Tribunal Rules Sales to Other SEZ Units Ineligible for Deduction u/s 10AA of Income Tax Act; Direct Exports Verified.

The Tribunal upheld the AO's decision to disallow the deduction under section 10AA of the Income Tax Act for sales to other SEZ units, as these do not qualify as exports under section 10AA. The Tribunal instructed the AO to verify the quantum of direct export sales and allow the exemption accordingly. The appeal was allowed for statistical purposes, with the order pronounced on 13.07.2016.

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Issues Involved:
1. Eligibility of the assessee's claim for deduction under section 10AA of the Income Tax Act, 1961.
2. Interpretation of "export" under section 10AA in relation to sales made to other SEZ units.
3. Applicability of the SEZ Act, 2005 provisions to the Income Tax Act, 1961.
4. Consistency in the allowance of deductions in subsequent assessment years based on past assessments.

Issue-wise Detailed Analysis:

1. Eligibility of the assessee's claim for deduction under section 10AA of the Income Tax Act, 1961:
The assessee, engaged in the business of electronic weighing scales, claimed a deduction under section 10AA for the assessment year 2010-11. The Assessing Officer (AO) disallowed this claim, arguing that the assessee did not fulfill the condition of export of goods as required under section 10AA, since 99% of the sales were local. However, the Commissioner (Appeals) allowed the claim, noting that the SEZ Act has an overriding effect, and similar claims were accepted in previous years.

2. Interpretation of "export" under section 10AA in relation to sales made to other SEZ units:
The crux of the dispute was whether sales to other SEZ units within India could be considered as "export" under section 10AA. The assessee argued that as per section 2(m) of the SEZ Act, supplying goods to another SEZ unit should be treated as export. The AO contended that the definition of "export" under section 10AA of the Income Tax Act does not include sales to other SEZ units. The Tribunal noted that section 10AA specifically defines "export" as taking goods out of India, and thus, sales to other SEZ units do not qualify.

3. Applicability of the SEZ Act, 2005 provisions to the Income Tax Act, 1961:
The Tribunal examined the interplay between the SEZ Act and the Income Tax Act. Section 27 of the SEZ Act states that provisions of the Income Tax Act apply to SEZ units subject to modifications in the second schedule, which includes section 10AA. The Tribunal concluded that the definition of "export" under section 10AA is confined to direct exports out of India, and the SEZ Act's broader definition does not override this.

4. Consistency in the allowance of deductions in subsequent assessment years based on past assessments:
The assessee argued that since the deduction under section 10AA was allowed in previous years, it should not be disallowed in the current year without withdrawing the earlier allowance. The Tribunal clarified that each assessment year is independent, and the exemption under section 10AA depends on the fulfillment of conditions in that specific year. The Tribunal distinguished the case from the Bombay High Court ruling in Western Outdoor Interactive Pvt. Ltd., noting that the current issue pertains to the computation of exemption based on export sales, not the eligibility of the unit itself.

Conclusion:
The Tribunal upheld the AO's decision to disallow the deduction under section 10AA for sales to other SEZ units, as such sales do not qualify as exports under the specific provisions of section 10AA. The Tribunal directed the AO to verify the quantum of direct export sales and allow the exemption accordingly.

Order:
The appeal was allowed for statistical purposes, with the AO instructed to verify and allow the exemption based on direct export sales. The order was pronounced in the open Court on 13.07.2016.

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