2019 (12) TMI 536 - AT - Income Tax

EPZ unit conversion into SEZ and 10A/10AA tax holiday start date, deduction allowed; foreign agent TDS issue remanded

Deduction under ss. 10A/10AA turned on whether conversion of an existing EPZ unit into an SEZ unit constitutes 'beginning to manufacture' in the SEZ so as ... Deduction under section 10AA - Interaction between section 10A and section 10AA; provisos and sub-section 7B - Reckoning of the period of deduction on conversion of EPZ/MEPZ into SEZ - Statutory construction of exemption provisions and onus on the assessee - Remand for de novo adjudication by the Commissioner (Appeals)Deduction under section 10AA - Interaction between section 10A and section 10AA; provisos and sub-section 7B - Reckoning of the period of deduction on conversion of EPZ/MEPZ into SEZ - Statutory construction of exemption provisions and onus on the assessee - Entitlement to deduction under section 10AA for assessment year 2011-12. - HELD THAT: - The tribunal examined the statutory scheme in Sections 10A and 10AA (and the provisos and the sub-section 7B inserted by the SEZ Act, 2005). The assessee's unit began manufacturing in the previous year relevant to AY 2001-02 in MEPZ and was converted into an SEZ on 01.01.2003. The Bench held that units converted from EPZ/FTZ/MEPZ to SEZ are governed by the second proviso to Section 10A(1) so that the ten year period is reckoned from the year the unit began manufacturing in the EPZ/FTZ. The SEZ Act introduced Section 10AA and sub section 7B to Section 10A; read together the saving and proviso provisions make newly enacted Section 10AA applicable to existing SEZ units which had not exhausted the ten years of deduction under Section 10A as on commencement of the SEZ Act, and entitle such units to the unexpired period under Section 10A followed by the additional period/rates under Section 10AA. Applying these principles to the undisputed facts, the tribunal held that the assessee, having been allowed deduction under Section 10A for ten consecutive assessment years only up to AY 2010-11 by virtue of the reckoning from AY 2001-02 and having unexpired entitlement as contemplated by the provisos, is entitled to deduction under Section 10AA(1)(ii) (subject to fulfilment of other statutory conditions) for AY 2011-12. The tribunal therefore allowed the claim under Section 10AA for the impugned year. [Paras 7]Deduction under section 10AA allowed for AY 2011-12, subject to fulfilment of statutory conditions.Disallowance under section 40(a)(i) for non-deduction of tax at source - Taxability of commission to non-resident agents and application of section 195 - Remand for de novo adjudication by the Commissioner (Appeals) - Validity of AO's disallowance under section 40(a)(i) in respect of commission paid to foreign agents was not adjudicated on merits and is remanded to the CIT(A) for fresh consideration. - HELD THAT: - The AO disallowed the commission payments on the ground that they represented fees for technical services and tax was not deducted under section 195; the assessee disputed that characterization and relied on facts, agreements and treaty provisions. The CIT(A) dismissed the ground at the threshold because no written submissions were placed before him. The tribunal observed that the CIT(A) is co terminus with the AO and is obliged to decide the issue on merits; given the absence of adjudication on merits and the change in law and administrative guidance over time, the tribunal restored the issue to the file of the CIT(A) for de novo adjudication and directed that the assessee be given adequate opportunity and that evidence/explanations be admitted and considered. The tribunal expressly declined to decide the merits of taxability or treaty arguments and limited its order to remand for fresh adjudication in accordance with law. [Paras 9]Issue under section 40(a)(i)/section 195 remitted to the CIT(A) for fresh adjudication on merits after affording opportunity to the assessee.Final Conclusion: The appeal is allowed in part: deduction under section 10AA is granted for AY 2011-12 subject to compliance with statutory conditions; the disallowance under section 40(a)(i) in respect of commission paid to foreign agents is remitted to the Commissioner (Appeals) for de novo adjudication after giving the assessee adequate opportunity. Issues Involved:1. Adequate opportunity to the Assessee.2. Denial of deduction under Section 10AA of the Income Tax Act.3. Application of Section 40(a)(i) with respect to payments.4. Disallowance of sales commission paid to foreign agents.Detailed Analysis:1. Adequate Opportunity to the Assessee:The assessee argued that the CIT(A) passed the order without providing an adequate opportunity to represent the matter. The Tribunal noted that the CIT(A) based the order on written submissions made during the first hearing and adjourned the matter to various dates, including 27/07/2017, which was acknowledged by the department. The Tribunal found that the CIT(A) did not provide the right of audience to the assessee, which is contrary to the principles of law.2. Denial of Deduction under Section 10AA:The assessee claimed a deduction of Rs. 47,19,678/- under Section 10AA for the assessment year 2011-12. The AO disallowed this deduction, stating that the assessee had already availed of the benefit under Section 10A for ten consecutive assessment years from AY 2001-02 to AY 2010-11. The AO held that the unit is not eligible for deduction under Section 10AA as it began manufacturing in AY 2001-02, not AY 2006-07 onwards. The CIT(A) upheld this disallowance. However, the Tribunal observed that the assessee's unit, initially in MEPZ, converted into an SEZ unit effective from 01.01.2003. The Tribunal noted that the assessee claimed deduction under Section 10A for ten years and switched to Section 10AA from AY 2011-12. The Tribunal found that the assessee is entitled to deduction under Section 10AA for the unexpired period of ten consecutive assessment years and further for five years under Section 10AA(1)(ii), subject to other conditions.3. Application of Section 40(a)(i):The AO disallowed sales commission of Rs. 34,98,309/- paid to foreign agents for procuring sales orders, citing non-deduction of TDS under Section 195 read with Section 40(a)(i) and Section 9(1)(vii). The AO classified the payments as 'fees for technical services.' The CIT(A) upheld this disallowance, noting the absence of evidence from the assessee to prove otherwise. The Tribunal observed that the assessee did not provide written submissions before the CIT(A) but had made elaborate arguments in the statement of facts and grounds of appeal. The Tribunal found that the CIT(A) failed to pass a speaking and reasoned order on merits and remanded the matter back to the CIT(A) for fresh adjudication on merits.4. Disallowance of Sales Commission Paid to Foreign Agents:The Tribunal noted that the assessee entered into agreements with foreign agents for sales commission and argued that these payments do not fall under 'fees for technical services' as per Section 9(1)(vii) and relevant DTAAs. The Tribunal found that the CIT(A) dismissed the appeal without proper adjudication on merits. The Tribunal remanded the issue back to the CIT(A) for fresh adjudication, allowing the assessee to produce evidence and explanations in its defense.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to provide an adequate opportunity to the assessee and to adjudicate the issues on merits, considering the legal provisions and evidence presented.