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2017 (4) TMI 867 - ITAT VISAKHAPATNAM

2017 (4) TMI 867 - ITAT VISAKHAPATNAM - TMI - Disallowance of exemption u/s 10AA - Held that:- Profit derived from the units situated at SEZ, engaged in the business of trading activity in the nature of import and re-export of goods falls within the definition of the term ‘services’ as defined in section 10AA of the Act. Consequently, the assessee is eligible for exemption u/s 10AA of the Act, towards export profit derived from eligible unit located at SEZ. The CIT(A), after considering the rele .....

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at these debts are offered as income 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 Limite .....

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essee 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 is not in the nature of speculative transaction as defined u/s 43(5)(d) of the Act. Therefore, we are of the view that any loss incurred on forward contracts entered with its bankers to hedge the export receivables, in order to safeguard against price fluctua .....

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er, the assessee has failed to file necessary evidences with regard to paid and payable. Therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue with reference to the books of accounts of the assessee 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 am .....

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ate, but identical orders of the Commissioner of Income Tax (A), Guntur for the assessment years 2006-07, 2007-08, 2009-10 & 2010-11. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed-off by way of this common order for the sake of convenience. 2. The brief facts of the case are that the assessee is a Private Limited company, which is engaged in the business of processing and export of tobacco, filed its return of income for the assessment ye .....

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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) an .....

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009-10 and 2010-11 has been completed u/s 143(3) of the Act and the A.O. has disallowed exemption claimed u/s 10AA of the Act, towards export profit derived from unit situated at SEZ. For the assessment year 2010-11, the A.O. also disallowed clearing and forwarding charges u/s 40(a)(ia) of the Act, for non-deduction of tax at source u/s 194C of the Act. 4. Aggrieved by the assessment orders, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate w .....

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e export turnover. The CIT(A) also deleted additions made by the A.O. towards disallowance of loss on forward exchange contracts. However, the CIT(A) partly allowed ground raised towards disallowance of expenditure made by the A.O., u/s 40(a)(ia) of the Act. Aggrieved by the CIT(A) order, the revenue as well as the assessee are in appeal before us. 5. The revenue has raised common grounds for all the assessment years. From these grounds of appeals, the revenue has agitated 3 issues. (i) Disallow .....

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u/s 194C of the Act. 6. The first issue that came up for our consideration is disallowance of exemption u/s 10AA of the Act, towards export profit derived from SEZ unit. The fact which leads to disallowance of exemption 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 Ci .....

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ut 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. submitted that the Ld. CIT(A) failed to appreciate the fact that, the assessee neither engaged .....

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e assessment year 2006- 07, wherein the ITAT, confirmed the order passed by the CIT u/s 263 of the Act, on the same issue, wherein the CIT has directed the A.O. to disallow exemption claimed u/s 10AA of the Act. The D.R. further submitted that the Ld. CIT(A) was erred in relied upon decision of the Hon ble Kerala High Court, in the case of Girnar Industries Vs. CIT (230 ITR 401) to consider the trading activity carried on by the SEZ unit has to be considered as Services as defined u/s 10AA of th .....

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he Ld. D.R. further submitted that the legislature has ambiguously referred section 2 of the SEZ Act, 2005 for the purpose of defining manufacture, SEZ and unit, however, consciously no such reference is made with regard to definition of services so as to include import for export as contended by the assessee. Thus, the definition of service as per SEZ Act, cannot be imported for the purpose of section 10AA of the Act. Since, the assessee is not engaged in the business of manufacture or rendered .....

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p; 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 service .....

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exemption u/s 10AA of the Act. In support of his arguments, relied upon the decision of ITAT, Visakhapatnam in ITA No.331/Vizag/2011 for the assessment year 2008-09 and submitted that the ITAT, after considering the provisions of section 10AA of the Act, the provisions of SEZ Act, 2005 and SEZ Rules, 2006 and also by relied upon the decision of Hon ble Kerala High Court, in the case of Girnar Industries Vs. CIT 230 CTR 401, held that profits derived from the units situated at SEZ, engaged in th .....

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he orders of the authorities below. The only question arises for our consideration is whether on the facts and in the circumstances of the case, the benefit of exemption u/s 10AA of the Act is available to the assessee, which is engaged in the business of trading activity in the nature of import and re-export of goods which falls within the meaning of the term services as defined u/s 10AA of the Act. Admittedly, the assessee has established a unit at Cochin SEZ, which was approved by the Develop .....

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h includes trading . As per explanation given in SEZ Rules, 2006, the expression trading for the purpose of second schedule of 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. The term services is not defined u/s 10AA of the Act. Since, the term services has not been defined u/s 10AA of the Act, the definition provided under the relevant Act, has to be considered for the purpose of the term ser .....

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on 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, a .....

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be applicable but the fact remains that the order passed by the Ld. CIT(A) is based on cogent reasons in the light of the explanation given in SEZ rules as well as the definition contained in SEZ Act, 2005 and facts being identical in the earlier years, which was accepted by the assessing officer, in order to deviate from the decision taken in the earlier years, the burden is upon the A.O. to show that the view taken by him is the only view possible in the matter and, in law assessee cannot, by .....

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ssed. 11. The assessee relied upon the decision of ITAT, Jaipur B Bench in the case of DCIT Vs. Goenka Diamonds & Jewellers Ltd. 509/JP/2011 dated 31.1.2012, wherein the coordinate bench of this Tribunal, under similar circumstances has held as under: We have also reproduced Section 51 of the SEZ Act. As per this Section, it is mentioned 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 .....

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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. .....

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. 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 from the units situated at SEZ, engaged in the business of trading activity in the nature of import and re-export of goods falls within the definition of the term services as defined in section 10AA of the Act. Consequently, the assessee is eligible for exemption u/s 10AA of the Act, towards export profit derived from eligible unit located .....

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the extent of Rs. 76,23,963/- on the ground that debts written off in the books of accounts of the assessee are arised out of export turnover, which can be written off in accordance with the guidelines issued by the RBI, whereas the assessee has written off these bad debts in contravention of the provisions of RBI guidelines, therefore, opined that bad debt written off is not allowable deduction u/s 36(1)(vii) of the Act. It is the contention of the assessee that in order to claim deduction u/s .....

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se debts in the books of accounts as irrecoverable. The Act does not differentiate between domestic debt and foreign debt and if such a bad debt is written off in the books of accounts as irrecoverable whether it is on account of receivables from domestic sales or non-realisation of export proceeds, then the assessee is eligible for deduction u/s 36(1)(vii) of the Act. In support of his arguments, relied upon the decision of Hon ble Supreme Court in the case of TRF Limited Vs. CIT (2010) 323 ITR .....

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6(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 wr .....

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ssessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee and amount has been offered as income in computing the income in earlier years fulfilling the conditions laid down in sub section (2) of section 36 of the Act, as held by the Hon ble Supreme Court in the case of TRF Limited Vs. CIT (2010) 323 ITR 397 (SC). We further observed that the Act does not make any difference between debts arise .....

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her observed that these debts are offered as income 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 cas .....

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y the assessee is in the nature of speculative transaction, which cannot be allowed as deduction against business income. According to the A.O., as 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) .....

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port 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 contracts not in the nature of speculative transactions is allowable as deduction against business income. 17. Having heard both the parties and considered m .....

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into by the assessee with its bankers is not in the nature of speculative transaction as defined u/s 43(5)(d) of the Act. Therefore, we are of the view that any loss incurred on forward contracts entered with its bankers to hedge the export receivables, in order to safeguard against price fluctuations in realization of trade debtors is in the nature of business loss, but not speculation loss as defined u/s 43(5)(d) of the Act. The CIT(A) after considering the relevant details has rightly deleted .....

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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 export clearing charges is in the nature of reimbursement of expenses incurred by the parties, for which the provisions of section 194C of the Act has no application. The assessee further submitted that export clearing charges and import clearing charges consist of payment towards custom duty; ocean freight, local transport char .....

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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 co .....

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s examined the issue of disallowance of expenditure specified under section 40(a)(ia) of the Act, for non-deduction of tax at source under respective provisions. The coordinate bench held that no disallowance can be made u/s 40(a)(ia) of the Act, if amounts have been paid on or before 31st March of the financial year. Therefore, we are of the view that the A.O. was not correct in disallowing expenditure incurred under the head clearing and forwarding charges under the provisions of section 40(a) .....

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IT (supra) and also considering the ratio of Hon ble A.P. High Court, in the case of Janapriya Engineering Syndicate (supra) decided the issue in favour of the assessee. The relevant portion of the order is extracted as under: We have carefully considered the rival submissions and perused the record. Consistent with the view taken by the ITAT Special Bench Visakhapatnam and also in the light of the view expressed by the Hon ble A.P. High Court in the case of Janapriya Engineering Syndicate, we a .....

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)(ia) of the Act, for the amounts which have been paid on or before the end of the financial year. However, the assessee has failed to file necessary evidences with regard to paid and payable. Therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue with reference to the books of accounts of the assessee 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 .....

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