TaxTMI 
TaxTMI 
TaxTMI 
2019 (12) TMI 536
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....unal") : "1. The order passed by the learned CIT (A) is bad in law and is passed without providing adequate opportunity to the Assessee to represent the matter and therefore liable to be quashed. 2. The order passed by the learned CIT(A) is based on the written submission made by the assessee on the first hearing date and the matter was adjourned by the learned CIT (A) on various dates, the last date fixed on 27/07/2017, which was sought to be adjourned by Assessee and acknowledged by the department on 27/07/2017. Under such circumstances , the order of CIT (A) without giving the right of audience to the assessee is contrary to the principles of law. 3. Without prejudice to the above, the CIT(A) has erred in denying the benefit of deduction under section 10AA of the Income tax Act to the Assessee. 4. Without prejudice to the above, the CIT (A) has erred in applying section 40(a)(i) with respect to payments without respecting the Hon"ble ITAT order in the Assessee's own case in the earlier year. 5. The Appellant craves to raise any other appropriate ground at the time of hearing." 3. The brief facts of the case are that assessee is in the business of manufacturing Pillows....
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....n for 10 assessment years till assessment year 2010-11 Date of conversion of MEPZ unit into sez unit 01-01-2003 Introduction of section 10A(1A) by Finance Act, 2003 With effect from assessment year 2004-05 Claim made in accordance with Sec.10A(1A) 100% deduction for assessment years 2004-05 and 2005-06 (4th and 5th year) and Introduction of new section 10AA by Special Economic Zones Act, 2005 With effect from assessment year 2006-07 onwards Claim made by the assessee 50% from assessment year 2006-07 onwards till assessment year 2010-11 (5 years) and 50% from assessment years 2011-12 onwards for the balance period of 5 years under sec.10AA The explanation, as referred to in your notice reads as fallows- Explanation- For the removal of doubts, it is hereby declared that an undertaking, being the unit which had already availed, before the commencement of the special economic zones act, 2005, the deduction referred to in section 10A for ten consecutive assessment years. Unit shall not be eligible for deduction from income under this section. The period of ten consecutive Assessment years need to be seen only as before commenc....
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....ons of SEZ Act, while the Hon'ble Finance Minister, Mr P.Chidambarom, went ahead and provided for certain amendments therein through Income tax Act to the said section 10AA (without making any amendment in the said section under the SEZ Act), The facts to be noted are:- Even though the company should have claimed 100% for 10 Assessment year till A.Y 2010-11. However in view of change in the character of Tambaram MEPZ into SEZ Zone, the assessee claimed 100% deduction for 5 assessment year and 50% deduction thereafter for the balance 10 years. No excess deduction has been ever claimed". 3.2 The AO after considering reply filed by assessee , rejected claim of the assessee,vide assessment order dated 07.03.2014 passed by AO u/s 143(3) of the 1961 Act, by holding as under: "Assessee is not eligible for deduction u/s.10AA at all since, as per section 10AA (1), the unit is eligible for deduction, only if the unit begins to manufacture or produce articles or things or provide any services during the previous year relevant to A.Y. 2006-07 onwards. In the present case the assessee has began manufacture in previous year relevant to A.Y. 2001-02. Therefore, the assessee is not elig....
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.... Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006. Thus the, Third proviso is only to clarify the second proviso i.e., if a unit has already availed deduction in 10 years, such unit will not be eligible at all. Therefore, in view of the discussion as above, it is ascertained that the assessee is not eligible to claim deduction under section 10AA and the claim of the assessee for deduction under section 10AA is rejected." 4. The assessee being aggrieved by an assessment order dated 07.03.2014 passed by AO u/s 143(3) of the 1961 Act , filed an first appeal before Ld.CIT(A) , who was pleased to dismiss appeal of the assesse, vide appellate order dated 02.08.2017 passed by learned CIT(A). The contentions raised by assessee during appellate proceedings before learned CIT(A) and decision of learned CIT(A) are reproduced hereunder: "5. During the appellate proceedings, the AR of the appellant f....
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....pply to any undertaking, being a Unit referred to in clause (zc) of section 2 of the Special Economic Zones Act 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone. C. BUT NO SUCH AMENDMENT WAS INTRODUCE BY THE FINANCE BILL IN INCOME TAX CORRESPONDING TO THE ABOVE AMENDMENY BY SEZ ACT, Confused by the complexities of two Acts (SEZ Act and Income Tax Act) governing the deduction for the SEZ Unit, based on legal advise, the Assessee company continued to claim deduction under Sec.10A(1a) for its MEPZ unit, which read as follows: SEC 10A(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April 2003, in any special economic zone, shall be- (i) Hundred per cent of profits and gains derived from the export of such articles or things or computer software for a per....
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.... years, by fulfilling the conditions by the company. Thus, having parallely complied with an alternate claim under the provisions of pari materia Sec.10AA, the assessee shall could continue to get the benefit of 50% (Subject to fulfilling the conditions, if any, by the Assessee company). The department refused to give the above benefits after having accepted 50% deduction in the earlier assessment years 2006-07 to 2010-11, in spite of non-existence of Sec.10A(1A). The petitioner seeks suitable relief on 'just cause' from Hon'ble CIT(A) 1. That the assessee company be entitled for deduction at 50% of its profits from the SEZ unit in terms of Section 10AA for the Assessment year 2011-12 onwards. 2. If the Department were to contend that the deduction granted from Assessment years 2001-02 to Assessment year 2010-11 were under the normal provisions of 5ec.10A(1) without application of Sec.10A(1A), the Department should have allowed 100% deduction for all these 10 years. Having accepted the stand of the Assessee of restricted 50% deduction from AY 2006-07 onwards, the assessee is not to be denied the benefit of deduction from AY 2011-12 onwards for the balance period....
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....6 and as per proviso to section 10AA, 50% deduction was claimed by the company from assessment year 2006-2007 till 2010-2011 (5 Years) and 50% from assessment years 2011-2012 for five years. Explanation to Section 10A states that, For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section. The period of ten consecutive years NEED TO BE SEEN ONLY AS BEFORE COMMENCEMENT OF THE SPECIAL ECONOMICZONE ACT 2005. As on the commencement of Assessment year 2006-07, which is the effective date of operation of Sec.10AA, the Unit has just claimed deduction under Section 10AA only for five Assessment years and therefore, is entitled for deduction under Section 10AA. The history of introduction of Section 10AA may be recalled. The Special Economic Zone Act 2005 ("the SEZ Act) has inserted the above Section 10AA into Income Tax Act 1961 (as an external Act), The most important fundamental legal principle that governed th....
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....rs. 4. The Learned Assessing Officer failed to give an opportunity to the appellant, before concluding, that the payments made towards export sales commission, were towards fee for technical services." 7.3 In the written submission filed on 11/4/2017 the A.R stated that the unit in MEPZ had been located into Special Economic Zone (SEZ Zone) by reason of conversion of MEPZ from export processing Zone status into SEZ Zone with effect from 01.01.2003. 7.4 Proviso and Explanation to section 10AA(3) reads as under: Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of subsection (1). Explanation.-For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions....
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.... A.Y. 2001-02, 2002-03 & 2003- 04 (1st, 2nd and 3rd year respectively). In the meanwhile, subsequent to conversion of the MEPZ to SEZ and introduction of s.10A(1A) by Finance Act, 2003 w.e.f. A.Y. 2004-05 the assessee would be eligible for 100% deduction for the A.Ys 2004-05 and 2005-06 (the 4th and 5th year respectively). Thereafter availing the benefit offered in new section 10AA applicable to Special Economic Zones (Special Economic Zones Act, 2005) the appellant claimed 50% of the eligible profits as deduction for the A.Y. 2006-07 onwards till A.Y. 2010-11 (5 years) and again 50% from A.Y. 2011-12 onwards for the balance period of 5 years u/s 10AA. 10. In the case of the appellant it is an undertaking which had already availed deduction u/s 10A before the commencement of the Special Economic Zones Act, 2005. For this bar to apply the period of 10 consecutive assessment years need to be seen only as before / prior to the commencement of the Special Economic Zone Act, 2005. As on the commencement of the assessment year 2006-07, which is the effective date of operation of S.10AA, the unit had claimed u/s 10A only for 5 assessment years as stated above and therefore claimed for t....
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....the appellant is eligible for deduction u/s.10A and subsequently u/s.10AA as discussed above." Our attentions was also drawn to appellate order dated 16.05.2017 passed by learned CIT(A) for ay: 2013-14 , wherein deduction u/s 10AA of the 1961 Act was allowed to the assessee. Presently, we are concerned with ay: 2011-12 which is the eleventh year in which the assesse is claiming deduction and being first year when the deduction u/s 10AA is claimed by the assesse. The learned CIT(A) held against assesse for ay: 2011-12 while for ay: 2012-13 and 2013-14, the learned CIT(A) has adjudicated the same issue in favour of assessee, which we have duly noted above. 6. The Ld.DR, on the other hand, relied upon orders of authorities below and submitted that assesse is not eligible for deduction u/s 10AA of the 1961 Act for impugned ay under consideration . It was submitted that assesse has already availed deduction u/s 10A of the Act for a period of 10 consecutive assessment years and now assesse is not eligible to claim deduction u/s 10AA of the 1961 Act for further period of five years as the assessee has rightly claimed deduction for ten consecutive assessment years beginning from ay: 2001....
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....SEZ unit but assessee continued to claim benefit of deduction u/s 10A of the 1961 Act for a total period of consecutive ten assessment years commencing from ay: 2001-02 to 2010-11 , which deduction was in-fact undisputedly also allowed by Revenue. It is claimed by assessee before us that for the first five years, deduction to the tune of 100% of profits derived from export of pillows and cushions were claimed and allowed by Revenue u/s 10A of the 1961 Act, while for next five years, deduction @50% of profits derived from export of pillows and cushions were claimed by assessee and was allowed by Revenue u/s 10A of the 1961 Act. The assessee has also claimed that it created Reserves as are contemplated u/s 10A(1A)(ii) of the 1961 Act for the 8th-10th year of its claim of deduction u/s 10A of the 1961 Act. Thus, in nutshell the assessee submitted that owing to conversion of its EPZ unit to SEZ unit effective 01.01.2003, it did not claim deduction of 100% of profits derived from export of pillows and cushions for ten consecutive assessment year as is contemplated u/s 10A(1) of the 1961 Act but the assessee relied upon and complied with provisions of Section 10A(1A) of the 1961 Act to c....
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....nt to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park;] [(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;] (ii) it is not formed by the splitting up, or the recon-struction, of a business already in existence: Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.-The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall appl....
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....es of the business of the industrial undertaking shall be computed as if the assessee had claimed and been actually allowed the deduc-tion in respect of depreciation for each of the relevant assess-ment years. (5) Where an industrial undertaking in any free trade zone has begun to manufacture or produce articles or things in any previous year relevant to the assessment year commencing on or after the 1st day of April, 1977, but before the 1st day of April, 1981, the assessee may, at his option, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for the assessment year commencing on the 1st day of April, 1981, furnish to the 11 [Assessing Officer] a declaration in writing that the provisions of sub-section (1) may be made applicable to him for each of the relevant assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1981, and if he does so, then the provi-sions of sub-section (1) shall apply to him for each of such relevant assessment years and the provisions of subsection (4) shall also apply in computing the....
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....stood applicable to assessee for the first year of its commencement of production for ay: 2001-02, reads as under:- '10A. Special provision in respect of newly established undertakings in free trade zones, etc. 10A (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years: Provided further that where an undertaking initially located in any free trade zone ....
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....y the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.-For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2.-The sale proceeds referred to in this sub-sec-tion shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee. (5) The deduction under sub-section (1) shall not be admissible for any assessment year....
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....all, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. (9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. Explanation 1-For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of....
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....e purposes of this section.' 7.4 Thus as could be seen that Finance Act, 2000 itself substituted Section 10A of the 1961 Act w.e.f. 01.04.2001 wherein it was , inter-alia, provided that in case units which are initially located in export processing zones or in free trade zones are subsequently located into an SEZ owing to conversion of such free trade zone or export processing zone into an special economic zone(SEZ) , then period of ten consecutive assessment years shall be reckoned from assessment year relevant to the previous year in which undertaking was first set up in such free trade zone or export processing zone. Similarly clause (c ) was introduced in Section 10A(2) by Finance Act,2000 effective from 01.04.2000 providing that benefit of deduction u/s 10A shall be applicable to undertaking which has begun or begins to manufacture or produce articles or things or computer software during previous year relevant to assessment year commencing on or after 1st day of April 2001 in special economic zone(SEZ). So , in the year 2000 itself, when SEZ Act, 2005 was not even in statute, provision's were introduced in the 1961 Act in Section 10A itself for granting benefit of deduction ....
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....day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. The following sub-section (1A) shall be inserted after sub-section (1) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 : (1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case m....
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....section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.] (5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form 3, alongwith the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,- (i) section 32, section 32A, section 33, section 35 and clause (ix) of subsection (1) of section 36 shal....
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.... not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. The following sub-section (9A) shall be inserted after sub-section (9) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 : (9A) Notwithstanding anything contained in sub-section (9), where as a result of reorganisation of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to the company, as the same would have been allowed to such firm or sole proprietary concern, as the case may be, if the reorganisation had not taken place: Provided that,- (a) in the case of a firm the aggregate of the shareholding in the company of the partners of the firm is not less than fifty-one per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the company is eligible for deduction under this section; (b) in the case of a sole proprietary concern, the shareholding of the so....
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....omputer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. (v) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, 7 specify for the purposes of this section; (vi) "relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section; (vii) "software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry; (viii) "special economic zone" means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.] 7a [Explanation 3.-For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from....
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.... assessment year starting from the year in which the unit begins to manufacture cushions and pillows in MEPZ viz. ay: 2001-02. If that interpretation as is canvassed by assessee is adopted that it begins to manufacture or produce articles or things in SEZ during previous year relevant to assessment year commencing on 01.04.2003 on being converted into SEZ unit from EPZ unit effective from 01.01.2003 and will be governed by newly inserted Section 10A(1A) of the 1961 Act, then in that case , it will also be hit by sub-section 2 , clause (ii) and/or (iii) that business should not be formed by splitting or reconstruction of a business already in existence , or that it is not formed by the transfer to a new business of machinery of plant previously used for any purpose and then in that situation , the assessee will not at all be entitled for deduction if Section 10A(1A) is invoked. When there is a specific provisions wherein language used is simple , plain , clear and unambiguous that in case of conversion of undertaking from EPZ to SEZ unit, the deduction shall be allowed for a period of ten consecutive assessment years starting from the ay when the undertaking begins to manufacture or....
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....ed its position by complying with State Policy by setting up accordingly manufacturing unit in SEZ/FTZ/EPZ on the faith that it will continue to enjoy fiscal incentives for a certain number of years as provided in the statute at the time of setting up of its unit, then normally the State Largesse are not withdrawn in such type of case midway as it creates a vested right in favour of the tax-payer who has altered its position based on State Commitment as in this case by setting up undertaking in EPZ/FTZ/SEZ etc. , which also strengthen the view that Section 10A(1) will continue to apply to EPZ/FTZ units which are converted into SEZ units and Section 10A(1A) is only applicable to newly set up SEZ units . As we will see later this restriction of deduction u/s 10A to newly set up SEZ vide sub-section 10A(1A) was later relaxed with certain conditions vide Finance Act,2003 effective from 01.4.2003. As could be seen that the Finance Act, 2000 itself recognizes SEZ units and brought the benefit of aforesaid deduction u/s 10A to SEZ units, which begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to ay commencing on or after th....
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.... the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the afore-said ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zo....
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....count of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Allowance Reserve Account") to be created and utilised for the purposes of the business of the assessee in the manner laid down in subsection (1B). (1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if the following conditions are fulfilled, namely:- (a) the amount credited to the Special Economic Zone Re-investment Allowance Reserve Account is to be utilised- (i) for the purposes of acquiring new machinery or plant which is first put to use before the expiry of a period of three years next following the previous year in which the reserve was created; and (ii) until the acquisition of new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India; (b) the particulars, as may be prescribed in this behalf, have been furnished by the assessee in respect of new machinery or plant along with the return of income f....
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....-vertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.-For the purposes of this sub-section, the ex-pression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2.-The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. 6[(4) For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in re-spect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.] (5) The deduction under [this section] shall not be admissible for an....
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.... the relevant assessment year. (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. The following sub-section (7A) shall be inserted after sub-section (7) of section 10A by the Finance Act, 2003, w.e.f. 1-4-2004 : (7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. (8) Notwithstanding anything contained in the foregoing provi-sions of this section, where the assessee, before the due d....
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....areholding of the company as a result of- (a) its becoming a company in which the public are substan-tially interested; or (b) disinvestment of its equity shares by any venture capital company or venture capital fund.]] Explanation 2.-For the purposes of this section,- (i) "computer software" means- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or serv-ice of similar nature, as may be notified 10 by the Board, which is transmitted or exported from India to any place outside India by any means; (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force; (iii) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technolo-gy Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv) "export turnover" mean....
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...." and the said reserves can only be utilized for specified purposes within stipulated period, as stipulated u/s 10A (IB) of the 1961 Act and consequences are provided in statute for non-utilization of said reserves within specified period or utilization for purposes other than specified u/s 10A(IB) , which consequences are provided u/s 10A(1C) of the 1961 Act. 7.7 It will be profitable at this stage to refer to Notes on Clauses and Memorandum to Finance Bill, 2003. The notes on clause in Finance Bill, 2003 proposing to amend Section 10A of the 1961 Act stipulated as under: "Clause 7 seeks to amend section 10A of the Income-tax Act relating to special provision in respect of newly established undertakings in free trade zone, etc. Under the existing provision contained in sub-section (1) of the said section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is allowed from the total income of the assessee. However, no deduction is allowable to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. Sub se....
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....on 10A(1A) to newly set up units in SEZ during previous year relevant to ay: 2003-04 onwards as terminology used in 'begins to manufacture...' and the word 'begun' is conspicuously missing in Section 10A(1A) and by no stretch of imagination provisions of Section 10A(1A) can be made applicable to existing EPZ/FTZ units which got themselves converted into an SEZ unit which shall continue to be governed by provisions of Section 10A(1) of the 1961 Act. For the units which are converted from EPZ/FTZ units to SEZ units, second proviso to Section 10A(1) shall continue to apply. For a newly established SEZ , now deductions are 100% of profits derived from exports for first five years and 50% for next 2 years, while for the next three years, deduction u/s 10A(1A) will be 50% subject to creation of specified reserves which can only be used for specified purposes within stipulated time limits as provided in Section 10A itself. . The legislature in its own wisdom while granting benefit of deduction u/s 10A(1A) to newly set up SEZ's units have put additional conditions for creation of reserves in 8th to 10 year and their utilization in a prescribed manner, while for the units which are set up p....
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....following conditions are fulfilled, namely :- (a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised- (i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and (ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India; (b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use. (3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),- (a) has been utilised for any purpose other than those referred to in sub-section (2), the amount....
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....king being the Unit, which has begun or begins to manufacture or produce articles or things or services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006, in any Special Economic Zone. (5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,- (a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place. (6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off. (7) For the purposes of sub-section (1), the profits derived from the export....
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....he export of computer software outside India.]" 7.10 Sub-section 7B was also simultaneously added to Section 10A by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006 , which reads as under: Section 10A "[(7B) The provisions of this section shall not apply to any undertaking, being a Unit referred to in clause (zc) of section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone.]:" 7.11 Before we proceed further, It is important to understand the concept rationale of Special Economic Zones and reasons for bringing a separate Statute namely Special Economic Zone Act, 2005, dealing with SEZ in India . We have referred to GOI web-site sezindia.nic.in to understand the concept of SEZ , wherein relevant extract is from the said GOI website is reproduced as under": "India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to ov....
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....on and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member interministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus. The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ Rules provide for: * " Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; * Single window clearance for setting up of an SEZ; * Single window clearance for setting up a unit in a Special Economic Zone; * Single Window clearance on matters relating to Central as well as State Governments; * Simplified compliance procedures and documentation with an emphasis on self certification" 7.12 As could be seen from above that aforesaid SEZ Act, 2005 was brought into st....
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.... provisions of Section 10AA, its applicability is limited to units in SEZ which begins to manufacture or produce articles or things or computer software in SEZ during the previous year relevant to assessment year commencing on or after 1st April, 2006. Similarly Section 7B simultaneously excludes allowability of deduction under Section 10A of the 1961 Act to undertakings being units referred to in Section 2(zc) of the 2005 Act which has begun or begins to manufacture or produce article or thing during the previous year relevant to assessment year commencing on or after 1st April 2006 in any SEZ. Careful perusal of sub-section 7B of the 1961 Act which was inserted in Section 10A of the 1961 Act by SEZ Act, 2005 w.e.f. 10.02.2006, clearly reveals that it excludes applicability of entire Section 10A to any undertaking , being a Unit referred to in clause (zc) of Section 2 of the SEZ Act, 2005 which has begun to manufacture or produce articles or things or computer software in SEZ or begins to manufacture or produce articles or things or computer software commencing on or after the 1st day of April 2006. Thus , the objective of using the word 'begun' is to exclude applicability of Sect....
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....AA(1)(ii) of the 1961 Act. It is also pertinent to mention that provisions of Section 10A of the 1961 Act refers to grant of deduction for a period of ten consecutive assessment years and Section 10AA for a newly set up SEZ units did not uses the terminology 'ten consecutive assessment years', which further strengthen the belief that Section 10AA shall be applicable to all SEZ whether these were established under old regime or under newly enacted SEZ Act, 2005. The Second proviso which is placed after sub-section 10AA(3) also provides that in case of units initially located in EPZ or FTZ but subsequently located in SEZ by reasons of conversion of such FTZ or EPZ into SEZ , the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the unit begins to manufacture or produce or process such articles or things or service in such FTZ or EPZ , which is in fact the case of the assessee, the assessee thus will be entitled for deduction for unexpired period of ten consecutive assessment years beginning from ay: 2006-07 u/s 10A of the 1961 Act which ended on ay: 2010-11 and thereafter further deduction of....
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....essee dated 1-4- 2010,1-07-2010 in respect of M/s, Darrow Lane Corporation and dated 1- 04-2010 in respect of M/s. Schonk BV, the commission fee is paid to nonresident on total value of every order given to the assessee company through Non-Residents. Therefore, the services are not just pertaining to a sale agent or a dealer, but are managerial and technical. In order to identify potential customers in their country, the two agents, M/s. Darrow Lane Corporation and M/s. Schonk BV have to necessarily carry out extensive marketing and advertising activities such as relationship marketing, internal marketing, integrated marketing, capturing marketing etc., to build a strong brand name of the assessee company in the offshore markets. In order to show cause their products and to get the orders in favour of the assessee company, the foreign agents would require to engage in public relations and sales promotion activities such as trade shows, aqua fairs or exhibitions, media, non-media marketing communications etc. These functionalities would require an organized marketing strategy and plans, which amounts to professional and technical services. Therefore, the services rendered woul....
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....t. In the absence of evidence in support, this ground of appeal is dismissed and the disallowance of `34,98,309/- u/s 40(a)(i) is upheld." 9.2 Thus, as could be seen from above , the assessee did not give its arguments on above issue in written submission filed before learned CIT(A) and in the absence thereof , the learned CIT(A) dismissed appeal of the assessee . The assessee has filed paper book with tribunal on 24.10.2018 and on going through the same (Page 1-3) , we have observed that the assessee did not filed any written submission on this issue of disallowance of sales commission paid to foreign agents before learned CIT(A), but it is a matter of record that assessee made elaborate arguments in statement of facts and grounds of appeal filed by assessee in memo of appeal filed with learned CIT(A). The learned CIT(A) has also reproduced grounds of appeal filed by assessee in memo of appeal filed with learned CIT(A), wherein para 8.1 and 8.2 of the appellate order passed by learned CIT(A) is reproduced hereunder: "Disallowance u/s.40(a)(i) 8.1 The Assessing officer noticed that the assessee did not deduct TDS on sales commission of Rs. 34,98,309/-. The A.R stated that th....
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....ising, publicity and sales promotion services cannot be treated as either royalty or FTS and would be treated as business income. Since the services are rendered by a non-resident outside India and it does not have a PE in India hence the income is not taxable. In the case ACIT v. Mainetti (India) (P) (Ltd.) (2011)12 Taxmann.com 60 Canvassing of orders abroad could not be regarded as managerial services, nor could it be said to be any consultation. Thus definitely, technical services as per Explanation 2 to section 9(l)(vii) of the Act would have no application. In the case of ACIT vs Modern Insulators Ltd (2011) 10 ITR 147 (Jp) it was observed that Section 40(a)(i) of the Act provides disallowance of payments to a non-resident in the nature of interest, royalty, fee for technical services or other sum chargeable under the Act on which tax has not been deducted. However, the word 'commission' is not specifically covered under Section 40(a)(i) of the Act and the sum is not chargeable to tax in India, Section 40(a)(i) of the Act is not applicable. Moreover, going by the nature of services rendered by way of referring the international clients to CLSA India Limited, the ....
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....r the use of, or the right to use, any copy right of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. '2. "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services(including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or Information for which a payment described in paragraph 4 of this Article is received; or (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. The two agents Darrow lane Textiles Corporation, USA and the AJN Schonk BV, The Netherlands rendered no such services as mentioned in Article 12 of DTAA with USA and the Netherlands and the services rendered by them cannot be classified as technical services. From the above extracts of DTAA, it is evident that the exp....