2018 (5) TMI 1829 - AT - Income Tax

Disallowing of deduction u/s. 10AA in respect of trading, warehousing and consultancy income - Held that - The term service is given an inclusive definition which includes trading activity. As per the first explanation trading will be treated as service if it is related to the import of the goods for the purpose of the export. In this case there is no dispute that goods imported by the assessee are in fact exported to other countries from its unit at Special Economic Zone. Exemption provided u/s. 10AA which are special provision in respect of newly established units in Special Economic Zone are for income received by providing any services. The other activity entitled for exemption is income from manufacturing and production of article or thing. So what has to be seen is whether the service definition given in the SEZ Rules as above reproduced can be read into for the purpose of claiming exemption u/s. 10AA of the Act; so that assessee can avail the benefit envisaged u/s. 10AA of the Act. The provisions as specified under The Special Economic Zones Act, 2005 would have overriding effect on the Income Tax Act because Special Economic Zone Act, 2005 is a Special Act and a later Act of the Parliament. Moreover, we note that assessee s claim u/s. 10AA was upheld by the Ld. CIT(A) for AY 2008-09, which order has been upheld by the Tribunal for the AY 2008-09 vide order dated 13/11/2013. We allow the claim of assessee in respect to its income from trading activity. Denial of exemption in respect of warehousing - Held that - The assessee has received ₹ 23,06,539/- as warehouse charges from M/s. Gallaher Ltd. of UK. For corroborating this fact, the assessee has produced FIRC, ledgers, invoices for consultancy and warehousing charges which are placed on pages 28-43 of the paper book. On perusal of the records including the remand report of AO we note that the AO disallowed the exemption on warehousing charges by observing that the assessee initially had shown the import of the goods as purchases and thereafter showed it as purchase return. According to AO, on such transaction of purchase, and thereafter purchase return the assessee has shown warehouse income for ₹ 23,06,539/-. As per the AO, the assessee cannot earn warehousing charges on such transaction and therefore such income is not entitled for exemption u/s 10AA of the Act. We note the Rule 76 of SEZ Rules 2006 (supra) defines Services includes warehouse activity also, so income from the said activity qualify for exemption u/s. 10AA of the Act on the same reasoning as that given for trading activity. The assessee has raised the bill for the warehousing charges and the payment was also received for the same by foreign exchange. The FIRC is also placed in support of the payment. Indeed the assessee has recorded the transaction as purchase and purchase return along with quantitative details of the goods in the books of accounts. So, the question arises as to whether the accounting entries can change the character of the transaction. We note that the assessee has raised the invoice for the warehousing and handling charges as evident from the invoice placed on page 29 of the paper book. AO/Ld. CIT(A) has not pointed out any defect in the bill, payment of the bill and the FIRC in support of the income. Hence, in our considered view the accounting entries cannot form the sole basis for denying the exemptions on account of warehousing charges to the assessee. As stated earlier, when warehousing activity has been included in the definition of service as per Rule 76 of SEZ Rules of 2006, therefore, the income from warehousing qualifies for exemption under section 10AA of the Act and we allow the claim of the assessee. Denial of exemption on Consultancy income - exemption was denied on the consultancy charges due to non-production of the necessary details - Held that - As brought to our notice that the assessee had produced the bills along with FIRC before the CIT(A) on which remand report was called, which are placed in the paper book and our attention was drawn to the fact that no defect could be pointed out by the authorities below. We note that the consultancy services rendered by the assessee were intrinsically linked with and part and parcel of the normal import-export activity carried on by the assessee from SEZ and same are covered under the other business service by applying ejusdem generis as per Rule 76 of SEZ Rules. So, we are inclined to allow the claim of assessee on the same reasoning given above to the trading and warehousing income. In view of above we are inclined to set aside the order of Ld. CIT(A) and AO and allow the appeal of the assessee. Ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 10AA of the Income-tax Act, 1961 for trading income.
2. Disallowance of deduction claimed under Section 10AA of the Income-tax Act, 1961 for warehousing income.
3. Disallowance of deduction claimed under Section 10AA of the Income-tax Act, 1961 for consultancy income.

Detailed Analysis:

1. Disallowance of Deduction for Trading Income:
The primary issue was whether the assessee's trading income qualifies for exemption under Section 10AA of the Income-tax Act, 1961. The assessee, engaged in import and export activities, claimed this income as exempt under Section 10AA. The AO disallowed the claim, stating that trading does not qualify as manufacturing or production of articles or things, nor could it be characterized as a service as required by Section 10AA. However, the SEZ Rules, 2006, specifically Rule 76, include trading activities within the definition of "services" if the goods are imported for the purpose of re-export. The Tribunal noted that the SEZ Act has an overriding effect over other laws, including the Income-tax Act, due to Section 51(1) of the SEZ Act. The Tribunal also referenced its earlier decision for AY 2008-09, where it had allowed the assessee's claim under similar circumstances. Consequently, the Tribunal allowed the assessee's claim for exemption on trading income.

2. Disallowance of Deduction for Warehousing Income:
The AO disallowed the exemption for warehousing income, arguing that the assessee initially recorded the goods as purchases and later as purchase returns, thus questioning the legitimacy of warehousing charges. However, the Tribunal observed that Rule 76 of the SEZ Rules, 2006, includes warehousing activities within the definition of "services." The assessee provided sufficient documentation, including FIRCs, ledgers, and invoices, to substantiate the warehousing charges received from a UK-based company. The Tribunal held that the accounting entries alone could not alter the nature of the transaction and allowed the exemption for warehousing income under Section 10AA.

3. Disallowance of Deduction for Consultancy Income:
The AO denied the exemption for consultancy income due to a lack of necessary details. The assessee argued that the consultancy services were intrinsically linked to its import-export activities. The Tribunal noted that the assessee had provided sufficient documentation, including bills and FIRCs, during the appellate proceedings. The consultancy services were considered part of the "other business services" under Rule 76 of the SEZ Rules, 2006. Therefore, the Tribunal allowed the exemption for consultancy income under Section 10AA, applying the same reasoning as for trading and warehousing income.

Conclusion:
The Tribunal set aside the order of the CIT(A) and AO, allowing the assessee's appeal for exemption under Section 10AA of the Income-tax Act, 1961, for trading, warehousing, and consultancy income. The judgment emphasized the overriding effect of the SEZ Act over the Income-tax Act and upheld the inclusive definition of "services" under the SEZ Rules, 2006. The appeal of the assessee was allowed in full.