2022 (4) TMI 233 - AT - Income Tax

Tribunal decision on Section 10A exemption, SEZ sales, disallowances, telecommunication expenses, and marked to market losses

The Tribunal allowed the assessee's appeal for statistical purposes regarding the Section 10A exemption and partly allowed the appeal concerning sales to ... Deduction under section 10A/10AA - Realisation of export proceeds within six months and extension by competent authority (Reserve Bank of India) - Computation of export turnover and treatment of amounts pending realisation (Form No.56F) - Chapter VI A deduction on profits enhanced by disallowances under sections 32, 40(a)(ia), 40A(3) and 43B - Exclusion of telecommunication expenses from export turnover and total turnover - Sales between SEZ/EOU units as export or deemed export under the SEZ Act - Recognition of provisions for marked to market losses - test of present obligation, probability of outflow and reliable estimate (Rotork Controls)Deduction under section 10A/10AA - Realisation of export proceeds within six months and extension by competent authority (Reserve Bank of India) - Computation of export turnover and treatment of amounts pending realisation (Form No.56F) - Whether export proceeds not realised within six months from the end of the previous year are eligible for deduction under section 10A by reason of RBI circulars extending or removing the six month stipulation. - HELD THAT: - The Tribunal examined section 10A(3) together with its Explanations, and relevant RBI circulars (AP(DIR Series) Circular No.28/30.03.2001 and Circular No.91/01.04.2003). It held that section 10A(3) permits the competent authority (RBI) to allow a further period for bringing export proceeds into India and that the RBI circulars applicable to the year in issue either extended the six month period or removed the specified time limit for SEZ units. The undisputed auditor certification (Form No.56F) showed an amount pending realisation at the end of six months; accordingly the Tribunal held that the assessee was entitled to claim deduction under section 10A in respect of the amount so pending realisation, subject to verification by the AO whether those proceeds were realised within one year from the year end as permitted by the RBI circulars, and directed the AO to verify at the stage of giving effect to the order. [Paras 7]Claim under section 10A allowed for the amount shown as pending realisation at the end of six months, subject to AO's verification whether realised within one year as per RBI circulars.Chapter VI A deduction on profits enhanced by disallowances under sections 32, 40(a)(ia), 40A(3) and 43B - Whether disallowances under sections 32, 40(a)(ia), 40A(3), 43B etc., which enhance business profits, must be taken into account for computing Chapter VI A deductions. - HELD THAT: - The Tribunal considered the AO's additions and the CIT(A)'s reliance on judicial authority and noted CBDT Circular No.37/2016 which accepts the settled position that disallowances related to the business activity against which Chapter VI A deduction is claimed operate to enhance the profits of the eligible business and that the deduction is admissible on the enhanced profits. The Department did not controvert the applicability of the Circular. In view of the CBDT Circular and the authorities it references, the Tribunal affirmed the CIT(A)'s deletion of the disallowance and dismissed the Revenue's appeal on this ground. [Paras 10, 11]Order of CIT(A) deleting the disallowance affirmed; Revenue's appeal dismissed on this issue.Exclusion of telecommunication expenses from export turnover and total turnover - Deduction under section 10A/10AA - Whether telecommunication expenses excluded from export turnover must also be excluded from total turnover for computing deduction under section 10A. - HELD THAT: - The Tribunal applied binding decisions of the Bombay High Court (CIT v. GEM Plus Jewellery India Ltd.) and the Special Bench of the ITAT Chennai (Sak Soft Ltd.), which hold that where an item is reduced from export turnover, the same item must be reduced from total turnover. Following those authorities, the Tribunal confirmed the CIT(A)'s direction to exclude telecommunication expenses from both export turnover and total turnover while computing the deduction under section 10A. [Paras 13]CIT(A)'s exclusion of telecommunication expenses from both export and total turnover confirmed.Deduction under section 10A/10AA - Whether the assessee is entitled to 100% deduction under section 10A or only 50% because commercial production commenced after 01.04.2003. - HELD THAT: - The Tribunal considered the uncontroverted documentary record of incorporation, approvals and the stated date of commencement of commercial production in 1999 2000, and the provisions restricting 100% deduction for units commencing production on or after 01.04.2003. As the assessee's commercial production date precedes 01.04.2003 and the facts are verifiable from the record, the Tribunal held that the assessee is eligible for 100% deduction under section 10A for the relevant period and confirmed the CIT(A)'s finding. [Paras 15, 16]CIT(A)'s allowance of 100% deduction upheld; Revenue's ground dismissed.Sales between SEZ/EOU units as export or deemed export under the SEZ Act - Deduction under section 10A/10AA - Whether sales made to other SEZ/EOU units located in India qualify as export turnover for the purpose of claiming deduction under section 10AA. - HELD THAT: - The Tribunal examined Explanation 1(i) to section 10AA and the SEZ Act provisions, and applied the decision of the Madras High Court in Preludesys India Ltd., which held that supplies from one Unit to another Unit in the same or different SEZ are within the definition of 'export' for SEZ purposes and that the SEZ Act's scheme must be read into the Income tax provisions. Given that the sales were penultimate to exports, consideration was received in convertible foreign exchange and the assessee acted as deemed exporter, the Tribunal held that such inter SEZ/EOU sales qualify as export/deemed export for section 10AA and allowed the claim. [Paras 21, 23]Sales to other SEZ/EOU units treated as export/deemed export; claim under section 10AA allowed.Recognition of provisions for marked to market losses - test of present obligation, probability of outflow and reliable estimate (Rotork Controls) - Whether the provision for marked to market (MTM) losses on forward foreign exchange contracts made by the assessee qualifies as an allowable provision for computing profits eligible for deduction under section 10AA/10A. - HELD THAT: - The Tribunal considered the assessee's illustrative charts and submissions but found that the assessee failed to demonstrate how the MTM provision satisfied the three conditions laid down by the Supreme Court in Rotork Controls (present obligation from past event; probable outflow; reliable estimate). There was no sufficient evidence of historical trend or reliable estimation methodology. The Tribunal therefore agreed with the AO and CIT(A) that the provision lacked the necessary basis and rejected the assessee's claim. [Paras 24, 25, 26, 27]Disallowance of provision for MTM losses upheld; assessee's claim dismissed.Final Conclusion: For AY 2009 10 the assessee's appeal is allowed for statistical purposes in respect of the export proceeds pending realisation subject to AO's verification of realisation within the RBI permitted period; the Revenue's appeal is dismissed on issues of disallowances (in light of CBDT Circular No.37/2016), telecommunication expenses exclusion and commencement date for 100% deduction. For AY 2010 11 the assessee's appeal is partly allowed (inter SEZ/EOU sales treated as export/deemed export) and the claim for MTM provision is rejected. Issues Involved:1. Disallowance of exemptions claimed under Section 10A of the Income Tax Act.2. Deletion of disallowance under Section 40A(7), Sections 43A, and 43B.3. Exclusion of telecommunication expenses from export turnover and total turnover.4. Eligibility for 100% deduction under Section 10A.5. Exclusion from export turnover on account of sales to other SEZ/EOU units.6. Disallowance of provision for marked to market losses.Issue-wise Detailed Analysis:1. Disallowance of Exemptions Claimed Under Section 10A:The primary issue in the assessee's appeal was the disallowance of exemptions claimed under Section 10A due to export proceeds not being realized within six months from the end of the previous year. The assessee argued that the amount pending realization was Rs. 22,51,13,218, not Rs. 41,63,08,042 as considered by the AO. The CIT(A) upheld the AO's decision, stating that the proceeds must be brought into India within six months or an extended period allowed by the competent authority, which is the RBI. The Tribunal noted that as per RBI Circulars No.28 and No.91, the period for realizing export proceeds for SEZ units was extended, and thus, the assessee should be entitled to the exemption. The Tribunal allowed the appeal for statistical purposes, directing the AO to verify if the export proceeds were realized within one year.2. Deletion of Disallowance Under Section 40A(7), Sections 43A, and 43B:The Revenue's appeal contested the CIT(A)'s deletion of disallowances made under Sections 40A(7), 43A, and 43B. The CIT(A) had allowed these claims, stating that disallowances under these sections should be considered part of the profits and gains of the business while computing deductions under Section 10A. The Tribunal upheld the CIT(A)'s decision, referencing CBDT Circular No.37/2016, which accepted that such disallowances enhance the profits of the eligible business and thus qualify for Chapter VI-A deductions.3. Exclusion of Telecommunication Expenses from Export Turnover and Total Turnover:The Revenue's appeal also challenged the CIT(A)'s decision to exclude telecommunication expenses from both export turnover and total turnover while computing the deduction under Section 10A. The Tribunal confirmed the CIT(A)'s decision, citing the Special Bench of ITAT, Chennai in the case of Sak Soft Ltd., and the Bombay High Court in the case of GEM Plus Jewellery India Ltd., which held that any item reduced from export turnover must also be reduced from total turnover.4. Eligibility for 100% Deduction Under Section 10A:The Revenue argued that the assessee was only eligible for a 50% deduction as the commercial production commenced after 01.04.2003. The CIT(A) found that the commercial production actually started in 1999-2000, thus qualifying for a 100% deduction. The Tribunal upheld this finding, confirming that the assessee was entitled to the deduction as the commercial production commenced before the cut-off date.5. Exclusion from Export Turnover on Account of Sales to Other SEZ/EOU Units:The assessee's appeal contested the exclusion of sales to other SEZ/EOU units from the export turnover for claiming exemption under Section 10AA. The CIT(A) had upheld the AO's decision, stating that such sales did not qualify as export sales. The Tribunal, referencing the SEZ Act and the Madras High Court decision in Preludesys India Ltd., held that sales to SEZ units should be considered as export sales for the purpose of claiming exemption under Section 10AA, thus allowing the assessee's claim.6. Disallowance of Provision for Marked to Market Losses:The assessee's appeal also challenged the disallowance of provision for marked to market losses. The CIT(A) upheld the AO's decision, stating that such provisions do not form part of the profits of the eligible undertaking for deduction under Section 10A. The Tribunal agreed with the CIT(A), noting that the assessee failed to provide a reliable estimate as required by the Supreme Court in Rotork Controls India P. Ltd., thus dismissing the assessee's claim.Conclusion:The Tribunal allowed the assessee's appeal for statistical purposes regarding the Section 10A exemption and partly allowed the appeal concerning sales to SEZ units. The Revenue's appeal was dismissed on all counts, upholding the CIT(A)'s decisions on disallowances and telecommunication expenses. The Tribunal confirmed the CIT(A)'s decision on the provision for marked to market losses, dismissing the assessee's claim.