TMI Blog2019 (12) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... version of EPZ unit into an SEZ unit but the fact remains that unit was already in operation since previous year relevant to ay: 2001-02 onwards and it could not be said the unit of the assessee begins to manufacture or produce articles or things or computer software in the previous year relevant to assessment year 2003-04 in SEZ as it is a clear case of mere conversion of EPZ into an SEZ and not setting up of new unit in SEZ. The assessee was entitled for deduction u/s 10A for a period of a ten consecutive assessment years commencing from ay: 2001-02 onwards and provisions of Section 10A(1) will continue to apply to it even after being converted into an SEZ unit effective from 01.01.2003 keeping in view second proviso to Section 10A(1) of the 1961 Act. The intention of law makers is manifestly clear that they intent to apply Section 10A(1A) to newly set up units in SEZ during previous year relevant to ay: 2003-04 onwards as terminology used in begins to manufacture and the word begun is conspicuously missing in Section 10A(1A) and by no stretch of imagination provisions of Section 10A(1A) can be made applicable to existing EPZ/FTZ units which got themselves converted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MEMBER: This is an appeal filed by assessee against appellate order dated 02.08.2017 passed by learned Commissioner of Income Tax (Appeals)-5, Chennai (hereinafter called as the CIT(A) ) in ITA No.74/CIT(A)-5/2014- 15 for assessment year(ay) 2011-12, the appellate proceedings before learned CIT(A) had arisen from assessment order dated 07th March 2014 passed by learned Assessing officer ( hereinafter called the AO ) u/s 143(3) of the Income-tax Act,1961( hereinafter called the Act ) . 2. The assessee has raised following grounds of appeal in memo of appeal filed with Income Tax Appellate Tribunal , Chennai( Hereinafter called the tribunal ) : 1. The order passed by the learned CIT (A) is bad in law and is passed without providing adequate opportunity to the Assessee to represent the matter and therefore liable to be quashed. 2. The order passed by the learned CIT(A) is based on the written submission made by the assessee on the first hearing date and the matter was adjourned by the learned CIT (A) on various dates, the last date fixed on 27/07/2017, which was sought to be adjourned by Assessee and ackn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing deduction from income under the provisions of Section 10AA of the 1961 Act. The AO show caused assessee why a sum of ₹ 47,19,678/- claimed as deduction u/s 10AA of the 1961 Act by the assesse should not be disallowed. The assessee in reply thereof submitted before the AO as under: We are giving below a date chart of claim made by the assessee company in respect of its operations in MEPZ unit. The deduction claimed varied based on the amendments made in the Income Tax Act. Date of incorporation MEPZ unit-February 2000 Date of commencement of production December 2000 Particulars Deduction Remarks Claim made under section 10A(1) 100% deduction for Assessment years 2001-02, 2002-03, 2003-04 (3 years) By application of this provision, the company should have claimed 100% deduction for 10 assessment years till assessment year 2010-11 Date of conversion of MEPZ unit into sez unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEZ Act, which stated as under. The provisions of this Act shall have effect 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 SEZ Act, 2005 (28 of 2005) vide section 27 stated: The provisions of the income-tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the developer or entrepreneur for carrying on the authorized operations in a special Economic Zone or unit subject to the modifications specified the second schedule. This implied that provisions of Income-tax Act, 1961 would apply with certain modifications in relation to developers and entrepreneurs as defined in the SEZ Act, 2005. There were doubts expressed by some tax counsels that there were certain lacunas, as SEZ Act provided deferent expressions (the second schedule of the SEZ Act clearly stated Modifications to the Income-tax Act, 1961 while the third schedule of the SEZ Act states 'Amendment to certain enactments, which in legal parlance are not at par). The counsels discou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section: Therefore, first proviso to Section 10AA (3) clearly states that the deduction is only for the unexpired period and Explanation below such proviso is to clarify the proviso ie., if a unit has already availed deduction in 10 years, such unit will not be eligible at all. An Explanation will only clarify the provisions of the Act and it will not confer any additional benefit/make new levy. Further, Second provisio to Section 10AA (3) reads as under, Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export processing Zone status into SEZ Zone with effect from 01.01.2003. Consequently, the Assessee continued to claim deduction under Sec.10A read with the provisions of Sec. 10A(1A) for Assessment Year 2003-04 (90%), 2004-05 and 2005-06 (3 YEARS). Thus, in total for 5 assessment years 100% deduction was claimed. B. In the meantime a new Act, namely, The Special Economic Zones Act, 2005 (SEZ ACT) was introduced and it modified income Tax by introducing a new section 10AA providing for Special provisions in respect of newly established Units in Special Economic Zones . The said newly introduced Sec.10AA was inter alia provided for the following: i) Under sub section (3) the following second proviso: Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty percent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) For the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Special Economic Zone Re-investment Allowance Reserve Account ) to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B). Based on above provisions, the Assessee has claimed exemption of 50% of the profits under section I0A for the Asst. Years 2006-07 2007-08 (2 years) and continued to claim for the next three Asst. year 2008-09 to 2010-11 a deduction of 50% of exports profits have been claimed after creating Special economic Zone re-investment allowance reserve account to the extent required under the Act, (3 years). Therefore, a period of 7 years was claimed (5 years 100% and next 2 consecutive assessment years at 50% and for the next 3 consecutive assessment years at 50% by cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled for deduction alternatively and only under Sec.10AA in respect of al! these assessment years 2006-07 to 2010-11 and the Department having accepted the deduction at the rate of 50% of its profits from the SEZ unit (in terms of a non existing provision under section 10A(1A) which has been nullified by Section 10A (7B)) cannot deny a rightful deduction under Sec.10AA of 50% of its profits from the SEZ unit for the balance 5 assessment years from Assessment year 2011-12 onwards. 6. I heard the contentions of the AR and perused the grounds of appeal, assessment order, written submission and material available on record. My observations in respect of the grounds raised by the appellant are as follows: 7. Disallowance of deduction u/s.10AA: 7.1 In the return of Income for A.Y. 2011-12, the assessee company claimed deduction u/s.10AA for a sum of ₹ 47,19,678/-. The assessee claimed deduction under section 10A for ten consecutive assessment years from AY 2000-01 till AY 2010-11 and in the A.Y 2011-12 the assessee claimed deduction under section 10AA. The Assessing Officer rejected the claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10AA may be recalled. The Special Economic Zone Act 2005 ( the SEZ Act) has inserted the above Section 10AA into Income Tax Act 1961 (as an external Act), The most important fundamental legal principle that governed through the SEZ Act was that the SEZ Act of 2005 override the provisions of the other taxing statutes including the Income tax Act, the Central Excise Act and the Customs Act, and the taxing Statute relevant to service tax. This legal position was made very dear by Section 51 of the SEZ Act, which stated as under; The provisions of this Act shall have effect 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 SEZ Act, 2005 (28 of 2005) vide section 27 stated: The provisions of the Income-tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule . This imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of subsection (1). Explanation.-For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section : 7.5 The assessee claimed deduction under section 10A for ten consecutive assessment years from AY 2000-01 till AY 2010-11. Hence the disallowance of claim of deduction claimed u/s 10AA is upheld. 5. Aggrieved by an appellate order dated 02.08.2017 passed by learned CIT(A), the assessee has filed an appeal before the tribunal. The learned counsel for assessee opened arguments and submitted before us that assessee is an industrial undertaking engaged in the business of manufacturing of pillows and cushions. The assessee is located in SEZ and claimed deductions u/s.10AA of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is an undertaking which had already availed deduction u/s 10A before the commencement of the Special Economic Zones Act, 2005. For this bar to apply the period of 10 consecutive assessment years need to be seen only as before / prior to the commencement of the Special Economic Zone Act, 2005. As on the commencement of the assessment year 2006-07, which is the effective date of operation of S.10AA, the unit had claimed u/s 10A only for 5 assessment years as stated above and therefore claimed for the deduction u/s 10AA thereafter. In sum, the appellant was eligible to avail deduction of 100% of the profits and gains of the industrial undertaking for 10 assessment years till A.Y. 2010-11. However, in view of change in the character of Tambaram MEPZ into SEZ Zone, the appellant claimed 100% deduction for 5 assessment years initially and 50% of the deduction in the following 10 assessment years thereafter. 11. As regards the objection raised by the AO in page 6 of the assessment order with regard to the bar placed by the second proviso of s.10AA(3) the same does not appear to be in all fours. It is so for the reasons that Sec.10A(7B) introduced with effect from 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve duly noted above. 6. The Ld.DR, on the other hand, relied upon orders of authorities below and submitted that assesse is not eligible for deduction u/s 10AA of the 1961 Act for impugned ay under consideration . It was submitted that assesse has already availed deduction u/s 10A of the Act for a period of 10 consecutive assessment years and now assesse is not eligible to claim deduction u/s 10AA of the 1961 Act for further period of five years as the assessee has rightly claimed deduction for ten consecutive assessment years beginning from ay: 2001-02 to 2010-11 u/s 10A of the 1961 Act which is the section under which assesse was actually entitled for deduction for ten consecutive ay s beginning from ay: 2001-02 and now assessee cannot claim deduction u/s 10AA of the 1961 Act. 7. We have carefully considered rival contentions and perused material placed on record including orders of the authorities relied upon. We have observed that assessee is in business of manufacturing and export of pillows and cushions. It is observed that initial date of registration of the business undertaking of the assessee for manufacturing of pillows and cushion in Tam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 10A of the 1961 Act. The assessee has also claimed that it created Reserves as are contemplated u/s 10A(1A)(ii) of the 1961 Act for the 8th-10th year of its claim of deduction u/s 10A of the 1961 Act. Thus, in nutshell the assessee submitted that owing to conversion of its EPZ unit to SEZ unit effective 01.01.2003, it did not claim deduction of 100% of profits derived from export of pillows and cushions for ten consecutive assessment year as is contemplated u/s 10A(1) of the 1961 Act but the assessee relied upon and complied with provisions of Section 10A(1A) of the 1961 Act to claim deduction from the profits on export of pillows and cushions of 100% of profits derived from export of pillows and cushions for first five years and thereafter claimed deduction @50% of profits derived from export of pillows and cushions . This deduction as claimed by assessee u/s 10A of the 1961 Act were allowed by Revenue until ay: 2010-11. It is only in this eleventh year viz. impugned ay: 2011-12 with which we are presently seized with, the assessee invoked provisions of Section 10AA of the 1961 Act for the first time to claim benefit of deduction to the tune of 50% of the profits derived from e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or things are not less than seventy-five per cent of the total sales thereof during the previous year;] (ii) it is not formed by the splitting up, or the recon-struction, of a business already in existence: Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial 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 Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the pur-poses of clause (ii) of that sub-section. [(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any [ten] consecutive assessment years, beginning with the assessment year relevant to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking in any free trade zone has begun to manufacture or produce articles or things in any previous year relevant to the assessment year commencing on or after the 1st day of April, 1977, but before the 1st day of April, 1981, the assessee may, at his option, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for the assessment year commencing on the 1st day of April, 1981, furnish to the 11 [Assessing Officer] a declaration in writing that the provisions of sub-section (1) may be made applicable to him for each of the relevant assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1981, and if he does so, then the provi-sions of sub-section (1) shall apply to him for each of such relevant assessment years and the provisions of subsection (4) shall also apply in computing the total income of the assessee for the assessment year immediately succeeding the last of the relevant assessment years and any subsequent assessment year. (6) The provisions of sub-section (8) and sub-section (9) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d applicable to assessee for the first year of its commencement of production for ay: 2001-02, reads as under:- 10A. Special provision in respect of newly established undertakings in free trade zones, etc. 10A (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years: Provided further tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this subsection as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.-For the purposes of this sub-section, the expression competent authority means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2.-The sale proceeds referred to in this sub-sec-tion shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. (9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trade zone which the Central Government may, by noti-fication in the Official Gazette, specify for the purposes of this section; (vi) relevant assessment year means any assessment year falling within a period of ten consecutive assessment years referred to in this section; (vii) software technology park means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Indus-try; (viii) special economic zone means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section. 7.4 Thus as could be seen that Finance Act, 2000 itself substituted Section 10A of the 1961 Act w.e.f. 01.04.2001 wherein it was , inter-alia, provided that in case units which are initially located in export processing zones or in free trade zones are subsequently located into an SEZ owing to conversion of such free trade zone or export processing zone into an special economic zone(SEZ) , then period of ten consecutive assessment years shall be reckoned from assess ..... 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Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone : 1[***] The following third proviso shall be inserted to sub-section (1) of section 10A by the Finance Act, 2002, w.e.f. 1-4-2003 : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.-For the purposes of this sub-section, the expression competent authority means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2.-The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. 2[(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains of the undertaking; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. (9) Where during any previous year, the ownership or the beneficial interest in the undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) disinvestment of its equity shares by any venture capital company or venture capital fund.] Explanation 2.-For the purposes of this section,- (i) computer software means- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified 5 by the Board, which is transmitted or exported from India to any place outside India by any means; (ii) convertible foreign exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force; (iii) electronic hardware technology park means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv) export turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) was restricted to units other than to whom Section 10A(1A) applies to 90% of the profits derived from export of articles or goods or computer software for ay: 2003-04. The assessee unit got itself converted into an SEZ unit during previous year relevant to ay: 2003-04 but can it be said that it begins to manufacture or produce goods or articles in SEZ in previous year relevant to ay: 2003-04. The answer is emphatic no , the assessee unit begins to manufacture or produce pillows or cushions in previous year relevant to ay: 2001-02 in MEPZ and once the unit begins to manufacture or produce articles in previous year relevant to ay: 2001-02 , then it cannot be said that it again begins to manufacture or produce articles in SEZ when it got converted itself from EPZ unit to SEZ unit. It is merely a conversion of EPZ unit into an SEZ unit but the fact remains that unit was already in operation since previous year relevant to ay: 2001-02 onwards and it could not be said the unit of the assessee begins to manufacture or produce articles or things or computer software in the previous year relevant to assessment year 2003-04 in SEZ as it is a clear case of mere conversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10A(1A) of the 1961 Act will come into play. The non-obstante clause in Section 10A(1A) is also placed in statute because there were SEZ units which were granted deduction u/s 10A(1)of the 1961 Act which had begun or begins to manufacture or produce article or things or computer software during the previous year relevant to the ay commencing on or after the 1st day of April 2001 in any SEZ for which reference is drawn to Section 10A(2)(i)(c) of the 1961 Act as well cases covered by conversion of EPZ units into SEZ units vide second proviso to Section 10A(1) of the 1961 Act and hence new sub-section 10A(1A) was introduced which only deal with newly established SEZ in previous year relevant to ay: 2003-04 and onwards. It can be seen that vide Finance Act, 2002 , Section 10A(1A) of the 1961 Act was introduced which curtailed the period of deduction to newly set up undertaking in SEZ to seven years as against period of deduction upto 10 consecutive years enjoyed by existing SEZ set-up prior to previous year relevant to ay: 2002-03. Not only period of deduction was reduced to 7 years by newly inserted Section 10A(1A) by Finance Act, 2002 as against period of ten consecutive assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from assessment year commencing from 1st April 2012 and subsequent ay s. It is now no more res-integra that exemption/deduction provisions are to be strictly construed and reference is made to Constitutional Bench decision of Hon ble Supreme Court in the case of Commissioner of Customs v. Dilip Kumar in Civil Appeal no. 3327 of 2007, judgment dated 30.07.2018. The Courts cannot go further and enlarge the scope of benefit of largesse granted by State through these deductions/exemption and these exemption/deduction provisions are to be strictly construed and onus is on the tax-payer to establish that it falls within four corners of rigors of exemption/deduction provisions as are existing in statute. Further, with introduction of Section 10A(1A) of the 1961 Act, the deduction to SEZ unit was restricted to a period of 7 years, if it begins to manufacture or produce articles or things or computer software in SEZ during the previous year starting on or after 1st day of April 2003. Then again by Finance Act, 2003, the amendments were brought in Section 10A of the 1961 Act wherein Section 10A(1A) to Section 10A(1C) were substituted for the existing Section 10A(1A) there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two assessment years.] The following sub-sections (1A) to (1C) shall be substituted for the existing subsection (1A) by the Finance Act, 2003, w.e.f. 1-4-2004 : (1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount so utilised; or (b) has not been utilised before the expiry of the period specified in subclause (i) of clause (a) of sub-section (1B), the amount not so utilised, shall be deemed to be the profits,- (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (ii) in a case referred to in clause (b), in the year imme-diately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (1B), and shall be charged to tax accordingly. (2) This section applies to any undertaking which fulfils all the following conditions, namely :- (i) it has begun or begins to manufacture or produce arti-cles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form 7, alongwith the return of income, the report of an account-ant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,- (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years 7a[ending before the 1st day of April, 2001], in rela-tion to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gamation or demerger had not taken place. (8) Notwithstanding anything contained in the foregoing provi-sions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. [(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. [(9A) Notwithstanding anything contained in sub-section (9), where as a result of reorganisation of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force; (iii) electronic hardware technology park means any park set up in accordance with the Electronic Hardware Technolo-gy Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv) export turnover means the consideration in respect of export 11[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign ex-change in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; (v) free trade zone means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 7 seeks to amend section 10A of the Income-tax Act relating to special provision in respect of newly established undertakings in free trade zone, etc. Under the existing provision contained in sub-section (1) of the said section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is allowed from the total income of the assessee. However, no deduction is allowable to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. Sub section (1A) of the said section provides that an undertaking set up in a special economic zone on or after the 1st day of April, 2003 is eligible for a deduction of hundred per cent of export profits for five years and fifty per cent for further two assessment years. Under sub-section (9), no deduction under sub-section (1) is allowed to the assessee where the ownership or the beneficial interest in the undertaking is transferred by any means. However, this condition is not applicable where as a result of the reorg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be governed by provisions of Section 10A(1) of the 1961 Act. For the units which are converted from EPZ/FTZ units to SEZ units, second proviso to Section 10A(1) shall continue to apply. For a newly established SEZ , now deductions are 100% of profits derived from exports for first five years and 50% for next 2 years, while for the next three years, deduction u/s 10A(1A) will be 50% subject to creation of specified reserves which can only be used for specified purposes within stipulated time limits as provided in Section 10A itself. . The legislature in its own wisdom while granting benefit of deduction u/s 10A(1A) to newly set up SEZ s units have put additional conditions for creation of reserves in 8th to 10 year and their utilization in a prescribed manner, while for the units which are set up prior to previous year relevant to ay: 2003-04, or are merely converted from EPZ to SEZ, this condition shall not apply and they will continue to get benefit of deduction u/s 10A(1) of the 1961 Act of 100% of profits derived from exports for a period of ten consecutive assessment years ( except for ay: 2003-04 when deduction was restricted to 90%). The deduction u/s 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income 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 been utilised for any purpose other than those referred to in sub-section (2), the amount so utilised; or (b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount not so utilised, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has begun or begins to manufacture or produce articles or things or 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. (5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,- (a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place. (6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off. (7) For the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.] 7.10 Sub-section 7B was also simultaneously added to Section 10A by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006 , which reads as under: Section 10A [(7B) The provisions of this section shall not apply to any undertaking, being a Unit referred to in clause (zc) of section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone.]: 7.11 Before we proceed further, It is important to understand the concept rationale of Special Economic Zones and reasons for bringing a separate Statute namely Special Economic Zone Act, 2005, dealing with SEZ in India . We have referred to GOI web-site sezindia.nic.in to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn sources creation of employment opportunities development of infrastructure facilities It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member interministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus. The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ Rules provide for: Simplified proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the 1961 Act , as in force for the time being, shall apply to , or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Units subject to the modification specified in the Second Schedule. Section 10AA was incorporated in Second Schedule to the 2005 Act and through it got included in the 1961 Act effective from 10.02.2006 and simultaneously sub-section 7B was inserted in Section 10A of the 1961 Act through insertion in Second Schedule to the 2005 Act. 7.13 The Section 10AA(1) of the 1961 Act , inter-alia, stipulates that subject to provisions of Section 10AA, its applicability is limited to units in SEZ which begins to manufacture or produce articles or things or computer software in SEZ during the previous year relevant to assessment year commencing on or after 1st April, 2006. Similarly Section 7B simultaneously excludes allowability of deduction under Section 10A of the 1961 Act to undertakings being units referred to in Section 2(zc) of the 2005 Act which has begun or begins to manufacture or produce article or thing during the previous year relevant to assessment year commencing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by insertion of sub-section 7B to Section 10A , the entire units in SEZ which were existing on or before commencement of SEZ Act were taken out from applicability of Section 10A and new regime of Section 10AA was made applicable even to existing units in SEZ. The first proviso clearly stipulates that the existing SEZ units which begun to produce or manufacture articles or things in old regime will be entitled for deduction u/s 10A of the 1961 Act only for unexpired period of consecutive ten years and thereafter they will be entitled for a further deduction for a period of five years under newly enacted provisions of Section 10AA(1)(ii) of the 1961 Act. It is also pertinent to mention that provisions of Section 10A of the 1961 Act refers to grant of deduction for a period of ten consecutive assessment years and Section 10AA for a newly set up SEZ units did not uses the terminology ten consecutive assessment years , which further strengthen the belief that Section 10AA shall be applicable to all SEZ whether these were established under old regime or under newly enacted SEZ Act, 2005. The Second proviso which is placed after sub-section 10AA(3) also provides that in case of units i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance made by AO of sales commission of ₹ 34,98,309/- paid by assessee to its foreign agents for procuring sales orders in favour of the assessee on the grounds that the assessee had failed to deduct income-tax at source as is required to be deducted u/s.195 of the Act read with provisions of Sec.40(a)(i) and Section 9(1)(vii) of the 1961 Act. The AO was of the view that this deduction of ₹ 34,98,309/- debited by assessee to its P L A/c as selling commission paid to foreign agents cannot be allowed , by holding as under vide assessment order dated 07.03.2014 passed u/s. 143(3) of the 1961 Act: As per the copy of the agreement submitted by the assessee dated 1-4- 2010,1-07-2010 in respect of M/s, Darrow Lane Corporation and dated 1- 04-2010 in respect of M/s. Schonk BV, the commission fee is paid to nonresident on total value of every order given to the assessee company through Non-Residents. Therefore, the services are not just pertaining to a sale agent or a dealer, but are managerial and technical. In order to identify potential customers in their country, the two agents, M/s. Darrow Lane Corporation and M/s. Schonk BV have to necessarily car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd CIT v. EON Technology Pvt Ltd. will not come in as rescue to the assessee. In view of the discussion as above the payment of commission made to foreign agents being sum of ₹ 34,98,309 is disallowed under section 40 a (ia). 9. Aggrieved by an assessment order dated 07.03.2014 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with learned CIT(A) but with no success as Ld.CIT(A) was pleased to dismiss the appeal of the assessee vide appellate order dated 02.08.2017 , by holding as under: 8.3 In the written submission filed on 11/4/2017 the A.R did not give any explanation regarding this ground of appeal. Thus the A.R did not bring any material on record to prove that the payment of ₹ 34,98,309/- does not come under fees for technical services and TDS is not required to be deducted on that payment. In the absence of evidence in support, this ground of appeal is dismissed and the disallowance of ` 34,98,309/- u/s 40(a)(i) is upheld. 9.2 Thus, as could be seen from above , the assessee did not give its arguments on above issue in written submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by them other than introducing new customers. They are neither involved in the design of the product or in the process of manufacture and therefore, no technical knowhow knowledge is imparted by them to the appellants. The Assessee relies on following case laws in support of the claims submitted. In Ceat International S.A. Vs. Commissioner of income-tax(1999) 237 ITR 259 (Bom.). A Non-resident Company, received payment from an Indian Company for Forgoing exports in favor of the Indian Company or Transferring Export Orders to the Indian Company and by doing so, assessee did not impart any Information Concerning Technical, Industrial, Commercial Or Scientific Knowledge, Experience Or Skill nor render any managerial, technical or Consultancy Service. Hence payment attributable to such services cannot be treated as Royalty or Fees for Technical Services falling under Clause, (vi) And (vii) of Sec.9(1). Further the Delhi High Court in the case of Sheraton International Inc. (2009) 313 ITR 267 (Del) held that payments for advertising, publicity and sales promotion services cannot be treated as either royalty or FTS and would be treated as business income. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport)from activities described in paragraph2(c) or 3 of Article 8.' 2. Royalty and fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.' 9. As per Article 12 of DTAA with Netherlands '1. The term royalties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax deduction at source does not arise and Hence not disallowable under section 40(a)(i) of the Income Tax Act. For these and other grounds that may be permitted to be raised at the time of hearing and it is requested that the additions made by the assessing officer be deleted and render justice. 9.3 Further , Statement of facts was also filed by assessee along with memo of appeal filed with learned CIT(A) wherein all the facts as claimed by assessee were stated (Page 53/PB). There was no concession given by assessee before learned CIT(A) waiving its right to agitate this issue and learned CIT(A) was obligated u/s 250(6) of the 1961 Act to pass speaking and reasoned order on merits but the learned CIT(A) dismissed appeal of the assessee on the grounds that no written submissions are filed by assessee before him. The assessee has also filed before us , copies of agreements entered into by it with foreign agents. The assessee has also claimed before us that for earlier years , the Chennai-tribunal in assessee s own case vide its appellate order dated 14.08.2013 in ITA no. 947/Mds/2013 for ay: 2009-10 has allowed sale commission paid to foreign a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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