TMI Blog2020 (3) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption under section 10AA of the Act within the meaning of the provisions provided under section 2(z) of the SEZ Act read with the rule 76 of Special Economic Zone Rules 2006 as discussed above. Whether the assessee is eligible for deduction with respect to the income generated by it on account of currency fluctuation, interest income - these incomes are arising in the course of the business (import and export) carried on by the assessee in its SEZ Unit. As such these incomes are intrinsically linked with the operation of the assessee. Accordingly we hold that such income is eligible for deduction/exemption under section 10AA of the Act. Assessee has correctly calculated the amount of deduction in proportion to the export sales viz a viz domestic sales of the SEZ unit as provided under subsection 7 of section 10AA of the Act. Thus the AO erroneously has reduced the amount of domestic turnover from the total turnover of the assessee SEZ unit which resulted loss to the assessee. No reason to interfere in the order of the learned CIT (A). Accordingly, we uphold the same. Hence the ground of appeal of the Revenue is dismissed. Disallowance of the hedging loss - Absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Mahavir Prasad, Judicial Member And Shri Waseem Ahmed, Accountant Member For the Assessee : Shri S.N. Soparkar, Shri Vartik Chokshi And Shri Parin Shah, A.Rs For the Revenue : Shri N.R. Soni, CIT. D.R ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeals are filed by the Revenue and the CO is filed by the Assessee against the seperate orders of the Learned Commissioner of Income Tax (Appeals) Ahmedabad, [Ld. CIT (A) in short] dated 30/03/2016 and 28/02/2017 arising in the matter of assessment order passed under s. 143(3) r.w.s 144C(3) of the Income Tax Act, 1961 (here-in-after referred to as the Act ) dated 27/02/2014 and 27/04/2015. The assessee has filed Cross Objection in the Revenue s appeals bearing ITA nos.1555/AHD/2016 IT(TP)A No.1102/Ahd/2017 for the Assessment Years 2010-2011 2011-2012. ITA No.1555/Ahd/2016 for A.Y. 2010-11 (appeal by the Revenue) The Revenue has raised following grounds of appeals. 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of claim of deduction u/s.10AA of the Act of ₹ 4,72,67,584/- 2. The Id. CIT(A) has erred in law and on facts in directing to rework ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be produced. 3.3 The assessee also claimed that the impugned activity has been classified by the Development Commissioner Mundra Port and Special Economic Zone, Ministry of Commerce and Industry, Government of India as manufacturing activity in the letter of approval dated 17 December 2008. 3.4 In view of the above, the assessee claimed that such processing is manufacturing activity within the meaning of the provision as defined in clause (iii) of explanation 1 to section 10AA r.w. clause (r) of section (2) of Special Economic Zones Act, 2005. The assessee without prejudice to the above also claimed that even the activity of the assessee is assumed as trading activity and not manufacturing activity, then also it is entitled for the deduction under section 10AA of the Act within the meaning of the services defined under section 2(z) of SEZ Act r.w.r. 76 of SEZ Rules 2006. 3.5 However, the AO was not satisfied with the contention of the assessee by observing that the assessee has shown plant and machinery worth of ₹ 8,46,899/- as evident from tax audit report in form 3 CD. But the assessee claimed to have dispatched the oil after processing from its SEZ territory at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he special economic zone Act 2005. Accordingly, the activity of the assessee i.e. blending of the various oils is a processing activity amounting to the manufacture. 4.1 The assessee to carry out the blending activity has hired 7 tanks on lease having total capacity of 74127 kilo litres which are equipped with specific pumps, churners and other requisite facilities such as insulated to maintain temperature, specific IT systems control the temperature, dip measurement, level of cargo. Therefore various technical survey reports generated during the blending process. As such, the finding of the AO that the assessee does not possess sufficient plant and machinery to carry out the blending activity is based on wrong assumption of facts. 4.2 The assessee also submitted during the assessment proceedings that even if the activity of the assessee is considered as trading in nature then also it was eligible for deduction under section 10AA of the Act in pursuance to the provisions of the services defined under section 2(z) of the SEZ Act. But the AO has wrongly assumed that the service income shown by the assessee in the audited financial statements is only eligible for deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital demand and credit backed export discounting in foreign currency facility. Accordingly the assessee claimed that the interest income from fixed deposits made as margin money for opening of the letter of credit has a direct nexuses with its business carried on from SEZ. Thus the impugned interest income of ₹ 82,89,467/- is eligible for deduction under section 10AA of the Act. 5. The learned CIT (A) after considering the submission of the assessee and the finding of the AO observed that: Regarding the manufacturing activity i. The assessee has hired the tanks for the purpose of storage and blending the various oils imported by it. These tanks were well equipped with the necessary facilities such as Turner, Jack pump, hot water pipeline, boiler etc which were already installed within the tank for proper blending. ii. These tankers were completely insulated to maintain temperature and specific IT systems which were installed at the storage terminal to have better control over temperature, dip measurement, level of cargo. iii. The technical survey reports filed by the assessee before the AO were mainly for the purpose of the reference though they were per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the ld. AR before us filed a paper book running from pages 1 to 198 and retiterated the submission made before the authorities below. 7.1 Both the ld. DR and the AR before us relied on the order of the authorities below as favorable to them. 8. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessee is eligible for the deduction under section 10AA of the Act with respect to the profit generated from the alleged activity of the processing/blending of oil. The provisions of section 10 AA of the Act has direct bearing on the issue on hand. Therefore it is imperative to refer the provisions of section 10 AA of the Act which reads as under: 14 [ Special provisions in respect of newly established Units in Special Economic Zones. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 15 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted have the specification of i.g. B Grade. The product of B Grade is received in tank which already have the product of A Grade, hence the specs of Imported Cargo is changed to C Grade, when it is blended with A Grade cargo already in the tank. At the time of Import there remains some product in the tanks which have specification of i.g. A Grade The blending activity takes place also when the product of different grades lying in various tanks is mixed and a product of a new grade comes into existence. As an operational requirement or specific order for supply the assessee company needs to carry out intertank transfers. In this activity the Specs of two different grade products are blended and the specs of the mixed product emerge different from the specs of cargo transferred. During the process of inter-tank transfer circulation, churning, heating activity also carried out to have proper blending and homogeneous product at all the levels in the tank. There are specific equipment like churners, jet pumps, hot water lines, boilers etc. are installed in the tanks for proper blending. -(Specific cost to have manufacturingfacility). Tanks are insulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of this section 2(z) of the SEZ Act which reads as under: 76. The services for the purposes of [1] [clause] (z) of section 2 shall be the following, namely:- Trading, warehousing, research and development services, computer software services, including information enabled services such as back-office operations, call centres, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centres and web-site services, off-shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Jaipur Bench in DCIT Vs. Goenka Diamond Jewellers Ltd. It appeal No. 509(JP) of 2011 2012(050)-SOT-0307-TJAI in which it has been held that trading of the eligible goods entitles the se to the benefit of section 10AA of the Act. Similarly, the copy of another order passed by Mumbai Bench in M/s Gitanjali Exports Corporation Limited Vs. ADCIT in ITA No. 6947 6948/Mum/2011 dated 08-05-2013 has also been placed on record in which the view expressed by the Jaipur Bench has been reiterated. No contrary precedent has been brought to our notice by the Ld. DR. In view of the two Tribunals orders available on the point allowing exemption u/s. 10AA of the Act in respect to trading activities, we are of the considered opinion that no exception can be taken to the view expressed by the Ld. CIT(A) in granting the exemption. 8.9 In this respect we also draw support and guidance from decision of Hon ble ITAT Jiapur B Bench in case of DCIT vs. Goenka Diamond Jewellers Ltd. reprted in 19 taxamman.com 91. The relevant extract of the order is reproduced below:- It is true that the word 'services' is not mentioned either in section 10AA or in section 2 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of re-export of imported goods. [Para 2.17] Vide Instruction No. 1/2006, dated 24-3-2006 of Ministry of Commerce, it was clarified that trading units can be set up in the SEZ. Further, modification was made on 24-5-2006 in which it was made clear that the deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported goods. Thus the assessees were promised that they will be eligible for deduction under section 10AA in respect of the profit earning on trading of re-export of imported goods. The revenue had not been able to show us that such instruction was not withdrawn or the Board has issued instruction that instruction dated 24-5-2006 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction. [Para 2.19] Section 51 of the SEZ Act mentions 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 any law other than this Act, the provision of SEZ Act will prevail. Thus one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. Name of the Associated Enterprise Heading Loss Remark 1. Chemoil Middle Eat DMCC 33342255 - 2. Chemoil Europe BV 6499522 The assessee has not made any sale and purchase sduring the period under consideration with A.E. 3. Chemoil international PTE Ltd. 343187101 - 10.2 The AO from the above details noticed that the hedging loss of ₹ 64,99,522/- was not arising to safeguard any sale and purchase transaction. Accordingly he was of the view that such loss is not eligible to be treated as business loss in pursuance to the clause (a) of subsection (5) to section 43 of the Act. 10.3 The AO similarly further observed that the assessee has not furnished the details of loss for the balance amount of ₹ 4,16,49,032/- (42,46,77,910 38,30,28,878). Accordingly the AO in the absence of documentary evidence has treated such loss as a speculative loss and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the learned Assessing Officer on the erroneous assumption that the loss had resulted from Currency Swap transactions not covered by the exception under clause (d) of the Proviso to Section 43(5), in total disregard of the fact that the loss had resulted from transactions pertaining to commodities intended to hedge the appellant's exposer to loss that may result from the peculiar nature of its business as explained in Note No. 14 in Schedule 20 of its audited accounts (even as the learned CIT(A) had granted relief by holding that the impugned disallowance had resulted into corresponding increase in the quantum of deduction u/s. 10AA to which the appellant was entitled). 14. Both the learned DR and the AR before us relied on the order of the authorities below as favorable to them. 15. We have heard the rival contentions of both the parties and perused the materials available on record. The impugned amount of loss of ₹ 4,81,48,554/- was disallowed by the AO which was subsequently confirmed by the learned CIT-A in the absence of the documentary evidence. Accordingly the authorities below treated such loss as a speculative in nature. We also note that the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger, statement issued by different mutual fund. 18.1 The assessee has also claimed that the investment in mutual fund was made out of its interest free fund available with it. As such it has invested such surplus fund for very short period. 18.2 The secured and unsecure loan were taken in the form of packing credit and buyer credit which were used for import and export of oil. This fact can be verified from the audited financial statement In view of the above, the assessee before the learned CIT (A) claimed that the AO without considering its reply assumed that the borrowed funds were utilized for the purpose of investment in mutual fund. 19. The learned CIT-A after considering the submission of the assessee and finding of the AO observed that the assessee has invested its interest free surplus temporarily in mutual fund and in turn earned very nominal amount of dividend. As such no interest expenses incurred for the purpose of earning dividend income. The learned CIT (A) also observed that the borrowed fund were taken as packing credit and buyer credit for the purpose of import as evident from the financial statement of the assessee. Thus the ld. CIT-A deleted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and no disallowance was warranted u/s 14A. 21.3 Similarly, we also find support from the judgment of Hon ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A . 21.4 Indeed, the above orders were rendered in the context of the provisions of section 14A of the Act but the principles laid down therein can be applied on the case of hand. Thus In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of investment in the mutual funds. Hence, we do not find any reason to interfere in the order of the ld. CIT-A. Hence, the ground of appeal of the Revenue is dismissed. 22. Coming to the CO bearing No. 112/AHD/2016 filed by the assessee The assessee has raised the following grounds in its Cross Objection 2. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in uphol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e impugned levy and that the appellant had challenged the very levy of interest before him. 5. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in dismissing Ground No. 7 of its appeal challenging levy of interest amounting to ₹ 11,28,484 u/s. 234C after stating that the levy was consequential and mandatory. He ought to have appreciated, inter alia, that even as the levy may be mandatory, it could not be universal and that in the peculiar facts and circumstances of the respondent's case, the ratio of the decision of the Gujarat High Court in Bharat Machinery and Hardware Mart's case (136 ITR 875) and of the decision of the ITAT, Delhi in Haryana Warehousing Corporation v. DCIT [252 ITR (AT.) 34] was attracted and it was not open to the learned Assessing Officer to make the impugned levy and that the appellant had challenged the very levy of interest before him. 6. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in dismissing Ground No. 8 of its appeal before him challenging the initiation of penalty proceedings u/s. 271(1)(c), on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 144C(3) on 25th March, 2015 even though the same was not warranted and finally passing the Assessment Order under Section 143(3) r.w.s. 144C(3) on 27th April, 2015, which is barred by limitation. 2. In law and in the facts and circumstances of the appellants case, the Ld. CIT(A) has erred in not allowing deduction u/s 10AA on other income of ₹ 60,38,553/-, stamp duty of ₹ 45,07,350/- and other expenses ₹ 10,28,692/- when such expenses are related to SEZ unit and eligible for deduction u/s 10AA. 2.1 In law and in the facts and circumstances of the appellants case, the Ld. CIT(A) has erred in restricting deduction u/s 10AA at ₹ 37,84,48,502/-when appellant has rightly claimed deduction u/s 10AA at ₹ 38,37,88124. 3. In law and in the facts and circumstances of the appellants case, the Learned CIT (Appeals) ought to have deleted addition of mark-to-market loss of ₹ 8,18,76,938 for commodity hedging derivative transactions on merits by treating such loss as business loss. 4. The respondent craves leave to add, amend and/or alter the ground or grounds of Cross-objections either before or at the time of hearing. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the Transfer Pricing Officer passed under section 92CA(3); and (ii) any foreign company. 10. The Supreme Court in P. Kasilingam v. P.S.G. College of Technology 1995 (Suppl) 2 SCC 348 has held that the use of word means indicates that the definition is a hard and fast definition and no other meaning can be assigned to the expression than is put down in the definition. 11. In Section 144C(15)(b) of the Act, the term eligible assessee is followed by an expression means only and there are two categories referred therein (i) any person in whose case the variation arises as a consequence of an order of the Transfer Pricing Officer and (ii) any foreign company. The use of the word means indicates that the definition eligible assessee for the purposes of Section 144(C)(15)(b) is a hard and fast definition and can only be applicable in the above two categories. 12. First of all, the petitioner is admittedly not a foreign Company. Secondly, the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The consequence of this is that the Assessing Officer cannot propose an order of assessment that is at variance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 144C (1) of the Act. The draft assessment order dated 31.03.2015 is accordingly quashed. 15. Since we have quashed the draft assessment order, the question that the assessment has now become time barred is left open and it is open to the parties to take recourse of such remedy, as may be available to them in law. In view of the above we hold that, the assessment order framed by the AO is not sustainable. Accordingly we hold that, the assessment framed under section 143 3 read with section 144C of the Act is about by limitation and the same is not sustainable in the eyes of law. Accordingly we quash the same. Hence, the ground of appeal of the assessee is allowed. 30. As we have addressed the technical issue raised by the assessee by holding the assessment framed under section 144C read with section 143(3) of the Act as unsustainable, therefore the issue raised by the revenue and the assessee on merit do not require any separate adjudication. As such, all other issue raised by the revenue and the assessee become infructuous. Hence we dismiss the same. In the result, appeal of the Revenue is dismissed and the CO of the assessee is partly allowed. 31. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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