M/S MIDAS DFS (P) LTD,HOWRAH vs. INCOME TAX OFFICER, WARD-1(3), KOLKATA, KOLKATA

The sole issue involved in this appeal of assessee is against the order of Ld. CIT(A) in confirming the action of AO by disallowing the deduction claimed u/s. 10AA of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) in respect of trading, warehousing and consultancy income.

Briefly stated fact are that assessee is a Private Limited Company and engaged in the business of import and export of tobacco products, C&F agent, trading of all types of FMCG products alcoholic and non-alcoholic beverages. The assessee, for the year under consideration has filed its return of income dated 11.02.2010 declaring total income of Rs.58,769/- after claiming deduction u/s. 10AA of the Act for ₹60,04,827/-. Thereafter case was selected for scrutiny and notice u/s. 143(2)/142(1) of the Act was issued upon assessee.

For the claim of exemption u/s. 10AA of the Act for the warehousing income, the AO’s stand was that assessee has imported goods which were recorded as purchase in its books of account along with quantitative details. But on later date the same goods were returned to the parties from whom the goods were imported, and then the assessee raised an invoice for providing warehousing facilities to such parties. Accordingly, AO was of the view that the bill raised to the party is not related to warehousing services as claimed by assessee. The AO was of the opinion that in order to be warehousing income, goods should have been stored by assessee in its go-down on behalf of some party and the same should be released at the instruction of that party. Since in the instant case, the assessee company has shown purchase of goods and sale thereafter and was in the activity of trading it cannot be termed as income from warehousing. Moreover, according to AO, assessee did not furnish any documentary evidence that assessee was engaged in clearing and forwarding agency business or storing the goods as agent of the party. AO also took note that the bank releasing certificate was also not furnished in order to ascertain the nature of the payment received by assessee. Likewise, according to AO, assessee failed to furnish any documentary evidence in support of consultancy income shown by assessee in the year under consideration. In view of the above, the deduction claimed by assessee for the aforesaid income u/s. 10AA of the Act was disallowed and added back to the income of assessee. Aggrieved, assessee preferred an appeal before Ld. CIT(A), who dismissed the appeal of the assessee. Aggrieved, assessee is before us.

We have heard rival submissions and gone through the paper book as well as precedents relied upon before us. We note that the assessee is an exporter and importer of tobacco products, C&F Agent, Trading of all types of FMCG products. The assessee company was engaged in international trading of commodities from their trading unit situated at Falta Special Zone, within the duty free sector. The assessee company has shown income from the trading activity, warehouse and consultancy services. The assessee in respect of the aforesaid incomes claimed exemption under section 10AA of the Act. The AO denied the exemption under section 10AA of the Act for all the aforesaid incomes. The AO observed that trading activity is not entitled for exemption under section 10AA of the Act. According to AO, neither the assessee was engaged in manufacturing or production of article or thing nor was the assessee able to show that it’s trading activity can be characterized as services as required by sec. 10AA of the Act. Moreover, necessary documents were not furnished before him in support of warehousing and consultancy income, therefore, he disallowed the assessee’s claim. Before the ld. CIT(A) the assessee submitted that AO has raised no dispute with regard to applicability of the provision of Sec. 10AA of the Act in relation to service income. It was contended before the Ld. CIT(A) that as per the Special Economic Zone Act 2005 and its Rules, 2006, definition of service included trading activity by virtue of its Rule 76 under Chapter VIII of Special Economic Zones Rules 2006. It was pointed out to Ld. CIT(A) that the view of AO that the definition of the term ‘service’ as specified in SEZ Act cannot be imported in the income tax proceedings is misplaced. The assessee had further submitted before the Ld. CIT(A) that the trading activity of the assessee has already been held eligible u/s 10AA of the Act in its own case for AY 2008-09 by the order of Ld. CIT(A). In respect to warehousing income, the assessee had submitted before Ld. CIT(A) that same was received from M/s Gallaher Ltd., of United Kingdom as warehousing and handling charges for storing its goods which were eventually returned to that party. It was brought to the knowledge of Ld. CIT(A) that the FIRC certificates was not submitted before AO as same were not available with the assessee at that relevant time. Similarly, the assessee with regard to consultancy income submitted before the Ld. CIT(A) that it received such income for the purpose of marketing activities on behalf of overseas customers. It was brought to the notice of Ld. CIT(A) that the consultancy charges are intrinsically linked with normal import-export activity carried out by assessee from its SEZ units. However, Ld. CIT(A) disregarded the claim of assessee after observing that definition provided under the SEZ Rules, 2006 which is included trading activities within the meaning of ‘service’ cannot applied in the income tax proceedings. Similarly, according to Ld. CIT(A), assessee has shown warehousing income from storing its own goods which cannot be regarded as “service” eligible for deduction u/s. 10AA of the Act. Similarly, the consultancy charges claimed by assessee were not treated as “service” and accordingly the deduction u/s. 10AA of the Act was denied. While doing so, the ld. CIT(A) also observed that the provisions of SEZ Act, 2005 cannot override the specific provisions of Income Tax Act ,1961. So, the question before us is whether assessee in the present case is entitled for exemption under section 10AA of the Act in respect to trading, warehousing & consultancy income.

First of all we take up the issue of trading income of the assessee. There is no dispute that the assessee is engaged in the import and export of the goods which is in the nature of trading activities. As per the Income-tax Act, the trading activity is not entitled for the exemption under section 10AA of the Act. However, we note that the SEZ Rules have been framed by Central Government by virtue of the delegated Rule making power given to it by the Special Economic Zone Act 2005. As per Rule 76 of the SEZ Rules 2006 the term “service” includes trading activities if it relates to the import of the goods for the purposes of export in terms of its explanation to Rule 76 of 2006. The relevant provisions of SEZ Rules 2006 read as under:-

From a plain reading of the aforesaid provision, it is clear that the term ‘service’ is given an inclusive definition which includes ‘trading activity.’ As per the first explanation trading will be treated as “service” if it is related to the import of the goods for the purpose of the export. In this case there is no dispute that goods imported by the assessee are in fact exported to other countries from its unit at Special Economic Zone.

We note that the exemption provided u/s. 10AA which are special provision in respect of newly established units in Special Economic Zone are for income received by providing any services. The other activity entitled for exemption is income from manufacturing and production of article or thing. So what has to be seen is whether the “service” definition given in the SEZ Rules as above reproduced can be read into for the purpose of claiming exemption u/s. 10AA of the Act; so that assessee can avail the benefit envisaged u/s. 10AA of the Act. We note that sec. 51(1) of The Special Economic Zones Act, 2005 gives an overriding provision over other laws which read as under: “51.(1) The provisions of this Act shall have effect notwithstanding anything inconsistent, therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.”

From the reading of the provisions it is clear that the provisions as specified under The Special Economic Zones Act, 2005 would have overriding effect on the Income Tax Act because Special Economic Zone Act, 2005 is a Special Act and a later Act of the Parliament. Moreover, we note that assessee’s claim u/s. 10AA was upheld by the Ld. CIT(A) for AY 2008-09, which order has been upheld by the Tribunal in for the AY 2008-09 vide order dated 13/11/2013. The relevant extract of the order is reproduced below:-

Since the Ld. DR is not able to point out any change in law or facts, therefore, respectfully following the order of Tribunal in earlier AY 2008-09, we allow the claim of assessee in respect to its income from trading activity.

Secondly coming to the issue of denial of exemption in respect of warehousing. We note that the assessee has received Rs.23,06,539/- as warehouse charges from M/s. Gallaher Ltd. of UK. For corroborating this fact, the assessee has produced FIRC, ledgers, invoices for consultancy and warehousing charges which are placed on pages 28-43 of the paper book. On perusal of the records including the remand report of AO we note that the AO disallowed the exemption on warehousing charges by observing that the assessee initially had shown the import of the goods as purchases and thereafter showed it as purchase return. According to AO, on such transaction of purchase, and thereafter purchase return the assessee has shown warehouse income for Rs.23,06,539/-. As per the AO, the assessee cannot earn warehousing charges on such transaction and therefore such income is not entitled for exemption u/s 10AA of the Act. We note the Rule 76 of SEZ Rules 2006 (supra) defines “Services” includes warehouse activity also, so income from the said activity qualify for exemption u/s. 10AA of the Act on the same reasoning as that given for trading activity. As a matter of fact, we note that the assessee has raised the bill for the warehousing charges and the payment was also received for the same by foreign exchange. The FIRC is also placed in support of the payment. Indeed the assessee has recorded the transaction as purchase and purchase return along with quantitative details of the goods in the books of accounts. So, the question arises as to whether the accounting entries can change the character of the transaction. We note that the assessee has raised the invoice for the warehousing and handling charges as evident from the invoice placed on page 29 of the paper book. The AO/Ld. CIT(A) has not pointed out any defect in the bill, payment of the bill and the FIRC in support of the income. Hence, in our considered view the accounting entries cannot form the sole basis for denying the exemptions on account of warehousing charges to the assessee. As stated earlier, when warehousing activity has been included in the definition of ‘service’ as per Rule 76 of SEZ Rules of 2006, therefore, the income from warehousing qualifies for exemption under section 10AA of the Act and we allow the claim of the assessee.

Thirdly, coming to consultancy income, we note that the exemption was denied on the consultancy charges due to non-production of the necessary details. The consultancy services were provided for the purpose of marketing support of overseas customers. According to assessee, Consultation charges income are intrinsically linked with and part and parcel of the normal import-export trading activity carried out by the assessee from SEZ. Thus, according to assessee, handling/consultancy charges are also intrinsically linked with and part & parcel of the normal import-export trading activity carried out by the assessee from SEZ. It was brought to our notice that the assessee had produced the bills along with FIRC before the ld. CIT(A) on which remand report was called, which are placed in the paper book and our attention was drawn to the fact that no defect could be pointed out by the authorities below. We note that the consultancy services rendered by the assessee were intrinsically linked with and part and parcel of the normal import-export activity carried on by the assessee from SEZ and same are covered under the “other business service” by applying ejusdem generis as per Rule 76 of SEZ Rules. So, we are inclined to allow the claim of assessee on the same reasoning given above to the trading and warehousing income. In view of above we are inclined to set aside the order of Ld. CIT(A) and AO and allow the appeal of the assessee. Hence, this ground of appeal of the assessee is allowed.

In the result, assessee’s appeal stands allowed. Order is pronounced in the open court on 25.05.2018