate method. The ld.CIT(A) also has confirmed the order of the TPO with the same reasoning. Since, the identical issue in the assessee’s own case had come up before this Tribunal for the A.Y. 2010-11, wherein the TNMM was accepted by the Tribunal in its order dated 30.08.2022 by holding as under:
For the purposes of benchmarking the profits, the assessee has considered TNMM as the most appropriate method and the PLI of the assessee is higher than that of the comparable companies. In the case of Durr India (P) Ltd in dated 21.12.2016, the co-ordinate Bench of Tribunal has held that allocation of cost partly on the basis of turnover and net profit cannot be considered as a factor to propose transfer pricing adjustment. Further, it was held that where the PLI of the assessee under TNMM is at arm’s length and it is not possible on the part of the department to identify a comparable, which is rendering similar services, the question of considering CUP method would not arise at all. Since the assessee has stated that all the relevant evidences were already available with the Assessing Officer/TPO and on that basis; it is required to be verified with regard to availing actual services and its allocation of cost to the assessee. Accordingly, this ground relating to Management fees is remitted to the file of the Assessing Officer for fresh consideration and the Assessing Officer after going through the evidences filed by the assessee decide the issue fresh as indicated above. This ground of appeal
of the assessee is allowed for statistical purposes.
7. Therefore, in the present facts and circumstances of the case and relying on the decision of this Tribunal in assessee’s own case for the A.Y. 2010-11, we are of the considered view that the lower
:-10-: ITA. No: 1330/Chny/2023 authorities have erred in rejecting TNMM method as MAM relating to the support services payment made by the assessee to AE and hence we remit this issue to the file of the AO for fresh consideration and AO after verification of the evidence decide the issue afresh in light of the above decision. Thus, all the grounds of appeal raised by the assessee relating to this issue stands allowed for statistical purposes.
Disallowance of deduction u/s.10AA- Ground No. 4
The next issue raised by the assessee is disallowance of deduction u/s.10AA of the Act to the tune of Rs.5,72,73,875/-. A brief description of the operations carried out by the assessee in the SEZ unit has been provided below:
The assessee is engaged in the business of providing warehousing services, logistics services and handling services to foreign parties / customers from its SEZ facility. Under the terms of such agreement the assessee stores the goods in its warehouse on behalf of such foreign parties. The goods are subsequently supplied by the assessee to parties in India, as designated by the foreign parties. The ownership / title in the goods imported (as importer on record) by the assessee lies with the foreign parties until they are delivered to the parties in India. The assessee provides service to the foreign parties as per their instructions. Further, in the event goods are not delivered to the parties in India then the same would be sent back to the foreign parties. The assessee raises invoices in convertible foreign currency on the foreign parties for the aforementioned services provided by it to the foreign parties.
:-11-: ITA. No: 1330/Chny/2023 Refer Page 429 of Factual Paper Book for ‘Model Suppliers Agreement’ entered with foreign parties.
The Learned AO vide assessment order dated 29.03.2016 has disallowed the claim of deduction under section 10AA of the Act on the following grounds:
That the assessee has not rendered or provided services outside India and the services were rendered in India. The assessee has provided warehousing and logistics services to customer located within the SEZ in India (i.e. DELL India). The business activity of the SEZ unit of the assessee falls within the purview of section 2(m)(iii) of the Special Economic Zones Act, 2005 ('the SEZ Act') i.e. supplying goods, or providing services, from one unit to another unit or developer, in the same or different Special Economic Zone ('SEZ') and the same is not covered in the scope of export under section 10AA of the Act. A wrong view taken in the Company’s own case for the AY 2010- 11 allowing deduction under section 10AA of the Act on similar grounds cannot be allowed to perpetuate on the basis of principle of consistency.
The Learned CIT(A) vide order dated 22.09.2023 confirmed the disallowance u/s.10AA of the Act made by the AO. The ld.AR submitted that the AO and the ld.CIT(A) had not denied the fact that the assessee renders services from the SEZ to foreign parties / customers. Before us the ld.AR submitted that the Export has been defined in the SEZ Act as detailed below:
The ld.AR submitted that section 10AA of the Act was inserted by virtue of enactment of the Special Economic Zones Act, 2005 (‘SEZ Act’) by the Parliament (Refer section 27 of the SEZ Act).
:-12-: ITA. No: 1330/Chny/2023 As per section 2(m) of the SEZ Act, the term ‘export’ is defined as under: “export means – (i) Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) Supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;”
Further, the term “export in relation to the SEZ” has been defined in Explanation 1 to section 10AA of the Act. The relevant extract of the same has been reproduced below:
“Export in relation to the Special Economic Zone means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise”.
The ld.AR submitted that the ‘warehousing and handling services’ are provided by the assessee to foreign parties / customers out of India from its unit in SEZ. Accordingly, the ld.AR submits that its case falls within the realm of section 2(m)(i) of the SEZ Act which is identical to the definition of the term ‘export’ as defined in the Act and not under section 2(m)(iii) of the SEZ Act as contented by the AO. In this regard, the ld.AR placed reliance on various judicial precedents as placed during the course of hearing. Emphasis is supplied with the Kolkata ITAT’s decision in the case of M/s.
:-13-: ITA. No: 1330/Chny/2023 Midas DFS (P) Ltd. vs. ITO (ITA No. 2666/Kol/2013), wherein it has been held that : Exemption provided under section 10AA of the Act, which are special provision in respect of newly established units in SEZ, are for income received by providing any services. The provisions as specified in the SEZ Act would have an overriding effect on the Act, because the SEZ Act is a special Act and a later Act of the Parliament. Where an activity has been permitted by the Competent Authority under the SEZ Act, there can be no question of denial of exemption under section 10AA of the Act. Assessee was eligible to claim a deduction under section 10AA of the Act as the term ‘services’ defined in the SEZ Rules include trading and warehousing services. Any services which are inextricably linked with and part and parcel of the normal activity carried on by the SEZ, shall be covered under the “other business service” by applying ejusdem generis as per Rule 76 of the SEZ Rules, 2006 (‘SEZ Rules’).
It is also highlighted that the definition of 'export' under section 10AA of the Act refers to ‘providing services out of India’ and not ‘rendering service out of India.’ Thus, service rendered in SEZ to a non-resident falls within the meaning of ‘export’ of ‘providing services out of India’. There is no requirement of rendering service outside India under section 10AA of the Act. Similarly, circular No.700 dated March 23, 1995, 213 ITR (St) 78, in the context of section 80-O of the Act, states that the deduction will be available even where the foreign recipient of the services utilizes the benefits of such services in India as held by the Authority for Advance Ruling in the case of A.S. Mani v CIT (227 ITR 380).
:-14-: ITA. No: 1330/Chny/2023 Therefore, the provision of service by the assessee to a non-resident foreign customer outside India from SEZ is export of service and eligible for deduction under section 10AA of the Act. Further, the ld. AR stated that the SEZ Act to have an overriding effect:
Section 51 of the SEZ Act reads as follows:
“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.”
By virtue of the aforementioned section, the SEZ Act has an overriding effect on all other enactments including the Act. Accordingly, if there is any inconsistency between the Act and the SEZ Act, then SEZ Act shall override. The ld.AR argued that notwithstanding our arguments supra, even in a situation where the assessee’s case is considered to fall within the purview of section 2(m)(iii) of the SEZ Act, considering that the provisions of SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, the same shall override the definition of the term ‘export’ as laid down in section 10AA of the Act. Reliance in this regard is placed on the following judicial precedents (case laws submitted on 27 January 2025). M/s Midas DFS (P) Ltd. vs. ITO (supra)
:-15-: ITA. No: 1330/Chny/2023 Solitare Diamonds Exports (182 ITD 474) ACIT vs. M/s Goenka Diamonds & Jewellers Ltd. (ITA No. 509/JP/2011 & M/s Gitanjali Exports Corporation Limited vs. ADCIT (ITA No. 6947 & 6948/Mum/2011) M/s. Diamonds 'R' US vs. CIT (ITA No. 276/Mum/2014) M/s. Ossian Exports vs. ITO (ITA No. 2024/Mum/2015) DCIT vs. M/s Gia Exports (ITA No. 6350/Mum/2016) Zaveri & Co Pvt. Ltd. vs. CIT [2014] 32 ITR(T) 250
Further, the Customs, Excise and Service Tax Appellate Tribunal Principal Bench, New Delhi in the case of Surya Roshni Ltd. vs. Commissioner of Central Excise, Rohtak 2012 (285) ELT 518 (Tri. - Delhi), while deciding as to whether the goods supplied to SEZ as well as SEZ Developers by a DTA unit would be treated as exports for the purpose of Cenvat Credit Rules, 2004, held that section 51 of the SEZ 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 the SEZ Act.
Similar provisions under Sick Industrial Companies Act, 1985 (‘SICA’) Further, the Ld.AR submitted that a provision similar to section 51 of the SEZ Act, was enacted under the SICA. Relevant extract of section 32 of SICA is reproduced as under:
:-16-: ITA. No: 1330/Chny/2023 “32(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the memorandum or articles of association of an industrial company or in any other instrument having effect by virtue of any law other than this Act..”
The above view has been inter-alia upheld by the Madras High Court in the case of Tube Investments of India Ltd. vs. CIT [2012] 341 ITR 199.
“Services” in relation to SEZ
The term ‘services’ has not been defined in the Act. In this regard, the ld.AR submitted when the provisions of section 10AA of the Act owes its genesis to the SEZ Act, a reference could be drawn to the definition of the term ‘services’ as defined in the SEZ Act. The extract of the definition of the term ‘services’ as per section 2(z) of the SEZ Act is reproduced below:
“services means such tradable services which, (i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organization concluded at Marrakesh on the 15 April 1994; (ii) may be prescribed by the Central Government for the purposes of this Act; and (iii) earn foreign exchange.”
:-17-: ITA. No: 1330/Chny/2023 Further, the services have been prescribed by the Central Government vide Rule 76 of the SEZ Rules which reads as follows (Refer Page No. 451 of the Paper Book 1):
“The ‘services’ for the purposes of 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,............ distribution services (excluding retail services), ............. transport services, services auxiliary to all modes of transport, pipelines transport.”
Accordingly, the ld.AR submitted that the services provided to the foreign customers located outside India, in the nature of warehousing, logistics and handling services shall squarely fall within the ambit of services as defined under section 2(z) of the SEZ Act read with Rule76 of the SEZ Rules. Claim of the assessee has been accepted by the AO in the AY 2010-11 and AY 2017-18 i) In this connection, the ld.AR submitted that during the course of assessment proceedings for the AY 2010-11, the issue pertaining to the deduction under section 10AA of the Act was considered and no dispute was raised pertaining to the allowability of the deduction claimed and only the quantum of deduction was disputed. In other words, the eligibility to claim deduction under section 10AA of the Act was accepted by the AO. The assessment order for the AY 2010- 11 is enclosed as Annexure 1.
:-18-: ITA. No: 1330/Chny/2023 ii) Further, pursuant to the assessment order passed for the AY 2012-13, the eligibility to claim deduction under section 10AA of the Act for the AY 2010-11 was directed to be reexamined in the order passed under section 263 of the Act. The order under section 263 of the Act for the AY 2010-11 is enclosed as Annexure 2. Thereafter, in the assessment order passed under section 143(3) read with section 263 of the Act, the Learned AO only disputed the quantum of deduction and the eligibility to claim deduction under section 10AA of the Act was accepted by the AO. A copy of the said order is enclosed as Annexure 3. iii) Further, during the course of assessment proceedings for the AY 2017-18, the AO had sought for details pertaining to the deduction claimed under section 10AA of the Act, inter-alia including eligibility of the claim (refer question 1(e) and 1(f) of the notice issued under section 142(1) of the Act dated 08 November 2019). A copy of the aforementioned notice issued under section 142(1) of the Act and submissions made during assessment proceedings, including the Form 56F is enclosed as Annexure 5. After verification of the details furnished by the assessee, the AO did not record any adverse findings with respect to the eligibility of the claim. The assessment order for the AY 2017-18 has been enclosed as Annexure 6.
:-19-: ITA. No: 1330/Chny/2023 13. In light of the above arguments and submissions the ld.AR prayed for setting aside the order of the ld.CIT (A) by allowing the grounds of appeal of the assessee.
14. Per contra the ld.DR for the revenue supported the orders of the AO and the Ld.CIT(A) by submitting as under on the issue of disallowance of deduction u/s.10AA of the Act: i) The assessee entered into agreements with foreign customers for providing supply chain management and vendor managed inventory services. Under these agreements, YCH imports the goods from the foreign customers as importer on record and stores the same in the warehouse located in the SEZ on behalf of the foreign customers. The ownership of the goods remains with the foreign customer. The goods are then supplied by YCH to the vendors of the foreign customers located within the SEZ. Looking at the activity undertaken by the Assessee, the AO has denied the deduction under Sec 10AA of the Income Tax Act, 1961 based on the following reasoning:
The definition of the term "export" under the Income Tax Act, 1961 and the SEZ Act, 2005 are not one and the same. While the definition under the SEZ Act is wide in scope, the definition as given under the Income Tax Act is very limited. The business activity of the Assessee was accorded permission by the SEZ authorities to set up its unit. However, such permission alone is not sufficient in order to eb eligible for deduction u/s. 10AA.
:-20-: ITA. No: 1330/Chny/2023 When the legislature has consciously excluded a specific activity from the purview of 'export' for the purpose of Sec 10AA. A wider meaning cannot be attributed to the definition of the export. An exemption is an exception to the general rule and since the same is opposed to the natural tenor of the statute, the entitlement for exemption ought not to be read with any latitude to the taxpayer or even with a wider connotation but its application shall be restricted to the specific language used depicting the intent of the legislature. The intention of the legislature was never to consider delivery of goods or services in India as amounting to export. The claim of the Assessee that the deduction was allowed under Sec 10AA for AY 2010- 11 does not entitle the assessee to the same deduction in the impugned Assessment Year also since the principle of consistency is not applicable in tax cases. ii) Having perused the Assessment Order, the Ld.CIT(A) also agreed with the stance taken by the AO and observed that the explanation is clear in explicit as well as implicit terms and states that "export" in relation to the SEZ means taking goods or providing services out of India from a SEZ by land, sea, air or by any other mode, whether physical or otherwise. The Ld. CIT(A) also placed reliance on the Hon'ble AP HC in the case of Swayam Consultancy (P) Ltd v. ITO [2011] 336 ITR 0189, in which it was held that the intention of the Parliament, in granting benefits to the units in free trade zones, special economic zones and EOUs, is to allow the benefit of deduction only when the articles or things or computer software are actually and factually exported out of India to a foreign country.
:-21-: ITA. No: 1330/Chny/2023 iii) When the profits from exports were allowed as deduction, the Parliament intended the actual export out of India of the articles of things. The intention was never to consider the delivery of goods to a foreign buyer in India as amounting to export. iv) Further, the ld.DR submitted that the section 10AA which deals with special provisions in respect of newly established Units in Special Economic Zones was inserted by the Special Economic Zone Act, 2005 w.e.f. 10.02.2006. Thus, it can be clearly seen that the provision itself was introduced through SEZ Act, 2005 and not vide Finance Act unlike all other amendments. v). The definition for the term "export" as provided in both the SEZ Act, 2005 and the Income Tax Act, 1961 are as follows:
AS PER SPECIAL ECONOMIC ZONE ACT, 2005: Sec 2(m): "export" means (i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone; AS PER INCOME TAX ACT, 1961: Sub-clause (ii) to Explanation 1 to Sec 10AA:
:-22-: ITA. No: 1330/Chny/2023 "export in relation to the Special Economic Zones" means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise; From a bare perusal, it can be seen that the definition of the term "export" is wide under the SEZ Act, 2005 which provides for 3 clauses whereas the definition provided under the Income Tax Act covers only 1 scenario. This clearly speaks for the intention of the legislature. Had the intention of the legislature been to import a wider definition into the term "export", all the three clauses provided in the SEZ Act, 2005 would have bene inserted. However, the definition of the term "export" is very limited in scope. vi) Since the definition of the term 'export' as per Sec 2(m) of the SEZ Act, 2005 and Explanation 1 of Sec 10AA of the Income Tax Act, 1961 was made from the same SEZ Act, 2005, it clearly implies that one Act does not prevail over the other as claimed by the Assessee. It is the same Act that has provided for the definition for the term "export" to address 2 different situations i.e., Under SEZ Act, the definition has been provided in the general definition section i.e.,
under Section 2 of the Act which applies for the whole Act unless specifically excluded and Under the Income Tax Act, 1961, the definition is given exclusively under Section 10AA under the explanation clause, thereby meaning that the definition for the term "export" is solely applicable for the purpose of claiming deduction under section 10AA of the Income Tax Act, 1961.
:-23-: ITA. No: 1330/Chny/2023 vii) Therefore, including a specific definition under a particular section through the SEZ Act itself speaks for the intention of the legislature. Thus, the SEZ Act, 2005 does not override the provisions of the Income Tax Act, 1961 at least with regard to the definition of the term export. viii) The activity undertaken in the instant case does not fit into the definition of export as provided under the Income Tax Act, 1961 as there is no taking of goods or provision of services out of India from the SEZ, the service provided fails to satisfy the condition laid down under the Income Tax Act, 1961. ix) It is the contention of the Assessee that the goods are in SEZ which does not form part of the India and has thus complied with the definition provided under the Income Tax Act, 1961. This argument is not tenable for the following 2 reasons namely: i. The term India used here denotes territorial demarcation and not tax-based demarcation wherein SEZ area does not form part of Indian territory. ii. The word out of India is followed by the words "from a Special Economic Zone". In the instant case, the goods still lie in SEZ only. x) The service though has been provided to a foreign party, the goods still lay in India and thus has not moved out of the territory of India. Since the deduction has been provided under the Act, the :-24-: ITA. No: 1330/Chny/2023 definition provided under the Income Tax Act should only be relied on and not the definition given under the SEZ Act, 2005. xi) The activity undertaken by the Assessee squarely falls under Sec 2(m)(iii) of the SEZ Act, 2005 since there is only supply of goods from one unit to another in the same SEZ. As the clause (iii) is not present in the definition of export under Sec 10AA of the Income Tax Act, 1961, the Assessee is not eligible for claiming deduction under the Income Tax Act, 1961. xii) It is also brought to your kind attention that the case law of Hon'ble Kolkata Tribunal in the case of Midas DFS (P.) Ltd ([2018] 96 taxmann.com 351) relied on by the assessee to substantiate its claim does not come to its aid since the actual issue in the said case was with regard to determination of whether the activity undertaken by the Assessee would fall within the definition of the term "Services" under the Income Tax Act and under Rule 76 of the SEZ Rules. 2006. Since the present case at hand is on an entirely different issue, the reliance placed on the Kolkata Tribunal order is not acceptable. xiii) It is also the case of the Assessee that the Assessment order passed under Sec 143(3) r.w.s. Sec 263 of the Income Tax Act, 1961 for the A Y 2010-11, and the Assessment order passed u/s. :-25-: ITA. No: 1330/Chny/2023 143(3) for the AY 2017-18 has allowed the claim of deduction u/s. 10AA of the Income Tax Act, 1961. xiv) As far as AY 2010-11 is concerned, while the Ld.PCIT has directed the Ld. AO vide their order u/s.263 to reconsider the allowability of deduction under Sec 10AA of the Income Tax Act, 1961, the AO has not given effect to the same in his order and has allowed the claim without discussing a word about its allowability. Thus, the order passed by theAO u/s.143(3) r.w.s. 263 is not a binding precedent since the issue of determining whether the activity falls under the definition of the term "export" under the Act was not discussed. xv) Similarly, for the AY 2017-18 the issue presently at dispute was not discussed and litigated. Therefore, the principle of res judicata and the principle of consistency is not applicable to the instant case. At this juncture reference is made to few cases in which it has been held that the principle of res judicata is not applicable for tax matters:
CITv. Seshasayee industries Ltd[(Mad) 242 ITR 691] Ace Investments (P) Ltd v. CIT [(Mad) 244 ITR 166] M.M. lpoh &Ors. v. CIT [(SC) 67 ITR 106] New Jehangir Vakil Mills Co. Ltdv. CIT[(SC) 49 ITR 137]
:-26-: ITA. No: 1330/Chny/2023 Bharat Sanchar Nijam Ltd &Ors v. UOI &Ors. [(SC) 282 ITR 273] 15. Thus, the ld.DR submitted that the claim of the assessee for deduction under Sec 10AA of the Act, is not tenable based on the arguments advanced, authorities cited and submissions made since it does not fall under the definition of the term "Export" to claim deduction.
We have heard the rival contentions perused the material available on record and gone through the orders of authorities along with the paper book filed and case laws relied. Admittedly, the assessee is engaged in the business of providing warehousing, transportation, supply chain management and vendor managed inventory services from a unit set up in the Special Economic Zone(SEZ) with the following modus operandi.
Under the terms of such agreement the assessee stores the goods in its warehouse on behalf of such foreign parties. The goods are subsequently supplied by the assessee to parties in India, as designated by the foreign parties. The ownership / title in the goods imported (as importer on record) by the assessee lies with the foreign parties until they are delivered to the parties in India. The assessee provides service to the foreign parties as per their instructions. Further, in the event goods are not delivered to the parties in India then the same would be sent back to the foreign parties. The assessee raises invoices in convertible foreign currency on the foreign parties for the aforementioned services provided by it to the foreign parties.
:-27-: ITA. No: 1330/Chny/2023
During the impugned assessment year, the AO had disallowed the deduction u/s.10AA of the Act an amount of Rs.5,72,73,875/- on the ground that the assessee has not rendered or provided any services outside India and the services are rendered in India. The ld.CIT(A) also confirmed the addition made by the AO stating that the agreement for provision of warehousing and logistic services was between the assessee and the foreign customers and the said services were provided to the foreign customers and there was no delivery of services in India as the activity of the SEZ unit falls within the purview of Section 2(m)(iii) of the SEZ Act 2005 and does not fall within the ambit of Section 2(m)(i) of the SEZ Act 2005. The ld.AR submitted that section 10AA of the Act was inserted by virtue of enactment of the Special Economic Zones Act, 2005(‘SEZ Act’) by the Parliament (Refer section 27 of the SEZ Act).
On perusal of SEZ Act 2005, as per section 2(m) of the SEZ Act, the term ‘export’ is defined as under:
Export means – (i) Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) Supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;
:-28-: ITA. No: 1330/Chny/2023 18. Further, the term “export in relation to the SEZ” has been defined in Explanation 1 to section 10AA of the Act. The relevant extract of the same has been reproduced below:
“Export in relation to the Special Economic Zone means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise”.
The assessee has claimed that the warehousing and handling services are provided by the assessee to foreign parties / customers out of India from its unit in SEZ which falls within the realm of section 2(m)(i) of the SEZ Act which is identical to the definition of the term ‘export’ as defined in the Act and not under section 2(m)(iii) of the SEZ Act as contented by the AO.
It is pertinent to note the judicial precedents of Kolkata ITAT’s decision in the case of M/s.Midas DFS (P) Ltd. vs. ITO (ITA No. 2666/Kol/2013), wherein it has been held that :
Exemption provided under section 10AA of the Act, which are special provision in respect of newly established units in SEZ, are for income received by providing any services. The provisions as specified in the SEZ Act would have an overriding effect on the Act, because the SEZ Act is a special Act and a later Act of the Parliament. Where an activity has been permitted by the Competent Authority under the SEZ Act, there can be no question of denial of exemption under section 10AA of the Act. Assessee was eligible to claim a deduction under section 10AA of the Act as the term ‘services’ defined in the SEZ Rules include trading and warehousing services.
:-29-: ITA. No: 1330/Chny/2023 Any services which are inextricably linked with and part and parcel of the normal activity carried on by the SEZ, shall be covered under the “other business service” by applying ejusdem generis as per Rule 76 of the SEZ Rules, 2006 (‘SEZ Rules’).
Further, we note that the definition of 'export' under section 10AA of the Act refers to ‘providing services out of India’ and not ‘rendering service out of India.’ Thus, service rendered in SEZ to a non-resident falls within the meaning of ‘export’ of ‘providing services out of India’. We further, note that there is no requirement of rendering service outside India under section 10AA of the Act. Similarly, circular No.700 dated March 23, 1995, 213 ITR (St) 78, in the context of section 80-O of the Act, states that the deduction will be available even where the foreign recipient of the services utilizes the benefits of such services in India as held by the Authority for Advance Ruling in the case of A.S. Mani v CIT (227 ITR 380). Therefore, the provision of service by the assessee to a non-resident foreign customer outside India from SEZ is export of service and eligible for deduction under section 10AA of the Act.
We note that the Section 51 of the SEZ Act gives over riding powers which reads as follows:
“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.”
:-30-: ITA. No: 1330/Chny/2023 23. By virtue of the aforementioned section, the SEZ Act has an overriding effect on all other enactments including the Act. Accordingly, if there is any inconsistency between the Act and the SEZ Act, then SEZ Act shall override. Therefore, in a situation where the assessee’s case is considered to fall within the purview of section 2(m)(iii) of the SEZ Act, considering that the provisions of SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, the same shall override the definition of the term ‘export’ as laid down in section 10AA of the Act. The reliance placed on the following judicial precedents by the assessee is relevant to the present facts of the case.
M/s Midas DFS (P) Ltd. vs. ITO (supra) Solitare Diamonds Exports (182 ITD 474) ACIT vs. M/s Goenka Diamonds & Jewellers Ltd. (ITA No. 509/JP/2011 & M/s Gitanjali Exports Corporation Limited vs. ADCIT (ITA No. 6947 & 6948/Mum/2011) M/s. Diamonds 'R' US vs. CIT (ITA No. 276/Mum/2014) M/s. Ossian Exports vs. ITO (ITA No. 2024/Mum/2015) DCIT vs. M/s Gia Exports (ITA No. 6350/Mum/2016) Zaveri & Co Pvt. Ltd. vs. CIT [2014] 32 ITR(T) 250
It is relevant to note that in the case of Surya Roshni Ltd. vs. Commissioner of Central Excise, Rohtak 2012 (285) ELT 518 (Tri. - Delhi),the CESTATPrincipal Bench, New Delhi while
:-31-: ITA. No: 1330/Chny/2023 deciding as to whether the goods supplied to SEZ as well as SEZ Developers by a DTA unit would be treated as exports for the purpose of Cenvat Credit Rules, 2004, held that section 51 of the SEZ 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 the SEZ Act.
Further, provision similar to section 51 of the SEZ Act, was enacted under the Sick Industrial Companies Act, 1985 (‘SICA’). Relevant extract of section 32 of SICA is reproduced as under:
“32(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the memorandum or articles of association of an industrial company or in any other instrument having effect by virtue of any law other than this Act..” The above view has been inter-alia upheld by the Madras High Court in the case of Tube Investments of India Ltd. vs. CIT [2012] 341 ITR 199.
Further, the term ‘services’ has not been defined in the Act. In this regard, the provisions of section 10AA of the Act refers to the SEZ Act, a reference could be drawn to the definition of the term
:-32-: ITA. No: 1330/Chny/2023 ‘services’ as defined in the SEZ Act and section 2(z) of the same is reproduced below:
“Services means such tradable services which, (i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organization concluded at Marrakesh on the 15 April 1994; (ii) may be prescribed by the Central Government for the purposes of this Act; and (iii) earn foreign exchange.”
Further, the services have been prescribed by the Central Government vide Rule 76 of the SEZ Rules which reads as follows (Refer Page No. 451 of the Paper Book 1):
“The ‘services’ for the purposes of 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,............ distribution services (excluding retail services), ............. transport services,services auxiliary to all modes of transport, pipelines transport.”
We note that the services provided to the foreign customers located outside India, in the nature of warehousing, logistics and handling services shall squarely fall within the ambit of services as defined under section 2(z) of the SEZ Act read with Rule76 of the SEZ Rules. We note that the assessment for the AY 2010-11 was concluded, by allowing the deduction u/s.10AA of the Act by disputing only the quantum of deduction. Further, pursuant to the :-33-: ITA. No: 1330/Chny/2023 assessment order passed for the AY 2012-13, the eligibility to claim deduction under section 10AA of the Act for the AY 2010-11 was directed to be reexamined in the order passed under section 263 of the Act. Thereafter, in the assessment order passed under section 143(3) r.w.s 263 of the Act, the AO only disputed the quantum of deduction and the eligibility to claim deduction under section 10AA of the Act was accepted by the AO. Further, during the course of assessment proceedings for the AY 2017-18, the AO had sought specifically for details pertaining to the deduction claimed under section 10AA of the Act, inter-alia including eligibility of the claim and passed an order accepting the claim of deduction u/s.10AA of the Act without recording any adverse findings. In light of the above discussions, the deduction claimed by the assessee u/s.10AA of the Act is allowable and hence we are of the opinion that the AO and that of the ld.CIT(A) have erred in disallowing the deduction. Therefore, considering the facts and circumstances of the case and following the judicial precedents discussed (supra) we are inclined to set aside the order of ld.CIT(A) and direct the AO to delete the disallowances made u/s.10AA of the Act by allowing the grounds raised by the assessee in this regard.
:-34-: ITA. No: 1330/Chny/2023 28. In the result the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the court on 19th March, 2025 at Chennai.