2016 (7) TMI 1552 - AT - Income Tax

Exemption u/s 10AA - what constitutes export in terms of section 10AA? - HELD THAT - In the present appeal, we are concerned with the issue what constitutes export in terms of section 10AA of the Act. Therefore, in our view, the assessee would be eligible to avail exemption under section 10AA in respect of goods / services directly exported by it and it will not get any exemption in respect of sales made to other SEZ unit which cannot be treated as export sales. The fact that assessee realized the sale proceeds in foreign exchange would also not entitle the assessee to claim exemption on sales effected to another SEZ unit. In the present case, there is no dispute that assessee being a SEZ unit is eligible to claim exemption u/s 10AA subject to fulfillment of conditions prescribed therein. Therefore, as far as assessee s claim of eligibility u/s 10AA is concerned, there is no doubt about that. We are only concerned with the computation of exemption u/s 10AA which is restricted only to export sales. In other words, exemption u/s 10AA has to be computed on each assessment year independently on the quantum of export sales made by assessee. If we pose a question to ourselves, can an assessee be allowed exemption u/s 10AA without exporting any goods or services in a particular assessment year only because in past assessment years it has been allowed such exemption? The answer will be No Allowance of exemption in such a case would not only be against legislative intent but also defeat the purpose for which the provision was enacted. The decision of the Hon'ble Bombay High Court in in Western Outdoor Interactive Pvt. Ltd. 2012 (8) TMI 709 - BOMBAY HIGH COURT cannot be interpreted in a manner to suggest that even without fulfilling the basic conditions of statutory provision, it can claim deduction merely because such deduction was allowed in earlier assessment years. As far as the decisions of the Tribunal in Goenka Diamonds and Jewellery Ltd. 2012 (3) TMI 258 - ITAT JAIPUR and Gitanjali Exports Corp. Ltd. 2013 (11) TMI 563 - ITAT MUMBAI relied upon by the learned Authorised Representative, on a perusal of the order of the Tribunal, we are of the view that they are of no help to the assessee as they were not directly on the issue whether sales to another SEZ unit will be treated as deemed export. Moreover, in both the decisions, the Tribunal has referred to instructions issued by the Ministry of Commerce and Industries clarifying that service includes trading also for the purpose of claiming exemption under section 10AA, whereas, there is no such instruction in relation to export vis a vis sales made to another SEZ unit. As stated earlier, the assessee is eligible for exemption under section 10AA in respect of direct export sales made by it. We, therefore, direct the Assessing Officer to verify the quantum of export sales directly made by the assessee and allow exemption under section 10AA in respect of such turnover.

Summary

Issues Involved:
1. Eligibility of the assessee's claim for deduction under section 10AA of the Income Tax Act, 1961.
2. Interpretation of "export" under section 10AA in relation to sales made to other SEZ units.
3. Applicability of the SEZ Act, 2005 provisions to the Income Tax Act, 1961.
4. Consistency in the allowance of deductions in subsequent assessment years based on past assessments.

Issue-wise Detailed Analysis:

1. Eligibility of the assessee's claim for deduction under section 10AA of the Income Tax Act, 1961:
The assessee, engaged in the business of electronic weighing scales, claimed a deduction under section 10AA for the assessment year 2010-11. The Assessing Officer (AO) disallowed this claim, arguing that the assessee did not fulfill the condition of export of goods as required under section 10AA, since 99% of the sales were local. However, the Commissioner (Appeals) allowed the claim, noting that the SEZ Act has an overriding effect, and similar claims were accepted in previous years.

2. Interpretation of "export" under section 10AA in relation to sales made to other SEZ units:
The crux of the dispute was whether sales to other SEZ units within India could be considered as "export" under section 10AA. The assessee argued that as per section 2(m) of the SEZ Act, supplying goods to another SEZ unit should be treated as export. The AO contended that the definition of "export" under section 10AA of the Income Tax Act does not include sales to other SEZ units. The Tribunal noted that section 10AA specifically defines "export" as taking goods out of India, and thus, sales to other SEZ units do not qualify.

3. Applicability of the SEZ Act, 2005 provisions to the Income Tax Act, 1961:
The Tribunal examined the interplay between the SEZ Act and the Income Tax Act. Section 27 of the SEZ Act states that provisions of the Income Tax Act apply to SEZ units subject to modifications in the second schedule, which includes section 10AA. The Tribunal concluded that the definition of "export" under section 10AA is confined to direct exports out of India, and the SEZ Act's broader definition does not override this.

4. Consistency in the allowance of deductions in subsequent assessment years based on past assessments:
The assessee argued that since the deduction under section 10AA was allowed in previous years, it should not be disallowed in the current year without withdrawing the earlier allowance. The Tribunal clarified that each assessment year is independent, and the exemption under section 10AA depends on the fulfillment of conditions in that specific year. The Tribunal distinguished the case from the Bombay High Court ruling in Western Outdoor Interactive Pvt. Ltd., noting that the current issue pertains to the computation of exemption based on export sales, not the eligibility of the unit itself.

Conclusion:
The Tribunal upheld the AO's decision to disallow the deduction under section 10AA for sales to other SEZ units, as such sales do not qualify as exports under the specific provisions of section 10AA. The Tribunal directed the AO to verify the quantum of direct export sales and allow the exemption accordingly.

Order:
The appeal was allowed for statistical purposes, with the AO instructed to verify and allow the exemption based on direct export sales. The order was pronounced in the open Court on 13.07.2016.