TMI Blog2015 (11) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... ecially an “existing unit” such as the Assessee. As already discussed under the scheme of coverage, the existing EPZ’s are included as SEZ’s and the definitions of the term “Entrepreneur” includes the unit recognized as such by the STP Director who has been equated with the “Development Commissioner” for this purpose. The Assessee’s license sets out three points. In addition the Directorate in charge of STPI, Kolkata, come within the EPZ/SEZ of Falta and this has also been confirmed in his letter dated 3.5.2011 that the Assessee’s unit is an existing unit and has all the necessary accreditations from the Ministry of Information Technology with regard to the setting up of the unit as per the licence issued to it. By notification F.No.114/10/2003 FTT, existing “Export Processing Zone” (EPZ) were to be renamed as “Special Economic Zone” (SEZ’s). we have already seen, Sec.10AA was telescoped with the earlier Sec.10A, as that section was excluded for application from AY 2006-07 for the reason that Sec.10AA was made to continue to apply to the remaining span of the “left over” years of relief under Sec.10A and which would spill over to the remaining assessment year after 2006-07. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated Enterprise in terms of Sec.92 of the Act, has nothing to do with allowing deduction u/s.10AA of the Act. This objection of the AO is therefore held to be unjustified. The last objection of the AO for not allowing deduction to the Assessee u/s.10AA of the Act was that the Assessee did not claim deduction u/s.10AA of the Act in the return of income. The CIT(A) has not commented on this issue. The Revenue in ground No.4 of the grounds has not chosen to take objection on this aspect. Nevertheless, the appellate authorities can take note of claim not made in a revised return of income, more so in the present case where a claim had been made in a revised computation of total income before the AO. This objection of the AO in our view is therefore devoid of any merits. Besides the above reasons, it is also seen that the AO, ought to have considered the claim of the Assessee for deduction u/s.10B of the Act, as made in the original return of income. He has chosen to ignore the same and sought to deny the benefit of Sec.10AA of the Act alone. The order of the AO is silent on the claim of the Assessee u/s.10B of the Act. This approach of the AO in our view is nor proper. We theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be set off and carried forward in the present case is not that of the 10AA unit on which the Assessee has claimed deduction u/s.10AA of the Act. The loss in question is that of Last Peak BPO Pvt.Ltd. This loss pursuant to the order of amalgamation by the Hon’ble Kolkata High Court has to be considered as loss of the Assessee not relating to the business of the undertaking of the Assessee. Such loss is covered by the provisions of Sec.70 & 71 of the Act and not by the provisions of Sec.72(1) or Sec.74(3) of the Act. They are therefore to be allowed to be set off against the income of the Assessee under any other source.The CBDT in File No.279/Misc./M-116/2012-ITJ dated 16.7.2013 circulated to the Assessing officers has after referring to conflicting views on whether section 10A and 10B provisions are deduction provisions or exemption provisions, has expressed its view that section 10A/10B provisions are deduction provisions. The said circular becomes a benevolent circular when there is loss in the 10A/10B unit against taxable income of non- 10A/10B unit. Even on the basis of the circular to the extent it is benevolent in the facts and circumstances of the present case, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. Hundred per cent exportoriented undertaking for the purpose of Sec.10B means, an undertaking which has been approved as a hundred per cent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act. Under the provisions of s. 10A of the IT Act, a five-year tax holiday is allowed to industrial undertakings manufacturing or producing articles or things in a free trade zone subject to certain conditions. The exemption is available to industrial undertakings which have begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year commencing on or after April 1, 1981. The tax holiday is at the option of the assessee for five consecutive assessment years falling within the block of eight years beginning with the assessment year relevant to the previous year in which the industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words entrepreneur and unit as defined in Special Economic Zone Act, 2005. However, the AO did not agree with the assessee. Ultimately the Tribunal in ITA No.1057/Kol/2012 order dated 19.2.2014, held that the Assessee s unit which was located in a unit located in Special Economic Zone (in short SEZ) is covered by sub section (6) of section 115JB irrespective of the fact that such unit is claiming deduction u/s 10B and, therefore, the book profit of the SEZ unit could not be included while computing book profit under section 115JB for A.Y. 2008-09, despite the fact that clause (f) of Explanation 1 to section 115JB(2) has been amended to apply the provisions of MAT to units which are entitled to deduction under section 10B. In that year the Assessee claimed deduction u/s.10B of the Act which was allowed by the AO and the dispute was only in the matter of computation of book profits u/s.115JB of the Act as stated above. 5. In AY 09-10, which is the AY in this appeal, the Assessee claimed deduction of it s income from the business of Data processing, software development and business processing outsource u/s.10AA of the Act. During the previous year relevant to AY 09-10, M/S.Las ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der clause (ii) of sub-section (1) shall be allowed only if the 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 income81 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (ii) of sub-section (1) with effect from the 1st day of April, 2006. (4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles or things or provide 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; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such 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 Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.] Explanation 1.-For the purposes of this section,- (i) export turnover means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India; (ii) export in relation to the Special Economic Zones 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; (iii) manufacture shall have the same meaning as assigned to it in clause of section 2 of the Special Economic Zones Act, 2005; (iv) relevant assessment year means any assessment year falling within a period of fifteen consecutive assessment years referred to in this sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005, 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. The definition of Unit u/s.2(zc) of the SEZ Act, is as follows: Unit means a Unit set up by an entrepreneur in a Special Economic Zone and includes an existing Unit, an Offshore Banking Unit and Unit in an International Financial Services Centre, whether established before or established after the commencement of this Act; 11. According to the AO the first condition is that the Assessee s unit must be located in an SEZ. This condition, according to him, is not satisfied, as the Assessee is a unit registered under the Software Technology Parks of India, Kolkata unit, as a 100% EOU for rendering IT and ITES with development centre (unit) at Module No.535/536, SDF Building, Salt Lake, Sector-V, Kolkata-91. According to the AO, the registration of STP unit is granted as per delegated power by inter-ministerial standing committee and monitored by Software Technology Parks of India under the Department of IT, Ministry of Communication and Information Technology, Govt. of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereunder : - (6). The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April , 2005 from any business carried on, or services rendered by an entrepreneur or a Developer, in a Unit or Special Economic Zones, as the case may be . A reading of the above sub-section would clearly show that section 115JB will not apply to a business carried on by an entrepreneur or a Developer in a Unit or Special Economic Zone. The Sub-section does not say that the Unit has to be functioning from a Special Economic Zone. The word Unit has not been defined under the Income Tax Act. Disjunctive expression or has been used by the legislature between the words unit and Special Economic Zone. Implication can only be that there is no condition that a unit has to function in an SEZ for claiming the benefit of sub-section (6). Since subsection 6 of section 115JB of the Act was inserted by Special Economic Zone, 2005, the meaning of the term Unit given in the said Act will , in our opinion, be relevant since such word is not defined in the Income Tax Act . Section 2(zc) of Special Economic Zone Act 2005 defines a Unit as under : - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SEZ. 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 overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. A geographical region encompassing more liberal economic laws than a country s typical economic laws can be referred to as a Special Economic Zone (SEZ). 16. For the promotion of Software exports from the country, the Software Technology Parks of India was set up in 1991 as an Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to all these areas for augmenting Net Foreign Exchange earnings. In particular, the STP s were placed on level footing with the EPZ s and SEZ s as regards control and development, by placing them under the direction of Department of Commissioners and for this purpose the Director of STP s were equated with Development Commissioners and the EPZ s were declared as SEZ s. The STP unit of the Assessee was issued with a license for export of IT enabled Services and was located in the area of control of the Falta EPZ. A letter of approval from STP dated 5.1.2005 approving the Assessee as STP has been issued. Falta Special Economic Zone (earlier FEPZ) was set up by the Government of India in the year 1984. This has now come under the purview of the SEZ Act Rules with effect from 10th February, 2006 in terms of Government of India Notification No. S.O.195(E) dated 10.02.2006. 20. EPZ concept was created and were set up for giving quick administrative support by dedicating the necessary staff etc., for speedy clearances of all units, including the STP units and the other similar units which were grouped under these EPZ s. The sole aim for all these units EPZ/STP/SEZ was to earn Net For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the remaining assessment year after 2006-07. 22. All these initiatives required that the earning of Foreign Exchange was to be Net Surpluses and were to be accruing to the Indian Economy. All the regulatory parameters were similar, as was the sole purpose of the Exports promoting effort. In a sweeping move to galvanize the export efforts into higher value and volume terms, all the units set up in the past, and those that were being grouped in a specific location were covered by the Special Economic Zones Act, 2006 and brought into effect from February, 2006 and made uniformly applicable to All units past, present, and future, as regards the benefits and were subject to the same and identical responsibilities and liabilities for complying with all the procedures. As a measure of uniform integration of the Income Tax exemptions, it was provided in the SEZ Act, 2005 that the period of benefit will be cumulatively calculated span which will take into account the relief already availed of, under any earlier Income Tax Act notifications section and only for the remaining period will be available 23. The unit to claim benefits of SEZ Act, 2005 need not be physically located ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of approval under sub-section (10) of Section 3, submit the exact particulars of the identified area referred to in sub-sections (2) to (4) of that section, to the Central Government and thereupon that Government may, after satisfying that the requirements, under sub-section (8) of Section 3 and other requirements, as may be prescribed, are fulfilled, notify the specifically identified area in the State as a Special Economic Zone : Provided that an existing Special Economic Zone shall be deemed to have been notified and established in accordance with the provisions of this Act and the provisions of this Act shall, as far as may be, apply to such Zone accordingly : Provided further that the Central Government may, after notifying the Special Economic Zone, if it considers appropriate, notify subsequently any additional area to be included as a part of that Special Economic Zone. 2. After the appointed day, the Board may, authorise the Developer to undertake in a Special Economic Zone, such operations which the Central Government may authorise. 44. Applicability of provisions of this Act to existing Special Economic Zones All the provisions of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EZ units. The above intent of the relevant statutory provisions also supports the conclusions which we have arrived at as above. 27. For the reasons given above, we concur with the order of the CIT(A) on this issue. 28. The second reason given by the AO for denying the benefit of deduction u/s.10AA of the Act to the Assessee was that as per Sec.10AA(4)(i) of the Act the unit has to begin manufacture or produce articles or things or provide services during the previous year relevant to AY commencing on or after the 1st day of April, 2006 (i.e., financial year 2005-06 or any subsequent year) in any Specialized Economic Zone and that the Assessee had begun production of article or thing prior to 1.4.2006 and has been claiming exemption u/s.10A of the Act, the deduction u/s.10AA of the Act cannot be allowed to the Assessee. In view of our conclusion that the Assessee was an existing unit , we are of the view that this condition will not apply to the Assessee. 29. The third fourth reason given by the AO was that the Assessee does not fulfil the following conditions laid down in Sec.10AA(4)(ii) (iii) of the Act which reads thus: (ii) it is not formed by the splitting up, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from SEZ and therefore did not export goods from SEZ and derive income therefrom and therefore not entitled to deduction u/s.10AA of the Act, is not sustainable in view of our conclusion that the Assesssee was an existing unit . 33. The sixth objection with regard to non-filing of Form No.56F is a valid objection. But on this ground the Assessee cannot be denied the benefit of deduction u/s.10AA of the Act. The non-furnishing of Form No.56F along with the return of income is not mandatory. The Assessee is directed to file the report in the prescribed form for AO s consideration. The non-furnishing of Form No.3CEB report in respect of international Transaction which the Assessee had with it s Associated Enterprise in terms of Sec.92 of the Act, has nothing to do with allowing deduction u/s.10AA of the Act. This objection of the AO is therefore held to be unjustified. 34. The last objection of the AO for not allowing deduction to the Assessee u/s.10AA of the Act was that the Assessee did not claim deduction u/s.10AA of the Act in the return of income. The CIT(A) has not commented on this issue. The Revenue in ground No.4 of the grounds has not chosen to take objection on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the items of exclusion from the profit as per profit and loss account referred to above is the amount of income to which any of the provisions of section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply, if any such amount is credited to the profit and loss account . Sec.10A/10B/10AA of the Act is not included in the above exclusion clause. Sec.115JB(6) however lays down that income of the SEZ should be excluded from the profits as per profit and Loss account for the purpose of computing book-profits . The said provision reads as follows: (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. 37. According to the AO, the Assessee was a unit in Special Economic Zone and therefore the provisions of Sec.115JB(6) of the Act were not applicable. We have already held while deciding the earlier grounds that this conclusion of the AO is not correct. Besides the above, the Tribunal in Assessee s own case in AY 08-09 he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid decision, we are of the view that the order of CIT(A) has to be upheld on this issue. 41. The next issue that arises for consideration is the disallowance of depreciation by the AO. The AO disallowed depreciation to the extent of ₹ 29,88,000 by reworking the WDV of the assets of Last Peak BPO Pvt.Ltd., which got amalgamated with the Assessee during the previous year by invoking the provisions of Explanation 2 to Sec.43(6) of the Act. Though the Assessee raised a specific ground challenging the action of the AO in this regard, the CIT(A) has not adjudicated the same. The revenue has raised a ground on the presumption that the addition made by the AO in this regard was deleted by the CIT(A). On a careful perusal of the order of the CIT(A), we find that the CIT(A) has not adjudicated the issue at all. We are therefore the view that it would be just and appropriate to direct the CIT(A) to adjudicate this issue. We order and direct accordingly. 42. The next issue that arises for consideration is the set off of brought forward loss. The AO denied the benefit of deduction u/s.10AA of the Act to the Assessee and brought the income of the said unit to tax. He set off bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be set off and carried forward in the present case is not that of the 10AA unit on which the Assessee has claimed deduction u/s.10AA of the Act. The loss in question is that of Last Peak BPO Pvt.Ltd. This loss pursuant to the order of amalgamation by the Hon ble Kolkata High Court has to be considered as loss of the Assessee not relating to the business of the undertaking of the Assessee. Such loss is covered by the provisions of Sec.70 71 of the Act and not by the provisions of Sec.72(1) or Sec.74(3) of the Act. They are therefore to be allowed to be set off against the income of the Assessee under any other source. The decision of the Special Bench of the ITAT in the case of Scientific Atlanta India Technology Pvt.Ltd. Vs. ACIT (2010) 38 SOT 0252 (SB)(Chennai) supports the above conclusion. The CBDT in File No.279/Misc./M-116/2012-ITJ dated 16.7.2013 circulated to the Assessing officers has after referring to conflicting views on whether section 10A and 10B provisions are deduction provisions or exemption provisions, has expressed its view that section 10A/10B provisions are deduction provisions. The said circular becomes a benevolent circular when there is loss in the 10A/10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the option of the Assessee depending on market conditions and its exigencies of business as it perceived. The Assessee made these sums available as money s call against certificates of deposit as part of its normal business dealings activities and being its own treasury management function. Having regard to the volatility of the money market as the Assessee perceived and having regard to its liquidity on account of the buoyancy dollar vis-vis a falling rupee, the Assesse thought it prudent to negotiate special rates with its own bankers for extending moneys on call to them at different rates that were advantageous to the Assessee. The Assessee claimed that the activity was part of its treasury options and an integral part of liquidity management of the Assessee and ell within the normal ambit of the Assessee s business and was to be regarded as income from business though not income derived from the Sec.10AA unit. The AO did not agree with the submissions of the Assessee. The CIT(A) without giving any independent reasons agreed with the submissions made by the Assessee. 51. We are of the view that the dispute in this appeal is only on the head of income. There is no tax impli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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