TMI Blog2017 (4) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing income in the earlier years. The conditions prescribed u/s 36(1)(vii) and 36(2) of the Act has been fulfilled. Therefore, we are of the view that merely because assessee had not obtained approval of RBI to write off debts pertaining to foreign party, the claim of the assessee could not be disallowed. The CIT(A) after considering the relevant provisions of the Act and also relied upon the decision of Hon’ble Supreme Court in the case of TRF Limited Vs. CIT (2010 (2) TMI 211 - SUPREME COURT ), has rightly deleted additions made by the A.O. towards disallowance of bad debt written off. - Decided against revenue Disallowance on loss of forward contracts - Held that:- The assessee has entered into a forward exchange contracts with its bankers to hedge the export receivables in foreign currency, in order to safeguard against price fluctuation in realization of trade debtors. During the year, in respect of such hedging contracts, the assessee incurred loss of an amount of ₹ 3,41,583/-. We further observed that the assessee has achieved an export turnover of over ₹ 100 crores. We further observed that the transaction entered into by the assessee with its bankers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;). The assessment for the assessment year 2006-07 was completed u/s 143(3) of the Act, on 24.12.2008. Subsequently, the case was reviewed by the CIT and passed order u/s 263 of the Act, on 18.3.2011 and set aside the order passed by the A.O. u/s 143(3) of the Act and directed the A.O. to reframe the assessment in accordance with law. The CIT reviewed the assessment order on 2 grounds i.e. disallowance of claim of exemption u/s 10AA of the Act, and examination of bad debts written off by the assessee in the case of debts received from out of exports sales. Consequent to directions of the CIT u/s 263 of the Act, the A.O. has passed assessment order u/s 143(3) r.w.s. 263 of the Act, on the directions of the CIT u/s 263 of the Act and disallowed exemption claimed u/s 10AA of the Act, towards export profit derived from the unit situated at Special Economic Zone (SEZ) and disallowed bad debts written off towards debts receivable out of export turnover. 3. The assessment for the assessment year 2007-08 has been originally completed u/s 143(1) of the Act, accepting income returned by the assessee. Subsequently, the case has been re-opened on the ground that income chargeable to tax had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption u/s 10AA of the Act are that the assessee is having a unit at Cochin SEZ. The unit was approved from the Development Commissioner, Cochin SEZ, Cochin, vide letter no.9/05/2005/IL/CSEZ/1563 dated 14.3.2005. The unit situated at Cochin SEZ is engaged in the business of import of Cigars, Cigaretts, Alcoholic Beverages, re-export the same and to derive foreign exchange. The assessee has claimed exemption u/s 10AA of the Act, towards export profit derived from the unit situated at Cochin SEZ, Cochin. The A.O. disallowed exemption u/s 10AA of the Act, on the ground that import and export activity cannot be treated as service for the purpose of section 10AA of the Act, notwithstanding its status as per SEZ Act. The A.O. further held that assessee was only engaged in trading, but neither carried any manufacturing nor rendered any service so as to be eligible for exemption u/s 10AA of the Act. According to the A.O., the eligible units situated at SEZ, engaged in the business of manufacture or production of articles or things or provided any service only qualifies for exemption u/s 10AA of the Act, but not the units engaged in the business of trading activity. 7. The Ld. D.R. subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section 10AA of the Act, in computing total income of an assessee, being an entrepreneur who begins to manufacture or produce articles or provide any services, a deduction of 100% of profits gains derived from export for a period of 5 years will be allowed beginning from the year in which the unit begins to manufacture or produce articles or provide any services. Though the meaning of the term services is not defined in the section, the definition provided under the relevant Act has to be considered for the purpose of section 10AA of the Act. The term services has been defined by the SEZ Act, 2005 and SEZ Rules, 2006 under which Rule 76 of SEZ Rules, 2006 defines the term services , which includes trading. As per explanation given in SEZ Rules, 2006, the expression trading for the purpose of second schedule of the SEZ Act, shall mean import for the purpose of re-export and such trading is included in the list of services for the purpose of section 2 of SEZ Act. Since, the assessee is carrying on trading of goods and the said activity falls within the scope of definition of services as defined under SEZ Act Rules and the profit derived from activity is eligible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act, the definition provided under the relevant Act, has to be considered for the purpose of the term services used in the section 10AA of the Act, for the purpose of determination whether the unit is eligible for exemption u/s 10AA of the Act. 10. The Ld. A.R. for the assessee at the time of hearing, submitted that the issue is covered by the decision of ITAT, Visakhapatnam in assessee s own case in ITA No.331/Vizag/2011, for the assessment year 2008-09. We find that the coordinate bench of this Tribunal, in assessee s own case has considered the issue and after considering the provisions of section 10AA of the Act, the definition of the term services as defined u/s (2) of SEZ Act, 2005 and Rule 76 of SEZ Rules, 2006, held that the activity carried on by the assessee amounts to rendering of services in importing and re-exporting of goods as defined under SEZ Rules, 2006. The relevant portion of the order is extracted below: 5. None appeared on behalf of the assessee. We have heard the Ld. Departmental Representative in this regard and carefully perused the record. As per the SEZ rules, admittedly the activity carried on by the assessee has to be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time being in force. The Hon ble Apex Court held that there can be no manner of doubt that the provision of Special Court Act wherever they are applicable shall prevail over the provisionof the Income tax Act. The Hon ble Delhi High Court in the case of CIT Vs. Vasisth Chay Vaapar Ltd., 330 ITR 440 held that when there is a provision in another enactment which contains a non obstente clause than that would override the provisions of the Income Tax. Thus one will have to consider the implication of Section 51 of the SEZ Act. It means that anything in-consistent 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 is export of imported goods. We therefore, feel that the assessee is entitled to deduction u/s 10AA of the Act and therefore, the Ld. CIT(A) was justified in allowing the exemption. 12. Considering the facts and circumstances of this case and also following the ratios of the judgements discussed above, we are of the view that profit derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d material on record, we find that the A.O. has disallowed bad debts written off in the books of accounts, on the ground that the bad debts are arised from the export turnover, which cannot be unilaterally written off in the books of accounts. According to the A.O., under the provisions of section 36(1)(vii) of the Act, only bad debt arised in the course of domestic business, written off in the books of accounts is eligible for deduction u/s 36(1)(vii) of the Act. Any debt arised in the course of export turnover cannot be written off unilaterally. The A.O. referred to the RBI guidelines and also the provisions of section 41(1) of the Act. In the case of domestic debts, where the domestic debt is unilaterally written off, the department had jurisdiction over other party to bring him under the provisions of Income Tax Act by way of section 41(1) of the Act. Whereas, in the case of debts arising out of non-realisation export proceeds written off unilaterally, the department cannot exercise jurisdiction over the other party, therefore, opined that the debts written off out of export profits is not deductible u/s 36(1)(vii) of the Act. We do not find any merits in the findings of the A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of section 43(5) of the Act, only eligible transactions which are not in the nature of speculative transaction as defined u/s 43(5) of the Act, only qualify for deduction. The A.O. referred to the CBDT circular and observed that any eligible transaction in respect of trading in derivatives referred to in clause (ac) of section (2) of the Securities Contracts (Regulation Act, 1965), that has been carried out in a recognised stock exchange shall not be treated as a speculative transaction. But, the transactions carried on by the assessee are not covered by the said exceptions, therefore, loss incurred by the assessee towards forward contracts is not eligible for deduction. It is claim of the assessee that it had entered into forward exchange contracts to hedge the possible loss in fluctuation in currency in the course of export turnover and the resultant loss on account of settlement of hedging transactions is treated as revenue expenditure. The assessee further contended that during the financial year relevant to assessment year 2009-10, its export turnover is more than the value of forward exchange contracts, therefore, any loss suffered on forward exchange cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such payments does not arise. Alternatively, the assessee contended that expenditure incurred under the head export clearing charges has been fully paid on or before 31st March of the financial year and hence no disallowance can be made u/s 40(a)(ia) of the Act, for failure to deduct TDS, if the amounts has been paid within the same financial year. In support of its arguments, relied upon the decision of ITAT, Visakhapatnam special bench decision in the case of Merilyn Shipping Transporters Vs. ACIT (2012) 136 ITD 23. 19. Having heard both the parties and considered material on record, we find that the A.O. has disallowed clearing and forwarding charges u/s 40(a)(ia) of the Act, for failure to deduct TDS u/s 194C of the Act. It is the contention of the assessee that expenditure incurred under the head clearing and forwarding charges has been paid within the end of the financial year and hence no disallowance can be made u/s 40(a)(ia) of the Act, for failure to deduct TDS, if amount has been paid on or before 31st March of the financial year. We find force in the arguments of the assessee, for the reason that the coordinate bench ITAT, Visakhapatnam Tribunal, in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to ascertain the fact of paid and payable and if expenditure is paid within the same financial year, then the A.O. is directed to delete additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict disallowance to the extent amount remaining payable at the end of the financial year. 21. In the result, the appeals filed by the revenue in ITA Nos.272, 273 274/Vizag/2012 and ITA No.484/Vizag/2014 are dismissed and appeal filed by the assessee in ITA No.477/Vizag/2014 is allowed for statistical purposes. ITA Nos.271 275/Vizag/2016: 22. These cross appeals filed by the assessee, as well as revenue are directed against order of the CIT(A), dated 29.1.2016 for the assessment year 2011-12. In these appeals, the revenue has challenged the deletion of additions made by the A.O., towards export profit u/s 10AA of the Act and additions towards disallowance of expenditure u/s 40(a)(ia) of the Act. The assessee has challenged the issue of disallowance of expenditure u/s 40(a)(ia) of the Act, for failure to deduct tax at source. Since the issues raised by the revenue and the assessee are identical to the ITA Nos.272 to 272/Vizag/2012 for A.Y. 2010-11 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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