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TMI Blog2016 (9) TMI 1516X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, are in respect of assessment proceedings completed u/s. 143(3) of the Act, whereas the appeals in ITA Nos. ITA No. 3775, 3776 & 3783/Mum/2011 for A.Ys. 2005-06 2006-07&2007-08respectively are in respect of assessment proceedings carried out u/s. 143(3) r.w.s. 153C of the Act. 3. We shall first take up the appeal in ITA No. 2329/A/2008 for A.Y. 2005-06 in relation to the assessment proceedings u/s. 143(3) of the Act as a lead case. In the said appeal, the Revenue has taken the following grounds of appeal: "1.The Ld. CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs. 1,51,33,873/- made u/s. 68 on account of share application money received from ShriAshish Jain. The Ld. CIT(A) has also erred in admitting fresh evidence in violation of Rule 46A. 2. The Ld. CIT(A) has erred in law and on the facts of the case in deleting the disallowance of deduction u/s. 10A at Rs. 74,72,739/- 3. The LdCIT(A) has erred in law and on the facts of the case in deleting the addition of Rs. 89,33,998/- on account of valuation of closing stock. 4. The Ld. CIT(A) has erred in law and on the facts of the case in stating that the addition to closing stock has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that identity of the shareholder is proved and also receipt of money from ShriAshish Jain through banking channel is proved. The appellant has furnished a certificate regarding remittance from Standard Chartered Bank, New York, copy of share certificate of ShriAshish Jain was also furnished. The A.R. has cited several decisions to claim that only identity of the share applicant was required to be proved. To meet the objections raised by the A.O. the appellant has also filed a statement of net worth of ShriAshish Jain duly certified by the auditors Peter Y. H. Lam & Co., Certified Public Accountants, Hong Kong which clarifies that ShriAshish Jain is carrying on business activity in the name of M/s. Alma Diamonds Co. Limited of which he is the Managing Director and that his company is enjoying credit limit of US $ 1 Million and it also confirms that he has remitted US Dollars of 329,935 for share capital in the appellant company. It also confirmed that ShriAshish Jain as a tax payer in Hong Kong. In view of the above details furnished it is held that creditworthiness of the share holder is proved. Hence on consideration of acts and details filed and case laws relied upon by the A.R., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in valuation of Rs. 89,33,998/- after taking into account FIFO method and added the same to the income of the assessee. 9. In appeal, the learned CIT(A) deleted the additions so made by the AO by observing as under: "I have considered the submissions of the A.R. carefully. The A.R. has made a detailed submissions saying that the appellant has adopted market rate of valuation of raw materials like gold and diamond as the market rate was lower as on 31.3.2005. The A.O. has taken into consideration the selling price of raw materials for the period after 31.3.2005 and nto the selling rate as on 31.3.2005. Further, the A.O. has not brought on record any material nor has given any reasons to reject the certificate filed by the appellant from the Bank of Scotia Mocatta giving the rate of gold as on 31.3.2005 as USD 427.50 per OZ for 0.995 purity as evidence for the cost price of gold as on 31.3.2005. Further, the A.O. has increased value of loose diamonds in store and on production as WIP, but has ignored the value of diamonds which have got studded in jewellery and he has not taken into account the compensatory effect for increase in valuation of diamonds for the diamonds used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in law and on facts in not appreciating the fact that the assessee is not the owner of the unit but has got it sub-contracted through unit in a SEZ Zone. 1.2 The Ld. CIT(A) erred in law and on facts in not appreciating the fact that the assessee who is claiming deduction u/s. 10AA of the Act should manufacture the goods itself by employing its machinery or equipments. 1.3 In doing so, the Ld. CIT(A) has erred in law and facts in not appreciating that the assessee was not an entrepreneur as defined in section 2 of the SEZ Act 2005 and was not even granted a letter of approval by the concerned Development Commissioner. 2. The Ld. CIT(A) erred in law and on facts in deleting the disallowance of Rs. 62,35,814/- made on account of incorrect valuation of closing stock. 2.1 In doing so, the Ld. CIT(A) erred in law and on facts in observing that the assessee Company is showing profits in the subsequent years without appreciating that the assessee cannot be given benefit of wrong valuation of inventory. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 4. On the facts it is therefore prayed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the language of the section that the deduction is available in respect of manufacture or production of articles or things or providing any services. Further, for the purposes of section manufacture have been assigned the same meaning as laid down in clause (r) of section 2 of Special Economic Zones Act, 2005. 6.11 As per the provisions of section 2(r) of SEZ Act 2005 "manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. This itself shows that the word manufacture used in section 10AA takes various activities in its compass. Further, even for the sake of argument if we hold that the appellant was not engaged in manufacturing activity yet it cannot be denied deduction u/s. 10AA simply because the persons who are providing any kind of services are also entitled for deduction under the section. The word 'serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was not entitled to claim deduction u/s. 10AA of the Act. The learned AR, on the other hand, while relying on the decision of the Hon'ble Bombay High Court in the case of Neo Pharma Private Ltd. [1982] 137 ITR 879 has contended that under an agreement the assessee had got the articles manufactured in another company under its direct supervision and quality control and the raw material was also supplied by the assessee. Under such circumstances the risk was of the assessee for the entire operation undertaken and the products manufactured at the assessee's cost were the property of the assessee. That, under such circumstances, itis to be deemed that the resultant products were manufactured by the assessee and, therefore, the assessee has rightly claimed deduction u/s. 10AA. The learned AR has further relied upon the findings of the learned CIT(A) as reproduced above. He has further contended that even under the provisions of section 10AA the word "services" has also been used. He has therefore contended that it is not only the production or the manufacturing activity in respect of which the deduction u/s. 10AA of the Act can be claimed but also for the services also. He, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading of the entire provisions of section 10AA, it reveals that the location of the unit is very important. To claim deduction u/s. 10AA, the unit must be established in SEZ. These SEZs are established by the Central Government or the State Government or by the third parties with the permission or sanction of the Government for the purpose of development of the area and for encouraging exports. Even the preamble of the "The Special Economic Zones Act, 2005" reads as under: "An Act to provide for the establishment, development and management of the SpecialEconomic Zones for the promotion of exports and for matters connected therewith orincidental thereto." The definition of "entrepreneur" as referred to in clause (j) of section 2 of SEZ Act 2005 reads as under: "(j) "entrepreneur" means a person who has been granted a letter of approval by the Development Commissioner under sub-section (9) of section 15". Now sub-section (9) of section 15 is read as under: "(9) The Development Commissioner may, after approval of the proposal referred to in sub- section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against the Directors of your company, the LOP will be cancelled. xiv) All future correspondence for amendments/changes in terms and conditions of the approval letter or for extension of its validity, if required etc., may be addressed to the Development Commissioner, MEPZ - SEZ. This issues with the approval of Development Commissioner, MEPZ -SEZ Yours faithfully, SD/- (C.R.KALAVATHY) ASST. DEVELOPMENT COMMISSIONER FOR DEVELOPMENT COMMISSIONER" The above reproduced approval letter read with section 15(9) of the SEZ Act 2005 and Rule 19 of the SEZ Rules 2006 reveals that the facilities and privileges as admissible to the units situated in SEZ have been granted to the assessee for the manufacture of plain gold jewelleryupto 500 kg on the basis of maximum utilization of plant and machinery. The assessee has also been granted facilities and privileges as admissible for trading activity in gold and polished diamonds as noted above. It is pertinent to note here that the Development Commissioner has to particularly specify as to what activities or authorized operation are allowed to be carried out in an SEZ unit for the claim of privileges and benefits under SEZ Act. Now t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired approvals of the competent authority to carry out the operations are very much necessary. Hence as per the provisions of section 10AA of the Income Tax Act 1961, the assessee is entitled to deduction on the manufacturing activity only as approved in the above reproduced approval letter of the Development Commissioner of the SEZ. The assessee's unit has not been approved for providing of any services. Even, we find that in the case in hand the assessee has allegedly imported raw material/gold and exported the jewellery. It is not the case that the assessee has offered /provided any services to itsoff shore customers. The assessee, in fact, had obtained services of third party for getting the jewellery manufactured. The incentives under the provisions of the Act are available on the offer or for providing of services and not for taking the services from a third party. Event it is not that each or any service can be provided by a unit in SEZ to get benefits. What services can be carried out to avail the benefits by the units situated in the SEZ has also been mentioned under the provisions of 'SEZ Rules 2006'. The relevant Rule is reproduced as under: : "76. The "services" for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side the Special Economic Zone for sub- contracting shall be brought back into Unit within one hundred and twenty days or within such period as may be extended by the Specified Officer for reasons to be recorded in writing for grant of such extension; (b) cut and polished diamonds and precious and semi-precious stones (except rough diamonds, precious or semi-precious stones having zero duty) shall not be allowed to be taken outside the Special Economic Zone for sub-contracting; (c) a gem and jewellery Unit may receive plain gold or silver or platinum jewellery from the Domestic Tariff Area or from an Export Oriented Unit or from a Unit in the same or another Special Economic Zone in exchange of equivalent content of gold or silver or platinum contained in the said jewellery after adjusting permissible wastage or manufacturing loss allowed under the provisions of the Foreign Trade Policy read with the Handbook of Procedures; (d) in sub-contracting or exchange, wastage shall be permitted as per the wastage norms admissible under the Foreign Trade Policy read with the Handbook of Procedures: Provided that the total wastage of the Unit, including the wastage of the sub- contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases, the goods may be exported from the sub-contractor's premises abroad subject to following conditions, namely:- (a) sub-contracting charges shall be declared in the export declaration forms and invoices and other related documents; (b) the export proceeds shall be fully repatriated in favour of the Unit. (3) A Developer or a co-developer or on their behalf their contractor, as the case may be, may also temporarily remove the goods, procured or imported duty free by them for their authorized operations, to a place in the Domestic Tariff Area or a unit in the same or another Special Economic Zone or Export Oriented Unit or a unit in Electronic Hardware Technology Park Unit or Software Technology Park Unit or Bio-technology Park Unit, for sub-contracting a process, with prior permission of and subject to such conditions as may be prescribed by the Approval Committee.] 42. Procedure for sub-contracting in Domestic Tariff Area or in a Unit in other Special Economic Zones or in Export Oriented Unit or in Electronic Hardware Technology Park Unit or in Software Technology Park Unit or Bio-technology Park Unit or sub-contracting abroad (1) A Unit may take goods, including fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated by the owner or Managing Director or working partner or the company secretary or by any person duly authorized in this behalf by the company or firm, as the case may be, and complete description of goods shall be provided on the challan; (g) the authorized officer at the Special Economic Zone gate shall note down the identification marks of the goods for verification of the goods when received back after sub-contracting: Provided that where sensitive items are sent out for subcontracting, based on the risk profile or past performance of the unit, sample may be drawn and retained by the Specified Officer, if required: Provided further that for gem and jewellery Units, there shall be no requirement for drawal of samples; (h) the goods sent out for sub-contracting shall be returned to the Unit within one hundred and twenty days from the date of removal or within such period as may be extended by the Specified Officer for reasons to be recorded in writing for granting such extension; (i) in case of failure by the Unit to bring back the goods after sub-contracting within the period under sub-clause (h), action shall be taken by the Specified Officer to recover the duty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions, namely:- (i) the movement of goods shall be under serially numbered challans and record of such movement of goods shall be maintained by the Unit; (ii) raw material imported or procured by the Unit for manufacture of capital goods may be transferred to another unit for the purpose of manufacture or fabrication of capital goods for use by the Unit which had imported or procured the raw materials. (5) The Developer or a co-developer or on their behalf their contractor, as the case may be, shall follow the same procedure for subcontracting in Domestic Tariff area or in a Unit in other Special Economic Zones or in an Export Oriented Unit or in an Electronic Hardware Technology Park Unit or a Software Technology Park Unit as prescribed for sub-contracting by SEZ Units in sub-rule (1) above : Provided that the Bank Guarantee to cover the duty foregone on the materials being sent for sub-contracting shall apply only in case of temporary removal of goods by the contractor.] 43. Sub-contracting for Domestic Tariff Area unit for export- A Unit may, on the basis of annual permission from the Specified Officer, undertake sub- contracting for export on behalf of a Domestic Tarif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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