AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 535
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.... 2010-11 (appeal by the Revenue) The Revenue has raised following grounds of appeals. 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of claim of deduction u/s.10AA of the Act of Rs. 4,72,67,584/- 2. The Id. CIT(A) has erred in law and on facts in directing to rework the disallowance of hedging loss of Rs. 4,81,48,554/- made by the AO. 3. That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs. 60,00,560/- u/s.36(i)(iii) of the Act. 2. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 4,72,67,584/- on account of the deduction claimed under section 10AA of the Act 3. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of dealing in fuel oil and high speed diesel and all types of petroleum products. The assessee has its processing unit in SEZ and thus it claimed the deduction from the operations carried out therein (SEZ Unit) under section 10AA of the Act amounting to Rs. 4,72,67,584/-. 3.1 As per the assessee, it was carrying out the activity of blending of differen....
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....ection 2(z) of SEZ Act r.w.r. 76 of SEZ Rules 2006. 3.5 However, the AO was not satisfied with the contention of the assessee by observing that the assessee has shown plant and machinery worth of Rs. 8,46,899/- as evident from tax audit report in form 3 CD. But the assessee claimed to have dispatched the oil after processing from its SEZ territory at 531113 Metric Tons and generated the sales of Rs. 1127,97,15,686/-. As per the AO the equipment/machinery used in processing of different oil was not sufficient enough to carry out the processing of such a huge quantity of oil. 3.6 The reports submitted by the assessee which were generated in the processing activities were pertaining for the financial year 2013-14. Therefore the same cannot be referred/considered for the year under consideration. 3.7 The AO also rejected the contention of the assessee that the trading activity falls within the meaning of the services as defined under section 2(z) of SEZ Act r.w.r. 76 of Rules 2006 by observing that the assessee has shown income from the services for Rs. 33,52,920/- which is only eligible for the purpose of deduction under section 10 AA of the Act. 3.8 The AO also observed t....
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....ered as trading in nature then also it was eligible for deduction under section 10AA of the Act in pursuance to the provisions of the services defined under section 2(z) of the SEZ Act. But the AO has wrongly assumed that the service income shown by the assessee in the audited financial statements is only eligible for deduction under section 10AA of the Act. As such the services defined under section 2(z) of the SEZ Act includes the trading activities. As such the words trading under the SEZ Act means import for the purpose of re-export. Accordingly the assessee was importing the various oils which were blended for the re-export purposes. Thus the trading activity is eligible for deduction under section 10AA of the Act. 4.3 The assessee also submitted that deduction claimed under section 10AA of the Act was based on the report furnished by the qualified chartered accountant in the form No. 56-F and not on the tax audit report furnished under section 44 AB of the Act. But the AO wrongly referred to such tax audit report and concluded that the assessee is engaged in the trading activities. The assessee further submitted that even the reference made by the AO to the tax audit repor....
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....y insulated to maintain temperature and specific IT systems which were installed at the storage terminal to have better control over temperature, dip measurement, level of cargo. iii. The technical survey reports filed by the assessee before the AO were mainly for the purpose of the reference though they were pertaining to the year 2013-14. As such the AO never demanded the assessee to furnish these reports for the year under consideration. In fact the assessee in order to explain the blending process files the reports. However the assessee during the appellate proceedings furnished the reports for the year under appeal. These reports were sufficient enough to establish that the assessee was carrying out the blending activities. iv. For claiming the deduction under section 10AA of the Act, the definition of manufacture has been provided under the SEZ Act but the AO erroneously made reference to the definition as provided under section 2(29BA) of the Act. Regarding the trading activity v. it was also observed that even if the activity of the assessee is assumed as of trading then also such activity is eligible for deduction under section ....
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.... in Special Economic Zones. 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 (j) of section 2 15 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- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Explanation 1.-For the purposes of this section,- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (iii) "manufacture" shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005 19; 8.1 From the above explanation, it is revealed that the meaning of manufacturing shall remain the same for the purpose of claiming the deduction under section 10AA of the Act as assigned in clause (r ) of section 2 of the Special Economic Zones Act, 2005 19; which reads as under: "manufacturing" means to make, produce, fabricate, assemble, process or bring into existence, by hand o....
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....argo transferred. During the process of inter-tank transfer circulation, churning, heating activity also carried out to have proper blending and homogeneous product at all the levels in the tank. There are specific equipment like churners, jet pumps, hot water lines, boilers etc. are installed in the tanks for proper blending. -(Specific cost to have manufacturingfacility). Tanks are insulated to maintain temperature. Specific IT systems are installed at storage terminal to have better control over temperature, dip measurement, level of cargo. The above submission of the assessee has not been doubted by the AO during the assessment proceedings. However, the AO doubted on the manufacturing activity carried out by the assessee mainly for 2 reasons, firstly, that there was not sufficient equipment available with the assessee secondly, and the AO referred the definition of manufacture as provided under section 2(29B) of the Act. 8.3 Regarding the availability of equipment, we note that the assessee hired the tanks which were well equipped for carrying out the blending activities as described above. Furthermore, the activity of blending cannot be linked ....
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....ithout operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport. [Explanation- The expression "Trading", for the purposes of the Second Schedule of the Act, shall mean import for the purposes of re-export.] On reading of the above rule, it is transpired that even the trading activity carried out by the assessee from its SEZ unit, the profit from such activity is also eligible for deduction under section 10AA of the Act. 8.7 Now the next question arises whether the provisions of Income Tax Act 1961 will prevail over the provisions of The Special Economic Zones Act, 2005. At this point it is relevant to refer the relevant provisions of section 51 of SEZ Act 2005 which is given below:- "51.(1) The provisions of this Act shall have Act to have effect notwit....
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....eption can be taken to the view expressed by the Ld. CIT(A) in granting the exemption." 8.9 In this respect we also draw support and guidance from decision of Hon'ble ITAT Jiapur 'B' Bench in case of DCIT vs. Goenka Diamond & Jewellers Ltd. reprted in 19 taxamman.com 91. The relevant extract of the order is reproduced below:- It is true that the word 'services' is not mentioned either in section 10AA or in section 2 of the Income Tax Act which contains the definition of various words. Deduction under section 10AA is available in case the unit begins to manufacture or produce such article or things or provide services. 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. [Para 2.10] 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 i....
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....will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction. [Para 2.19] Section 51 of the SEZ Act mentions that notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act, the provision of SEZ Act will prevail. Thus one will have to consider the implication of section 51 of the SEZ Act. It means that anything inconsistent to the provision of the SEZ Act will not be considered. Thus, the word 'services' as mentioned in section 10AA cannot be construed in consistently with the definition of services given in the SEZ Act. Under the SEZ Act, the trading is included in the services provided the trading in export of imported goods. Therefore, the assessee is entitled to deduction under section 10AA and therefore, the Commissioner (Appeals) was justified in allowing the exemption. [Para 2.20] Thus from the above, it is clear that the trading activity carried out by the assessee is also eligible for exemption under section 10AA of the Act ....
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....e amount of Rs. 4,16,49,032/- (42,46,77,910 - 38,30,28,878). Accordingly the AO in the absence of documentary evidence has treated such loss as a speculative loss and accordingly disallowed the impugned loss against the business income. Hence the AO disallowed the loss of Rs. 4,81,48,554/- (41649032+6499522) and added to the total income of the assessee. Aggrieved assessee preferred an appeal to the learned CIT (A). 11. The assessee before the learned CIT (A) regarding the loss of Rs. 64,99,522/- submitted that the impugned loss was against the sale purchase of the commodities with the AE Chemoil Europe B.V. As such the nature of such loss is identical to the loss incurred to provide the security against the price fluctuation for the sale purchase transactions with the other related party namely Chemoil Middle East and Chemoil International. 11.1 The assessee regarding the loss of Rs. 4,16,49,032/- submitted that such loss has been disallowed without providing any opportunity to the assessee. As such this loss was on account of hedging with respect to the transactions of sale purchase with non-related party namely MF Global Singapore Pte. Limited which was of the similar n....
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....the absence of the documentary evidence. Accordingly the authorities below treated such loss as a speculative in nature. We also note that the learned counsel for the assessee has also not produced any documentary evidence at the time of hearing before us suggesting that the impugned losses were not speculative in nature. Thus in the absence of any information/documentary evidence we hold that such losses are speculative in nature and therefore the same cannot be setoff against the non-speculative income. 15.1 However, we are conscious to the fact that the income of the assessee from the SEZ unit shall stand increased on account of the disallowance of the impugned loss and the assessee shall be eligible for deduction on such enhanced income. Thus the ground of appeal of the Revenue is dismissed and the ground of appeal of the assessee is also dismissed. 16. The last issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 60,00,560/- under section 36(1)(iii) of the Act. 17. The AO during the assessment proceedings found that the assessee has diverted its borrowed fund for the investment in the mutual fund and the income ....
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....ng credit and buyer credit for the purpose of import as evident from the financial statement of the assessee. Thus the ld. CIT-A deleted the addition made by the AO. Hence the ground of appeal of the assessee was allowed. Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us. 20. Both the learned DR and the AR before us relied on the order of the authorities below as favorable to them. 21. We have heard the rival contentions of both the parties and considered the materials available on record. In the instant case, the allegation of the AO was that the assessee has diverted its borrowed fund into the investments of mutual fund and the dividend income from the mutual fund is exempted under the Act. Accordingly, he was of the view that the amount of interest expenses claimed by the assessee corresponding to the investment made in the mutual fund cannot be allowed as deduction under the provisions of section 36 1 (iii) of the Act. Accordingly, the AO made the disallowance of the interest expenses in proportion to the investment made in the mutual funds. However, the learned CIT (A) was pleased to delete the addition made by the AO by observing....
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....tion 2. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in upholding the disallowance of deduction for.hedging loss of Rs. 4,81,48,554 made by the learned Assessing Officer on the erroneous assumption that the loss had resulted from Currency Swap transactions not covered by the exception under clause (d) of the Proviso to Section 43(5), in total disregard of the fact that the loss had resulted from transactions pertaining to commodities intended to hedge the appellant's exposer to loss that may result from the peculiar nature of its business as explained in Note No. 14 in Schedule 20 of its audited accounts (even as the learned CIT(A) had granted relief by holding that the impugned disallowance had resulted into corresponding increase in the quantum of deduction u/s. 10AA to which the appellant was entitled). 3. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in dismissing Ground No. 5 of its appeal challenging levy of interest amounting to Rs. 5,68,180 u/s. 234A after stating that the levy was consequential and mandatory. He ought to have ....
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....in dismissing Ground No. 8 of its appeal before him challenging the initiation of penalty proceedings u/s. 271(1)(c), on the ground that no appeal lies against mere initiation of penalty proceedings. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the respondent's case, there being absolutely no warrant/justification for initiating the penalty proceedings, they deserved to be dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation. 7. The respondent craves leave to add, amend and/or alter the ground or grounds of Cross-objections either before or at the time of hearing. 23. At the outset we note that the issue raised by the assessee in its CO has already been adjudicated along with the appeal bearing No. 1555/AHD/2016 filed by us in favour of the Revenue vide paragraph No. 15 of this order. Respectfully following the same, we do not find any reason to interfere in the order of the learned CIT(A). Hence the ground of appeal of the assessee in the CO is dismissed. 23.1 The other grounds raised by the assessee in the CO are consequential and premature to decide. Therefore we dismi....
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....o add, amend and/or alter the ground or grounds of Cross-objections either before or at the time of hearing. The assessee in the 1st ground of the CO has challenged the validity of the assessment order passed by the AO on the reasoning that it was passed beyond the time prescribed under section 153 of the Act. 27. The learned AR before us submitted that the AO has made the reference to the TPO for the international transactions entered by the assessee. However the TPO has not made any adjustment on account of such international transactions in his order dated 31 July 2014. Accordingly, the learned AR claimed that the assessee is not the eligible assessee as defined under clause (b) to section 144C(1) of the Act. 27.1 However, the AR further claimed that the time limit for passing the assessment order under section 143(3) of the Act was of 31st March 2015 whereas the AO has framed assessment under section 143(3) read with section 144C(3) of the Act dated 27 April 2015 beyond the time prescribed under the Act. Accordingly, the learned AR claimed that the order passed by the AO is beyond the prescribed time. Therefore, the same cannot be held sustainable and liable to be quas....
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....etitioner. The consequence of this is that the Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. In view of the which, neither of the two conditions are satisfied in the case of the petitioner and thus the petitioner for the purposes of Section 144C(15)(b) is not an "eligible assessee". Since the petitioner is not an eligible assessee in terms of Section 144C(15)(b), no draft order can be passed in the case of the petitioner under Section 144C(1). 13. Similar is the view taken by the High Court of Gujarat in Pankaj Extrusion Ltd. v. Asstt. CIT [2011] 198 Taxman 6/10 taxmann.com 17, which has held as under:- '7. Plain reading of clause (b) of sub-section (15) of section 144C would show that an assessee can be stated to be an eligible assessee as referred to in sub-section (1) of section 144C in whose case variation referred to in the said sub-section arises as a consequence of order of Transfer Pricing Officer passed under sub-section (3) of section 92CA. We have been taken through the order passed by the Assistant Commissioner o....