ITO 8(2)2, MUMBAI vs. KIARA JEWELLERY P.LTD, MUMBAI

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction u/s 10AA before computing the brought forward business losses and unabsorbed depreciation ignoring that the CBDT vide its Circular No. 7 of 2013 dated 16.07.2013 has categorically clarified as under:

.... "first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee ... "?

4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction u/s 10AA before computing the brought forward business losses and unabsorbed depreciation by placing reliance upon the decision of Bombay High ITA 5040/Mum/2014 3 Court in the case of CIT Vs Black & Veatch Consulting P Ltd 20 Taxmann .com 727 (Bom) ignoring the fact that the department has not accepted the ratio laid down in the said case.

5. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the expenses required to be excluded from the export turnover in terms of Explanation 2 (iv) of Section 10A are also required to be excluded from the total turnover in terms of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd., 330 ITR 175, without appreciating that the Department has filed an SLP in respect of the said decision. 6. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored.”

3. The brief facts of the case are that the assessee is engaged in the business of manufacturing and export of diamond studded gold and platinum jewellery. The manufacturing unit is located at Unit No. 180, SDF-VI, SEEPZ- SEZ, Andheri (E), Mumbai which is an approved Special Economic Zone under the SEZ Act, 2005 and assessee has claimed deduction u/s 10AA of the Act in respect of profit earned from export activity. It is an admitted and undisputed position between the rival parties that the assessee is entitled for deduction u/s 10AA of the Act. The assessee has claimed deduction u/s 10AA of the Act before setting off of the brought forward losses and unabsorbed depreciation from the eligible unit against the current year profits of the same eligible unit. While, the A.O. has contended that the deduction u/s 10AA of the Act is to be computed after setting off of brought forward business losses and unabsorbed depreciation of the eligible unit against current year profits of the eligible unit. The A.O. has concluded that the provision of Section 10AA of the Act was introduced in statute in 2005 and the provisions runs parallel with the provisions of Section 10A & 10B of the Act , which after amendments by Finance Act, 2000 are in the form of deduction from the gross total income of the assessee and not exemption.The said view is supported by decision of Hon’ble Bombay High Court in the case of Hindustan Lever Limited v. DCIT (2010) 325 ITR 102(Bom.HC). Thus, the ITA 5040/Mum/2014 4 A.O. held that the concession u/s 10AA of the Act is in the form of deduction and not exemption. Thus, the Revenue is contemplating set off of brought forward business losses and unabsorbed depreciation of earlier years of the eligible unit from the current years’ profit of eligible unit before allowing deduction u/s 10AA of the Act, while the assessee is contemplating the claim of deduction u/s 10AA of the Act of current years profit without set off of adjustment of brought forward business losses and unabsorbed depreciation of the eligible unit. On first appeal by the assessee before the learned CIT(A), the ld. CIT(A) accepted the contentions of the assessee that brought forward business losses and unabsorbed depreciation of earlier years of the eligible unit is not to be set off against the current year profit of eligible unit, before allowing the deduction u/s 10AA of the Act. The ld. CIT(A) relied upon the decision of Hon’ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385(Kar.), the decision of Hon’ble Bombay High Court in the case of CIT v. Black & Veatch Consulting P. Ltd. [2012] 348 ITR 72 (Bom) and in the case of Hindustan Unilever v. Dy CIT [2010] 325 ITR 102 (Bom) and held as under:-

“I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. Similar issue was involved in the appellant's case which has been adjudicated by my Ld. Predecessor wherein CIT(A) in his order for AY 2008-09 in favour of the appellant while placing reliance on the following decisions and concluded that section 10AA deduction has to be computed before computing the Gross Total Income and brought forward losses and unabsorbed losses cannot be set off against the Total income while computing the deduction u/s 10AA. i) CIT vs. Black & Veatch Consulting Pvt. Ltd [2012] (348 ITR 72)(Bom.) ii) Hindustan Unilever vs. Dy. CIT[2010] [325ITR 102 (Bomj] ITA 5040/Mum/2014 5 iii) Scientific Atlanta vs. Asst. CIT [2010] 38, SOT 252 (Chennai)(SB) iv) CIT vs. Yokogawa India Ltd [2012] (341ITR 385)(Kar.)

Respectfully following the decision of my predecessor, I direct the Id. A.O to allow deduction u/s 10AA of the Act before setting off brought forward depreciation and losses. This ground of appeal is thus allowed.”

Thus the ld. CIT(A) decided the issue in favour of the assessee vide appellate orders dated 16.05.2014. 4. Aggrieved by the appellate order dated 16.05.2014 of the ld. CIT(A), the Revenue is in appeal before the Tribunal.

6. It is the say of the ld. Counsel for the assessee that Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in of 2013 (2015) 97 CCH 0048 (Bom. HC) has duly considered the decision of Hon’ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. (2006) 156 Taxman 1512 (Kar.) which was upheld by Hon’ble Apex court vide orders dated 19-09-2013, the Hon’ble Apex Court has left the decision of the Hon’ble Karnataka High Court undisturbed in civil appeal no 1501 of 2008, by holding as under:

ITA 5040/Mum/2014 6 “We have heard learned counsel for the parties to the lis. 2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. Ordered accordingly”

The learned counsel for the assessee referred to decision of Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in of 2013 (2015) 97 CCH 0048 (Bom. HC) wherein Hon’ble Bombay High Court has held as under:

“5. We find that the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court was in respect of Assessment Year 1994-95. Thus it dealt with the provisions of Section 10B of the Act as existing prior to 1 April 2001 which was admittedly different from Section 10B as in force during Assessment Year 200910 involved in this appeal. Section 10B of the Act as existing prior to 1 April 2001 provided for an exemption in respect of profits and gains derived from export by 100% Export Oriented Undertakings and now it provides for deduction of profits and gains derived from a 100% Exported Oriented Units..

6. In any view of the matter, the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court dealt with the provision of law different from that which was dealt with in the impugned Order. A decision has to be considered in the context of the law as arising for consideration and a change in law would render the decision under the old law inapplicable while considering the amended law.

7. The issue as raised stands concluded by the decision of this Court in Black & Veatch Consulting(P) Ltd.(supra) and “Ganesh Polychem Ltd. Vs. ITO” against the Revenue. Therefore, the question of law as proposed for our consideration does not give rise to any substantial question of law.

8. Accordingly, the appeal is dismissed. No order as to costs.”

ITA 5040/Mum/2014 7 It was submitted that in the case of CIT v. Techno Tarp Polymers Private Limited(supra) wherein the Hon’ble Bombay High Court relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Black & Veatch Consulting P. Ltd. [2012] 348 ITR 72 (Bom) and held that brought forward business losses and unabsorbed depreciation of the eligible unit are not to be set off against the current year profits of the eligible unit while computing deduction u/s 10AA of the Act.

7. We have considered the rival submissions and perused the material available on record including the case laws cited by both the parties. The assessee is engaged in the business of manufacturing and export of diamond studded gold and platinum jewellery having its manufacturing unit located at Unit No. 180, SDF-VI, SEEPZ-SEZ, Andheri (E), Mumbai which is an approved Special Economic Zone under the SEZ Act, 2005. The assessee is entitled for deduction u/s 10AA of the Act in respect of the profit earned from the export activity. We have observed that the assessee has claimed that there will be no set off of brought forward business losses and unabsorbed depreciation of eligible unit against current year profits of eligible unit before claiming deduction u/s 10AA of the Act , while the A.O. is contemplating adjustment of set off of brought forward business losses and unabsorbed depreciation of eligible unit against current years profit of eligible unit before allowing deduction u/s 10AA of the Act. The learned CIT(A) held in favour of the assessee and hence Revenue is in appeal before us. We have observed that Hon’ble Bombay High Court in the case of CIT v. Techno Tarp and Polymers Pvt. Ltd. In I.T. Appeal No. 2134 of 2013 dated 5th December, 2015 (

(2015) 97 CCH 0048 (Bom. HC)) has held that brought forward business losses and unabsorbed depreciation of the eligible unit are not to be set off and adjusted against the current year profits of the eligible unit while ITA 5040/Mum/2014 8 allowing deduction u/s 10B of the Act keeping in view of the provisions of section 72 of the Act. Section 10AA is running parallel to the concession available under Section 10B of the Act .The Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in of 2013 ( (2015) 97 CCH 0048 (Bom. HC) ) has duly considered the decision of Hon’ble Karnataka High Court in the case of CIT vs. Himatasingike Seide Ltd. (2006) 156 Taxman 1512 (Kar.) which was upheld by Hon’ble Apex court wherein vide orders dated 19-09-2013 the Hon’ble Apex Court has left the decision of the Hon’ble Karnataka High Court undisturbed in civil appeal no 1501 of 2008, by holding as under:

We have heard learned counsel for the parties to the lis. 2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. Ordered accordingly Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in of 2013 (2015) 97 CCH 0048 (Bom. HC) has allowed the relief to the assessee wherein question of law was answered in favour of the assessee. The question of law formulated in the said appeal in CIT v. Techno Tarp Polymers Private Limited(supra) was as under:

(1) Whether on the facts and in circumstances of the case and in law, the Tribunal was justified in holding that the brought forward unabsorbed loss/depreciation of the assessee’s 10B unit was not liable for set off against the current year’s profit of the same 10B unit?

ITA 5040/Mum/2014 9 The Hon’ble Bombay High Court answered above question of law vide judgment dated 05-12-2015 in of 2013, by holding as under:

“5. We find that the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court was in resepct of Assessment Year 1994-95. Thus it dealt with the provisions of Section 10B of the Act as existing prior to 1 April 2001 which was admittedly different from Section 10B as in force during Assessment Year 200910 involved in this appeal. Section 10B of the Act as existing prior to 1 April 2001 provided for an exemption in respect of profits and gains derived from export by 100% Export Oriented Undertakings and now it provides for deduction of profits and gains derived from a 100% Exported Oriented Units..

6. In any view of the matter, the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court dealt with the provision of law different from that which was dealt with in the impugned Order. A decision has to be considered in the context of the law as arising for consideration and a change in law would render the decision under the old law inapplicable while considering the amended law.

7. The issue as raised stands concluded by the decision of this Court in Black & Veatch Consulting(P) Ltd.(supra) and “Ganesh Polychem Ltd. Vs. ITO” against the Revenue. Therefore, the question of law as proposed for our consideration does not give rise to any substantial question of law.

8. Accordingly, the appeal is dismissed. No order as to costs.”

Respectfully following the decision of Hon’ble Bombay High Court in the case of Black & Veatch Consulting (P) Ltd. (supra) , in the case of Ganesh Polychem Ltd. v. ITO decided in on 10-08-2010 ((2013) 35 taxmann.com 446(Bom.) and the latest decision of Hon’ble Bombay High Court in the case of CIT v. Techno Tarp and Polymers Pvt. Ltd. In Income Tax Appeal No. 2134 of 2013 dated 5th December, 2015 ( (2015) 97 CCH 0048 (Bom. HC) , the appeal of the Revenue is not sustainable in law and hence ITA 5040/Mum/2014 10 we dismiss appeal filed by the Revenue , by upholding/sustaining the appellate order of the ld. CIT(A)’s wherein relief was granted to the assessee by holding that the assessee is entitled to deduction u/s 10AA of the Act from current year’s profits without setting off of carry forward of business losses and unabsorbed depreciation of the eligible unit and hence the appeal filed by the Revenue is dismissed. We order accordingly.

Profit of the Business X Export Turnover ----------------------- Total Turnover The assessee relied upon decision of Hon’ble Bombay High Court in the case of CIT v. Suderashan Chemicals Industries Limited (2000) 245 ITR 769(Bom.). The ld. CIT(A) granted relief to the assessee by holding as under:-

ITA 5040/Mum/2014 11 “ I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. AO. I find that the similar issue arose for the consideration of Special Bench of ITAT at Chennai in the case of ITO vs. Sak Soft Ltd. (2009) 121 TTJ (Chennai (SB) 865,wherein it was held that there is no definition of 'total turnover'. If the parity principle is to be applied, it follows that whatever has been excluded from the export turnover by the definition shall stand excluded from the total turnover also. In cl. (iii) of Expln. 2 to s. 10B, the freight, telecom charges and insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in providing technical services outside India have been excluded from export turnover. Therefore, the same have to be excluded also from the total turnover though that expression has not been defined in the section. The argument of the Department that in the absence of any definition of 'total turnover’ for the purpose of s. 10B, there is no authority to exclude anything from the expression as understood in general parlance cannot be accepted for two reasons. Firstly there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange on connection with the providing of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of export turnover in s. 10B the aforesaid two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent "consideration" in respect of the export. This can only refer to the price of the computer software exported out of India. Any reimbursement of the two items of expenses mentioned in the definition can under no circumstances be considered to represent "consideration" for the export of the computer software or articles or things. Thus there is evidence inherent in the definition of ‘export turnover' itself that it should represent "consideration" for export of the articles or things or computer software. It follows that the expression 'total turnover' which is not defined in s. 10B should also be interpreted in the same manner. Thus the two items of ITA 5040/Mum/2014 12 expenses referred to in the definition of 'export turnover' cannot form part of the total turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported. In this behalf it must be borne in mind that total turnover is nothing but the aggregate of the domestic turnover and the export turnover. The figure of export turnover has to be the same both in the numerator and in the denominator of the formula. It follows that the total turnover cannot include the two items of expenses recovered by the assessee and referred to in the definition of ‘export turnover'. Further, the Hon'ble Bench held that the objection of the Department that the scheme of ss. 10A and 10B on the one hand and that of ss, 80HHC; 80HHE and 80HHF on the other was completely different and, therefore, it would be wrong to read into s. 10B the definition of 'total turnover' appearing in the other sections referred to above is not well-founded. The common thread running through all these sections is that they are all provisions granting relief to the assessees in respect of profits derived from export. It cannot be disputed that the object of these sections is to encourage the earning of foreign exchange and provide incentive to promote exports. If some of the sections such as ss. 80HHE and 80HHF provide for a formula for calculating the deduction which is identical with the formula prescribed by s. 10B, it follows that it would be incongruous to interpret s. 10B in a manner different from those two sections merely because there is no definition of 'total turnover' in that section. 'Export turnover' is defined in Expln. (c) below ss. 80HHE and' 80HHF. The definition excludes freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. Thus statutorily parity is maintained between export turnover and total turnover in these sections. There is no reason why such parity cannot be maintained between export turnover and total turnover in s. 10B just because ‘total turnover’ has not been defined in that section. The words 'total turnover' appearing in the various provisions of the IT Act should be construed in the same manner unless it leads to contextual inconsistencies or repugnancy: So far as the present controversy is concerned, the context requires that the above words be construed in such a manner as to be in harmony with the expression' export turnover' in the sense that whatever is excluded from the export turnover should also be excluded-from the total turnover, more particularly when all the provisions referred to above uniformly prescribe a formula in which the ITA 5040/Mum/2014 13 export turnover is the numerator and the total turnover is the denominator. Therefore, the total turnover for the purpose of applying the formula prescribed by sub-s. (4) of s. 10B, though not defined should be construed in the same manner in which the export turnover has been defined in that section, that is to say, by excluding the freight, telecom charges and insurance attributable, to the delivery of goods outside India or expenses incurred in foreign exchange in providing technical services outside India.

3.3.2 I further find that in-the case of Capgemini India(P) Ltd. vs. Addl.CIT (2011) 46 SOT 195,Mumbai Tribunal following the decisions of ITO vs. Sak Soft Ltd. (2009) 121 TTJ (Chennai)(SB) 865 and CIT vs. Gem Plus Jewellery, India Ltd. (2010) 233 CTR (Bom) 248 has held that under the provisions of Expln. 2(iv) to s. 10A, expenses on freight, telecommunication charges and insurance attributable to the delivery of article or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India are required to be excluded from the export turnover. In this case the data line cost being the telecommunication expenses have been excluded by the AO from the export turnover. The case of the assessee is that the telecommunication expenses had been incurred in the business of software development at the software undertakings of the assessee in India. This, claim has not been controverted by the AO by placing any material on record. The expenses incurred on development of software in India cannot be considered as expenses attributable to the delivery of computer software outside India. Therefore such expenses cannot be excluded from the export turnover and in case these are excluded, these have to be excluded from total turnover also. In any case since these expenses have been incurred in the business of software development in India, these could not be considered as expenditure attributable to delivery of computer software outside India. Therefore, expenses are not to be excluded from the export turnover. In view of the foregoing the Ld. A.O. is directed to verify the exact figure of the total turnover from his record and adopt the same for computation, the deletion of an item from total turnover is also to be reduced from the export turnover for the purposes of arriving at consistency in the computation so as to make the formula workable. This ground of appeal is thus allowed for statistical purposes.”

ITA 5040/Mum/2014 14

8. Aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before the Tribunal.

9. The ld. D.R. submitted that Revenue has filed SLP with the Hon’ble Supreme Court and has not accepted the decision of Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra). The ld. Counsel for the assessee, on the other hand relied on the decision of Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra).

Profit of the Business X Export Turnover ----------------------- Total Turnover The ld. CIT(A) granted relief to the assessee by holding that the freight expenses are required to be excluded from the export turnover in terms of Explanation 1(i) of section 10AA are also required to be excluded from the total turnover, as per the decision of Hon’ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175(Bom. HC), wherein Hon’ble Bombay High Court held as under:

ITA 5040/Mum/2014 15

7. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of section 10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parlia- ment and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation ITA 5040/Mum/2014 17 would lead to an absurdity. If the contention of the revenue were to be accepted, the same expression, viz., 'export turnover' would have a different connotation in the application of the same formula. The submission of the revenue would lead to a situation where freight and insurance, though it has been specifically excluded from "export turnover" for the purposes of the numerator would be brought in as part of the "export turnover" when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided.

ITA 5040/Mum/2014 18

10. Freight and insurance do not have an element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary. The first question of law would therefore, have to be answered against the revenue and in favour of the assessee”

We are of the considered view that merely because the Special Leave Petition has been filed by the Revenue with Hon’ble Apex Court under Article 136 of The Constitution of India against the decision of Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra), the assessee cannot be denied the relief as granted by the ld. CIT(A) who relied upon the decision OF Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra) which was decided by Hon’ble Bombay High Court in favour of the assessee by holding that receipts such as freight and insurance which does not have any element of profit cannot be included in total turnover as they donot have an element of turnover, wherein the issue under the instant appeal is directly covered by the decision of Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra). The provisions governing computation of export turnover as contained in explanation 2(iv) to Section 10A of the Act is para materia to explanation 1(i) to Section 10AA of the Act with respect to the excludability of 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 outside India. The Hon’ble Bombay High Court decision is binding on us till it is reversed by the Hon’ble Apex Court. The Revenue has not been able to bring on record any other decision of the Hon’ble Apex Court which reflects contrary position as was taken by Hon’ble Bombay High Court in the case of ITA 5040/Mum/2014 19 Gem Plus Jewellery India Ltd. (supra) and hence keeping in view the factual matrix of the case, we agree that the assessee is entitled for the relief and the freight of Rs.8,50,250/- incurred for exporting goods outside India attributable to delivery of articles or things outside India is to be excluded from the export turnover(numerator) and to maintain consistency and harmony, the same is also to be excluded from total turnover(denominator) as the formula for deduction u/s 10AA is as as follows:

Profit of the Business X Export Turnover ----------------------- Total Turnover Hence the appeal filed by the Revenue lacks merit and is hereby ordered to be dismissed as we are not inclined to interfere with the appellate orders of learned CIT(A) which we sustain/affirm keeping in view ratio of law laid down by Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra).We order accordingly.