IT : Section 10A(6) would apply to previous year relevant to first assessment year succeeding tax holiday period
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[2013] 29 taxmann.com 139 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'C'
Tata Consultancy Services Ltd.
v.
Assistant Commissioner of Income-tax, Company Circle 1(1), Chennai*
N.S. SAINI, ACCOUNTANT MEMBER
and S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NOS. 792 & 793 (MDS.) OF 2010
[ASSESSMENT YEARs 2003-04 & 2004-05]
NOVEMBER 21, 2012
Section 10A, read with section 154, of the Income-tax Act, 1961 - Free Trade Zone - Sub-section (6) - Assessment years 2003-04 and 2004-05 - Whether section 10A(6) would apply to previous year relevant to first assessment year succeeding tax holiday period - Held, yes - Assessing Officer found that claim for depreciation and brought forward business loss for assessment year had been wrongly allowed as assessee, a section 10A unit, had violated section 10A(6) - He passed rectification order and rejected said claim - Whether since assessee chose to avail benefit of tax holiday from assessment year 1999-2000, its exemption period was continuing and, therefore, section 10A(6) would not apply - Held, yes [Para 8] [In favour of assessee]
FACTS
Facts
• The assessee, a section 10A unit, claimed deduction for depreciation and brought forward business loss which was allowed accordingly.
• However, the Assessing Officer found that assessee had violated section 10A(6)(ii) as it had claimed relief under section 10A in computing its total income for assessment year 1997-98 and, thus, brought forward business loss and depreciation for said assessment year had been wrongly allowed.
• He rectified its order under section 154 and rejected the assessee's claim.
• The Commissioner (Appeals) sustained the said order.
Arguments of assessee
• Section 154 had been wrongly invoked the assessee was very well entitled to relief of brought forward loss and depreciation for the assessment year 1997-98 as accepted in the assessment order and section 10A(6)(ii) of the "Act" is not even applicable.
Issue involved
• Whether section 10A(6) can be invoked where exemption period is continuing?
HELD
Scope of section 10A
• A perusal of the legislative history of section 10A makes it clear that the same was incorporated in the 'Act' with effect from 1-4-1981 by the Finance Act, 1981. Initially, it had provided tax holiday of five consecutive year beginning with the assessment year relevant to the previous year in which the undertaking begins manufacturing or production of the article, things or computer software. From the amendment incorporated by the Finance Act, 2000 with effect from 1-4-2001, the period of tax holiday of five assessment year stands extended to ten consecutive assessment years. At the same time, the Legislature has also prescribed certain conditions whilst computing the income after the tax holiday period is over, i.e., sub-section (6) comes into play as per which, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of relevant assessment year, no loss under section 72 or 74 relating to business of the undertaking is to be allowed to be carried forward or set off if it pertains to any of the relevant assessment year before 1-4-2001. [Para 7]
Section 10A(6)(ii) cannot be invoked in exemption period
• In the definition clauses of the provision i.e. Explanation 2 to 6 of the 'Act', relevant assessment year has been defined as 'assessment year falling within the period of ten consecutive assessment years' referred to in this section. If the above definition vis-à-vis opening lines of sub-section (6) is incorporated, it emerges that sub-section (6) would apply in the previous year relevant to the assessment year immediately succeeding last of the relevant assessment year i.e. the previous year relevant to the first assessment year succeeding tax holiday period. To put in other words, since the assessee's exemption period is continuing as it chose to avail the benefit of tax holiday from the assessment year 1999-2000, sub-section 6(ii) does not apply in this case. [Para 8]
Conclusion
• The Assessing Officer as well as the Commissioner (Appeals) have erred in subjecting the assessee's claim of brought toward loss and depreciation to section 10A(6)(ii) by invoking rectification under section 154 [Para 9]
CASE REVIEW
WNS Global Services (P.) Ltd. v. Addl. CIT [2011] 45 SOT 74 (Mum.) (URO) (para 7) followed.
CASES REFERRED TO
WNS Global Services (P.)Ltd. v. Addl. CIT [2011] 45 SOT 74 (Mum.) (URO) (para 5), Lason India (P.) Ltd. v. ITO [IT Appeal No. 206 (Mds.) of 2007 dated 27-7-2007] (para 5), Jai Ushin Ltd. v. Dy. CIT [2009] 117 ITD 1/[2008] 171 Taxman 110 (Delhi) (para 5), Dy. CT v. Akay Flavours & Aromatics (P.) Ltd. [2011] 130 ITD 41/10 taxmann.com 219 (Cochin) (TM) (para 5) and Ford Business Services Centre (P.) Ltd. v. Asstt. CIT [2008] 114 TTJ 881 (Chennai) (para 5).
R. Vijayaraghavan and S.P. Chidambaram for the Appellant. S. Jayaraman for the Respondent.
ORDER
S.S. Godara, Judicial Member - These two appeal of the assessee are directed against different orders of the Commissioner of Income Tax (Appeals) III Chennai in ITA No. 578/07-08/A.III and ITA No. 521/06-07/A.III; dated 16.03.2010 and 15.03.2010 for the assessment years 2003-04 and 2004-05, respectively, in proceedings under section 154 of the Income Tax Act 1961 [in short the "Act"] for the assessment year 2003-04 and under section 143(3) of the "Act" for the assessment year 2004-05. Since grounds raised are identical in both appeals, we take up I.T.A. No. 792/Mds/2010 as lead case.
I.T.A. No. 792/Mds/2010:
2. The following grounds have been raised:
"2. (i) The Commissioner of Income Tax (Appeals) erred in confirming the rectification order under Section 154 of the Income Tax Act, 1961.
(ii) The Commissioner of Income Tax (Appeals) ought to have appreciated that issue considered by the Assessing officer for the purpose of rectification is highly debatable issue and as such the Assessing Officer was not correct in amending the order under Section 154 of the Act.
(iii) The Commissioner of Income Tax (Appeals) ought to have appreciated that debatable issue cannot be considered as mistake apparent from record.
3. Without prejudice to the above claim, the Appellant submitted that the Commissioner of Income Tax (Appeals) ought to have appreciated that the claim of deduction under section 10A allows an assessee to avail the benefits only for a period of 5 years out of 8 consecutive years and the Appellant had chosen the period only from Assessment Year 1999-2000 and not claimed the deduction under Section 10A for the Assessment Year 1997-98. Accordingly, the unabsorbed business loss /unabsorbed depreciation of Assessment Year 1997-98 should be allowed to be carried forward and set off in the subsequent years."
3. Facts as relevant to the grounds are that the assessee is a company involved in the business of maintenance and development of computer software. For the impugned assessment year, it filed its 'return' on 21.11.2003 admitting total income of Rs. 1,36,36,175/-. Thereafter, the Assessing Officer completed scrutiny assessment vide assessment order dated 13.02.2006 computing taxable income of Rs. 1,75,58,720/- as under:
| | | "Profits of the business as computed by the assessee | | | 5,33,38,428 |
| | Add: | | | | |
| | | Difference in revenue as per P&L A/c and TDS certificate (para 2) | | | 1,36,617 |
| | Less: | | | | 5,34,75,045 |
| | | 10% of withholding tax added by the assessee | | | 9,84,379 |
| | Add: | | | | 5,24,90,666 |
| | | Entire Withholding tax Profits | | | 98,43,786 |
| | | | | | 6,23,34,452 |
| | Less: | | | | |
| | | Gain on exchange fluctuation treated as 'Income from other sources Adjusted Profits | | | 30,85,451 |
| | | | | | 5,92,49,001 |
| | | Eligible export turnover (As computed by the assessee) | | | 14,77,74,533 |
| | Less: | | | | |
| | | Communication charges relating to Voice & data transmission | | | 13,53,966 |
| | | Adjusted Export turnover | | | 14,64,20,567 |
| | | Total turnover as computed by the assessee | | | 16,65,85,708 |
| | Less: | | | | |
| | | Communication charges relating to Voice & data transmission | | | 13,53,966 |
| | | Adjusted total turnover | | | 16,52,31,742 |
| | | Exemption u/s 10A - 90% of Profit X ETO/TTO - 90% of 5,25,03,667 = Rs. 4,72,53,300 | | | |
| | | The taxable income is determined as under Business income | | | 5,92,49,001 |
| | Less: | | | | |
| | | Exemption u/s 10A (as worked above) | | | 4,72,53,300 |
| | | Business income | | | 1,19,95,701 |
| | Add: | | | | |
| | | Income from other sources (as admitted) | 28,81,563 | | |
| | | Exchange fluctuation treated as income from other sources | 30,85,451 | | 59,67,014 |
| | | GROSS TOTAL INCOME | | | 1,79,62,715 |
| | Less: | | | | |
| | | Deduction u/s 80-G | | | 4,000 |
| | | TAXABLE INCOME | | | 1,79,58,715 or 1,79,58,720 |
| | | Net tax payable | Rs. 17,83,430/- | | |
| | | (Calculation sheet enclosed) This should be paid as per demand notice and challan enclosed | |||
| | | The income computed by the assessee under sec. 115JB is adopted as it is." | |||
Subsequently, the Assessing Officer issued notice dated 27.04.2007 to the assessee stating therein that there had been a mistake apparent on the face of record since its claim of brought forward business loss and depreciation of assessment year 1997-98 of Rs. 4,90,32,291/- and Rs. 32,17,651/- respectively had been wrongly accepted. Per Assessing Officer, the assessee had claimed relief under section 10A in computing total income and therefore in claiming loss and depreciation pertaining to the assessment year 1997-98, violated section 10A(6)(ii) of the "Act".
As the paper book reveals, since no representation was filed by the assessee in furtherance to the above said notice, the Assessing Officer passed rectification order dated 17.12.2007 under section 154 of the "Act" rejecting assessee's claim of brought forward loss and depreciation.
4. Aggrieved, the assessee preferred appeal; wherein, the Assessing Officer's findings have been upheld by the CIT(A) as herein below:
"4. I have considered the submission of the Id. AR and the material on record. I find that an appeal has been filed against the order u/s 154 dated 17.12.2007. The merit as well as jurisdiction of the AO are the disallowance is the subject matter of the above appeal. As far as rectification order is concerned, I find that the A.O. is perfectly within his jurisdiction to carry out rectification. Under sub-section (1) of section 154, any mistake apparent from the record can be rectified i.e. a mistake which is obvious and patent and not something which can be established after a long-drawn debate or reasoning on which there may be more than one opinion [T.S. Balaramam v. Volkanrt Brothers, 82 ITR 50 (SC). It may be a mistake of fact or law. In this case it was a mistake to allow the carried forward loss of a year prior to assessment year 2001-02. The loss pertained to A.Y. 1997-98. The disallowance was made as per clear provisions of section 10A (6)(ii) of the Act. The mistake is very patent and obvious and it strikes one at the first glance of the order. Therefore, an income-tax authority under section 116 of i.e., the DCIT, Company Circle I(1), Chennai in the instant case, was statutorily within jurisdiction to rectify such appellant mistake. Hence, the action of the AO is sustained. The appellant fails on this ground."
In this backdrop the assessee is in appeal.
5. Reiterating the pleas raised in the grounds, the AR has vehemently argued that the CIT(A) has wrongly confirmed the order of the Assessing Officer passed under section 154 of the "Act" dated 17.12.2007. It is the contention of the AR that section 154 has been wrongly invoked in the instant case. Per him, the assessee is very well entitled to relief of brought forward loss and depreciation for the assessment year 1997-98 as accepted in the assessment order and section 10A(6)(ii) of the "Act" is not even applicable. To buttress his submissions, he has also placed reliance on following case law:
1. WNS Global Services (P) Ltd. v. Addl. CIT [2011] 45 SOT 74 (Mum) (URO)
2. Lason India (P.) Ltd. v. ITO [I.T. Appeal No.206/Mds/07 decided on 27-7-2007].
3. Jai Ushin Ltd. v. Dy. CIT [2009] 117 ITD 1/[2008] 171 Taxman 110 (Delhi)
4. Dy. CIT v. Akay Flavours & Aromatics (P.) Ltd. [2011] 130 ITD 41/10 taxmann.com 219 (Cochin) (TM).
5. Ford Business Services Centre (P) Ltd. v. Asstt. CIT [2008] 114 TTJ 881 (Chennai).
and prayed for acceptance of the appeal.
6. Opposing the submissions made by the assessee, the DR representing the Revenue has strongly supported the order of the CIT(A) as well as reasons contained therein and prayed for upholding the same.
7. We have considered rival contentions at length and have also perused relevant findings as well as case law cited. Admitted facts of the case are that the assessee is a unit entitled for deduction under section 10A of the Act i.e. special provisions in respect of newly established undertaking in free trade zone. We also deem it appropriate to reproduce relevant portion of section 10A of the "Act" as follows:
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:
| | ** | ** | ** |
(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 76[ending before the 1st day of April, 2001], 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) 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 [ending before the 1st day of April, 2001];
(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.
8. A perusal of the legislative history of the provision makes it clear that the same was incorporated in the "Act" with effect from 01.04.1981 by the Finance Act, 1981. Initially, it had provided tax holiday of five consecutive year beginning with the assessment year relevant to the previous year in which the concern undertaking begins manufacturing or production of the article, things or computer software. As we notice from the amendment incorporated by the Finance Act 2000 w.e.f. 01.04.2001, the period of tax holiday of five assessment year stands extended to ten consecutive assessment years. At the same time, the legislature has also prescribed certain conditions whilst computing the income after the tax holiday period is over i.e. sub-section 6 comes into play as per which, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of relevant assessment year, no loss under section 72 or 74 relating to business of the undertaking is to be allowed to be carried forward or set off if it pertains to any of the relevant assessment year before 01.04.2001. It is the applicability of sub-section 6(ii), which the subject matter of interpretation before us. Regarding the construction of provision, the argument put forward by the assessee is that since it is still availing the tax holiday relief, the case is not governed by sub-section 6; whereas, the argument of the Revenue is to the contrary. We find that the contention of the assessee, qua the applicability of the provision to be on the right side of the law for the reason that in the definition clauses of the provision i.e. explanation 2 to 6 of the "Act", relevant assessment year has been defined as 'assessment year falling with the period of ten consecutive assessment years' referred to in this section. If we interpret the above definition vis-à-vis opening lines of sub-section 6, it emerges that sub-section (6) would apply in the previous year relevant to the assessment year immediately succeeding last of the relevant assessment year i.e. the previous year relevant to the first assessment year succeeding tax holiday period. To put in other words, since the assessee's exemption period is continuing as it chose to avail the benefit of tax holiday from assessment year 1999-2000, sub-section 6(ii) does not apply in this case. We also find support from the case law of Coordinate Bench of Mumbai, ITAT in the case of WNS Global Services (P.) Ltd. (supra), wherein it has been held as under:
"40. We have heard the rival submissions. The relevant provisions of Sec.10-A(6)(ii) reads as follows:
"(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) 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 ;
Expln.-2 (vi) to Sec.10-A of the Act defines "relevant Assessment year" for the purpose of Sec.10-A of the Act as follows:
"(vi) "relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section,;"
41. It is clear from the aforesaid provisions that they apply during the assessment years after the end of the holiday period. Admittedly the present AY relates to the holiday period and therefore the above provisions are not applicable. In the case of Enercon Wind Farms (Krishna) Ltd. v. ACIT [2008] 21 SOT 29 (mum) this Tribunal has taken the view that provisions of Sec.10-B(6)(ii) are applicable only after the tax holiday period is over. The Tribunal held that if after allowing deduction u/s.10-B of the Act, there was certain income still left with the Assessee, the same will be total income of the Assessee to which all other sections of the Act, including Sec.72 would apply and carried forward losses could definitely be set off against such total income. Similar view was expressed by the ITAT Bangalore Bench in the case of Mindtree Consulting (P) Ltd. v. ACIT 102 TTJ (Bang) 691. Respectfully following the decisions referred to above, we direct the AO to allow the claim of the Assessee. Ground No.7 is allowed. Ground No.8 being general in nature does not call for any specific adjudication."
9. Accordingly, we are of the opinion that the Assessing Officer as well as CIT(A) have erred in subjecting the assessee's claim of brought forward loss and depreciation to sub-section 6(ii) of the "Act" by invoking rectification under section 154 of the "Act". Hence, we hold that in the assessment order (supra), the assessee had been right held entitled for the claim of setting off brought forward loss and depreciation as was accepted by the Assessing Officer.
10. Since on legality, we have held that section 10A (6)(ii) of the "Act" does not apply in the case of the assessee, we refrain ourselves from dealing with the issue on merits and therefore, we are not adverting to other case law as cited by the assessee.
11. In view of the above discussion, the appeal of the assessee stands accepted.
I.T.A. No. 793/Mds/2010:
12. In this appeal, the assessee has raised following effective grounds:
"2. The Commissioner of Income Tax (Appeals) erred in not allowing the brought forward business loss and unabsorbed depreciation pertaining to the Assessment Year 1997-98 and set it off against the income from other sources.
3. The Commissioner of Income Tax (Appeals) ought to have appreciated that Section 10A of the Act provides the assessee to opt for the claim of deduction in any 5 years out of 8 consecutive years and the Appellant had chosen the period from Assessment Year 1999-2000. Accordingly the Appellant had not claimed deduction under Section 10A for the Assessment Year 1997-98 and therefore the unabsorbed business loss/unabsorbed depreciation of that year is eligible to be carried forward and set off against the income of the current year."
13. Both representatives have very fairly stated that the issue raised in the ground is also consequential to that raised in the appeal I.T.A. No. 792/Mds/2010 decided hereinabove. We have also gone through the facts of the case as well as grounds raised and find that the submission to be correct. Hence, we also accept this appeal of the assessee in the above terms.
14. To sum up, both the appeal stand allowed.
The below are some judgements of High court on some issue favouring Revenue u/s 10A and 10B. If all officers are made aware of these judgements , and data is collected from the relevant authories( Excise, Custom , State Government , SEZ etc) regarding these units , a lot of revenue can be generated for the department in this period of recession.
1. State government is providing incentives to exporters under VKYU, can be disallowed as per Judgement of Apex Court in case of Liberty india.
2. Sale of one EOU to another or one SEZ to another SEZ and one STPI to another STPI will be avaiable with the Custom authorities , Excise authorities etc.
But , one needs to take it as a profession and not as a routine government servant.
2009] 184 TAXMAN 46 (BANG.)(MAG.)
IN THE ITAT BANGALORE BENCH 'A'
Tata Elxsi Ltd.
v.
Assistant Commissioner of Income-tax, Circle 12(3)
P. MOHANARAJAN, JUDICIAL MEMBER AND N.L. KALRA, ACCOUNTANT MEMBER
IT APPEAL NO. 315 (BANG.) OF 2006
OCTOBER 16, 2007
I. Section 10A of the Income-tax Act, 1961 - Free trade zone - Assessment year 2002-03 - Whether formula prescribed for computing deduction under section 10A being same as prescribed in section 80HHE, term 'total turnover' for purposes of section 10A should be same as understood for purposes of section 80HHE and, therefore, for purposes of section 10A, 'total turnover' would mean a sum of export turnover and domestic turnover - Held, yes - Whether, therefore, if as per formula for computation of deduction under section 10A, 'export turnover' in numerator is to be arrived at after excluding certain expenses, same should also be excluded in computing 'total turnover' in denominator - Held, yes
II. Section 10A of the Income-tax Act, 1961 - Free trade zone - During relevant assessment year, assessee, a STP unit, had made certain sales to another STP unit in India and claimed that such sale should be treated as deemed export for purpose of section 10A - Assessing Officer, however, excluded amount of such sale from export turnover-Commissioner (Appeals) confirmed action of Assessing Officer - Whether when provisions of section 10A, as it stood at relevant time, specifically provided as to how much benefit was to be given to assessee if sales to another STP did not exceed 25 per cent of total products and assessee had been provided with benefit to that extent in case of sale to a similar STP within India, its claim was rightly rejected - Held, yes
[2011] 13 taxmann.com 193 (Ker.)
HIGH COURT OF KERALA
Commissioner of Income-tax, Cochin
v.
Electronic Controls & Discharge Systems (P.) Ltd.*
C.N. RAMACHANDRAN NAIR AND BHABANI PRASAD RAY, JJ.
IT APPEAL NOS. 217 AND 232 OF 2010
JULY 27, 2011
Section 10A of the Income-tax Act, 1961 - Free trade zone - Assessment years 2003-04 and 2004-05 - Whether section 10A provides for exemption only on profits derived on export proceeds received in convertible foreign exchange - Held, yes - Whether, therefore, benefit of exemption under section 10A cannot be extended to local sales made by units in Special Economic Zone, whether as part of domestic tariff area sales or as inter-unit sales within zone or units in other zones - Held, yes [In favour of revenue]
IT : Eligibility of a 100 per cent EOU for deduction under section 10B is that it should be approved by Central Govt. through appropriate authority constituted under section 14 of Industries (Development and Regulation) Act; and if a 100 percent EOU is only approved by Director, STPI it would not be a valid approval
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[2012] 27 taxmann.com 322 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income tax
v.
Regency Creations Ltd.*
S. RAVINDRA BHAT AND R.V. EASWAR, JJ.
IT APPEAL NOS. 69 OF 2008, 783 OF 2009 & 1239 OF 2011
SEPTEMBER 17, 2012
Section 10B, read with section 10A, of the Income-tax Act, 1961 - Export oriented undertaking - Grant of approval - Assessment years 2003-04, 2004-05, 2006-07 and 2007-08 - Whether though considerations which apply for granting approval under sections 10-A and 10-B may to an extent, overlap, yet deliberate segregation of these two benefits by statute reflects Parliamentary intention, that to qualify for benefit under either, specific procedure enacted for that purpose has to be followed - Held, yes - Whether, therefore, approval granted to a 100 per cent EOU set up under Software Technology Park Scheme cannot be deemed to be an approval under section 10-B - Held, yes [Para 14] [In favour of revenue]
Circulars and Notifications : Circular Nos. 1 of 2005, dated 6-1-2005, 149/194/2004/TPL, dated 6-1-2005, 200/20/2006, dated 31-3-2006 and 694, dated 23-11-1994; Instruction No. 1 of 2006, dated 6-1-2005
Andhra High Court
M/S.Swayam Consultancy Pvt., ... vs The Income Tax Officer, Ward 3(2), ... on 26 April, 2011
THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH INCOME TAX TRIBUNAL APPEAL No.62 of 2011
26-4-2011
M/s.Swayam Consultancy pvt., Ltd., Pashamylaram, Medak
The Income Tax Officer, Ward 3(2), Hyderabad
Counsel for Appellant: Sri M.V.J.K. Kumar
Counsel for Respondent: Sri A.Rajasekhar Reddy,Standing Counsel
:JUDGMENT: (Per Hon'ble Sri Justice V.V.S.Rao)
This appeal under Section 260A of the Income Tax Act, 1961 (the Act) is against the order dated 31.1.2011 of the Income Tax Appellate Tribunal, Hyderabad Bench 'A', in ITA No.1242/H/2010. By the said order, the appeal of the assessee against the order dated 03.2.2010 of the Commissioner of Income Tax (Appeals)-IV, Hyderabad was dismissed holding that the appellant is not entitled to claim deduction under Section10B of the Act.
The appellant is engaged in the manufacturing and assembling of wire and cable drawing/manufacturing machines. It is an assessee within the jurisdiction of the respondent. The assessee filed income tax returns for the year 2007-08 declaring loss of Rs.45,469/-. Though the surplus, as per the profit and loss account, is Rs.1,29,79,828/-, the assessee claimed deduction of Rs.1,28,97,161/- under Section10B of the Act. They contended that they are a 100% export oriented unit (EOU) as approved under the scheme of the Government of India, and they are entitled for deduction under Section 10B of the Act. The assessing officer noticed that the goods were cleared from the factory on 04.11.2006 and, as per the invoice-cum-challan, the place of delivery is at Attola Village in Silvasa (Daman & Nagar Haveli Union Territory). During the scrutiny of the return, the assessee pleaded that the machinery was delivered to M/s.Chandra Proteco Ltd., (the Agent for short) under Section 143(3) of the Act on the express instructions of the foreign buyer, M/s.Proteco De Marino Ozino and C Sass, Italy (the Proteco for short) and, therefore, it is deemed to be an export for the purpose of Section 10B of the Act. The assessing officer disallowed deduction holding that the assessee did not fulfil the conditions laid down for deduction under Section 10B of the Act; the goods were delivered in India; and they were not exported out of India. Being aggrieved, the appellant preferred an appeal to CIT (A). While holding that the assessee did not furnish any evidence that the goods had moved out of India so as to fall within the definition of "export", the appeal was dismissed. This view found favour with the learned Tribunal as well.
Learned Tribunal considering the Explanation to Section 80HHC of the Act held that delivery of the machinery to the Proteco's agent in India does not amount to export out of India. The relevant observations are as follows. In our opinion, in view of the above provisions of the IT Act, deemed export is not recognized by the provisions of the IT Act. Even otherwise, as seen from the facts of the case, it is an admitted fact that M/s.Chandra Proteco Ltd., is not the buyer of the goods. The said concern is only the 'Consignee', at whose place the delivery of the goods sold by the assessee to M/s.Proteco De Marino Ozino and C Sass (Italy), was to be given at their request of said buyer. Therefore, it is not the case that the assessee had sold the goods to otherEOU against relevant declaration in Form CT 3, so as to consider the transaction as an export. In view of this fact, we do not find any merit in the contention that there was a case of sale from one EOU to another. Therefore, for the mere fact that there was movement of goods from one bonded warehouse to another cannot be taken to mean that there was an 'Export'. In order to claim deduction u/s.10B, it must be proved by the assessee that such sale transaction must involve clearance at any Customs station as defined in the Customs Act. Otherwise, there was possibility that goods after the purchase may not be exported at all and yet the benefit may be claimed. Since in the present case, the transaction involves no clearance at the Customs station, it cannot be treated as export out of India.
The Counsel for the appellant, placing reliance on Central Coal Fields v State of Orissa1, CIT v Silver and Arts Palace2, Ram Babu and sons v Union of India3 and CIT v Silver and Arts Palace4, would contend that Section 10B of the Act is intended to extend the benefit of exemption to Industries and, therefore, it should be construed liberally. He would submit that the machinery intended for export is delivered to the agent of Proteco and, even though it is delivered in India at Silvasa, it should be deemed to be delivery to a foreign buyer, and a delivery on export. He points out that payment was made in convertible foreign exchange as evidenced by Foreign Inward Remittance Certificate (FIRC) issued by the State Bank of Hyderabad and, therefore, the learned Tribunal erred in rejecting the contention of the appellant. According to the Counsel, the FIRC is conclusive proof of export and, therefore, the assessee is entitled for claiming deduction under Section 10B of the Act.
Exports and imports are regulated by the Customs Act, 1962 which, among others, repealed the Sea Customs Act, 1878. Section 2(18) of the Customs Act defines "export" to mean "taking out of India to a place outside India". As defined in Section 2(16) of the Customs Act "entry" in relation to goods, inter alia, means an entry made in a bill of entry, shipping bill or bill of export. Sections 50 and 51 of the Customs Act stipulate the procedure for entry of goods for exportation as well as clearance of goods for exportation. For ready reference they are quoted below.
Section 50. Entry of goods for exportation.- (1) The exporter of any goods shall make entry thereof by presenting to the proper officer in the case of goods to be exported in a vessel or aircraft, a shipping bill, and in the case of goods to be exported by land, a bill of export in the prescribed form. (2) The exporter of any goods, while presenting a shipping bill or bill of export, shall at the foot thereof make and subscribe to a declaration as to the truth of its contents.
Section 51. Clearance of goods for exportation.- Where the proper officer is satisfied that any goods entered for export are not prohibited goods and the exporter has paid the duty, if any, assessed thereon and any charges payable under this Act in respect of the same, the proper officer may make an order permitting clearance and loading of the goods for exportation.
The exporter of any goods has to present a shipping bill making entry in relation to the goods to be exported in a vessel and the shipping bill should contain a declaration as to the truth of the contents thereof. After the officer is satisfied that the goods entered in the shipping bill are not prohibited goods, and the exporter has paid the duty of customs and charges leviable under the Customs Act, he may make an order for clearance and loading the goods for exportation. Therefore the document evidencing clearance and loading the goods for exportation is conclusive proof of export outside India. It is also the fact that, for the purpose of Central Excise Act and the Customs Act, certain transactions involving sale of goods in India are treated as "deemed exports" under different schemes evolved by the Central Government to facilitate growth of income from export and import duties. But for the purpose of Income-tax Act as we shall presently see, the law neither contemplates nor recognizes such "deemed exports".
The term "export" is not defined in the Income-tax Act though the term "export turnover" is explained/defined by four provisions, namely, the Explanations to Sections 10A, 10AA, 10B and 80HHC of the Act. Be it noted, Section 10A of the Act enables an undertaking in a free trade zone to claim deduction of profits and gains from the export of articles or things or computer software for a period of 10 consecutive years. Similarly, under Section 10AA of the Act, a newly established unit in a Special Economic Zone can claim deduction of 100% profits and gains derived from the export for a period of 10 years and, under Section 10B of the Act, an assessee can claim deduction of profits and gains as are derived by 100% EOUs from the export of articles or things for a period of 10 years. Section 80HHC of the Act is to the effect that an assessee, being an Indian company engaged in the business of 'export out of India', may be allowed deduction of the profits to the extent specified in Section 80HHC(1B) of the Act. The Explanation to all these provisions has a definite bearing in understanding Section 10B(3) of the Act on which the petitioner's Counsel placed considerable emphasis. For ready reference, we quote the same hereunder. Section 10B(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.
The language of Section 10B (3) of the Act is plain. It does not admit any other meaning than what is conveyed by the language used therein. The benefit under Section 10B (1) of the Act is available to 100% EOUs only if the sale proceeds of articles or things exported out of India are received in convertible foreign exchange. Two conditions should be satisfied before the benefit under Section 10B(1) of the Act is claimed. There should be export of articles or things or computer software out of India, and the sale proceeds therefore shall be received in convertible foreign exchange. One would not exclude the other nor would only one condition satisfy the eligibility conditionality's. The intention of the Parliament, in granting benefit to the units in free trade zones, special economic zones and EOUs, is to allow the benefit of deduction only when the articles or things or computer software are actually and factually exported out of India for foreign currency. This is made very clear by the Explanation to other such similar Sections conferring the benefit of deduction of profits. For ready reference, they are shown in the following table.
Section 10A
Explanation 2(iv) "export turnover" means the consideration in respect of export 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, it any, incurred in foreign exchange in providing the technical services outside India; Section 10AA
Explanation 1
(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 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;
Section 10B
Explanation 2(iii) "export turnover" means the consideration in respect of export 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, it any, incurred in foreign exchange in providing the technical services outside India; Section 80HHC
Explanation (aa) "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situated in India, notinvolving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962);
Explanation (b) "export turnover" means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);
(emphasis supplied)
Sections 10A, 10AA, 10B and 80HHC of the Act allow an assessee to claim deduction of profits from export of articles. These provisions, in effect, deal with different categories of eligible undertakings and establishments engaged in the export of articles and things in various locations. The Explanation to these provisions defines/explains the "export turnover". The freight and telecommunication charges incurred in connection with the "delivery of articles or things outside India" during the course of export cannot be reckoned as "export turnover". This clearly indicates that when the profits from exports are allowed as deduction, the Parliament intended the actual export out of India of the articles or things. The intention was never to consider the delivery of goods to a foreign buyer in India as amounting to export. The decisions relied by the petitioner's Counsel do not in any manner assist the point argued by him. Indeed they support the view expressed by us supra. Explanation (aa) of Section 80HHC of the Act is clarificatory in nature and explains a transaction which cannot be treated as "export out of India". A sale in a shop, emporium, or other establishment in India which does not require any clearance in any Customs station is notconsidered as "export out of India". The view of the Allahabad High Court in Ram Babu and Sons to the said effect followed by the Rajasthan High Court received imprimatur from the Supreme Court in Silver and Arts Palace. Suffice to excerpt the following observations from the decision of the Supreme Court which reads as under.
The Allahabad High Court specifically considered the effect of introduction of Explanation (aa) to Section 80HHC of the Act and had taken view in Ram Babu and sons v Union of India, (1996) 222 ITR 606 (All), that this Explanation means that, for the purpose of this section, there will be no export out of India if two conditions are cumulatively fulfilled viz., (a) it is a transaction by way of sale or otherwise in a shop, emporium or establishment situate in India, and (b) that it does not involve clearance in any customs station as defined in the Customs Act. This view of the Allahabad High Court had been consistently followed by several other High Courts, including the Rajasthan High Court itself in ITO v Vaibhav Textiles, (2002) 258 ITR 346 (Raj).It is the admitted position herein that initially Proteco agreed to take delivery of wire/cable drawing machines at Hyderabad Ex-factory, subsequently Proteco sent a communication advising the appellant to deliver the machinery to their Agent at Silvasa which is also a 100% EOU, the payment was received in convertible foreign exchange as evidenced by FIRC, and the goods were delivered to the Agent under a proforma invoice in the name of the foreign buyer. This transaction of manufacturing machines in India by EOU and delivering them in India to another 100% EOU, which is alleged to be the agent of a foreign buyer, does not amount to "export out of India" either under the Customs Act or under the Income-tax Act. The assessing officer, the appellate authority and the learned Tribunal appreciated the principle of law and applied it correctly. The appeal is misconceived.
The appeal, for the above reasons, is dismissed, without any order as to costs.
?1 AIR 1992 SC 1371
2 (2003) 259 ITR 684 (SC)
3 (1996) 222 ITR 606 (All) ----- Forwarded Message -----
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