TaxTMI 
TaxTMI 
2012 (3) TMI 258
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....ipur. 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 that the assessee was purchasing readymade goods ....
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.... 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 to make a levy of charge effective : 1. Sardar Harvinder Singh S....
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....on 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 product, and therefore, the appellant cannot be said as providing services. The AO has also taken supp....
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....n 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 that not only the profits and gains of manufactured goods but also trading of goods are allowed for getting the exempti....
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.... 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 the SEZ Act cannot be taken from any other Act. Section 2(z) of SEZ Act defines the word 'service' as (i) tradable service w....
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....es 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 and, therefore, entitled for deduction u/s 10AA. The AO is, therefore, directed to allow deduction u/s 10AA and the addition mad....
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....ee 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 deduction u/s 10AA on both manufacturing and trading activity carried on by it from its SEZ unit at Surat. 4. The AO did not accept the argum....
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....s 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 does not apply to the Income-tax assessment and the AO is empowered to look into an issue from fresh perspective. For this the AO has relied on some Su....
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....ture'. 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. The words "goods" used in s. 2(7)(d) of the Finance Act, 1966, has been used in the sense of merchandise, i.e., articles for sale, and so understood in a commercial se....
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....ions 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 legislatures it would have said so in clear terms. Since in Explanation-I only three terms re defined as per SEZ Act, therefore for the purpose of Sec. 10AA, only these three terms are....
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....e 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. Ld. CIT(A) has also mentioned that in instruction No. 4 of 2006 dated 24/05/2006 issued by the Department of Commerce it is clarified that the benefit u/s 10AA will exclude trading other tha....
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.... 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. It is seen that in these details ld. AR has given the following figures:- Sales (Rs. ) Gross margin (Rs. ) Net Profit (Rs. ) Trading 115,21,16,216 7,04,55,671 (6.11%) &....
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....ing 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, fabricate, assemble, process or bring into existence, by hand or by machine a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering, and inc....
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....o 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 primary conditions of section 10AA for getting the exemption i.e. (a) The assessee is a entrepreneur (i.e. person who has granted approval by Development Commissioner) as per sec. 2(i) of SEZ Act, 2005. (b) The unit has started to provide services (trading i.e. import for....
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....e 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.5/1/2006-EPZ) which states as follows: "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 acco....
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.... 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 SEZ Act, 2005. Thus the discussions references and decisions used in assessment order are not at all applicable in the case. It will be thus clear that trading activity in the nature of re-export of imported goods is falling under the head service u/s 10AA of I. T. Act, 1961 r/w section 2(z) of SEZ Act, 2005 r/w rule 76 of SEZ Rules, 2006 and above referred notification. We also submit herewith clarification issued by Development Commission SEZ, Sachin, Surat issued to the assessee company w....
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....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 to the Agreement establishing the World Trade Organisation concluded at Marrakesh on the 15th day of April, 1994; (ii) may be prescribed by the Central Government for the purposes of this Act; and earn foreign exchange 2.12 Before we proceed further, it will be useful to reproduce Section 27 and Section 57 of the SEZ Act, 2005. 27. Provisions of Income - tax Act, 1961 to apply with certain modification in relation to Developers and entrepreneurs. - The provisions of the Income-tax Act, 1....
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....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 deduction and the income which is not eligible for deduction. If no separate books of accounts have been maintained and the expenses have been incurred jointly for earning both the income then such expense have to be estimated by the ITO which are relatable to earn the non-exempted activities in order to arrive at the true and correct income. For this proposition, Hon'ble Jurisdictional High Court observed that exemption clause in taxation statute has to be construed strictly and cannot be extended beyond the clear language ....
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....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 ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that if the language is plain and unambiguous, one Ld. CIT(A) only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonable and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exempt....
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.... 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 definition of "manufacture" contained in the EXIM Policy is applicable for the purpose of the said provision. We have already noticed that "manufacture" as defined under the EXIM Policy has a wide and liberal meaning covering tea blending as well and so much so, blending and packing of tea qualify for exemption under s. 10A. Besides this, appellant-industry presently in the Special Economic Zone engaged in the same process of blending and packing of tea is specifically brought under the exemption clause through incorporation of s. 2(r) ....
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....izance 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 undertaking by the concerned unit that no Income tax benefits will be availed by the unit for trading, except in the nature of re-export of imported goods. 3. Development Commissioners are requested to note the above and take appropriate action. 2.17 In the above instruction, a reference has been made to Section 10AA of the Act. It is made clear to the entrepreneur having units in SEZ that benefit u/s 10AA will exclude other trading except in the nature of re-export of imported goods. Thus there is a promissory estoppel by the Govt. to the entrepreneur....
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....t 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 could have referred Jeet Ram's case to a larger Bench, but we do not think it was right on their part to express their disagreement with the enunciation of the law by a co ordinate Bench of the same court in Motilal Padampat Sugar Mills case [1979] 118 ITR 326 (SC). We have carefully Considered both the decisions in Motilal Padampat Sugar Mills' case and Jeet Ram's case [1980] 3 SCR 689, and we are clearly of the view that what has been laid down in Motilal Padampat Sugar Mills' case represents the correct law in regard to the doctrine of promissory estoppel a....
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....n 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. 1996, though the draft rules wee circulated on 03-01-1996. It will be useful to reproduce the head note of this case. ''It is indeed difficult to see on what principle can a Government, committed to the rule of law, claim immunity from the doctrine of promissory estoppels: It is elementary that in a republic governed by the rule of law, no one, howsoever high or low, is above the law. Everyone is subject to the law as fully and completely as any other and the Government is no exception. It is indeed the pride of constitutional democracy and rule of law that the Gove....