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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI RAMIT KOCHAR
PER RAMIT KOCHAR, ACCOUNTANT MEMBER:
This is an appeal filed by assessee against appellate order dated 02.08.2017 passed by learned Commissioner of Income Tax (Appeals)-5, Chennai (hereinafter called as ‘the CIT(A)’) in ITA No.74/CIT(A)-5/2014- 15 for assessment year(ay) 2011-12, the appellate proceedings before learned CIT(A) had arisen from assessment order dated 07th March 2014 passed by learned Assessing officer ( hereinafter called “ the AO” ) u/s 143(3) of the Income-tax Act,1961( hereinafter called “ the Act”) .
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The assessee has raised following grounds of appeal in memo of appeal filed with Income Tax Appellate Tribunal , Chennai( Hereinafter called “the tribunal”) :
“1. The order passed by the learned CIT (A) is bad in law and is passed without providing adequate opportunity to the Assessee to represent the matter and therefore liable to be quashed.
The order passed by the learned CIT(A) is based on the written submission made by the assessee on the first hearing date and the matter was adjourned by the learned CIT (A) on various dates, the last date fixed on 27/07/2017, which was sought to be adjourned by Assessee and acknowledged by the department on 27/07/2017. Under such circumstances , the order of CIT (A) without giving the right of audience to the assessee is contrary to the principles of law.
Without prejudice to the above, the CIT(A) has erred in denying the benefit of deduction under section 10AA of the Income tax Act to the Assessee.
Without prejudice to the above, the CIT (A) has erred in applying section 40(a)(i) with respect to payments without respecting the Hon"ble ITAT order in the Assessee’s own case in the earlier year.
The Appellant craves to raise any other appropriate ground at the time of hearing.”
The brief facts of the case are that assessee is in the business of manufacturing Pillows and Cushions. The first issue concerns itself with disallowance of deduction to the tune of Rs. 47,19,678/- u/s.10AA of the 1961 Act by both the authorities below. The assessee in its return of income filed with Revenue claimed deduction u/s 10AA of the 1961 Act to the tune of Rs. 47,19,678/-. The case of assesse was selected by Revenue for framing scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act. The assessee during the course of assessment proceedings conducted by AO u/s 143(3) read with Section 143(2) of the 1961 Act, filed Form No. 56F before the AO, wherein it is stated that initial date of registration of business undertaking of the assessee in MEPZ is 30.08.2000 and date of commencement of manufacture of production is 09.12.2000. Thus, the AO observed that this is 11th consecutive year in which assessee has claimed deduction. The AO observed that assessee
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has claimed deduction u/s 10A for ten consecutive assessment years from ay:2001-01 to ay: 2010-11, while in this year under consideration viz. 2011-12 , the assessee has claimed deduction u/s 10AA of the 1961 Act. The AO observed that as per provisions of Section 10AA of the 1961 Act , the assessee can claim deduction u/s 10AA for 15 consecutive years but as per Explanation in proviso to sub-section (3) of Section 10AA, it is clarified that in case of undertaking which has already availed the benefit before the commencement of the Special Economic Zone Act,2005 , the deduction referred to in Section 10A for ten consecutive assessment years, such unit shall not be eligible for claiming deduction from income under the provisions of Section 10AA of the 1961 Act. The AO show caused assessee why a sum of Rs. 47,19,678/- claimed as deduction u/s 10AA of the 1961 Act by the assesse should not be disallowed. The assessee in reply thereof submitted before the AO as under:
“We are giving below a date chart of claim made by the assessee company in respect of its operations in MEPZ unit. The deduction claimed varied based on the amendments made in the Income Tax Act.
Date of incorporation MEPZ unit-February 2000
Date of commencement of production – December 2000
Particulars Deduction Remarks Claim made under section 100% deduction for By application of this 10A(1) Assessment years 2001-02, provision, the company 2002-03, 2003-04 (3 years) should have claimed 100% deduction for 10 assessment years till assessment year 2010-11 Date of conversion of MEPZ 01-01-2003 unit into sez unit Introduction of section With effect from assessment 10A(1A) by Finance Act, year 2004-05 2003 Claim made in accordance 100% deduction for with Sec.10A(1A) assessment years 2004-05 and 2005-06 (4th and 5th year) and Introduction of new section With effect from assessment 10AA by Special Economic year 2006-07 onwards Zones Act, 2005 Claim made by the assessee 50% from assessment year 2006-07 onwards till
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assessment year 2010-11 (5 years) and 50% from assessment years 2011-12 onwards for the balance period of 5 years under sec.10AA
The explanation, as referred to in your notice reads as fallows-
Explanation- For the removal of doubts, it is hereby declared that an undertaking, being the unit which had already availed, before the commencement of the special economic zones act, 2005, the deduction referred to in section 10A for ten consecutive assessment years. Unit shall not be eligible for deduction from income under this section.
The period of ten consecutive Assessment years need to be seen only as before commencement of the special economic zone Act 2005.
As on the commencement of Assessment year 2006-07, which is the effective date of operation of sec.10AA, the unit has just claimed deduction under section 10A only for five assessment years and therefore, is entailed for deduction under section 10AA.
The history of introduction of section 10AA may be recalled. The special economic zone act 2005 ('the SEZ Act) has inserted the above section 10AA into income tax Act 1961 (as an external Act.) the most important fundamental legal principal that governed through the SEZ Act was that the SEZ Act of 2005 override the provisions of the other taxing statutes including the income tax Act, the Central Excise Act and the Customs Act, and the taxing Statute relevant to service tax.
This legal position was made very clear by section 51 of the SEZ Act, which stated as under.
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.
The SEZ Act, 2005 (28 of 2005) vide section 27 stated:
The provisions of the income-tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the developer or entrepreneur for carrying on the authorized operations in a special Economic Zone or unit subject to the modifications specified the second schedule.
This implied that provisions of Income-tax Act, 1961 would apply with certain modifications in relation to developers and entrepreneurs as defined in the SEZ Act, 2005. There were doubts expressed by some tax counsels that there were certain lacunas, as SEZ Act provided deferent expressions (the second schedule of the SEZ Act clearly stated Modifications to the Income-tax Act, 1961 while the third schedule of the SEZ Act states 'Amendment to certain enactments, which in legal parlance are not at par). The counsels discouraged applying directly the provisions of section 10AA as introduced by the said SEZ Act unless the section stands judicially noticed under income tax Act by a finance bill. The Assesses, based on the counsels advise, therefore, placed its claim of sec 10AA, under the pari material provisions of Sec.10A(1A) originally. It may be noted that only through the union budget for 2007-08, the finance Act noted the amended
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provisions of SEZ Act, while the Hon'ble Finance Minister, Mr P.Chidambarom, went ahead and provided for certain amendments therein through Income tax Act to the said section 10AA (without making any amendment in the said section under the SEZ Act),
The facts to be noted are:-
Even though the company should have claimed 100% for 10 Assessment year till A.Y 2010-11. However in view of change in the character of Tambaram MEPZ into SEZ Zone, the assessee claimed 100% deduction for 5 assessment year and 50% deduction thereafter for the balance 10 years. No excess deduction has been ever claimed".
3.2 The AO after considering reply filed by assessee , rejected claim of the assessee,vide assessment order dated 07.03.2014 passed by AO u/s 143(3) of the 1961 Act, by holding as under: “Assessee is not eligible for deduction u/s.10AA at all since, as per section 10AA (1), the unit is eligible for deduction, only if the unit begins to manufacture or produce articles or things or provide any services during the previous year relevant to A.Y. 2006-07 onwards. In the present case the assessee has began manufacture in previous year relevant to A.Y. 2001-02. Therefore, the assessee is not eligible to claim deduction under section 10AA.
Further, provisio to Section 10AA (3) reads as under.,
Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1).
Explanation—For the removal of doubts, it is hereby declared that on undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section:
Therefore, first proviso to Section 10AA (3) clearly states that the deduction is only for the unexpired period and Explanation below such proviso is to clarify the proviso ie., if a unit has already availed deduction in 10 years, such unit will not be eligible at all. An Explanation will only clarify the provisions of the Act and it will not confer any additional benefit/make new levy.
Further, Second provisio to Section 10AA (3) reads as under,
Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which
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the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone.
Therefore, Second Proviso to sec.10AA(3) clearly states that, in the case of conversion of FTZ or EPZ to SEZ, period of 10 years will be counted from the previous year in which the unit begins to manufacture or produce articles or things - which is A.Y. 2001-02 in this case.
Further, third provisio to Section 10AA (3) reads as under
Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006.
Thus the, Third proviso is only to clarify the second proviso i.e., if a unit has already availed deduction in 10 years, such unit will not be eligible at all.
Therefore, in view of the discussion as above, it is ascertained that the assessee is not eligible to claim deduction under section 10AA and the claim of the assessee for deduction under section 10AA is rejected.”
The assessee being aggrieved by an assessment order dated 07.03.2014 passed by AO u/s 143(3) of the 1961 Act , filed an first appeal before Ld.CIT(A) , who was pleased to dismiss appeal of the assesse, vide appellate order dated 02.08.2017 passed by learned CIT(A). The contentions raised by assessee during appellate proceedings before learned CIT(A) and decision of learned CIT(A) are reproduced hereunder: “5. During the appellate proceedings, the AR of the appellant filed written submission on 11.04.2017, as under: "A. Assessee started a unit in MEPZ on 21.02.2000 and commenced production in beginning of the financial year 2001. Assessee claimed deduction under section 10A of the Income Tax Act @100% of profits derived from exports for the Assessment Years 2001-02, 2002-03 (2 Years) The unit in MEPZ has been located into Special Economic Zone (SEZ Zone) by reason of conversion of MEPZ from export processing Zone status into SEZ Zone with effect from 01.01.2003. Consequently, the Assessee continued to claim deduction under Sec.10A read with the provisions of Sec. 10A(1A) for Assessment Year 2003-04 (90%), 2004-05 and 2005-06 (3 YEARS). Thus, in total for 5 assessment years 100% deduction was claimed. B. In the meantime a new Act, namely, The Special Economic Zones Act, 2005 (SEZ ACT) was introduced and it modified income Tax by introducing a new section 10AA providing for "Special provisions in respect of newly established Units in Special Economic Zones". The said newly introduced Sec.10AA was inter alia provided for the following: i) Under sub section (3) the following second proviso: Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone
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by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone: ii) Under sub section (3) the following first proviso: Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1). iii) Correspondingly a new sub-section (7B), as reproduced below, was also inserted by the SEZ Act under Section 10A. 10A(7B) 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.
C. BUT NO SUCH AMENDMENT WAS INTRODUCE BY THE FINANCE BILL IN INCOME TAX CORRESPONDING TO THE ABOVE AMENDMENY BY SEZ ACT, Confused by the complexities of two Acts (SEZ Act and Income Tax Act) governing the deduction for the SEZ Unit, based on legal advise, the Assessee company continued to claim deduction under Sec.10A(1a) for its MEPZ unit, which read as follows: SEC 10A(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April 2003, in any special economic zone, shall be- (i) Hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty percent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) For the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Allowance Reserve Account") to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B).
Based on above provisions, the Assessee has claimed exemption of 50% of the profits under section I0A for the Asst. Years 2006-07 & 2007-08 (2 years) and continued to claim for the next three Asst. year 2008-09 to 2010-11 a deduction of 50% of exports profits have been claimed after creating "Special economic Zone re-investment allowance reserve account" to the extent required under the Act, (3 years).
Therefore, a period of 7 years was claimed (5 years 100% and next 2 consecutive assessment years at 50% and for the next 3 consecutive assessment years at 50% by creating suitable reserve account called the "Special Economic Zone Re-investment Allowance Reserve Account".
The tax department also accepted the above deduction and assessed the income accordingly.
D. The Assessee was advised legally about the precedents accepting the supremacy of Section 51 of the SEZ Act.
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"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 effective by virtue of any law other than this Act."
For every Sec.10A Unit, the deduction is allowed at 100% for 10 years of its profits from Section 10A unit and by reason of conversion of MEPZ from export processing Zone status into SEZ zone with effect from 01.01.2003, the assessee stood benefited by the deduction at the rate 100% of its profits from the SEZ unit for 5 years an 50% of its profits from the SEZ unit only for the next 2 years and 50% of its profits from the SEZ unit only for the next 3 years, by fulfilling the conditions by the company. Thus, having parallely complied with an alternate claim under the provisions of pari materia Sec.10AA, the assessee shall could continue to get the benefit of 50% (Subject to fulfilling the conditions, if any, by the Assessee company).
The department refused to give the above benefits after having accepted 50% deduction in the earlier assessment years 2006-07 to 2010-11, in spite of non-existence of Sec.10A(1A).
The petitioner seeks suitable relief on 'just cause' from Hon'ble CIT(A) 1. That the assessee company be entitled for deduction at 50% of its profits from the SEZ unit in terms of Section 10AA for the Assessment year 2011-12 onwards. 2. If the Department were to contend that the deduction granted from Assessment years 2001-02 to Assessment year 2010-11 were under the normal provisions of 5ec.10A(1) without application of Sec.10A(1A), the Department should have allowed 100% deduction for all these 10 years. Having accepted the stand of the Assessee of restricted 50% deduction from AY 2006-07 onwards, the assessee is not to be denied the benefit of deduction from AY 2011-12 onwards for the balance period as per Sec.10AA.
The Assessee should be entitled for deduction alternatively and only under Sec.10AA in respect of al! these assessment years 2006-07 to 2010-11 and the Department having accepted the deduction at the rate of 50% of its profits from the SEZ unit (in terms of a non existing provision under section 10A(1A) which has been nullified by Section 10A (7B)) cannot deny a rightful deduction under Sec.10AA of 50% of its profits from the SEZ unit for the balance 5 assessment years from Assessment year 2011-12 onwards." 6. I heard the contentions of the AR and perused the grounds of appeal, assessment order, written submission and material available on record. My observations in respect of the grounds raised by the appellant are as follows: 7. Disallowance of deduction u/s.10AA: 7.1 In the return of Income for A.Y. 2011-12, the assessee company claimed deduction u/s.10AA for a sum of Rs.47,19,678/-. The assessee claimed deduction under section 10A for ten consecutive assessment years from AY 2000-01 till AY 2010-11 and in the A.Y 2011-12 the assessee claimed deduction under section 10AA.
The Assessing Officer rejected the claim of the assessee for deduction u/s 10AA as the assessee had already availed deduction for 10 years.
7.2 In the grounds of appeal the appellant contested as under: "2. The Learned Assessing Officer erred in law in disallowing a sum of Rs.47,19,678/- under section 10AA on the grounds that an undertaking which has already availed the benefit before the commencement of the SEZ Act 2005, the deduction referred to in section 10A for the ten consecutive assessment years, such unit shall not be eligible for deduction from income in this section. 3. The company has claimed deduction under section 10AA on the following grounds: The company was incorporated in February 2000 in Tambaram, MEPZ Chennai, which was later converted into SEZ and commenced the production in December 2000. The Company had claimed deduction under the Income Tax Act in the following manner: a. 100% for the assessment years 2001-2002 to 2005-2006 (five years) under section 10A, b. 50% from 2006-2007 to 2010-2011 (5 years) deduction. The company was rightfully eligible for 100% deduction as per section 10A(1) till the assessment year 2010-2011.
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In the meanwhile, the Special Economic Zones Act 2005 inserted section 10AA effective from 01/04/2006 and as per proviso to section 10AA, 50% deduction was claimed by the company from assessment year 2006-2007 till 2010-2011 (5 Years) and 50% from assessment years 2011-2012 for five years.
Explanation to Section 10A states that, For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section. The period of ten consecutive years NEED TO BE SEEN ONLY AS BEFORE COMMENCEMENT OF THE SPECIAL ECONOMICZONE ACT 2005.
As on the commencement of Assessment year 2006-07, which is the effective date of operation of Sec.10AA, the Unit has just claimed deduction under Section 10AA only for five Assessment years and therefore, is entitled for deduction under Section 10AA.
The history of introduction of Section 10AA may be recalled. The Special Economic Zone Act 2005 ("the SEZ Act) has inserted the above Section 10AA into Income Tax Act 1961 (as an external Act), The most important fundamental legal principle that governed through the SEZ Act was that the SEZ Act of 2005 override the provisions of the other taxing statutes including the Income tax Act, the Central Excise Act and the Customs Act, and the taxing Statute relevant to service tax.
This legal position was made very dear by Section 51 of the SEZ Act, which stated as under; "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".
The SEZ Act, 2005 (28 of 2005) vide section 27 stated: The provisions of the Income-tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule".
This implied that provisions of Income-tax Act, 1961 would apply with certain modifications in relation to Developers and entrepreneurs as defined in the SEZ Act, 2005. There were doubts expressed by some tax counsels that there were certain lacunas, as SEZ Act provided different expressions (the Second Schedule of the SEZ Act clearly stated "Modifications to the Income-Tax Act 1961" while the Third Schedule of the SEZ Act states "Amendment to certain Enactments", which in legal parlance are not at par). The counsels discouraged applying directly the provisions of Section 10AA as introduced by the said SEZ Act unless the Section stands judicially noticed under Income Tax Act by Finance Bill.
The Assessee, based on the counsel's advise, therefore, placed its claim of Sec 10AA, under the pari rnateria provisions of Sec. 10AA(1A) originally. It may be noted that only through the Union Budget for 2007-08, the Finance Act noted the amended provisions of SEZ Act, while the Hon'ble Finance Minister Mr. P. Chidambaram, went ahead and provided for certain amendments therein through Income Tax Act to the said Section 10AA (without making an amendment in the said section under the SEZ Act).
By virtue of explanation and provisos to section 10AA of Income Tax Act the deduction under this section has been made applicable to the units located in Special Economic Zone from the assessment year 2006-2007 provided the unit has not claimed deduction under section 10A(1) for the period of 10 years.
The Learned Assessing Officer failed to give an opportunity to the appellant, before concluding, that the payments made towards export sales commission, were towards fee for technical services."
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7.3 In the written submission filed on 11/4/2017 the A.R stated that the unit in MEPZ had been located into Special Economic Zone (SEZ Zone) by reason of conversion of MEPZ from export processing Zone status into SEZ Zone with effect from 01.01.2003. 7.4 Proviso and Explanation to section 10AA(3) reads as under: Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub- section (1). Explanation.—For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section : 7.5 The assessee claimed deduction under section 10A for ten consecutive assessment years from AY 2000-01 till AY 2010-11. Hence the disallowance of claim of deduction claimed u/s 10AA is upheld.”
Aggrieved by an appellate order dated 02.08.2017 passed by learned CIT(A), the assessee has filed an appeal before the tribunal. The learned counsel for assessee opened arguments and submitted before us that assessee is an industrial undertaking engaged in the business of manufacturing of pillows and cushions. The assessee is located in SEZ and claimed deductions u/s.10AA of 1961 Act. Our attention was drawn to Proviso to Sec.10AA(3) and further to Sec.10A(1A) and Section 10(7B) of the Act, and it was submitted that assessee was allowed deduction u/s.10A of the 1961 Act for 10 years from ay:2001-02 to 2005-06 @ 100% of profits from export of goods and from for ay: 2006-07 to 2010- 11 @50%. It was submitted that assessee is entitled for deduction u/s.10AA of the 1961 Act from ay: 2011-12 for a period of 5 years . It was submitted that impugned ay before the Bench is 11th year and assessee has been denied deduction u/s.10AA of 1961 Act. It was submitted that deduction u/s 10AA to the tune of 50% of profits derived from exports is to be allowed to the assessee. It was also submitted that Ld.CIT(A) has allowed deduction for ay: 2012-13 and 2013-14. The said appellate orders are placed on record before the Bench, wherein Ld.CIT(A) vide appellate order dated 16.05.2017 for ay: 2012-13 has held in favour of assessee , by holding as under: “9. I have carefully considered the facts, order of the AO, submissions made by the appellant and material on record. The dispute relates to the claim of deduction
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u/s 10A and subsequently u/s 10AA of the I.T.Act by the appellant. The appellant originally carried out the eligible business from its operation in the MEPZ unit. The MEPZ unit subsequently was converted into a SEZ unit from 1.1.2003. Following the same the appellant claimed 100% of the profits and gains derived from the industrial undertaking for the period of initial 3 years i.e., from the date when it began to manufacture or produce the article or thing. Therefore 100% of deduction of the profits and gains was claimed for A.Y. 2001-02, 2002-03 & 2003- 04 (1st, 2nd and 3rd year respectively). In the meanwhile, subsequent to conversion of the MEPZ to SEZ and introduction of s.10A(1A) by Finance Act, 2003 w.e.f. A.Y. 2004-05 the assessee would be eligible for 100% deduction for the A.Ys 2004-05 and 2005-06 (the 4th and 5th year respectively). Thereafter availing the benefit offered in new section 10AA applicable to Special Economic Zones (Special Economic Zones Act, 2005) the appellant claimed 50% of the eligible profits as deduction for the A.Y. 2006-07 onwards till A.Y. 2010-11 (5 years) and again 50% from A.Y. 2011-12 onwards for the balance period of 5 years u/s 10AA.
In the case of the appellant it is an undertaking which had already availed deduction u/s 10A before the commencement of the Special Economic Zones Act, 2005. For this bar to apply the period of 10 consecutive assessment years need to be seen only as before / prior to the commencement of the Special Economic Zone Act, 2005. As on the commencement of the assessment year 2006-07, which is the effective date of operation of S.10AA, the unit had claimed u/s 10A only for 5 assessment years as stated above and therefore claimed for the deduction u/s 10AA thereafter. In sum, the appellant was eligible to avail deduction of 100% of the profits and gains of the industrial undertaking for 10 assessment years till A.Y. 2010-11. However, in view of change in the character of Tambaram MEPZ into SEZ Zone, the appellant claimed 100% deduction for 5 assessment years initially and 50% of the deduction in the following 10 assessment years thereafter.
As regards the objection raised by the AO in page 6 of the assessment order with regard to the bar placed by the second proviso of s.10AA(3) the same does not appear to be in all fours. It is so for the reasons that Sec.10A(7B) introduced with effect from 10.2.2006 provides that any undertaking which had already begun manufacturing will not be eligible for the deductions u/s.10A from the AY 2006-07 onwards. In such cases, the provisions of sec.10AA will apply. The first proviso to the provisions of Sec.10AA (13) provides that in such cases for the unexpired period of 10 consecutive years and thereafter it shall be eligible for deduction u/s.10AA. The second proviso provides that in such cases, the period of eligibility shall be reckoned form the AY relevant to the previous year in which such units started manufacturing. While in the case of the appellant, the manufacturing started in the period relevant to AY 2001-02. Therefore , up to AY 2005-06 the provisions of Sec.10A would be applicable to it and thereafter the provisions of sec.10AA would follow for the unexpired period.
As per the provisions of Sec.10AA, the eligible deduction is given being 100% for first five years, 50% for next five years, 50% for the remaining five years, subject to the condition prescribed therein, such as, creation of reserve etc. There is no dispute or finding from the AO that the appellant has not fulfilled those conditions. Therefore, the appellant shall be eligible for deduction u/s.10A from AY 2001-02 to 2005-06 (5 years). Thereafter 50% u/s.10AA for five years followed by 50% for next five years subject to fulfillment of conditions. It is pertinent to note that the third proviso to sec.10AA (3) bars allowing deduction u/s.10AA to those unit which have already availed deduction u/s.10AA for ten years prior to AY 2006-07. The appellant in this case has not completed ten years of claim as on AY
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2Q06-07 and therefore the bar shall not apply to it. To sum up, the appellant is eligible for deduction u/s.10A and subsequently u/s.10AA as discussed above.”
Our attentions was also drawn to appellate order dated 16.05.2017 passed by learned CIT(A) for ay: 2013-14 , wherein deduction u/s 10AA of the 1961 Act was allowed to the assessee. Presently, we are concerned with ay: 2011-12 which is the eleventh year in which the assesse is claiming deduction and being first year when the deduction u/s 10AA is claimed by the assesse. The learned CIT(A) held against assesse for ay: 2011-12 while for ay: 2012-13 and 2013-14, the learned CIT(A) has adjudicated the same issue in favour of assessee, which we have duly noted above.
The Ld.DR, on the other hand, relied upon orders of authorities below and submitted that assesse is not eligible for deduction u/s 10AA of the 1961 Act for impugned ay under consideration . It was submitted that assesse has already availed deduction u/s 10A of the Act for a period of 10 consecutive assessment years and now assesse is not eligible to claim deduction u/s 10AA of the 1961 Act for further period of five years as the assessee has rightly claimed deduction for ten consecutive assessment years beginning from ay: 2001-02 to 2010-11 u/s 10A of the 1961 Act which is the section under which assesse was actually entitled for deduction for ten consecutive ay’s beginning from ay: 2001-02 and now assessee cannot claim deduction u/s 10AA of the 1961 Act.
We have carefully considered rival contentions and perused material placed on record including orders of the authorities relied upon. We have observed that assessee is in business of manufacturing and export of pillows and cushions. It is observed that initial date of registration of the business undertaking of the assessee for manufacturing of pillows and cushion in Tambaram MPEZ was 30.08.2000 and date of commencement of manufacturing of aforesaid products was 09.12.2000. The assessee
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claimed deduction u/s 10A effective from ay: 2001-02 from profits derived from export of pillows and cushions manufactured from its unit located in Tambaram MEPZ. Later, there was conversion of assessee’s unit located in Tambaram MEPZ into an SEZ unit effective from 01.01.2003. The assessee had claimed and was allowed deduction u/s 10A of the 1961 Act by Revenue for period commencing from ay: 2001-02 to 2010-11 viz. ten consecutive assessment years , while in the impugned ay: 2011-12 which is under consideration before us is the eleventh year of claim of deduction by the assessee in which assessee had claimed deduction u/s. 10AA of the 1961 Act in the return of income filed with the Revenue. This claim of deduction u/s 10AA of the 1961 Act for impugned ay: 2011-12 was concurrently denied/disallowed by both the authorities below viz. AO and learned CIT(A) and now we are seized of the matter and are now called upon to adjudicate this issue as to whether assessee will be entitled for deduction u/s. 10AA of the 1961 Act for ay: 2011-12 , keeping in view of the fact that assessee is now an SEZ unit effective from 01.01.2003 and has claimed and was already allowed deduction u/s 10A of the 1961 Act by Revenue for ten consecutive assessment years beginning from ay: 2001-02 to ay: 2010-11. It is an undisputed fact between rival parties that assessee’s unit was set up and commenced manufacturing of pillows and cushions in Tambaram MEPZ in previous year relevant to ay: 2001-02 and assessee was entitled for deduction u/s.10A of 1961 Act commencing from ay: 2001-02 onwards. It is only on 01.01.2003, the Tambaram MEPZ unit of the assessee was converted as SEZ unit but assessee continued to claim benefit of deduction u/s 10A of the 1961 Act for a total period of consecutive ten assessment years commencing from ay: 2001-02 to 2010-11 , which deduction was in-fact undisputedly also allowed by Revenue. It is claimed by assessee before us that for the first five years, deduction to the tune of 100% of profits derived from export of pillows and cushions were claimed and allowed by Revenue u/s 10A of the 1961 Act, while for next five years, deduction @50% of profits derived from
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export of pillows and cushions were claimed by assessee and was allowed by Revenue u/s 10A of the 1961 Act. The assessee has also claimed that it created Reserves as are contemplated u/s 10A(1A)(ii) of the 1961 Act for the 8th-10th year of its claim of deduction u/s 10A of the 1961 Act. Thus, in nutshell the assessee submitted that owing to conversion of its EPZ unit to SEZ unit effective 01.01.2003, it did not claim deduction of 100% of profits derived from export of pillows and cushions for ten consecutive assessment year as is contemplated u/s 10A(1) of the 1961 Act but the assessee relied upon and complied with provisions of Section 10A(1A) of the 1961 Act to claim deduction from the profits on export of pillows and cushions of 100% of profits derived from export of pillows and cushions for first five years and thereafter claimed deduction @50% of profits derived from export of pillows and cushions . This deduction as claimed by assessee u/s 10A of the 1961 Act were allowed by Revenue until ay: 2010-11. It is only in this eleventh year viz. impugned ay: 2011-12 with which we are presently seized with, the assessee invoked provisions of Section 10AA of the 1961 Act for the first time to claim benefit of deduction to the tune of 50% of the profits derived from export of pillows and cushions, which claim of the assessee was repelled by Revenue authorities both by AO as well learned CIT(A) and said deduction claimed by assessee u/s 10AA stood disallowed for impugned ay: 2011-12. However, it is matter of record that learned CIT(A) was pleased to allow benefit of deduction u/s 10AA to the assessee for immediately succeeding ay’s: 2012-13 and 2013-14 while adjudicating first appeal of the assessee. This is purely a legal issue which requires interpretation of law applied to as facts are undisputed and admitted and there is no dispute so far as facts are concerned between rival parties. The question of law which is to be adjudicated is as to whether the assessee on facts and circumstances of the case is entitled to deduction u/s 10AA of the 1961 Act for impugned ay: 2011-12 which is eleventh year of commencement of production. Before we proceed further it is important to reproduce relevant provisions
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of Sec. 10A and 10AA of the 1961 Act as were in force from time to time during the relevant period(s).
7.2 Section 10A of the 1961 Act as was existing in the statute immediately before its substitution by Finance Act, 2000 w.e.f. 01.04.2001 , which reads as under immediately prior to ay: 2001-02: “[Special provision in respect of newly established industrial undertakings in free trade zones.1
10A. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:—
[(i) it has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year—
(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park;]
[(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;]
(ii) it is not formed by the splitting up, or the recon-struction, of a business already in existence:
Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the pur-poses of clause (ii) of that sub-section.
[(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any [ten] consecutive assessment years, beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things.
(4) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year
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immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—
(i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the industrial undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduc-tion;
(ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) 8 [or sub- section (3)] of section 74 and no deficiency referred to in sub-section (3) of section 80J, in so far as such loss or deficiency relates to the business of the industrial undertaking, shall be carried forward or set off where such loss, or, as the case may be, deficiency relates to any of the relevant assessment years;
(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I [or section 80-IA] [or section 80-IB] or section 80J in relation to the profits and gains of the industrial under-taking; and
(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the industrial undertaking shall be computed as if the assessee had claimed and been actually allowed the deduc-tion in respect of depreciation for each of the relevant assess-ment years.
(5) Where an industrial undertaking in any free trade zone has begun to manufacture or produce articles or things in any previous year relevant to the assessment year commencing on or after the 1st day of April, 1977, but before the 1st day of April, 1981, the assessee may, at his option, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for the assessment year commencing on the 1st day of April, 1981, furnish to the 11 [Assessing Officer] a declaration in writing that the provisions of sub-section (1) may be made applicable to him for each of the relevant assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1981, and if he does so, then the provi-sions of sub-section (1) shall apply to him for each of such relevant assessment years and the provisions of sub- section (4) shall also apply in computing the total income of the assessee for the assessment year immediately succeeding the last of the relevant assessment years and any subsequent assessment year.
(6) The provisions of sub-section (8) and sub-section (9) of section 80-I shall, so far as may be, apply in relation to the industrial undertaking referred to in this section as they apply for the purposes of the industrial undertaking referred to in section 80-I.
(7) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, [before the due date for furnishing the return of income under sub-section (1) of section 139] [***], furnishes to the [Assessing] Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.
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[(8) References in sub-section (5) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.]
Explanation.—For the purposes of this section,—
(i) “free trade zone” means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section;
[(ii) “relevant assessment years” means the ten consecutive assessment years referred to in sub-section (3);]
[(iii) “manufacture” includes any—
(a) process, or
(b) assembling, or
(c) recording of programmes on any disc, tape, perforated media or other information storage device;]
[(iv) “electronic hardware technology park” means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce;
(v) “software technology park” means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce;
(vi) “produce”, in relation to articles or things referred to in clause (i) of sub-section (2), includes production of computer programmes.]”
7.3 Section 10A of the 1961 Act as was substituted by Finance Act, 2000 w.e.f. 01.04.2001 and which stood applicable to assessee for the first year of its commencement of production for ay: 2001-02, reads as under:- ‘10A. Special provision in respect of newly established undertakings in free trade zones, etc.
10A (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in
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this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years:
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking was first set up in such free trade zone or export processing zone:
Provided also that the profits and gains derived from such domestic sales of articles or things or computer software as do not exceed twenty-five per cent of total sales shall be deemed to be the profits and gains derived from the export of articles or things or computer software :
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.
(2) This section applies to any undertaking which fulfils all the following conditions, namely:—
(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year—
(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;
(c) commencing on or after the 1st day of April, 2001 in any special economic zone;
(ii) it is not formed by the splitting up, or the recon-struction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circum-stances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation. —The provisions of Explanation 1 and Explanation 2 to sub- section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (ii) of that sub-section.
(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
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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-sec-tion 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.
(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee.
(5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form, alongwith the return of income, the report of an account-ant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, —
(i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in rela-tion to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduc-tion;
(ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub- section (3) of section 74 in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years;
(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and
(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.
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(7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.
(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years.
Explanation 1—For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year in which the under-taking was set up, the company shall be presumed to have trans-ferred its ownership or the beneficial interest in the undertak-ing.
Explanation 2—For the purposes of this section,—
(i) "computer software" means,—
(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means;
(ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;
(iii) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technolo-gy Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(iv) "export turnover" means the consideration in respect of export of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
(v) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which
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the Central Government may, by noti-fication in the Official Gazette, specify for the purposes of this section; (vi) "relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section; (vii) "software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Indus-try; (viii)"special economic zone" means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.’
7.4 Thus as could be seen that Finance Act, 2000 itself substituted Section 10A of the 1961 Act w.e.f. 01.04.2001 wherein it was , inter-alia, provided that in case units which are initially located in export processing zones or in free trade zones are subsequently located into an SEZ owing to conversion of such free trade zone or export processing zone into an special economic zone(SEZ) , then period of ten consecutive assessment years shall be reckoned from assessment year relevant to the previous year in which undertaking was first set up in such free trade zone or export processing zone. Similarly clause (c ) was introduced in Section 10A(2) by Finance Act,2000 effective from 01.04.2000 providing that benefit of deduction u/s 10A shall be applicable to undertaking which has begun or begins to manufacture or produce articles or things or computer software during previous year relevant to assessment year commencing on or after 1st day of April 2001 in special economic zone(SEZ). So , in the year 2000 itself, when SEZ Act, 2005 was not even in statute, provision’s were introduced in the 1961 Act in Section 10A itself for granting benefit of deduction u/s 10A to the units which are located in special economic zones(SEZ) and at that time it was through a notification in official gazette, Central Government was notifying SEZ’s. Section 2(k) read with Section 2(za) of the Special Economic Zone Act, 2005 recognizes such existing SEZ which were in existence on or before the commencement of SEZ Act, 2005. It was on 01.01.2003, the assessee unit was converted into an SEZ unit. In the meantime Finance
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Act, 2002, further amended provisions of Section 10A of the 1961 Act and provisions of Section 10A of the 1961 Act as were applicable for ay : 2003-04 are reproduced hereunder: “[Special provision in respect of newly established undertakings in free trade zone, etc.
10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone :
1[***]
The following third proviso shall be inserted to sub-section (1) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 :
Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.
The following sub-section (1A) shall be inserted after sub-section (1) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 :
(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two assessment years.
(2) This section applies to any undertaking which fulfils all the following conditions, namely :—
(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year—
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(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;
(c) commencing on or after the 1st day of April, 2001 in any special economic zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
(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.
2[(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.]
(5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form 3, alongwith the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—
(i) section 32, section 32A, section 33, section 35 and clause (ix) of sub- section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii)
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of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction;
(ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years;
(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and
(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.
(7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.
(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years.
The following sub-section (9A) shall be inserted after sub-section (9) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 :
(9A) Notwithstanding anything contained in sub-section (9), where as a result of reorganisation of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to the company, as the same would have been allowed to such firm or sole proprietary concern, as the case may be, if the reorganisation had not taken place:
Provided that,—
(a) in the case of a firm the aggregate of the shareholding in the company of the partners of the firm is not less than fifty-one per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the company is eligible for deduction under this section;
(b) in the case of a sole proprietary concern, the shareholding of the sole proprietor in the company is not less than fifty-one per cent of the total voting power in the company and his shareholding continues to remain as such for the period for which the company is eligible for deduction under this section.
Explanation 1.—For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking :
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4[Provided that nothing contained in this Explanation shall apply to any change in the shareholding of the company as a result of—
(a) its becoming a company in which the public are substantially interested; or
(b) disinvestment of its equity shares by any venture capital company or venture capital fund.]
Explanation 2.—For the purposes of this section,—
(i) “computer software” means—
(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) any customized electronic data or any product or service of similar nature, as may be notified 5 by the Board,
which is transmitted or exported from India to any place outside India by any means;
(ii) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;
(iii) “electronic hardware technology park” means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(iv) “export turnover” means the consideration in respect of export 6[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.
(v) “free trade zone” means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, 7 specify for the purposes of this section;
(vi) “relevant assessment year” means any assessment year falling within a period of ten consecutive assessment years referred to in this section;
(vii) “software technology park” means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(viii) “special economic zone” means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.]
7a [Explanation 3.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]
7.5 Now, two events happened , first the assessee unit which was located in export processing zone got converted into an SEZ unit effective from
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01.01.2003 and secondly, provision was introduced by Finance Act, 2002 w.e.f. 01.04.2003 by way of Section 10A(1A) of the 1961 Act with a non obstante clause that notwithstanding anything contained in Section 10A(1) of the 1961 Act , the deduction u/s 10A is to be allowed for a total period of seven years to a unit located in SEZ which begins to manufacture or produce article or things or computer software during the previous year relevant to assessment year beginning from 01.04.2003 and thereafter. At the same time , deduction u/s 10A(1) was restricted to units other than to whom Section 10A(1A) applies to 90% of the profits derived from export of articles or goods or computer software for ay: 2003-04. The assessee unit got itself converted into an SEZ unit during previous year relevant to ay: 2003-04 but can it be said that it begins to manufacture or produce goods or articles in SEZ in previous year relevant to ay: 2003-04. The answer is emphatic ‘no’, the assessee unit begins to manufacture or produce pillows or cushions in previous year relevant to ay: 2001-02 in MEPZ and once the unit begins to manufacture or produce articles in previous year relevant to ay: 2001-02 , then it cannot be said that it again begins to manufacture or produce articles in SEZ when it got converted itself from EPZ unit to SEZ unit. It is merely a conversion of EPZ unit into an SEZ unit but the fact remains that unit was already in operation since previous year relevant to ay: 2001-02 onwards and it could not be said the unit of the assessee begins to manufacture or produce articles or things or computer software in the previous year relevant to assessment year 2003-04 in SEZ as it is a clear case of mere conversion of EPZ into an SEZ and not setting up of new unit in SEZ.The terminology used in Section 10A(1A) is only ‘begins to manufacture….’ while the word ‘begun’ which is also simultaneously used along with ‘begins to manufacture….‘ in Section 10A(2) is missing in Section 10A(1A) of the 1961 Act The second proviso to Section 10A(1) of the 1961 Act shall continue to govern cases of conversion of EPZ into SEZ and benefit of deduction u/s 10A shall be available for ten consecutive assessment year starting from the year in
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which the unit begins to manufacture cushions and pillows in MEPZ viz. ay: 2001-02. If that interpretation as is canvassed by assessee is adopted that it begins to manufacture or produce articles or things in SEZ during previous year relevant to assessment year commencing on 01.04.2003 on being converted into SEZ unit from EPZ unit effective from 01.01.2003 and will be governed by newly inserted Section 10A(1A) of the 1961 Act, then in that case , it will also be hit by sub-section 2 , clause (ii) and/or (iii) that business should not be formed by splitting or reconstruction of a business already in existence , or that it is not formed by the transfer to a new business of machinery of plant previously used for any purpose and then in that situation , the assessee will not at all be entitled for deduction if Section 10A(1A) is invoked. When there is a specific provisions wherein language used is simple , plain , clear and unambiguous that in case of conversion of undertaking from EPZ to SEZ unit, the deduction shall be allowed for a period of ten consecutive assessment years starting from the ay when the undertaking begins to manufacture or produce article or thing or computer software in EPZ which in the instant case the assessee began to manufacture or produce pillows and cushions during previous year relevant to ay: 2001-02 , then in the case there is no need to refer to provisions of Section 10(1A) as it will be applicable only to newly set up undertaking which begins to manufacture or produce articles or things or computer software during previous year relevant to assessment year beginning from 1st April , 2003 and onwards. It is only in those cases, when the undertaking begins to manufacture or produce article or things or computer software in SEZ during previous year relevant to ay: 2003-04 or thereafter , provisions of Section 10A(1A) of the 1961 Act will come into play. The non-obstante clause in Section 10A(1A) is also placed in statute because there were SEZ units which were granted deduction u/s 10A(1)of the 1961 Act which had begun or begins to manufacture or produce article or things or computer software during the previous year relevant to the ay commencing on or after the 1st day of
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April 2001 in any SEZ for which reference is drawn to Section 10A(2)(i)(c) of the 1961 Act as well cases covered by conversion of EPZ units into SEZ units vide second proviso to Section 10A(1) of the 1961 Act and hence new sub-section 10A(1A) was introduced which only deal with newly established SEZ in previous year relevant to ay: 2003-04 and onwards. It can be seen that vide Finance Act, 2002 , Section 10A(1A) of the 1961 Act was introduced which curtailed the period of deduction to newly set up undertaking in SEZ to seven years as against period of deduction upto 10 consecutive years enjoyed by existing SEZ set-up prior to previous year relevant to ay: 2002-03. Not only period of deduction was reduced to 7 years by newly inserted Section 10A(1A) by Finance Act, 2002 as against period of ten consecutive assessment years allowed by Section 10A(1) of the 1961 but also deduction was reduced to 50% of profits derived frome exports for sixth and seventh assessment years. Under normal circumstances , once such type of fiscal incentive is provided by State on fulfillment of condition such as setting up of manufacturing unit in EPZ/FTZ/SEZ for a particular period of time to achieve State Policy for encouraging exports, bringing in foreign investments, enhancing employment etc. and the tax-payer has altered its position by complying with State Policy by setting up accordingly manufacturing unit in SEZ/FTZ/EPZ on the faith that it will continue to enjoy fiscal incentives for a certain number of years as provided in the statute at the time of setting up of its unit, then normally the State Largesse are not withdrawn in such type of case midway as it creates a vested right in favour of the tax-payer who has altered its position based on State Commitment as in this case by setting up undertaking in EPZ/FTZ/SEZ etc. , which also strengthen the view that Section 10A(1) will continue to apply to EPZ/FTZ units which are converted into SEZ units and Section 10A(1A) is only applicable to newly set up SEZ units . As we will see later this restriction of deduction u/s 10A to newly set up SEZ vide sub-section 10A(1A) was later relaxed with certain conditions vide Finance Act,2003 effective from 01.4.2003. As
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could be seen that the Finance Act, 2000 itself recognizes SEZ units and brought the benefit of aforesaid deduction u/s 10A to SEZ units, which begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to ay commencing on or after the 1st day of April , 2001 in any SEZ(Refer Sec. 10A(2)(i)(c) of the 1961 Act). Thus, the assessee was entitled for deduction u/s 10A for a period of a ten consecutive assessment years commencing from ay: 2001-02 onwards and provisions of Section 10A(1) will continue to apply to it even after being converted into an SEZ unit effective from 01.01.2003 keeping in view second proviso to Section 10A(1) of the 1961 Act. The Finance Act, 2002 restricted deduction u/s 10A(1) of the 1961 Act till ay: 2009-10 as it provided that no such deduction u/s 10A(1) shall be allowed for ay: 2010-11 and subsequent ay’s , but rigors of the said limitation were later relaxed and deduction u/s 10A(1) was finally not allowed from assessment year commencing from 1st April 2012 and subsequent ay’s. It is now no more res-integra that exemption/deduction provisions are to be strictly construed and reference is made to Constitutional Bench decision of Hon’ble Supreme Court in the case of Commissioner of Customs v. Dilip Kumar in Civil Appeal no. 3327 of 2007, judgment dated 30.07.2018. The Courts cannot go further and enlarge the scope of benefit of largesse granted by State through these deductions/exemption and these exemption/deduction provisions are to be strictly construed and onus is on the tax-payer to establish that it falls within four corners of rigors of exemption/deduction provisions as are existing in statute. Further, with introduction of Section 10A(1A) of the 1961 Act, the deduction to SEZ unit was restricted to a period of 7 years, if it begins to manufacture or produce articles or things or computer software in SEZ during the previous year starting on or after 1st day of April 2003. Then again by Finance Act, 2003, the amendments were brought in Section 10A of the 1961 Act wherein Section 10A(1A) to Section 10A(1C) were substituted for the existing Section 10A(1A) thereby allowing
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deduction u/s 10A to newly set up SEZ to a total period of 10 years , w.e.f. 01.04.2004 . The Section 10A as introduced by Finance Act, 2003 read as under: “ [Special provision in respect of newly established undertakings in free trade zone, etc.
10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the afore-said ten consecutive assessment years :
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone :
[Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertak-ing from the export of such articles or things or computer soft-ware :]
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.
[(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two assessment years.]
The following sub-sections (1A) to (1C) shall be substituted for the existing sub- section (1A) by the Finance Act, 2003, w.e.f. 1-4-2004 :
(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be,—
(i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the under-taking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter;
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(ii) for the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Allowance Reserve Account”) to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub- section (1B).
(1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if the following conditions are fulfilled, namely:—
(a) the amount credited to the Special Economic Zone Re-investment Allowance Reserve Account is to be utilised—
(i) for the purposes of acquiring new machinery or plant which is first put to use before the expiry of a period of three years next following the previous year in which the reserve was created; and
(ii) until the acquisition of new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;
(b) the particulars, as may be prescribed in this behalf, have been furnished by the assessee in respect of new machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use.
(1C) Where any amount credited to the Special Economic Zone Re-investment Allowance Reserve Account under clause (ii) of sub-section (1A),—
(a) has been utilised for any purpose other than those referred to in sub- section (1B), the amount so utilised; or
(b) has not been utilised before the expiry of the period specified in sub- clause (i) of clause (a) of sub-section (1B), the amount not so utilised,
shall be deemed to be the profits,—
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year imme-diately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (1B), and shall be charged to tax accordingly.
(2) This section applies to any undertaking which fulfils all the following conditions, namely :—
(i) it has begun or begins to manufacture or produce arti-cles or things or computer software during the previous year relevant to the assessment year—
(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;
(c) commencing on or after the 1st day of April, 2001 in any special economic zone;
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(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circum-stances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the pur-poses of clause (ii) of that sub-section.
(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 con-vertible 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 ex-pression “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.
6[(4) For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in re-spect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.]
(5) The deduction under [this section] shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form 7, alongwith the return of income, the report of an account-ant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—
(i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years 7a[ending before the 1st day of April, 2001], in rela-tion to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accord-ingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduc-tion;
(ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub- section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years 7a [ending before the 1st day of April, 2001];
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(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and
(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.
(7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
The following sub-section (7A) shall be inserted after sub-section (7) of section 10A by the Finance Act, 2003, w.e.f. 1-4-2004 :
(7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,—
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.
(8) Notwithstanding anything contained in the foregoing provi-sions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.
[(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years.
[(9A) Notwithstanding anything contained in sub-section (9), where as a result of reorganisation of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to the company, as the same would have been allowed to such firm or sole proprietary concern, as the case may be, if the reorganisation had not taken place:
Provided that,—
(a) in the case of a firm, the aggregate of the shareholding in the company of the partners of the firm is not less than fifty-one per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the company is eligible for deduction under this section;
(b) in the case of a sole proprietary concern, the shareholding of the sole proprietor in the company is not less than fifty-one per cent of the total voting power in the company and his shareholding continues to remain as such for the period for which the company is eligible for deduction under this section.]]
8a[Explanation 1.—For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty- one per cent of the voting power are not beneficially held by persons who held the shares
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of the company carrying not less than fifty-one per cent of the voting power on the last day of the year in which the under-taking was set up, the company shall be presumed to have trans-ferred its ownership or the beneficial interest in the undertak-ing :
9[Provided that nothing contained in this Explanation shall apply to any change in the shareholding of the company as a result of—
(a) its becoming a company in which the public are substan-tially interested; or
(b) disinvestment of its equity shares by any venture capital company or venture capital fund.]]
Explanation 2.—For the purposes of this section,—
(i) “computer software” means—
(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) any customized electronic data or any product or serv-ice of similar nature, as may be notified 10 by the Board,
which is transmitted or exported from India to any place outside India by any means;
(ii) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;
(iii) “electronic hardware technology park” means any park set up in accordance with the Electronic Hardware Technolo-gy Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(iv) “export turnover” means the consideration in respect of export 11[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign ex-change in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
(v) “free trade zone” means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section;
(vi) “relevant assessment year” means any assessment year falling within a period of ten consecutive assessment years referred to in this section;
(vii) “software technology park” means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Indus-try;
(viii) “special economic zone” means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.]
[Explanation 3.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of soft-ware) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]
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The following Explanation 4 shall be inserted after Explanation 3 by the Finance Act, 2003, w.e.f. 1-4-2004: Explanation 4.- For the purposes of this section, “manufacture or produce” shall include the cutting and polishing of precious and semi-precious stones.
7.6 Thus, as could be seen that Finance Act, 2003 , inert-alia, amended Section 10A by substituting Section 10A(1A) of the 1961 Act by a newly inserted Section 10A(1A) to 10A(1C) with effect from 01.04.2004 , wherein it provided for deduction available to SEZ unit for a period of 10 years as against period of 7 years provided by Finance Act, 2002 provided that for 8th to 10th year, deduction u/s 10A shall be allowed to SEZ unit provided it creates an reserve called “Special Economic Zone Re- investment Allowance Reserve Account” and the said reserves can only be utilized for specified purposes within stipulated period, as stipulated u/s 10A (IB) of the 1961 Act and consequences are provided in statute for non-utilization of said reserves within specified period or utilization for purposes other than specified u/s 10A(IB) , which consequences are provided u/s 10A(1C) of the 1961 Act.
7.7 It will be profitable at this stage to refer to Notes on Clauses and Memorandum to Finance Bill, 2003. The notes on clause in Finance Bill, 2003 proposing to amend Section 10A of the 1961 Act stipulated as under: “Clause 7 seeks to amend section 10A of the Income-tax Act relating to special provision in respect of newly established undertakings in free trade zone, etc. Under the existing provision contained in sub-section (1) of the said section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is allowed from the total income of the assessee. However, no deduction is allowable to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. Sub section (1A) of the said section provides that an undertaking set up in a special economic zone on or after the 1st day of April, 2003 is eligible for a deduction of hundred per cent of export profits for five years and fifty per cent for further two assessment years. Under sub-section (9), no deduction under sub-section (1) is allowed to the assessee where the ownership or the beneficial interest in the undertaking is transferred by any means. However, this
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condition is not applicable where as a result of the reorganisation of the business, a firm or sole proprietary concern is succeeded by a company. It is proposed to insert the reference of sub-section (1A) in sub-section (4) of the said section. The proposed amendment is consequential in nature. It is also proposed to amend sub-section (5) so as to insert the reference of “this section” instead of “sub-section (1)”. The proposed amendment is consequential in nature. These amendments will take effect retrospectively from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. It is also proposed to omit sub-sections (9) and (9A) and Explanation 1 occurring below sub-section (9A). It is also proposed to insert a new sub-section (7A) to provide that where a company is transferred to another company under a scheme of amalgamation or demerger, the deduction shall be allowable in the hands of the amalgamated or the resulting company. However, no deduction shall be admissible under this section to the amalgamating company or the demerged company for the previous year in which the amalgamation or demerger takes place. It is also proposed to insert Explanation 4 at the end so as to provide that for the purposes of this section, “manufacture or produce” shall include the cutting and polishing of precious and semi- precious stones. These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years.”
7.8 Thus as can be seen above that Notes on Clauses and Memorandum to Finance Bill, 2003 clearly stipulated that Section 10A(1A) is applicable to newly set up units in SEZ on or after 1st day of April 2003 and it cannot be stretched to the units which are converted from EPZ units to SEZ units. The intention of law makers is manifestly clear that they intent to apply Section 10A(1A) to newly set up units in SEZ during previous year relevant to ay: 2003-04 onwards as terminology used in ‘begins to manufacture…’ and the word ‘begun’ is conspicuously missing in Section 10A(1A) and by no stretch of imagination provisions of Section 10A(1A) can be made applicable to existing EPZ/FTZ units which got themselves converted into an SEZ unit which shall continue to be governed by provisions of Section 10A(1) of the 1961 Act. For the units which are converted from EPZ/FTZ units to SEZ units, second proviso to Section 10A(1) shall continue to apply. For a newly established SEZ , now deductions are 100% of profits derived from exports for first five years and 50% for next 2 years, while for the next three years, deduction u/s 10A(1A) will be 50% subject to creation of specified reserves which can only be used for specified purposes within stipulated time limits as
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provided in Section 10A itself. . The legislature in its own wisdom while granting benefit of deduction u/s 10A(1A) to newly set up SEZ’s units have put additional conditions for creation of reserves in 8th to 10 year and their utilization in a prescribed manner, while for the units which are set up prior to previous year relevant to ay: 2003-04, or are merely converted from EPZ to SEZ, this condition shall not apply and they will continue to get benefit of deduction u/s 10A(1) of the 1961 Act of 100% of profits derived from exports for a period of ten consecutive assessment years ( except for ay: 2003-04 when deduction was restricted to 90%). The deduction u/s 10A(1) was restricted by Finance Act, 2002 with sunset clause till ay: 2009-10 , but later this limitation of sunset clause was subsequently finally extended to ay: 2011-12 by later Finance Act’s and finally it is provided that no deduction u/s 10A(1) shall be provided effective from ay: 2012-13 onwards.
7.9 Then , w.e.f. 10.02.2006 vide Special Economic Zones Act, 2005, Section 10AA was inserted as well sub-section 7B was simultaneously inserted in Section 10A of the 1961 Act. The newly inserted Section 10AA read as under :
“Special provisions in respect of newly established Units in Special Economic Zones. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of— (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). (2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :—
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(a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised—
(i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;
(b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use.
(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),—
(a) has been utilised for any purpose other than those referred to in sub-section (2), the amount so utilised; or
(b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount not so utilised,
shall be deemed to be the profits,—
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (2),
and shall be charged to tax accordingly :
Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1).
Explanation.—For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section :
Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone :
Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub- section (1) with effect from the 1st day of April, 2006.
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(4) This section applies to any undertaking being the Unit, which has begun or begins to manufacture or produce articles or things or services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006, in any Special Economic Zone.
(5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,—
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place.
(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off.
(7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the assessee.
(8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if—
(a) for the figures, letters and word “1st April, 2001”, the figures, letters and word “1st April, 2006” had been substituted;
(b) for the word “undertaking”, the words “undertaking, being the Unit” had been substituted.
(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
Explanation 1.—For the purposes of this section,—
(i) “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;
(ii) “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;
(iii) “manufacture” shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005 66b;
(iv) “relevant assessment year” means any assessment year falling within a period of fifteen consecutive assessment years referred to in this section;
(v) “Special Economic Zone” and “Unit” shall have the same meanings as assigned to them under clauses (za) and (zc) of section 2 of the Special Economic Zones Act, 2005.
Explanation 2.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]”
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7.10 Sub-section 7B was also simultaneously added to Section 10A by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006 , which reads as under: Section 10A “[(7B) 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.]:”
7.11 Before we proceed further, It is important to understand the concept rationale of Special Economic Zones and reasons for bringing a separate Statute namely Special Economic Zone Act, 2005, dealing with SEZ in India . We have referred to GOI web-site sezindia.nic.in to understand the concept of SEZ , wherein relevant extract is from the said GOI website is reproduced as under”: “India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.
This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes.
To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. Around 800 suggestions were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of
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procedures and for single window clearance on matters relating to central as well as state governments. The main objectives of the SEZ Act are: • generation of additional economic activity • promotion of exports of goods and services • promotion of investment from domestic and foreign sources • creation of employment opportunities • development of infrastructure facilities It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.
The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member inter- ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus.
The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.
The SEZ Rules provide for: • " Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; • Single window clearance for setting up of an SEZ; • Single window clearance for setting up a unit in a Special Economic Zone; • Single Window clearance on matters relating to Central as well as State Governments; • Simplified compliance procedures and documentation with an emphasis on self certification”
7.12 As could be seen from above that aforesaid SEZ Act, 2005 was brought into statute to promote exports, bring in large foreign investments in India and to make SEZ as an engine for economic growth supported by quality infrastructure and complemented by an attractive fiscal package both by Central and state Governments. The objective was to instill confidence in investors and signal Government Commitment to a stable SEZ policy with a view to achieve greater economic activity and employment through establishment of SEZ’s. Preamble to SEZ Act, 2005 provides that it is an Act to provide for establishment , development and
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management of the SEZ for the promotion of exports and for matters connected therewith or incidental thereto. The SEZ Act, 2005 vide Section 2(za) read with Section 2(k) while defining SEZ also included existing SEZ’s which were in existence on or before commencement of the 2005 Act . The SEZ Act, 2005 vide Section 2(zc) read with Section 2(l) while defining Unit in SEZ also included Units in SEZ which was set up on or before commencement of this Act. Thus this Act of 2005 brought within its fold not only newly set up SEZ’s or units in SEZ which are set up post commencement of this Act of 2005 but also bring within its fold existing SEZ’s or Units in SEZ which were in existence at the time when this new Act of 2005 came into force. Section 51 of the Act of 2005 stipulates that the provisions of the 2005 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. Section 44 of the 2005 Act stipulates that all the provisions of this Act(except Section 3 and 4) shall , as far as may be apply, to every existing Special Economic Zones. Section 27 of the 2005 Act stipulates that the provisions of the 1961 Act , as in force for the time being, shall apply to , or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Units subject to the modification specified in the Second Schedule. Section 10AA was incorporated in Second Schedule to the 2005 Act and through it got included in the 1961 Act effective from 10.02.2006 and simultaneously sub-section 7B was inserted in Section 10A of the 1961 Act through insertion in Second Schedule to the 2005 Act.
7.13 The Section 10AA(1) of the 1961 Act , inter-alia, stipulates that subject to provisions of Section 10AA, its applicability is limited to units in SEZ which begins to manufacture or produce articles or things or computer software in SEZ during the previous year relevant to assessment year commencing on or after 1st April, 2006. Similarly Section 7B
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simultaneously excludes allowability of deduction under Section 10A of the 1961 Act to undertakings being units referred to in Section 2(zc) of the 2005 Act which has begun or begins to manufacture or produce article or thing during the previous year relevant to assessment year commencing on or after 1st April 2006 in any SEZ. Careful perusal of sub-section 7B of the 1961 Act which was inserted in Section 10A of the 1961 Act by SEZ Act, 2005 w.e.f. 10.02.2006, clearly reveals that it excludes applicability of entire Section 10A to any undertaking , being a Unit referred to in clause (zc) of Section 2 of the SEZ Act, 2005 which has begun to manufacture or produce articles or things or computer software in SEZ or begins to manufacture or produce articles or things or computer software commencing on or after the 1st day of April 2006. Thus , the objective of using the word ‘begun’ is to exclude applicability of Section 10A to all the units in SEZ effective from insertion of Section 10AA of the 1961 Act and henceforth provisions of Section 10AA shall be applicable to units in SEZ, even if these units are existing units in SEZ on or before commencement of SEZ Act, 2005. We have already seen that SEZ Act, 2005 is a beneficial legislation with objective to promote exports, encourage large foreign investments , generate higher employment, develop quality infrastructure development etc and to provide fiscal incentive and stable policy regime to encourage setting up of SEZ and units in SEZ. As could be seen, Section 10AA of the 1961 Act which was inserted effective from 10.02.2006 , has three proviso which are placed after sub-section (3) to Section 10AA of the 1961 Act. The first proviso states that while computing the total income of the unit in SEZ for any assessment year, its profits and gains had not been included by application of provisions of sub-section 7B of Section 10A , the undertaking being unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of Sub-section (1) of Section 10AA of the 1961 Act. We have already seen that provisions of
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Section 10AA(1) of the 1961 Act is subject to provisions of other sub- sections of Section 10AA of the 1961 Act. The Section 10AA(1) provides for deduction for a total period of 15 years, first 5 years deduction is provided @100% of profits derived from exports, while for rest ten years deduction is provided @50% of profits derived from exports subject to fulfilment of conditions as are stipulated u/s 10AA of the 1961 Act. As we have observed that by insertion of sub-section 7B to Section 10A , the entire units in SEZ which were existing on or before commencement of SEZ Act were taken out from applicability of Section 10A and new regime of Section 10AA was made applicable even to existing units in SEZ. The first proviso clearly stipulates that the existing SEZ units which begun to produce or manufacture articles or things in old regime will be entitled for deduction u/s 10A of the 1961 Act only for unexpired period of consecutive ten years and thereafter they will be entitled for a further deduction for a period of five years under newly enacted provisions of Section 10AA(1)(ii) of the 1961 Act. It is also pertinent to mention that provisions of Section 10A of the 1961 Act refers to grant of deduction for a period of ten consecutive assessment years and Section 10AA for a newly set up SEZ units did not uses the terminology ‘ten consecutive assessment years’, which further strengthen the belief that Section 10AA shall be applicable to all SEZ whether these were established under old regime or under newly enacted SEZ Act, 2005. The Second proviso which is placed after sub-section 10AA(3) also provides that in case of units initially located in EPZ or FTZ but subsequently located in SEZ by reasons of conversion of such FTZ or EPZ into SEZ , the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the unit begins to manufacture or produce or process such articles or things or service in such FTZ or EPZ , which is in fact the case of the assessee, the assessee thus will be entitled for deduction for unexpired period of ten consecutive assessment years beginning from ay: 2006-07 u/s 10A of the 1961 Act
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which ended on ay: 2010-11 and thereafter further deduction of 50% of profits derived from exports for further period of five years under the provisions of Section 10AA of the 1961 Act beginning with impugned assessment year 2011-12. The third proviso contains embargo that in case of conversion of EPZ or FTZ units into an SEZ unit which has already completed period of ten consecutive assessment years referred to above before the commencement of SEZ Act, 2005 and simultaneous insertion of sub-section 7B to Section 10A of the 1961 Act, wef 10.02.2006 shall not be entitled for additional period of deduction for five years as is allowed to SEZ units by provisions of Section 10AA(1)(ii) of the 1961 Act. These three provisos inserted after Section 10AA(3) of the 1961 Act read with sub-section 7B to Section 10A of the 1961 Act inserted by SEZ Act, 2005 effective from 10.02.2006 are in-fact saving clauses which have made applicable provisions of newly inserted Section 10AA to existing SEZ units under old regime which have not exhausted deduction for ten consecutive assessment years on the date of introduction of Section 10AA , as was available to them u/s 10A of the 1961 Act on commencement of SEZ Act, 2005 and thus these SEZ units shall be entitled for deduction for further period of 5 years beyond period of ten consecutive assessment years owing to newly inserted Section 10AA of the 1961 Act keeping in view provisions of Section 10AA(1)(ii) of the 1961 Act. Thus, vide our detailed discussions above, we hold that the assessee is entitled for deduction u/s 10AA(1)(ii) of the 1961 Act for the impugned assessment year, subject to fulfilment of other conditions for grant of deduction u/s 10AA of the 1961 Act. We order accordingly.
The second issue concerns itself with disallowance made by AO of sales commission of Rs. 34,98,309/- paid by assessee to its foreign agents for procuring sales orders in favour of the assessee on the grounds that the assessee had failed to deduct income-tax at source as is required to be deducted u/s.195 of the Act read with provisions of Sec.40(a)(i) and
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Section 9(1)(vii) of the 1961 Act. The AO was of the view that this deduction of Rs. 34,98,309/- debited by assessee to its P&L A/c as selling commission paid to foreign agents cannot be allowed , by holding as under vide assessment order dated 07.03.2014 passed u/s. 143(3) of the 1961 Act: “ As per the copy of the agreement submitted by the assessee dated 1-4- 2010,1-07-2010 in respect of M/s, Darrow Lane Corporation and dated 1- 04-2010 in respect of M/s. Schonk BV, the commission fee is paid to non- resident on total value of every order given to the assessee company through Non-Residents. Therefore, the services are not just pertaining to a sale agent or a dealer, but are managerial and technical. In order to identify potential customers in their country, the two agents, M/s. Darrow Lane Corporation and M/s. Schonk BV have to necessarily carry out extensive marketing and advertising activities such as relationship marketing, internal marketing, integrated marketing, capturing marketing etc., to build a strong brand name of the assessee company in the offshore markets.
In order to show cause their products and to get the orders in favour of the assessee company, the foreign agents would require to engage in public relations and sales promotion activities such as trade shows, aqua fairs or exhibitions, media, non-media marketing communications etc. These functionalities would require an organized marketing strategy and plans, which amounts to professional and technical services.
Therefore, the services rendered would fall within the ambit of the Section 9 (1} (vii) wherein it is defined as. "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel.
Further, as per explanation to Section 9 (2) inserted by Finance Act w.r.e.f 1/6/1976, 'Business connection' (Place of permanent establishment) is not required in a case where the income is deemed to accrue as per Section 9 (1) (vii). Therefore as per Section 5 (2) r. w. s. 9 (1) (vii) of the Income- tax, the payment made by the assessee to the Non-Resident is an income accrued in India.
Furthermore as per Explanation 2 to Section 195 inserted by the Finance Act 2012 w.r.e.f 1/4/1962., it is stated that,,
For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction there-under applies and shall be deemed to hove always applied and extends and shall be deemed to have always extended to. all persons, resident or non-resident, whether or not the non-resident person has—
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(i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India
Therefore, the judgments relied on by the assessee in the case of CIT vs. R.D. Agarwal & Co, 56 ITR 20 (1965) (SC), CIT v. Toshoku Ltd. (21980) 125 ITR 525 (SC), TVS Motor Co. Ltd. v ACIT (ITA NO. 697 & 7S7/ Mds/2009, DCIT v. Dibi's Laboratories Ltd and CIT v. EON Technology Pvt Ltd. will not come in as rescue to the assessee.
In view of the discussion as above the payment of commission made to foreign agents being sum of Rs.34,98,309 is disallowed under section 40 a (ia).
Aggrieved by an assessment order dated 07.03.2014 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with learned CIT(A) but with no success as Ld.CIT(A) was pleased to dismiss the appeal of the assessee vide appellate order dated 02.08.2017 , by holding as under:
“8.3 In the written submission filed on 11/4/2017 the A.R did not give any explanation regarding this ground of appeal. Thus the A.R did not bring any material on record to prove that the payment of Rs 34,98,309/- does not come under "fees for technical services" and TDS is not required to be deducted on that payment.
In the absence of evidence in support, this ground of appeal is dismissed and the disallowance of `34,98,309/- u/s 40(a)(i) is upheld.”
9.2 Thus, as could be seen from above , the assessee did not give its
arguments on above issue in written submission filed before learned
CIT(A) and in the absence thereof , the learned CIT(A) dismissed appeal
of the assessee . The assessee has filed paper book with tribunal on
24.10.2018 and on going through the same (Page 1-3) , we have
observed that the assessee did not filed any written submission on this
issue of disallowance of sales commission paid to foreign agents before
learned CIT(A), but it is a matter of record that assessee made elaborate
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arguments in statement of facts and grounds of appeal filed by assessee
in memo of appeal filed with learned CIT(A). The learned CIT(A) has also
reproduced grounds of appeal filed by assessee in memo of appeal filed
with learned CIT(A), wherein para 8.1 and 8.2 of the appellate order
passed by learned CIT(A) is reproduced hereunder:
“Disallowance u/s.40(a)(i)
8.1 The Assessing officer noticed that the assessee did not deduct TDS on sales commission of Rs.34,98,309/-. The A.R stated that these payments were made to foreign agents for services rendered outside India. The Assessing Officer concluded that the services rendered would fall within the ambit of the Section 9(l)(vii) wherein it is defined as "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel. Hence the Assessing Officer disallowed Rs 34,98,309/-u/s.40(a)(i).
8-2 In the grounds of appeal the appellant contested as under:
" 5. The Learned Assessing officer erred in law in disallowing a sum of Rs.34,98,309/- under section 40(a)(i) for non-deduction of TDS on payments made to foreign agents as commission for services rendered outside India, treating them as payments for provision of technical knowledge, experience, skill knowhow.
The learned officer failed to understand that the agreements entered with the foreign agents AJN Schonk BV, The Netherlands and the Darrow Line Textiles Corporation, USA are only sales commission agreements which clearly states that the percentage of commission to be paid on the value of sales invoice to the buyers introduced by them to the appellant and are to be paid them on the realization of the exports sales invoices. No other services are rendered by them other than introducing new customers. They are neither involved in the design of the product or in the process of manufacture and therefore, no technical knowhow knowledge is imparted by them to the appellants. The Assessee relies on following case laws in support of the claims submitted.
In Ceat International S.A. Vs. Commissioner of income-tax(1999) 237 ITR 259 (Bom.). A Non-resident Company, received payment from an Indian Company for Forgoing exports in favor of the Indian Company or Transferring Export Orders to the Indian Company and by doing so, assessee did not impart any Information Concerning Technical, Industrial, Commercial Or Scientific Knowledge, Experience Or Skill nor render any managerial, technical or Consultancy Service. Hence payment attributable to such services cannot be treated as Royalty or Fees for Technical Services falling under Clause, (vi) And (vii) of Sec.9(1). Further the Delhi High Court in the case of Sheraton International Inc. (2009) 313 ITR 267 (Del) held that payments for advertising, publicity and sales promotion services cannot be treated as either royalty or FTS and would be treated as business income. Since the services are rendered by a non-resident outside India and it does not have a PE in India hence the income is not taxable.
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In the case ACIT v. Mainetti (India) (P) (Ltd.) (2011)12 Taxmann.com 60 Canvassing of orders abroad could not be regarded as managerial services, nor could it be said to be any consultation. Thus definitely, technical services as per Explanation 2 to section 9(l)(vii) of the Act would have no application.
In the case of ACIT vs Modern Insulators Ltd (2011) 10 ITR 147 (Jp) it was observed that Section 40(a)(i) of the Act provides disallowance of payments to a non-resident in the nature of interest, royalty, fee for technical services or other sum chargeable under the Act on which tax has not been deducted. However, the word 'commission' is not specifically covered under Section 40(a)(i) of the Act and the sum is not chargeable to tax in India, Section 40(a)(i) of the Act is not applicable.
Moreover, going by the nature of services rendered by way of referring the international clients to CLSA India Limited, the assessee cannot be said to have rendered any technical, managerial or consultancy services as envisaged in Explanation 2 to section 9(1)(vii) as held by the AAR in the case of Cushman and Wakefield (S) Pte Ltd., In r [2008] 305 ITR 208 (AAR-New Delhi).
Moreover, Section 90 of the Indian Income Tax Act provide that if a non- resident taxpayer is a tax resident of a foreign country with which India has a Double Taxation Avoidance Agreement (DTAA), then such non-resident taxpayer can apply either the provisions of the Income Tax Act or the provisions of the applicable tax treat, whichever is more beneficial to it.
As per article 12 of DTAA with USA,
The term "royalties" as used in this Article means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific; work, including cinematograph films or work on film, tape or other mean of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport)from activities described in paragraph2(c) or 3 of Article 8.'
"Royalty and fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.'
As per Article 12 of DTAA with Netherlands
ITA No.2406/Chny/2017 :- 50 -:
'1. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copy right of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
'2. "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services(including through the provision of services of technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or Information for which a payment described in paragraph 4 of this Article is received; or
(b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
The two agents Darrow lane Textiles Corporation, USA and the AJN Schonk BV, The Netherlands rendered no such services as mentioned in Article 12 of DTAA with USA and the Netherlands and the services rendered by them cannot be classified as technical services.
From the above extracts of DTAA, it is evident that the export commission does not fall in the category of Fee for Technical Services and FTS clause is intended for specific knowledge/knowhow transfer and merely procuring orders and sales promotion will not result in any such specific knowledge transfer as envisaged under the FTS clause and hence the payments should be merely treated as business profits of the agent. Since the services were rendered outside India, the provisions of Section 5 of the Act could not be applied to the commission paid. As the foreign agent does not have any PE in India and the commission to be considered as business income, it cannot be taxed in India as per the tax treaties.
For reasons cited above, commission income does not satisfy the test of fees for technical Services and it is to be classified as Business Income and Hence taxability will depend upon PE in India. As the foreign agents operate outside India they do not have PE in India, payments made to foreign entities with no permanent establishment in India the question of Tax deduction at source does not arise and Hence not disallowable under section 40(a)(i) of the Income Tax Act.
For these and other grounds that may be permitted to be raised at the time of hearing and it is requested that the additions made by the assessing officer be deleted and render justice."
9.3 Further , Statement of facts was also filed by assessee along with memo of appeal filed with learned CIT(A) wherein all the facts as claimed by assessee were stated (Page 53/PB). There was no concession given by assessee before learned CIT(A) waiving its right to agitate this issue and
ITA No.2406/Chny/2017 :- 51 -:
learned CIT(A) was obligated u/s 250(6) of the 1961 Act to pass speaking and reasoned order on merits but the learned CIT(A) dismissed appeal of the assessee on the grounds that no written submissions are filed by assessee before him. The assessee has also filed before us , copies of agreements entered into by it with foreign agents. The assessee has also claimed before us that for earlier years , the Chennai-tribunal in assessee’s own case vide its appellate order dated 14.08.2013 in ITA no. 947/Mds/2013 for ay: 2009-10 has allowed sale commission paid to foreign agent without deduction of income-tax at source u/s 195 of the 1961 Act. Be that it may be but learned CIT(A) has not adjudicated this issue in its appellate order on merits for impugned assessment year under consideration and has simply dismissed appeal of the assessee at threshold on the ground that no written submissions are filed by assessee on this issue and in the interest of substantial justice, this issue need to be restored to the file of learned CIT(A) for fresh adjudication on merits in accordance with law. Needless to say that learned CIT(A) will give proper and adequate opportunity of being heard to the assessee in the interest of justice . The assessee shall be allowed to produce evidences/explanation in its defense in denovo adjudication of its appeal by learned CIT(A) which evidences/explanations shall be admitted by learned CIT(A) in the interest of substantial justice and then adjudicated on merits in accordance with law. We clarify that we have not commented on merits of the issues in appeal filed before us. It is well settled that powers of learned CIT(A) are co-terminus with powers of the AO and need for set aside to learned CIT(A) has arisen as law as enshrined in Section 9 and 195 of the 1961 Act has undergone substantial change over the years and need may arise to apply amended law for impugned ay and hence learned CIT(A) who has power co-terminus with powers of the AO is best equipped to look into, enquire and verify facts and apply law as applicable accordingly. CBDT circular No. 786 dated 07.02.2000 stipulating no deductibility of income- tax at source on sales commission paid to foreign agents under certain
ITA No.2406/Chny/2017 :- 52 -:
situation within provisions of Section 195 of the 1961 Act also stood withdrawn by a new CBDT circular No. 7/2009 dated 22.10.2009. Thus, in our considered view this issue need to be restored to the file of learned CIT(A) for denovo adjudication of this issue on merits in accordance with law. We order accordingly.
In the result, the appeal filed by assessee in iTA No.2406/Chny/2017 for ay: 2011-12 is allowed for statistical purposes.
Order pronounced on this 11th day of December, 2019 in Chennai.
Sd/- Sd/- (एन.आर.एस. गणेशन) (र1मत कोचर) (N.R.S. GANESAN) (RAMIT KOCHAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai, 2दनांक/Dated: 11th December , 2019. TLN
आदेश क* (�त1ल3प अ4े3षत/Copy to: 4. आयकर आयु5त/CIT 1. अपीलाथ'/Appellant 5. 3वभागीय (�त�न�ध/DR 2. ()यथ'/Respondent 6. गाड$ फाईल/GF 3. आयकर आयु5त (अपील)/CIT(A)