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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND Dr. M.L. MEENA
PER BENCH:
These cross appeals in ITA Nos.1775/Chny/2016 & 214/Chny/2017 are arising out of the order of learned Commissioner of Income Tax (Appeals)-1, Chennai in ITA No.332/13-14/A-1 dated 20.10.2015 for the assessment year 2009- 10. The assessment was framed by the DCIT, Company Circle I(1), Chennai u/s. 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) for the assessment year 2009-10 vide order dated 28.03.2013.
First, we will take up assessee’s appeal in ITA No.1775/Chny/2016. The only issue in this appeal is as regards to the order of CIT(A) confirming the action of AO in disallowing exemptions claimed u/s.10A of the Act, in regard to export proceeds brought into India after a period of six months from the end of the previous year. For this, assessee has raised various grounds which we need not to reproduce.
Brief facts are that the assessee is a company registered and located in NEPZ Special Economic Zone, involved in manufacture and export of printed circuit boards. The assessee is claiming
3 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 exemption u/s.10A of the Act, in respect of 100% of profits and gains derived from export of articles or things or computer software for a period of 10 consecutive assessment years beginning with assessment year relevant to the previous year in which the unit begins to manufacture or produce such articles or things of computer software. According to AO, the proceeds in respect of export turnover to the tune of Rs.41,63,08,042/- was not realized within six months from the end of the previous year and hence, the same was adjusted from the export turnover for arriving at the amount of exemption claimed u/s.10A of the Act. The assessee explained that the AO has taken the amount of export proceeds not realized incorrectly as Rs.41,63,08,042/-, whereas as per Form No.56F (Note No.4), the amounts outstanding at the end of the year is Rs.22,51,13,218/- pending realization at the end of six months from the year end as against export sales amounting to Rs.41,63,08,042/-. But the AO has taken the incorrect consideration i.e., entire export sales amounting to Rs.41,63,08,042/-. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) confirmed the action of the AO stating that one of the primary condition which needs to be satisfied to avail the
4 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 exemption u/s.10A of the Act includes bringing into India the proceeds of export sales in convertible foreign exchange within six months from the end of previous year or within such further period allowed. He held that the extent to which such sale proceeds are not brought in India have to be excluded from export turnover and to be included in the total turnover. He relied on the decision of ITAT, Mumbai in the case of ACIT vs. M/s. Aftek Infosys Limited, in ITA No.6533/Mum/2007, 3584 & 5058/Mum/2008 and also noted that the issue is covered in assessee‘s own case for the assessment years 2005-06 to 2008-09 in ITA Nos.2200, 2201, 2267 to 2270/Mds/2013, order dated 31.10.2014 against the assessee. The CIT(A) has negated the argument advanced by the assessee that the relevant circulars of RBI have removed this stipulation of 12 months period or extended period and that there is no time prescription of any time limit for realization of export proceeds by eligible units will not be of any benefit to the assessee. He noted that the deduction u/s.10A of the Act can only be allowed in accordance with the provisions of the Act and the Circular of RBI cannot override such provisions. For this, he placed reliance on the decision of ITAT, Cochin in the case of DCIT vs. IBS Software Services P Ltd., 129 ITD 21. Aggrieved, against the action of CIT(A)
5 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 confirming the action of AO, assessee preferred second appeal before the Tribunal.
Before us ld.counsel for the assessee stated that exemption claim of assessee is in regard to the export proceeds pending realization amounting to Rs.22,51,13,218/- which was not received as inward remittance during the stipulated time of six months from the end of the year. The ld.counsel for the assessee took us through the RBI Circular No.28 dated 30.03.2001 and he particularly referred to para 11, regulation 9 which reads as under:- In regulation 9- The existing Regulation is numbered as (1). Sub- Regulation (2) permits the units situated in Special Economic Zones to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export. Reserve Bank has also been empowered to extend the said period beyond twelve months. The Bank has also been empowered to direct, if necessary, that a unit shall cease to be governed by provisions of sub-regulation (2) and in such a case the unit shall be governed by sub-regulation (1).
The ld.counsel also took us through RBI Circular No.91 dated 01.04.2003 and took us through para ‘A’ wherein the treatment of pending realization of consideration of export proceeds and how to give treatment to the same and the same reads as under:- “Realisation of export proceeds In terms of para 11© of AP(DIR Series) Circular No.28 dated March 30, 2001, units situated in Special Economic Zones have been permitted to realize and repatriate to India the full value of goods or software within a period of
6 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 twelve months from the date of export. It has now been decided to remove the stipulation of twelve months or extended period thereof for realization of export proceeds. Accordingly, there shall be no prescription of any time limit for realization of exports made by units in SEZs. However, the units in SEZs will continue to follow the GR/PP/SOFTEX export procedure outlined in Part B of Annexure to A.P. (DIR Series) Circular No.12 dated September 9, 2000 as amended from time to time.
The ld.counsel further drew our attention to RBI Circular No.108 dated 11.06.2013, para 2 which reads as under:- “2. It has now been decided that the units located in SEZs shall realize and repatriate, full value of goods/software/services, to India within a period of twelve months from the date of export. Any extension of time beyond the above stipulated period may be granted by Reserve Bank of India, on case to case basis.”
The ld.counsel stated that Circular No.108 dated 11.06.2013 is applicable for financial year 2013-14 relevant to assessment year 2014-15 but the Circular Nos.28 & 91 are very much relevant for the issue under consideration for the year under consideration. The ld.counsel stated that as per auditor’s certificate in Form No.56F only an amount aggregating to Rs.22,51,13,218/- was pending realization as at the end of six months from the year end and in the cojoint reading of Circular No.28 dated 30.03.2001 and Circular No.91 dated 01.04.2003, it would reveal that the assessee would be entitled to exemption u/s.10A of the Act from six months to one year as the RBI, as competent authority, has relaxed the aforementioned time period of six months vide Circular No.28 and
7 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 thereafter vide Circular No.91, time limit for realization and repatriation of export proceeds, for the exports made by the units in SEZs was extended. The ld.counsel also read out the provisions of section 10A(3) of the Act and read out further Explanation 1 and Explanation 2 for considering the decision of competent authority and deemed export proceeds and stated that CIT(A) has erred in not considering the provisions of section 10A(3) and Explanation 1 for the purpose that RBI is actually the competent authority for issuing directions in regard to realization of export proceeds. Accordingly, he asked the Bench to allow the claim of the assessee.
On the other hand, the ld.CIT-DR, Shri Guru Bashyam, relied on the Tribunals’ order in assessee’s own case by the Chennai Benches in ITA Nos.2200, 2201, 2267 to 2270/Mds/2013, order dated 31.10.2014 and also the decision of ITAT, Mumbai in the case of ACIT vs. M/s. Aftek Infosys Limited, ITA No.6533/Mds/2007, 3584 & 5058/Mum/2008, order dated 20.04.2011.
We have heard rival contentions and gone through facts and circumstances of the case. We noted that the undisputed fact is that as per auditor’s certificate Form No.56F, the aggregate amount of Rs.22,51,13,218/- was pending realization at the end of six
8 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 months from the year end. With respect to the consideration of export proceeds pending realization, whether the assessee is entitled for deduction u/s.10A of the Act in relation of export proceeds not received in convertible foreign currency in India, we have gone through the provisions of section 10A(3) of the Act and the relevant reads as under:- 10A(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.
Explanation 1.—For the purposes of this sub-section, the expression “competent authority” means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.
Explanation 2.—The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.
7.1 We noted from the arguments of the ld.counsel for the assessee that the harmonious and conjoint reading of section 10A(3) read with Explanation 1 & 2 of the Act with RBI Circular No.28 dated 30.03.2001 and Circular No.91 dated 01.04.2003 would reveal that the assessee would be entitled for deduction
9 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 u/s.10A of the Act in respect of export proceeds only in the following conditions:- “a) If the sale proceeds from exports is brought into India in convertible foreign exchange within a period of 6 months from the of the end of the previous year or, within such further period as the competent authority may allow.
b) The Competent authority for the said purpose is referred to as Reserve Bank of India.
c) The Reserve Bank of India, as competent authority, vide Circular No.28 dated March 30th 2001 has relaxed the aforementioned time period for bringing in the export proceeds from 6 months to 1 year and thereafter vide Circular No.91 dated 1st April 2003 time limit for realization and repatriation of export proceeds, for the exports made by units in Special Economic Zones (SEZs), was done away
d) The Reserve Bank of India Vide Circular No. 108 dated 11.06.2013 imposed condition that the units located in SEZs shall realize and repatriate, full value of goods/software/services, to India within a period of twelve months from the date of export. Any extension of time beyond the above stipulated period may be granted by Reserve Bank of India, on case to case basis.
7.2 We noted that for the relevant assessment year no timeline has been referred for realization of export proceeds as per RBI guidelines for SEZ units but the RBI Circular Nos.28 & 91 are applicable and hence, the benefit u/s.10A of the Act should not be denied to the assessee on the ground that there is no realization of export proceeds within six months from the end of previous year. As argued by ld.counsel for the assessee as well as ld.CIT-DR, we have
10 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 gone through the case law of ITAT, Mumbai in the case of M/s. Aftek Infosys Ltd., supra wherein the Tribunal has considered this very issue and allowed the claim of assessee by following the circular of RBI applicable to the provisions of section 10A of the Act, by observing in para 8 as under:- “8. Now coming to the facts of the case, it is fairly admitted by the learned A.R. that the amount in question was brought into India beyond a period of six months from the end of the previous year. He relied on the order passed by the Mumbai Bench of the Tribunal in M/s.Shangold India Ltd. Vs. ITO – ITA No.6041/Mum/2002 dated 6th May, 2009 in which the Tribunal noted that for the assessment year 2004-2005 the Reserve Bank of India, being the competent authority as per sub-section (3), has extended the period. Though this order was passed in the context of section 10A, the learned A.R. contended that the same would be applicable for calculating relief u/s.10B also. On a specific query, the learned A.R. could not place on record the full text of Circular of Reserve Bank of India on which he has placed reliance. The ld. AR candidly accepted that the matter be restored to the file of Assessing Officer with the direction to decide this aspect in the light of the RBI Circular as well as the mandate of sub-section (3) of section 10B in the light of the definition of export turnover in Explanation 2(iii) of section 10B. No serious objection was taken by the learned Departmental Representative. Under such circumstances, we, set aside the impugned order on this issue and direct the Assessing Officer to re-compute the relief u/s.10B by initially not including the sum of Rs.8.11 crores in the export turnover, which was realized beyond the period of six months from the close of the previous year. If however as per RBI Circular there is some scope for the extension of the above said period of six months and the assessee has realized the sale proceeds in foreign exchange within such extended period, then the resultant amount should be included in the amount of `export turnover’ . However the figure of total turnover, in any case, shall continue to include the amount of Rs.811 crores as discussed above.”
11 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 7.3 As pointed out by the ld.counsel for the assessee that in assessee’s own case for assessment years 2005-06 to 2008-09 in ITA Nos.2200, 2201, 2267 to 2270/Mds/2013 supra, the Explanation 1 of section 10A(3) was never brought to the notice of Tribunal and even the RBI’s Circulars were not placed before the Tribunal and hence, the Tribunal reached to a particular conclusion. In view of the above, we are of the view that the assessee is entitled for exemption for an amount of Rs.22,51,13,218/- which was pending realized as at the end of six months from the year end, subject to verification by the AO whether the export proceeds pending realization has been realized within one year from the year end. This can be verified by the AO at the time of giving appeal effect to the order of the Tribunal. This issue of assessee’s appeal is allowed as indicated above and the appeal of the assessee is allowed for statistical purpose.
Coming to Revenue’s appeal in ITA No.214/Chny/2017. The first issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance made in regard to violation of provisions of section 40A(7) and sections 43A & 43B of the Act. For this, Revenue has raised following grounds Nos.2.1 to 2.4:-
12 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 2.1 The learned CIT(A) erred in deleting the disallowance made with regard to issue of infringement of law u/s 40A(7) and sections 43A 43 B of the Act.
2.2 The learned CIT(A) failed to appreciate that the total income should be computed as envisaged under the Act and there can be no concessions or benefits which allow the assessee to violate other provisions of the Act and claim them as deduction.
2.3 The learned CIT(A) failed to appreciate that the disallowances are on account of the infringement provisions contained in the Act and cannot be taken for the benefit of the assessee.
2.4 The learned CIT(A) failed to consider the judgment of the Ahmedabad Tribunal in the case of Rameshbhai C Prjapati (2013) 140 ITD 488 (Ahd) relied on by the Assessing Officer.
We have heard rival contentions and gone through facts and circumstances of the case. We noted that the AO noted from the computation of total income that the assessee has added back the disallowances in the total income of the assessee as under:- Particulars Amount (in Rs.) Disallowance u/s37 – Donations 1,05,501 Disallowance u/s 43B 10,35,690 Disallowance u/s 36(i)(va) 26,93,729 Disallowance u/s 40(a)(ia) 1,50,000 Disallowance u/s.40A(7) 4,79,493 Disallowance u/s 40A(3) 91,496 TOTAL 45,55,909
Accordingly, the AO disallowed the deduction and added the same to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after considering the
13 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 following case laws (i) Ahmedabad bench in the case of ITO v. Computer Force [2011] 136 TTJ 221 (ii) Hyderabad bench of ITAT in the case of Xilinx India Technology Services (P) Ltd v. DCIT, 1813/Hyd/2012 (iii) ITAT, Hyderabad in the case of Datla Constructions Ltd. v. ACIT, ITA No.2077/Hyd/2011, (iv) ITAT, Hyderabad in the case of Batronics India Ltd., v. ACIT, (2012) 47(II) ITCL 361, allowed the claim of assessee by observing in para 3.5 as under:-
3.5 I have carefully considered the facts in issue, the view taken by the AO, the arguments advanced by the appellant and material on record and find that the plea made by the appellant has to be upheld. The provisions u/s 10A provides for a deduction of such profits and gains as are derived by an undertaking from export of articles or things or computer software.......... The incomes which cannot be said to be derived from i.e., which do not have a direct nexus with the activity of the industrial undertaking do not qualify to be reckoned with while computing the deduction. In this case the appellant has correctly pointed that the disallowances preferred by the AO cannot be kept away from the profits and gains of business as the disallowances are under deeming fictions of the Income-tax Act. As per s.29, income and profits and gains of business or profession shall be computed in accordance with the provisions contained in s.30 to 43D. This view is also supported by the decision in Rajkumar Exports (supra) wherein it is held that the section 80IA is part of Chapter VI-A of the Act and the deduction is available from the 'profits and gains of business derived by an undertaking specified therein. The disallowances made by the AO under different sections from 30 to 43D of the Act do not change the nature of the 'income’ that is arrived at. The AO is therefore directed to take into
14 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 consideration the disallowances aggregating Rs.45,55,909 as being part of the profits and gains of business while computing the deductions u/s 10A. This issue of appeal is allowed.” Aggrieved, Revenue came in appeal before the Tribunal.
Before us, the ld.counsel for the assessee filed copy of CBDT Circular No.37/2016 dated 02.11.2016 and stated that the Board has accepted the settled position, as settled by Hon’ble Bombay High Court and Allahabad High Court that the disallowances made u/s.32, 40(a)(ia), 40A(3), 43B etc., of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under chapter VI-A is admissible on the profits so enhanced by the disallowances. The ld.counsel stated that the CBDT Circular No.37 of 2016 categorically states that no appeal should be filed by the Department before the Tribunal on this issue or in case, the same has been filed, the same should be withdrawn or not pressed upon. When this was confronted to ld.CIT-DR, he could not controvert the stated fact position.
15 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 11. After hearing both the sides, we have gone through the CBDT Circular No.37/2016, dated 02.11.2016 which reads as under:- Circular No.37/2016, dated 02-11-2016
Chapter VI-A of the Income-tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia) , 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
The issue of the claim of higher deduction on the enhanced profits has been a contentious However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduct ion of TDS under law, such disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: Income-tax Officer – Ward 5(1) Keval Construction, Tax Appeal No. 443 of 2012, December 10, 2012, Gujarat High Court. (NJRS-2012-LL-1210-45) Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambhamath Tiwari, IT Appeal No. 2 of 2011, September 11, 2015, Bombay High Court.(NJRS-2015-LL-0911-22) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the This view was taken by the court in the following case:
16 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 Principal CIT, Kanpur vs. Surya Merchant s , I.T. Appeal No. 248 of 2015, May 03, 2016, Allahabad High Court. (NJRS-2016-LL-0503-77) The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department. 3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3) , 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result inenhancement of the profits of the eligible business, and that deduction under Chapter VI- A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/ Tribunals may be withdrawn/ not pressed upon. The above may be brought to the notice of all concerned. (K. Vamsi Krishna) ACIT (OSD) (ITJ) CBDT, New Delhi In view of the above Circular, we affirm the order of CIT(A) and this issue of Revenue’s appeal is dismissed.
The second issue in this appeal of Revenue is as regards to the order of CIT(A) directing the AO to exclude the telecommunication expenses from the export turnover as well as from the total turnover while computing the claim of deduction u/s.10A of the Act. For this, the Revenue has raised Ground Nos.3.1 & 3.2 which need not to be reproduced.
17 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 13. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the AO while framing assessment has not reduced the telecommunication expenses of Rs.3,55,33,215/- from the total turnover of the assessee while reducing the same from the export turnover for the purpose of computation of deduction u/s.10A of the Act. The CIT(A) excluded telecommunication expenses from export turnover as well as total turnover while computing eligible deduction u/s.10A of the Act. We noted that this issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. GEM Plus Jewellery India Ltd., ITA No.2426 of 2009, order dated 23.06.2010 and also Special Bench of ITAT, Chennai in the case of ITO vs. Sak Soft Ltd., 313 ITR (AT) 353 (Chennai). Both the decisions categorically state that in case any item is reduced from the export turnover, the same has to be reduced from total turnover. Hence, respectfully following the decision of Hon’ble Bombay High Court in the case of GEM Plus Jewellery India Ltd., supra and Special Bench of ITAT, Chennai in the case of Sak Soft Ltd., supra we confirm the order of CIT(A) and dismiss this ground of Revenue’s appeal.
The next issue in this appeal of Revenue is as regards to the order of CIT(A) allowing 100% of deduction u/s.10A of the Act and
18 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 according to Revenue, the assessee is eligible for claim of deduction to the extent of 50% as the actual date of commencement of production was after 01.04.2003. For this, Revenue has raised Ground Nos.4.1 to 4.3, which need not to be reproduced.
We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the AO was of the view that assessee has commenced commercial production on or after 01.04.2003 and thereby he restricted the claim of deduction u/s.10A of the Act at 50% of the profit. The assessee before CIT(A) filed complete details of commencement and stated that commercial production commenced in the year 1999-2000. The details given are as under:- Sl.No. Event Date 1. Incorporation of the company 03.11.1999 2. Approval from Development Commissioner (DC) of 06.12.1999 Madras Export Processing Zone (MEPZ) for establishment of new undertaking at MEPZ 3. Approval given by DC for Allotment of Unit in 14.02.2000 MEPZ (SDF Unit No.52) 4. Commencement of Commercial Production 15.03.2000 5. Expansion of undertaking to Unit No.53 (leased 04.08.2000 premises) 6. Conversion of MEPZ to a SEZ 01.01.2003 7. Extension of Original Approval referred to in 3 22.03.2003 above for a period of 5 years upto 31.12.2007 (Consequent to Conversion of EPZ into SEZ as in six above) 8 Extension of Approval referred to in 7 above for a 19.02.2008 further period of 5 years upto 31.12.2012
19 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017
In view of the above, the CIT(A) noted that the commercial production started in the year 1999-2000 and thereby he allowed 100% deduction by observing in par 6.4 as under:- 6.4 I have carefully considered the facts in issue, the view taken by the AO, the arguments advanced by the appellant and material on record. The provisions of s.10A availed by the appellant are in respect of provisions existing when it commenced commercial production in the year 1999-2000. On the other hand the provisions of s.10A(1A) restricting the deduction to 50% of the profit applies to such undertakings where commercial production was commenced on or after 1.4.2003 in any SEZ in terms of s.10A/1A) of the Act. In the case of the appellant the assertions made with regard to commencement of production /manufacture is verifiable from the records as listed in para 6.2. Accordingly the assumption made by the AO is erroneous and not supported by facts. Therefore the plea of the appellant that it is eligible for such deduction for a period of 10 years from the commencement of commercial production in the year 1999-2000 relevant to A.Y.2000-2001 is upheld. The AO is directed to amend the order allowing the claim u/s 10A accordingly. This issue is allowed.
We noted that these facts are uncontroverted and actual commercial production started in assessee’s case in the year 1999- 2000, which fact is uncontroverted. Hence, we confirm the order of CIT(A) on this issue and this issue of Revenue’s appeal is dismissed. Appeal of Revenue is dismissed.
20 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 ITA 445/Chny/2016 17. This appeal by assessee is arising out of order of the learned Commissioner of Income Tax (Appeals)-1, Chennai in ITA No.332/13-14/A-I dated 20.10.2015. The assessment was framed by DCIT, Company Circle I(1), Chennai for the assessment year 2010-11 u/s. 143(3) r.w.s 92CA of the Act, vide order dated 27.03.2014.
The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in the matter of exclusion from export turnover on account of sales to other SEZ/EOU units.
Brief facts are that the AO during the course of assessment proceedings noted that the assessee has made sales to other SEZ/EOU units located within India amounting to Rs.29,73,956/- and claimed the same as export turnover for the purpose of claiming exemption u/s.10AA of the Act. The AO disallowed the claim of exemption. Aggrieved assessee preferred appeal before CIT(A).
21 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 20. The CIT(A) confirmed the action of AO by stating that the computation of deduction u/s.10AA of the Act is in respect of profitsand gains derived by the eligible undertaking but the domestic sales of finished goods and raw material to other SEZ/EOU units (to holding companies) as a part of domestic tariff area sales or inter unit sales within the SEZ or units in other EOU units would not qualify for the claim of exemption u/s.10A of the Act, being export sales. He noted that domestic sales of finished goods and raw material to companies, which in turn makes exports amounts to sales made to exporter and not “export” as such. The CIT(A) relied on the decision of Hon’ble High Court of Kerala in the case of CIT v. Electronic Controls and Discharge Systems (P) Ltd 202 Taxman 33 (Ker) and the decision of ITAT, Delhi Bench in the case of T.Two International P Ltd v. ITO, 122 ITD 255. Aggrieved, assessee is in appeal before Tribunal. Aggrieved assessee is in appeal before Tribunal.
Before us, the ld.counsel for the assessee stated that the total sales to SEZ units located in India is Rs.5,36,973/-. He stated that the total sales to SEZ units located in India against Form H is Rs.24,36,984/- thereby total claim made u/s.10AA of the Act is Rs.29,73,956/-. The ld.counsel before us, drew our attention to
22 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 Explanation 1(i) to Section 10AA of the Act, wherein the definition of export turnover is given and the same reads as under:- ‘export turnover’ means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;
He also drew our attention to the definition as given in the Special Economic Zones Act, 2005 which reads as under:- Further, it is also defined that, ‘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;
He further stated As per Section 2(m) The Special Economic Zones Act, 2005, (“the SEZ Act”, “export” means – “ (i).. (ii).. (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.”
21.1 The ld.counsel for the assessee also explained that as per section 53 of SEZ Act, a Special Economic Zone shall be deemed to be a territory outside the customs territory of India for the purposes
23 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 of undertaking the authorized operations. Hence, according to him, the definition of domestic tariff are as per section 2(i) of the SEZ Act also specifically excludes “the areas of the Special Economic Zones”. The ld.counsel for the assessee for this relied on the decision of Hon’ble Madras High Court in the case of Preludesys India Ltd., vs. ACIT, (2021) 318 CTR 287, wherein exactly on identical facts, Hon’ble Madras High Court considered all the cases and held as under:- 28. From the above, it is seen that in Section 10A of the Act, Sub-Section (7B) was inserted and it says that the provisions of this Section shall not apply to any undertaking, being a Unit referred to in Clause (zc) of Section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone. Therefore, the expression occurring in Section 27 of the SEZ Act namely ‘subject to modifications specified in the Second Schedule’ is the modification, which was made in 2006 by introducing Sub-Section (7B) in Section 10A and inserting Section 10AA of the Act.
Therefore, a proper reading of Section 27 of the SEZ Act would mean that the benefit, which will accrue to the assessee will be subject to the modification specified in the Second Schedule and it would mean fulfillment of certain conditions for being entitled to the benefit of the special provision namely Section 10AA of the Act. The provisions of the SEZ Act cannot be ignored because of the fact that the terms ‘developer’, ‘entrepreneur’ and ‘authorized operations’ are not defined under the Income Tax Act, but they are defined under the SEZ Act, which, being a special Statute, will have to be applied to consider as to whether the transaction is an export or a deemed export. This is amply made clear by the provisions of Section 53 of the SEZ Act, which states that a Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the
24 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 customs territory of India for the purposes of undertaking the authorized operations’.
In fact, the CBEC issued a clarification vide Circular No. 1001/8/2015- CX.8 dated 28.4.2015 with regard to rebate of duty on goods cleared from DTA to SEZ, which clearly explains the concept of a deemed export and also states that the provisions of the SEZ Act shall have overriding effect of the provisions of the Income Tax Act in case of any inconsistency.
In the instant case, there was no inconsistency. Rather, the provisions of the Income Tax Act resorts to the provisions of the SEZ Act while considering as to whether the assessee would be entitled for the benefit under Section 10A or 10B of the Act.
It is argued by the learned Senior Standing Counsel appearing for the respondent Revenue that the provision, being a beneficial provision, requires to be strictly interpreted in favour of the Revenue.
However, the law has been settled by the Constitution Bench of the Hon’ble Supreme Court in the case of Dilip Kumar, which has been referred to in the decision of the Hon’ble Supreme Court in the case of Ramnath & Co.
Further, the question before us is as to whether a transaction is an export or a deemed exportand not on the quantum of deduction, which the assessee is entitled to. The Income Tax Act being silent with regard to the concept of deemed export and since, even under Sections 10A and 10B of the Act, the provisions of the SEZ Act are required to be read, the decision of the Hon’ble Supreme Court in the case of Ramnath & Co., will not be applicable to the facts and circumstances of this case.
In the light of the above discussion, we hold that the Tribunal committed an error in not even rendering a finding as to whether the order passed by the CIT(A) was right in law and as to whether the decision in the case of Electronic Controls and Discharge Systems (P) Limited would be applicable to the facts and circumstances of this case. The decision in the case of Electronic Controls and Discharge Systems (P) Limited cannot be applied to the facts of the present case firstly for the reason that the Court, in the said decision, found that the receipt was in Indian currency whereas
25 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 in the instant case, the receipt was routed through the banking channel by convertible foreign exchange. Secondly, the Court had not decided the effect of the provisions of the SEZ Act 2005, the Rules framed thereunder and the Foreign Trade Policy Guidelines issued by the Director General of Foreign Trade as well as the decision of the Kerala High Court in the case of Tata Tea Limited Vs. ACIT [reported in (2010) 189 Taxmann.com 303]. It is not out of place to mention that as against the decision in the case of Tata Tea Limited, a special leave petition was filed by the Revenue before the Hon’ble Apex Court and it was dismissed on the ground of low tax effect in the decision reported in [2020] 115 taxmann.com 347. Therefore, the decision in the case of Electronic Controls and Discharge Systems (P) Limited is distinguishable and cannot be applied to the assessee’s case. For all the above reasons, the assessee is entitled to succeed.
When the same was confronted to ld.CIT-DR, he could not controvert the above fact situation and case law of Hon’ble Madras High Court.
After hearing both the sides and going through the facts of the case, we noted that the total sales to SEZ units located in India is the tune of Rs.24,36,984/- and these are penultimate in the course of exports and the export documents, the assessee is the deemed exporter. Further, it is an undisputed fact that the sale consideration is released in convertible foreign exchange and assessee also claimed exemption u/s.10AA of the Act as the ultimate objective of this provision is promotion of exports from India and accordingly, such sales are considered as export sales for
26 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 the purpose of claiming exemption under this section. As this issue is squarely covered by the decision of Hon’ble Jurisdictional High Court in the case of Preludesys India Ltd., supra, were are of the view that the assessee is entitled for claim of deduction. Accordingly, we allow the claim of assessee.
The second issue in this appeal of assessee is as regards to the order of CIT(A) in disallowing the claim of assessee in regard to provision for marked to market losses.
The AO during the course of assessment proceedings noticed that the assessee has made provision for marked to market losses on the basis of earlier years but the AO disallowed the claim on account of reversal of the provision on the ground that this provision would have been included or reversed during the current year, and will be part of foreign exchange difference in the profit & loss account. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) confirmed the action of AO by observing in para 8 & 9 as under:- 8. I have carefully considered the facts in issue, the view taken by the AO, the arguments advanced by the appellant and material on record. The computation of deduction u/s 10A is to be made from such profit and gains as are derived by an eligible undertaking. Therefore, the profits of the
27 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 undertaking must have a direct nexus to the activity of the undertaking. Profits derived from forward foreign exchange contracts are therefore not eligible for deduction u/s 10A as the contract is in respect of foreign exchange which is not goods manufactured by the assessee or merchandise sold by it. On the contrary, it is merely speculation business and hence not business of the eligible undertaking. Such has also been the view of the Hon’ble ITAT Bangalore in ACIT v K. Mohan & Co.(Exports) P Ltd., 126 ITD 59, Delhi Tribunal in Convergys India Securities P Ltd v. DCIT, 2011- TIOL-352.
On the facts of the case it is seen that the appellant had written back the provision for foreign exchange loss while computing the total income. The writing back of the same would result in finally yielding an inflated claim of deduction to that extent u/s 10A as they do not form the profits of the undertaking eligible for the deduction. In other words, the profits of the undertaking eligible for the deduction would be inclusive of the provision written back. Hence, I do not find merit in the plea raised by the appellant and I am inclined to reject the same and affirm the view taken by the AO. This issue is dismissed. Aggrieved, assessee came in appeal before the Tribunal.
The ld.counsel for the assessee before us filed a summary of provision for marked to market losses adjustment for assessment years 2009-10 & 2010-11. The ld.counsel for the assessee filed a complete chart and the relevant chart reads as under:- Summary of provision for MTM Losses adjustments for AY 09-10 and AY 10-11 (Illustrative only) As per Books Of Accounts as per Companies Act, 1956 Rs in Lacs AY 2009-10 AY 2010-11 Particulars 2,000.00 a Gross Income 1,000.00 750.00 1,500.00 b Expenditure (Before Provision For MTM Loss) As per Books of Accounts as Profit ( Before Provision } [ a-b] 250.00 500.00 c per Companies Act 1956 213.81 - d Less: Provision for MTM Loss 213.81 e Add: Provision for MTM Loss for PY Written f Profit ( After Provision ) as per Books of A/c 36.19 713.81
28 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017
Taxable income as per income Tax Act 1961 g Profit ( After Provision ) as per Books of A/c 36.19 713.81 h Disallow MTM Provision passed During the Year 213.81 - Taxable income as per Income Tax Act 1961 i Allow MTM Provision Reversed During the Year - 213.81 500.00 j Taxable Profit as per Income Tax Act [ g+h-i] 250.00
Note: 1. It is seen that During the FY 2008-09 (i.e AY 2009-10) Provision for MTM losses on account of Forward Contract has been made in the books of accounts as per the Accounting Standards. However while Computing Taxable profit as per income Tax Act the Provision for Loss has been added back to the Book Profit SINCE IT IS A NOTIONAL LOSS Note: 2. It is seen that During the AY 2010-11 Provision for MTM losses on account of Forward Contract which has been made in the Previous Financial Year (i.e FY 2008-09) has been reversed during the FY 2009-10 (i.e AY 2010-11} as per the Accounting Standards. However while Computing Taxable profit as per Income Tax Act the Provision for Loss which had been written back has been reduced from the Book Profit SINCE IT IS A REVERSAL OF NOTIONAL LOSS
Note: 3. In both the years the Taxable profit is same as the book profit before giving effect to the provision of MTM Losses. It is only adjustment required as per companies act (Accounting Standards) for Accrual and Matching Concepts. This is a revenue neutral adjustment because in both the years the taxable profit is same as the Book profit before MTM loss Adjustments.
The ld.counsel stated that the provision is made on the basis of scientific method but could not elaborate what is the scientific method. On the other hand, the ld.CIT-DR relied on the assessment order and that of the CIT(A).
29 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 27. After hearing rival contentions and going through the facts of the case, we noted that the assessee has given some details in chart for the provisions made for market to market losses adjustment made for assessment years 2009-10 & 2010-11, which are illustrative only. We noted that this issue has been dealt with by Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd., vs. CIT, reported in [2009] 314 ITR 62 (SC) wherein the Hon’ble Supreme Court explained that a provision is a liability which can be measured only by using a substantial degree of estimation. The Hon’ble Supreme Court had laid down 3 conditions for recognizing a provision: a. An enterprise has a present obligation as result of past event. b. It is probable that an out flow of resources will be required to settle the obligation and c. A reliable estimate can be made on the amount of obligations
27.1 From the above, we noted that the assessee even now could not produce before us how the provision is made based on historical trend and a reliable estimate as held by the Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd., supra. Hence, we find that the claim made by the assessee is without any basis and the CIT(A) has rightly upheld the action of the AO. We dismiss this issue of assessee’s appeal.
30 I.T.A. Nos. 1775 & 445/Chny/2016 & 214/Chny/2017 28. In the result, the appeals filed by the assessee for assessment year 2009-10 in ITA No.1775/Chny/2016 is allowed for statistical purpose and for assessment year 2010-11 in ITA No.445/Chny/2016 is partly allowed. The appeal filed by the Revenue for the assessment year 2009-10 in ITA No.214/Chny/2017 is dismissed.
Order pronounced in the court on 31st March, 2022 at Chennai. Sd/- Sd/- (महावीर �सह ) (डॉ एम एल मीना) (MAHAVIR SINGH) (Dr. M.L. MEENA) उपा�य� /VICE PRESIDENT लेखा सद�य /ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 31st March, 2022 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. िनधा�रती/Assessee 2. राज�व/Revenue 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.