TaxTMI 
TaxTMI 
2012 (3) TMI 258
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....unit at Bombay and is having Head Office at Jaipur. During the course of assessment proceedings, the assessee was asked to justify the claim of deduction u/s 10AA of the Act. Vide letter dated 29-11-2010, it was submitted that the assessee is engaged in the business of precious and semi precious stones. The AO examined the process through which the assessee is obtaining the finished products as against initial purchase items. The AO noticed the following facts : 1. The perusal of the fixed asset chart in respect of Surat Unit showed that the assessee was having no fixed assets including machinery except factory land as on 01-04-2007. The assessee made first machinery addition in the fixed asset chart on 03-12-2007. The fixed asset was diamond polishing Bench. The Bench itself could not have been sufficient for the purpose of manufacturing unless other tools were purchased. Such tools were purchased till 31-01-2008. The AO therefore, inferred that the assessee merely doing purchase and sale of goods and no manufacturing or processing was done as there were no machines or manufacturing set up. 2. From the perusal of purchase and sale bill, the AO noticed....
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....at deduction u/s 10AA is available in case the assessee is engaged either in manufacturing or production of article or things. The services have not been defined in the Income tax Act. The definition of service as provided in clause 2(z) of SEZ Act cannot be imported. Only the definition of manufacture given in Section 2(z) of SEZ Act was imported in Section 10AA of the Act. Hence, the definition of services as provided in SEZ Act cannot be applied. The AO relied on following decisions and held that the definition of expression in one statute cannot be automatically applied to another statute. 1. CIT v. Vasan Publications (P.) Ltd. [1986] 159 ITR 381/25 Taxman 284 (Mad.) 2. CIT v. Buhari Sons (P.) Ltd. [1983] 144 ITR 12/14 Taxman 529 (Mad.) 3. Laxmandas Pranchand v. Union of India [1998] 234 ITR 261/98 Taxman 203 (M.P.) 4. CIT v. R.J. Trivedi & Sons [1990] 183 ITR 420/53 Taxman 485 (MP) The AO observed that the provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction that is to say, in accordance with the clear intention of the legislature which is t....
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....tute. For this, the AO relied upon various case laws. With this, the AO held that benefit of provision which could have been provided by the Act but actually not provided deliberately, cannot infer or interpreted automatically. That the Income tax Act was not intended to refer definition of services as provided in SEZ Act. Relying on various case laws, the AO has emphasized that provisions to confer benefit to the assessee should be interpreted in the spirit of strict construction. With this, the AO held that the definition of services cannot be borrowed from SEZ Act and trading cannot be inclusive of "services". The AO has explained the word "services" as provider/client interaction that creates and can capture value. In general parlance services are provided when certain value addition is made to some existing goods so that it becomes more useful and fetches more value. Thus, element of value addition and use of skills are there in services. Also that there should be a service agreement between the provider and client. With this discussion the AO held that in the present case the appellant has not done any value addition or has not applied any skills for the improvement of the pr....
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....der the General Agreement on Trade. 2. As prescribed by the Central Govt. for the Act and 3. Earn foreign exchange The Central Govt. has defined the 'services' in rule 76 of SEZ Rules, 2006 which inter alia includes trading. Thus the trading activity has been included in the definition of services under rule 76. Further, explanation to rule 76 states that trading for the purposes of second schedule of the Act shall mean import for the purpose of re-export. The Income tax Act has not defined "re-export" but explanation u/s 10AA explains export in relation to SEZ as taking goods or providing services out of India from a SEZ by any other mode, whether physical or otherwise. Further, Ministry of Commerce vide their notification dated 10.8.06 has explained the word trading for the purpose of second schedule of the Act as import for the purposes of re-export. Thus the appellant company fulfills the primary conditions of section 10AA for getting the exemption. The appellant is a entrepreneur and the unit has started to provide services i.e. trading and manufacturing activities. The appellant company has exported goods or services in physical mode. Thus it is clear tha....
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....aw which includes Income tax Act as well. Section 27 of SEZ Act further clarifies that the provisions of Income tax Act in force for the time being, shall apply to, or in relation to, developer or entrepreneur for carrying on the authorized operation in SEZ unit subject to modifications specified in the Second Schedule. In other words, the provisions of Income Tax Act will be applicable subject to the modifications specified in Second Schedule. Second Schedule defines the word "manufacture" has same meaning as assigned to it in Section 2(r) of SEZ Act. Various definitions including 'manufacture' given in section 10AA is nothing but definitions provided u/s 2 of SEZ Act, 2005. That the word service has not been defined in section 10AA of IT Act as well as second schedule but as whatever definitions provided in section 10AA have been imported from second schedule of SEZ Act which is origin of section 10AA, the definition of 'services' also must be taken from SEZ Act only. The word services as understood in common parlance cannot be taken for section 10AA. As already discussed section 51 of SEZ Act is an overriding provision and, therefore, anything which is not in consistency with th....
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....tate SEZ Act. That the Central Act of 2005 prevails by law of doctrine of parliamentary supremacy. Sec. 27 of SEZ Act provides that provisions of Income Tax Act 1961 will apply with certain modifications in relation to developers and entrepreneur and thus the SEZ Act overrides the provisions of Income-tax Act. The A.O. is therefore not correct in holding that as 'services' is not defined in I.T. Act, it should be given meaning what is understood in common parlance. Further the Development Commissioner SEZ, Surat has also clarified vide his letter dated 18.3.01 that the benefit of section 10AA is available to the unit engaged in trading activities in respect of re-export of the imported goods only. He has also clarified that in case of contradiction vis-a-vis the provisions of IT Act and SEZ Act, 2005, provisions of SEZ Act, 2005 shall prevail. In section 4 of 2006 dated 24.5.06 issued by the department of Commerce clarified that the benefit u/s 10AA will exclude trading other than trading in the nature of re-export of imported goods. As the appellant fulfills other conditions as discussed above, the appellant is providing services by re-exporting the goods in terms of SEZ Act an....
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....dymade goods and selling them without any value addition because the nature of goods purchased and sold was exactly the same. The assessee had not maintained any wages register, which showed that there was no evidence that any manpower was used for manufacturing or processing. It was obvious that no manufacturing had been done by the assessee maintained any wages register, which showed that there was no evidence that any manpower was used for manufacturing or processing. It was obvious that no manufacturing had been done by the assessee and therefore it was wrong on part of the assessee to claim that it was involved in manufacturing at the Surat SEZ unit. 3.1 When confronted with the above facts the assessee filed a reply in which it was claimed that it was involved in both manufacturing and trading of goods. The assessee claimed that from its unit in SEZ Surat it also carried out import of goods for re-export and as per the SEZ Act and SEZ Rules the activity of import for re-export was treated as trading activity on which deduction u/s 10AA was allowable as per Rule 76 of SEZ Rules 2006 and Section 2(z) of SEZ Act, 2005. Thus the assessee claimed that it was eligible for ....
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....which the courts have held that provisions to confer benefit to the assessee should be interpreted in the spirit of strict construction. On the basis of the above discussion the AO concluded that when the legislature deliberately excluded definition of services from the scope of section 10AA by not referring to the SEZ Act, 2005 then such definition cannot be imported from the SEZ Act. Therefore, the AO held that as provided in the SEZ Act/Rules 'trading' cannot be treated as 'services'. AO further held that even by general meaning of trading it cannot be considered as providing of services as required u/s 10AA(1), and therefore the assessee was not eligible for deduction u/s 10AA on the 'trading' activity done from its Surat SEZ unit. The AO rejected the plea of the assessee that it had been granted LOA by the Development Commissioner and therefore it was eligible for deduction u/s 10AA, on the ground that this was not the only condition for claiming this deduction. The AO also rejected the argument of the assessee that it should be allowed deduction u/s 1 OAA because last year also this deduction was allowed on trading. The AO has observed that the principle of res judicata....
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....ure' from the SEZ Act and not the definition of 'Service'. If it had intended to do so it would have said so for definition of 'service' also as it did for 'manufacture'. Since 'service' as defined in SEZ Act is not to be used for the purpose of section 10AA of the IT. Act, therefore, the definition of service as per Rule 76 of SEZ Rules 2006 can also not be used for the purpose of section 10AA. In this respect the following headnote from the decision of CIT v. Buhari Sons Pvt. Ltd. (Madras High Court) (1983) 144 ITR 12 is reproduced below, and relied on: "It is well established that in the absence of any definition in the statute, words occurring in a statute will have to be understood with reference to the objects of the Act and in the context in which they occur. Consequently, the definitions given for the words in one statute cannot automatically be imported for interpreting the same words in another statute. The interpretation of the expression "manufacturing process" for purposes of the Factories Act, 1948, will not be relevant in construing the same expression for purposes of the Finance Act, 1966. The preparation of eatables cannot be taken to be manufacture of goods.....
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....odification specified in Second Schedule. The Second Schedule defines 'manufacture' as per the definition given in sec. 2(r) of the SEZ Act. According to Ld. CIT(A) various definitions given in Sec. 10AA are nothing but definitions given in Sec. 2 of the SEZ Act. According to Ld. CIT(A) 'service' is not defined in Second Schedule and Sec. 10AA both but since whatever defined in sec IOAA has been taken from Sec. 2 of the SEZ Act, therefore for 'Service' also the definition given in the SEZ Act, should be used. This interpretation of ld. CIT(A) is an attempt to stretch the matter too far and make provisions which the legislature never intended. First of all the above interpretation of ld. CIT(A) is factually incorrect. For the purpose of Sec. 10AA, some definitions are given in Explanation I under this section. In this Explanation I total 6 terms are defined in clauses (i) to (v) but out of these only three terms in clauses (iii) and (v) are defined as per the SEZ Act, 2005 but the other 3 are independent definitions. Section 2 of the SEZ Act, 2005 has definitions from clauses (a) to (zd). All of them cannot be applied to section 10AA of the IT Act. If that was the intention of le....
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....difications in a number of sections of the IT Act. Introduction of sec. 10AA is only one of these 10 modifications made in the IT Act 1961. It may further be noted that this meaning to the expression 'trading' has been given through the Rules but in the main SEZ Act in the Second Schedule the terms 'services' and 'trading' have not been included under definitions of section 10AA of the IT Act at all. it is a well settled principle of law that something which is not provided in the main legislation (i.e. an Act) cannot be provided through a subordinate legislation (i.e. Rules). Thus when the definition of service as provided in SEZ Act is not included in Section 10AA of the IT Act then it cannot be applied for the purpose of this section. (4) Fourthly, Ld. CIT(A) has also stated that the Development Commissioner SEZ, Surat has also clarified vide his letter dated 18/03/2010 that the benefit of section I0AA is available to the unit engaged in trading activities in respect of re-export of the imported goods. The Development Commissioner has also clarified that in case of contradiction between the provisions of I.T. Act and SEZ Act, 2005, provisions of SEZ Act, 2005 shall prevail....
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....vices. The A.O has discussed the meaning of the work 'service' on page 10 to 12 of her order and has clearly brought out that trading cannot be considered as service. It is further added that whenever a service is provided it involves two distinct parties one a provider and second a recipient of the service. But in case of trading of goods the assessee is the only party and one cannot provide service to himself. Thus, in general parlance trading cannot be called providing of service and therefore deduction u/s 10AA cannot be allowed on trading including trading in the nature of re-export of imported goods. 6. In respect of this appeal the Id. AR of the assessee has filed a written submission on 30-12-2011 before Hon'ble ITAT. In this submission Id. AR has basically taken all the arguments which are given by ld. CIT(A) in his order. The arguments of ld. CIT(A) have been countered in para 5 above. In this written submission ld. AR has also submitted a break up of gross margin and net profit of the Surat unit of the assessee for trading activity and so called manufacturing activity carried at this unit. These details are given on page 5 & 6 of the written submission of ld. AR. I....
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....ct, 1961 by second schedule of Special Economic Zones Act, 2005 w.e.f. 10-02-2006. For sake of convenience and ready reference relevant portion of section 10AA is reproduced below: 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (f) of section 2 of the Special Economic Zones Act, 2005 from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of (i) hundred per cent of profits and gains derived from the export of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter: The word manufacture have been defined in sub-clause (r) of section 2 of SEZ Act, 2005. (r) "Manufacture" means to make, produce, fab....
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....trading", for the purposes of the Second Schedule of the Act, shall mean import for the purposes of re-export. According to Income Tax Act: The term "re-export" has not been defined. According to Explanation under section 10AA of the Income-tax Act, "export in relation to Special Economic Zone" 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. The Ministry of Commerce, Govt. of India has issued a notification dated 10-08-2006 which inter alia introduced an explanation which defined the word trading "Trading" for the purpose of the second schedule of the Act, shall mean import for the purpose of re-export. Similarly the Ministry of Commerce, Govt. of India has also clarified vide instruction no. 4/2006 that the trading activities will be allowed to carry out all forms of trading activity but the benefits u/s 10AA will be available to trading in the nature of re-export of imported goods. A copy of said instruction enclosed. The said instruction is also made available on the web site of Govt. of India www.sezindia.gov.in The assessee company thus fulfills all the primar....
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.... from its Surat SEZ unit but merely purchasing and selling goods without applying any skills on it or improving its value quotient and transactions are devoid of basic fundaments of services and so cannot be termed as service also and so cannot be termed service also and, therefore, it is not entitled to deduction u/s 10AA of I. T. Act, 1961 as claimed by it. In this connection it is submitted that: The scope of Section 10AA is mainly focused on encouraging the trading activity at an international level from newly established units operating in an SEZ. The intention behind the introduction of Sec. 10AA is to encourage international trade and in the process enable more and more organizations to participate in global trade. The Section was introduced not as an amendment but as a modification to the Income Tax Act, 1961 by the SEZ Act, 2005. Reference to the introduction of section in the I. T. Act, 1961 can be found in the Second Schedule to the SEZ Act, 2005. b. Instructions given by the Ministry of Commerce and Industry under the SEZ Rules, 1976. As per Instruction No. 4/2006 In respect of SEZ Rules (Issued by Department of Commerce) Dated 24.5.2006 (F. No. F.5/1/....
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....ffect by virtue of any law other than this Act." The Ld. A.O. has taken a stand on the issue which is not a logical interpretation, instead every effort has been made by him to overlook and misinterpret the meaning and logic behind the introduction of Section 10AA. The term "Service" has been examined by Ld. A.O. on the basis whether mere purchase & sale with no value addition as done by the assessee can be termed services. However there is no reason to deviate far from the immediately available definition of "Services" under the SEZ Act. (given that the Income Tax Act, 1961 does not define the term "services") and, therefore in accordance with Section 51 of SEZ Act, 2005 the definition given in SEZ Act, 2005 will apply more so when explanation to rule 76 clearly provides Trading for the purposes of the second schedule of the Act, (by which Section 10AA inserted in I. T. Act, 1961) shall mean import for the purposes of re-export. The Ld. A.O. in assessment order discussed irrelevant references to case laws and decisions that bear no relevance to case specifically on the fact that unit of assessee is established in the SEZ in accordance with section 10AA of I.T. Act, 1961 and ....
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....rvices' is not mentioned either in Section 10AA or in Section 2 of the I.T. Act which contains the definition of various words. Deduction u/s 10AA is available in case the unit begins to manufacture or produce such article or things or provide service. It is not disputed that the unit of the assessee has done trading activity by importing the items and thereafter selling them. However, it is disputed by the revenue that the assessee has done only trading and no value addition has been made. 2.11 The Explanation 1 to Section 10AA contains the definition of the word 'export turnover. Export in relation to Special Economic Zone, Manufacture relevant to Section 10AA Special Economic Zone and Unit. The word manufacture is to be considered to have the same meaning as assigned in clause (r) of Section 2 of SEZ Act, 2005. Similarly, SEZ unit will have the same meaning as assigned to them under clause (za) of Section 2 of SEZ Act. The word 'services' has been defined in SEZ Act, 2005 u/s 2(z) of the Act and the same is reproduced as under:- (z) "services" means such tradable services which - (i) are covered under the General Agreement on Trade in Services annexed as IB....
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.... contention of the revenue is that the word services being not defined under the I.T. Act, therefore, the meaning of the word services should be considered the same as understood in normal parlance. The trading cannot be considered as services. For providing services, one has to have a party which provides services to other party and that accepts the services. The word trading is included in the services under SEZ Act and not under I.T. Act and therefore, it was submitted that deduction u/s 10AA should not be allowed in respect of trading activities. 2.14 The AO in his order has referred to the decision of Hon'ble Jurisdictional High Court in the case of Kota Co-operative Marketing Society Ltd. (supra) for the proposition that granting exemption should be strictly construed. In the case before Hon'ble Jurisdictional High Court, the issue was as to whether proportionate share of expenses attributable to earning income which is entitled for deduction should be made in computing such income. The assessee was claiming the entire expenses to be allowable and it was the contention of the assessee that the expenditure should not be bifurcated between the income which is eligible for de....
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....re was defined in explanation 1 to Section 10AA of the Act w.e.f. 10-02-2006. The word manufacture was also mentioned in EXIM Policy. In the case before the Hon'ble Kerala High Court, it was noticed that Development Commissioner of Special Economic Zone has issued a permanent registration certificate to the assessee declaring that the assessee is engaged in manufacture and export of blended tea. The case of the assessee was that every unit in the Special Economic Zone enjoys the income tax exemption on the profit derived on the export of their products. The Hon'ble Kerala High Court has referred to the meaning of manufacture as contained in EXIM Policy and has also considered the meaning of manufacture as done in Explanation 1 to Section 10AA of the Act which means that the word manufacture should be same as contained in clause 2(r) the SEZ Act. The Hon'ble Kerala High Court in the case of Girnar Industries (supra) has referred to the decision of Hon'ble Apex Court in the case of CIT v. Gwalior Rayons Silk Mfg. Co. Ltd. [1992] 196 ITR 149/62 Taxman 471 in which the Hon'ble Supreme Court held as under:- ''It is settled law that the expression used in a taxing statute would ordina....
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....s granted based on the EXIM Policy framed by the Government periodically. In this context it is pertinent to refer to the definition of "manufacture" contained in Chapter IX of the EXIM Policy extracted above. We notice that "manufacture" is given a very wide definition to take in even processing involving conversion of something to another with distinct name, character and use. Further, even refrigeration of an item which involves only freezing, repacking, labeling etc. are also covered by the definition of "manufacture". Blending of tea is mixing of different varieties of teas produced in estates located in different regions having different altitudes. Climate conditions etc. It is common knowledge that new flavours of tea are generated by blending different varieties. In our view, it would not be incorrect to say that in the course of blending the product obtained namely, the blended tea, certainly has different characteristics in as much as flavor, taste etc. of the blended tea is different from that of the various varieties of tea used in blending. We are of the view that since the purpose of exemption under s. 10A is to give effect to the EXIM Policy of the Government, the de....
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....uction No. 4/2006, Dated 24.5.2006 (F. No. F.5/1/2006-EPZ) Subject : Modification in Instruction No. 1/2006 dated 24th March, 2006 of the Department of Commerce regarding setting up of trading units in the Special Economic Zones - Reg. This Department has been receiving representations on difficulties faced by the existing SEZ units holding approval to do trading, that their exports are adversely affected and also that several of their orders are held up due to the restriction on trading on account of the above instruction. Taking cognizance of these representations, in partial modification of the above-referred Instruction dated 24th March, 2006, It has been decided that while units in the Special Economic Zones who hold approval to do trading activities will be allowed to carry out all forms of trading activity, the benefits under Section 10AA will exclude trading other than trading in the nature of re-export of imported goods. Appropriate amendments in this regard are being issued. 2. In the meantime, sourcing from domestic area may be permitted by units in the SEZs which are allowed to do trading, subject to this circular being cited and on production of an undertak....
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....ot be invoked to defeat the applicability of the doctrine of promissory estoppel. We must concede that the subsequent decision of this court in Jeet Ram v. State of Haryana [1980] 3 SCR 689, takes a slightly different view and holds that the doctrine of promissory estoppel is not available against the exercise of executive functions of the State and the State cannot be prevented from exercising its functions under the law. This decision also expresses its disagreement with the observations made in Motilal Padampat Sugar Mills' case [1979] l18 ITR 326 (SC), that the doctrine of promissory estoppel cannot be defeated by invoking the defence of executive necessity, suggesting by necessary implication that the doctrine of executive necessity is available to the Government to escape its obligation under the doctrine of promissory estoppel. We find it difficult to understand how a Bench of two judges in Jeet Ram's case, could possibly overturn or disagree with what was said by another Bench of two judges in Motilal Padampat Sugar Mills' case. If the Bench of two judges in Jeet Ram's case found themselves unable to agree with the law laid down in Motilal Padampat Sugar Mills' case,. they ....
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.... [1979] 118 ITR 326 (SC) and we find ourselves wholly in agreement with what has been said in that decision on this point.'' 2.18 The Hon'ble Apex Court in the case of State of Haryana v. Mahabir Vegetable Oils (P.) Ltd. [Civil Appeal No. 1977 of 2011, dated 21-2-2011] had an occasion to consider the applicability of promissory estoppel on public authorities. In the case before Hon'ble Apex Court, the State of Haryana in Industrial Policy for the period 01-04-1988 to 31-03-1997 promised to give incentive by way of sales tax exemption for the industries set up in backward areas of the State. Schedule III appended to the Rules provides for a negative list of the industries and at the initial stage the solvent extract plant was admittedly not included in the negative list. On 16th Dec. 1996, amendment to the draft rules were notified and according to which sales tax benefit was to be given to the investment made upto 3rd Jan. 1996 and solvent extraction plant was also placed in negative list. The Hon'ble Apex Court after considering the doctrine of promissory estoppel held that the assessee will be entitled to sales tax exemption in respect of the investment made upto 16th Dec. 199....