2023 (4) TMI 636 - HC - Income Tax

Deduction u/s 10AA - disallowing the deduction as that the deduction could be claimed only against articles manufactured in, or against the services which emanated from, the NSEZ - whether or not the Tribunal could have taken recourse to the definition of expression services given in the 2005 Act and the 2006 Rules framed thereunder? - HELD THAT - The undisputed position is that the definition of the expression services is not provided in the 1961 Act. That being said, a plain reading of the language of Section 10AA of the 1961 Act would show that an assessee can claim deduction equivalent to 100% of profits and gains derived from export of services. Whether trading services of the nature which the respondent/assessee was involved in would fall within the ambit and scope of Section 10AA ? - A plain reading of Section 27 of the 2005 Act would show that, clearly, the provisions of 1961 Act are made applicable to a developer or entrepreneur who carries out authorized operations in the SEZ, subject to modifications specified in the Second Schedule appended to the 2005 Act. The Second Schedule of the 2005 Act, which adverts to the modifications made in the 1961 Act, concededly, refers to Section 10AA of the 1961 Act. Thus, having regard to the fact that the deduction made available to an assessee under Section 10AA of the 1961 Act, which has a unit located in the SEZ, is rooted in the 2005 Act, one would, in our opinion, necessarily have to advert to the definition of expression services contained in the said Act. A plain reading of the Explanation would show that trading for the purposes of the Second Schedule of the 2005 Act means import for the purposes of re-export. Undoubtedly, the 2005 Act and Rule 76 point in the direction that the expression services means services which are offered by way of re-export of articles that are imported into the country. If there was any doubt as regards this aspect of the matter, the same is clarified if one were to peruse Instruction No.4 dated 24.05.2006 issued by the Government of India, Ministry of Commerce and Industry, Department of Commerce.. The aforementioned Instruction has been adopted by the Export Promotion Council in short, EPC via its Circular No.17 dated 29.05.2006. Likewise, after Rule 76 was inserted in the 2006 Rules, the EPC for EOUs and SEZ units issued another Circular dated 16.11.2006. Thus we have no doubt that it was always intended that the deduction under Section 10AA of the 1961 Act will also be available qua those articles which, upon import to the unit located in SEZ, were thereafter re-exported. Decided in favour of assessee.

Summary

Issues:
- Interpretation of deduction under Section 10AA of the Income Tax Act, 1961 in relation to trading activities in a Special Economic Zone.

Detailed Analysis:

Issue 1: Interpretation of Deduction under Section 10AA
The case involved a dispute regarding the deduction claimed under Section 10AA of the Income Tax Act, 1961 by an assessee with units in a Special Economic Zone (SEZ). The primary question was whether trading activities of the assessee qualified for the deduction under Section 10AA. The Tribunal had to determine if the definition of "services" from the Special Economic Zones Act, 2005 and Rule 76 of the Special Economic Zones Rules, 2006 should be considered for interpreting the deduction provision.

Analysis:
The Tribunal disallowed the deduction claimed by the assessee under Section 10AA, stating that it could only be claimed against articles manufactured in or services emanating from the SEZ. However, the Commissioner of Income Tax (Appeals) ruled in favor of the assessee, leading to an appeal by the revenue to the Tribunal. The Tribunal upheld the decision of the CIT(A), prompting the revenue to appeal to the High Court.

Key Points:
- The deduction under Section 10AA is available for profits derived from the export of articles or things or services from a unit in an SEZ.
- The provision of Section 10AA was introduced through the Special Economic Zones Act, 2005, and modifications in the Income Tax Act, 1961.
- The definition of "services" was crucial in determining the scope of the deduction, as it was not explicitly defined in the Income Tax Act, 1961.
- The High Court analyzed the provisions of the 2005 Act, Rule 76 of the 2006 Rules, and relevant instructions to conclude that trading activities involving import for re-export qualified for the deduction under Section 10AA.

Conclusion:
The High Court ruled in favor of the assessee, stating that the deduction under Section 10AA was applicable to trading activities involving import for re-export in the SEZ. The Court's decision upheld the Tribunal's ruling and dismissed the revenue's appeal, emphasizing the importance of interpreting relevant definitions and rules in determining tax deductions in SEZs.