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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
This is an appeal by the Revenue against the order dated 14th February 2014, passed by the learned Commissioner (Appeals)–9, Mumbai, for the assessment year 2010–11.
The only grievance of the Department in the present appeal is against the decision of the learned Commissioner (Appeals) in allowing assessee’s claim for deduction under section 10AA of the Income Tax Act, 1961 (for short "the Act").
2 M/s. Sarto Electro Equipment Pvt. Ltd.
Briefly stated the facts are, assessee a company is engaged in the business of sale of electronic weighing scales. For this purpose, assessee has set–up a unit in the SEZ and has been notified by the Department of Commerce, Ministry of Commerce and Industry, Government of India. For the assessment year under dispute, the assessee filed its return of income on 13th October 2010, declaring nil income after claiming deduction under section 10AA for an amount of ` 67,64,222. In the course of assessment proceedings, in response to the query of the Assessing Officer to justify its claim of deduction under section 10AA, the assessee submitted, the matter relating to assessee’s claim of deduction under section 10AA was examined in detail during the scrutiny assessment proceedings for assessment year 2007–08 and the Assessing Officer being satisfied that the assessee has fulfilled the conditions of the said provision accepted assessee’s claim. In support of such contention, assessee also submitted a copy of the assessment order passed for the assessment year 2007–08. It was also submitted by the assessee that as per instruction no.4 of 2006, dated 24th May 2006, issued by the Department of Commerce, Ministry of Commerce and Industry, Government of India, all the activities relating to SEZ shall be guided by the provisions contained under the said Act and not under 3 M/s. Sarto Electro Equipment Pvt. Ltd.
any provisions of any other Act. This is in view of the overriding effect of section 51 of the SEZ Act. The Assessing Officer, however, did not find merit in the submissions of the assessee. The Assessing Officer, though, accepted the fact that the assessee being recognised under the SEZ Act, fulfills the first condition under section 10AA, however, he was of the view that it has not fulfilled the other condition of export of goods. He observed, out of the total sales effected of ` 2,93,85,793 to 110 parties, only two parties are located abroad thereby demonstrating that 99% of the sales are local and not export as envisaged under the SEZ Act. He, therefore, held that as the assessee has not fulfilled the condition of section 10AA, claim of deduction under the said provision cannot be allowed. Being aggrieved of such decision of the Assessing Officer, assessee preferred an appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after considering the submissions of the assessee in the light of the facts and material on record, agreed with the assessee’s contention that as the SEZ Act has overriding effect over all other Acts, assessee’s unit having been indentified under the SEZ Act, 2005, is eligible for deduction under section 10A. Further, taking into consideration the fact that similar
4 M/s. Sarto Electro Equipment Pvt. Ltd. claim made by the assessee in the earlier assessment years have been allowed by the Department, the learned Commissioner (Appeals) allowed claim of deduction under section 10AA.
Learned Departmental Representative, though, agreed to the fact that this is not the first year of claim of deduction under section 10AA and similar deduction claimed in the preceding assessment years, have been allowed to the assessee, but, he submitted, in the impugned assessment year there being material difference in fact as brought out by the Assessing Officer to the effect that 99% of the sales made by the assessee are local sales, the action of the Assessing Officer in disallowing assessee’s claim of deduction is justified.
Learned Counsel for the assessee supporting the order of the first appellate authority submitted as the assessee has fulfilled all conditions of section 10AA r/w SEZ Act, 2005, it is entitled to claim deduction under section 10AA. Refuting the allegation of the Assessing Officer that 99% of the sales effected are local sales, learned Counsel for the assessee submitted, apart from the export sales, the rest of the sales made by the assessee locally are only to SEZ units, hence, such sales are deemed to be export sales as per the provision of SEZ Act, 2005, which has overriding effect over all
5 M/s. Sarto Electro Equipment Pvt. Ltd. other Acts. Further, the learned counsel submitted as the assessee’s claim of deduction under section 10AA, has been allowed by the Department in the preceding assessment years, no disallowance of deduction claimed in the impugned assessment year can be made unless such disallowance made in the initial year of claim is withdrawn / disallowed. In this context, learned counsel relied upon a decision of Hon'ble Jurisdictional High Court in CIT v/s Western Outdoor Interactive Pvt. Ltd., [2012] 349 ITR 309 (Bom.).
We have considered the submissions of the parties and perused the material available on record. Before delving to decide the issue arising for consideration before us, it is necessary to provide a brief factual back–drop. The hearing of appeal was initially concluded on 15th February 2016. Subsequently, on the basis of a decision of the Hon’ble Kerala High Court in CIT v/s Electronic Controls and Discharge Systems Pvt. Ltd., [2011] 245 CTR 465 (Ker.) on the issue of eligibility of exemption under section 10A in the event of sale of products to another SEZ unit, the matter was put up for clarification. Learned Counsels appearing for rival parties were heard at length vis–a–vis the observations made in the decision referred to above.
6 M/s. Sarto Electro Equipment Pvt. Ltd.
It is the case of the Department that during the relevant previous year, 99% of the sales effected by the assessee since are domestic sales and not export sales, it is not eligible to claim deduction under section 10AA. Per–contra, the submissions advanced on behalf of the assessee broadly are as under:–
i) As per the definition of ―Export‖ under section 2(m) of Special Economic Zone Act, 2005, supplying goods or providing services from one unit to another unit or developer in the same or different Special Economic Zone should also to be treated as export. He submitted, though, the aforesaid provisions has not been included in the definition of ―export turnover‖ or definition of ―export in relation to Special Economic Zone‖ under section 10AA of the Act, however, by virtue of section 51 of SEZ Act, which has overriding affect, the definition of ―Export‖ under the SEZ Act would apply; ii) Unlike the condition imposed under section 10A(3), there is no requirement under section 10AA to realise the sale proceed in convertible foreign exchange, therefore, there is no need for the assessee to directly export the 7 M/s. Sarto Electro Equipment Pvt. Ltd. goods out of the country and sell to another SEZ unit will be treated as deemed export; and iii) The judgment of Hon'ble Kerala High Court in Electronic Controls and Discharge Systems Pvt. Ltd. (supra), would not apply to the facts of the present case as the said decision is in the context of section 10A which is materially different from section 10AA; and iv) Under identical facts and circumstances, the Assessing Officer has allowed assessee’s claim of deduction under section 10AA in assessment year 2007–08, 2008–09 and 2009–10 in assessments completed under section 143(3), hence, assessee’s claim of exemption in the impugned assessment year cannot be denied in view of the decision of the Hon'ble Jurisdictional High Court in Western Outdoor Interactive Pvt. Ltd. (supra).
Thus, on the basis of aforesaid submissions made by the parties, the issue arising for consideration is to be decided. Undisputedly, as per the facts submitted before us, out of the total sales effected during the relevant previous year amounting to ` 2,93,85,793, sales amounting to ` 2,53,56,748 was not direct
8 M/s. Sarto Electro Equipment Pvt. Ltd. export sales by the assessee but sales to other SEZ units within the country. It is the claim of the assessee that such sales to SEZ units should also be considered as deemed export in terms of the definition of ―export‖ contained under section 2(m) of the SEZ Act. Before deciding the validity of the aforesaid claim of the assessee, it is necessary to look into some of the provisions contained under Special Economic Zone Act, 2005 as well as Income Tax Act, 1961 which are relevant for the purpose of deciding the present issue. SEZ Act, 2005, enacted by the Parliament came into effect from 23rd June 2005. The object of bringing the said enactment was to provide for the establishment, development and management of SEZ for the promotion of export and for matters connected therewith or incidental thereto. In section 2(m) of the SEZ Act, ―Export‖ has been defined as under:–
―2(m) ―Export‖ means – (i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;‖
9 M/s. Sarto Electro Equipment Pvt. Ltd.
Section 7 of SEZ Act provides exemption from payment of taxes, duties, or cess on goods or services exported out of or imported into or procured from the domestic tariff area by the unit or developer, under all enactment specified in the first schedule. Section 26 of the SEZ Act provides certain exemptions, drawbacks and concessions to a developer and entrepreneur subject to conditions stipulated therein. However, section 27 of the SEZ Act, 2005, specifically deals with applicability of provisions of Income Tax Act, 1961 to a SEZ unit. For ready reference the said provision is extracted herein below:–
―27. 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 authorised operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule.‖
As could be seen from the reading of the aforesaid provision, the provision of the Income Tax Act, 1961 shall apply to a developer or entrepreneur for carrying on the authorized operations in SEZ subject to the modification specified in the second schedule. In furtherance to provisions of section 27 of SEZ Act, 2005, section 10AA of the I.T. Act was incorporated in the second schedule to SEZ Act, 2005. Therefore, in terms of section 27 of SEZ Act, provisions of 10 M/s. Sarto Electro Equipment Pvt. Ltd.
I.T. Act would apply subject to modification brought in by way of section 10AA of the Act.
Now, we will deal with the provision of section 10AA of the I.T. Act. On a careful reading of the aforesaid provision, it appears that 100% exemption of profit and gain derived from export of a product or service is allowed to a unit / developer / entrepreneur in SEZ for a period of five years subject to fulfillment of certain conditions. ―Export Turnover‖, as per Explanation–1(i) of section 10AA of the I.T. Act, 1961, reads as under:–
―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;‖
Export in relation to SEZs, as defined in Explanation–1(ii) of section 10AA of the I.T. Act, reads as under:–
―(ii) ―export in relation to special economic zones‖ means taking goods or providing service out of India from a special economic zone by land, sea, air, or by any other mode, whether physical or otherwise.‖
If the definition of ―export in relation to SEZs‖ as provided under Explanation–1(ii) of section 10AA of the I.T. Act, is kept in 11 M/s. Sarto Electro Equipment Pvt. Ltd.
juxtaposition to the definition of ―Export‖ under section 2(m) of the SEZ Act, it is to be seen while clause (i) of section 2(m) of SEZ Act, was incorporated under Explanation–1(ii) of section 10AA of the I.T. Act, however, clause (ii) and (iii) of section 2(m) of the SEZ Act, 2005, were left out. Thus, from the aforesaid fact, it is clear that the legislature took a conscious decision in leaving out certain portion of definition of “export” as provided under section 2(m) of SEZ Act, while defining “export in relation to the SEZs” under Explanation– 1(ii) of section 10AA of the I.T. Act. Thus, it becomes clear that the intention of the legislature while enacting the provisions of section 10AA is to confine the exemption only in respect of direct export sales and not in respect of exports as provided under clause (ii) and (iii) of section 2(m) which also includes sale to another SEZ unit. As already stated earlier, section 27 of the SEZ Act, make it clear that provisions of the I.T. Act, 1961, would be applicable to the units and developers under the SEZ Act, subject to modification brought under second Schedule. The modification has been brought under second Schedule by enacting section 10AA of the I.T. Act. Therefore, the exemption to SEZ unit will strictly be in accordance with the provisions contained under section 10AA. Had it been the intention of the legislature to allow general exemption from payment of income tax to a unit / developer in the SEZ, the legislature would
12 M/s. Sarto Electro Equipment Pvt. Ltd. have provided such exemption either under section 7 of SEZ Act, 2005, by including income Tax Act, under the first schedule or even under section 26 of SEZ Act, 2005, which provides for exemption, drawback and concession in respect of custom duties, excise duty, service tax, securities transaction tax, central sales tax, etc. As far as I.T. Act is concerned, section 27 of the SEZ Act provides for its applicability subject to the modification brought under second Schedule which in other words, means that exemption in terms of section 10AA is to be allowed to SEZ unit / developer. The contention of the learned Authorised Representative that provisions of section 2(m)(iii) would apply to even section 10AA in view of the overriding provisions of section 51 of the Act, in our view, is not acceptable because there is no inconsistency between the provisions of section I.T. Act, 1961 and the provisions contained in SEZ Act, 2005. as section 27 of SEZ Act, 2005, makes it clear that the provisions of I.T. Act would apply to SEZ unit subject to modification provided under second Schedule. Thus, by virtue of provisions contained under section 27 of SEZ Act, 2005, r/w second Schedule, the provisions contained under section 10AA would be applicable to SEZ units. Therefore, as per the definition of “export in relation to SEZ units” as provided under Explanation–1(ii), a unit / developer claiming exemption has to export goods / service, out of India from 13 M/s. Sarto Electro Equipment Pvt. Ltd. a SEZ directly by itself to qualify as export. Sale effected to another SEZ unit either within the same SEZ or a different SEZ cannot be considered to be an export of goods or services out of India in terms of explanation 1(ii) of section 10AA. Therefore, to that extent goods sold to another SEZ unit would not qualify for exemption under section 10AA.
The Hon'ble Kerala High Court in Electronic Controls and Discharge Systems Pvt. Ltd. (supra) while examining similar claim of sale to another SEZ whether qualifies for deduction under section 10A of the Act, even after taking note of definition of ―Export‖ contained in section 2(m)(iii) of SEZ Act, however, did not agree with assessee’s claim. The Hon'ble High Court observing that I.T. Act, 1961, is a self contained code held as under:–
―6. After hearing both sides and after going through the above referred provisions of the Income-tax Act and the provisions of the Special Economic Zones Act, 2005, we are unable to uphold the order of the Tribunal because the concept of deemed export under the Special Economic Zones Act is not incorporated in the scheme of exemption under section 10A of the Income-tax Act and it is the settled position that the Income-tax Act is a self- contained code and the validity or correctness of the assessment has to be considered with reference to statutory provisions. It is not as if the Special Economic Zones Act, 2005 or the Foreign Exchange Regulation Act or the Foreign Exchange Management Act are not referred to in the Income-tax Act. The Income-tax Act refers to several statutes in different places and wherever required, provisions of such statutes are incorporated in the Act through reference or by incorporation. It is not as if the Parliament is unaware of other statutes which have specific purposes. Inter-unit transfers in Economic Zones are treated as 14 M/s. Sarto Electro Equipment Pvt. Ltd. exports for the purpose of Customs Act and the Central Excise Act. However, when section 10A, provides for exemption only on profits derived on export proceeds received in convertible foreign exchange, the Legislature never intended the benefit to be extended to local sales made by the units in the Special Economic Zone, whether as part of Domestic Tariff Area sales or inter-unit sales within the Zone or units in other Zones. In fact all Special Economic Zones are allowed to make 25 per cent sales to Domestic Tariff Area and the profit derived from such sales are not entitled to exemption. Exemption under section 10A(3) is specifically geared to profits on actual exports, that too, made against receipt of convertible foreign exchange. We are of the view that if the provisions of the Special Economic Zones Act, 2005, are brought into extend the exemption on profits derived on inter-unit sale made by industries within the Export Processing Zone, the court will be re-writing the legislation which is exactly what the Tribunal has done. In fact, the unit which purchased components from the assessee must be manufacturing final products and being a unit in the Special Economic Zone will be exporting the final product, on which that unit will get exemption on the entire profits which include the value of the components supplied by the assessee. Probably the Legislature did not want duplicity in exemption on export profit. That is why inter-unit sales in the Export Processing Zone are not treated as export within the meaning of section 10A of the Income-tax Act, no matter such transfers are treated as exports for the purpose of Customs and Excise duty exemption. When the exemption is only on actual profits derived on exports made against receipt in convertible foreign exchange, the Tribunal, in our view, has no justification to extend it to profits received on local sales within India against payment received in Indian rupees. For the above reasons, we are unable to sustain the orders of the Tribunal and we, therefore, allow the appeals by reversing the orders of the Tribunal and by restoring the orders cancelled by the Tribunal.‖
The ratio laid down by the Hon'ble Kerala High Court, as referred to above, clearly applies to the facts of the present case. Undisputedly, section 10AA has been incorporated into the Act by virtue of section 27 of SEZ Act, 2005, and provides exemption to SEZ units subject to conditions mentioned therein. Therefore, a unit
15 M/s. Sarto Electro Equipment Pvt. Ltd.
/ developer claiming exemption under section 10AA, has to come within the four corners of the said provision. Unless, the conditions prescribed therein are fulfilled the exemption cannot be granted. Attempt of learned Authorised Representative to draw a distinction between section 10A and 10AA by pointing out that there is no need to obtain sale proceeds in convertible foreign exchange under section 10AA, unlike section 10A(3) is of not much help to the assessee. Though, it is not expressly mentioned in section 10AA, for bringing the export proceeds in convertible foreign exchange but in our view that cannot be interpreted in a manner to mean that sales made to another SEZ unit would amount to export as provided under Explanation–1(ii) of section 10AA. If assessee’s contention is accepted, then it may possibly lead to a situation where for the same turnover the assessee as well as the actual exporter would be claiming benefit under section 10AA, because, as per the provision, the person / unit actually exporting the goods out of India would qualify for exemption. Further, condition of bringing the sale proceeds in convertible foreign exchange is not specifically referred to in section 10AA, unlike section 10A may be for the reason that procedure relating to export and import of goods / services have been laid down in detail under SEZ Act, 2005 and SEZ Rules, 2006. In any case of the matter, in the present appeal, we are concerned
16 M/s. Sarto Electro Equipment Pvt. Ltd. with the issue what constitutes export in terms of section 10AA of the Act. Therefore, in our view, the assessee would be eligible to avail exemption under section 10AA in respect of goods / services directly exported by it and it will not get any exemption in respect of sales made to other SEZ unit which cannot be treated as export sales. The fact that assessee realized the sale proceeds in foreign exchange would also not entitle the assessee to claim exemption on sales effected to another SEZ unit. As far as the contention of the learned Authorised Representative that in view of the decision of Hon'ble Jurisdictional High Court in Western Outdoor Interactive Pvt. Ltd. (supra), no disallowance of exemption under section 10AA can be made in the impugned year as assessee has been allowed exemption in the past years, we are of the view that the contention of the learned Authorised Representative is wholly misconceived. On a careful reading of the aforesaid judgment of the Hon'ble Jurisdictional High Court, it is noted, exemption under section 10A was denied on the reason that unit was formed by splitting up of existing unit. However, this aspect of the matter was examined by the Assessing Officer while completing assessment under section 143(3) for assessment year 2000–01 and 2001–02 and the Assessing Officer allowed exemption after reaching a conclusion that unit was not formed by splitting up or reconstruction of business
17 M/s. Sarto Electro Equipment Pvt. Ltd. already in existence. Considering the aforesaid factual position, the Hon'ble High Court held that unless exemption granted in earlier assessment year under identical facts and circumstances and on satisfaction of certain conditions of the provision is withdrawn, exemption in a subsequent assessment year cannot be denied. In the present case, there is no dispute that assessee being a SEZ unit is eligible to claim exemption u/s 10AA subject to fulfillment of conditions prescribed therein. Therefore, as far as assessee’s claim of eligibility u/s 10AA is concerned, there is no doubt about that. We are only concerned with the computation of exemption u/s 10AA which is restricted only to export sales. In other words, exemption u/s 10AA has to be computed on each assessment year independently on the quantum of export sales made by assessee. If we pose a question to ourselves, can an assessee be allowed exemption u/s 10AA without exporting any goods or services in a particular assessment year only because in past assessment years it has been allowed such exemption? The answer will be ―No‖! Allowance of exemption in such a case would not only be against legislative intent but also defeat the purpose for which the provision was enacted. The decision of the Hon'ble Bombay High Court cannot be interpreted in a manner to suggest that even without fulfilling the basic conditions of statutory provision, it can claim deduction merely because such deduction was allowed in earlier assessment years. As far as the decisions of the Tribunal
18 M/s. Sarto Electro Equipment Pvt. Ltd. in Goenka Diamonds and Jewellery Ltd. and Gitanjali Exports Corp. Ltd., relied upon by the learned Authorised Representative, on a perusal of the order of the Tribunal, we are of the view that they are of no help to the assessee as they were not directly on the issue whether sales to another SEZ unit will be treated as deemed export. Moreover, in both the decisions, the Tribunal has referred to instructions issued by the Ministry of Commerce and Industries clarifying that service includes trading also for the purpose of claiming exemption under section 10AA, whereas, there is no such instruction in relation to export vis–a–vis sales made to another SEZ unit. As stated earlier, the assessee is eligible for exemption under section 10AA in respect of direct export sales made by it. We, therefore, direct the Assessing Officer to verify the quantum of export sales directly made by the assessee and allow exemption under section 10AA in respect of such turnover.
7. In the result, appeal is allowed for statistical purposes. Order pronounced in the open Court on 13.07.2016