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2019 (12) TMI 536 - AT - Income TaxSEZ unit - Deduction u/s 10AA - conversion of EPZ unit to SEZ unit - eligibility for additional 5 years after availing benefit of exemption u/s 10A for 10 years - Additions u/s 40(a)(i) for non deduction of TDS - validity of assessment order passed u/s 143(3) - assessee is in business of manufacturing and export of pillows and cushions. - 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. Held that - 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 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 into an SEZ unit which shall continue to be governed by provisions of Section 10A(1) of the 1961 Act. Careful perusal of sub-section 7B of the 1961 Act which was inserted in Section 10A of the 1961 Act by SEZ Act, 2005 w.e.f. 10.02.2006, clearly reveals that it excludes applicability of entire Section 10A to any undertaking , being a Unit referred to in clause (zc) of Section 2 of the SEZ Act, 2005 which has begun to manufacture or produce articles or things or computer software in SEZ or begins to manufacture or produce articles or things or computer software commencing on or after the 1st day of April 2006. Thus , the objective of using the word begun is to exclude applicability of Section 10A to all the units in SEZ effective from insertion of Section 10AA of the 1961 Act and henceforth provisions of Section 10AA shall be applicable to units in SEZ, even if these units are existing units in SEZ on or before commencement of SEZ Act, 2005. These SEZ units shall be entitled for deduction for further period of 5 years beyond period of ten consecutive assessment years owing to newly inserted Section 10AA of the 1961 Act keeping in view provisions of Section 10AA(1)(ii) of the 1961 Act. Thus, vide our detailed discussions above, we hold that the assessee is entitled for deduction u/s 10AA(1)(ii) of the 1961 Act for the impugned assessment year, subject to fulfilment of other conditions for grant of deduction u/s 10AA of the 1961 Act. We order accordingly. Addition u/s 40(a)(i) r.w.s 9(1)(vii) - TDS u/s 195 - payment to foreign agents for procuring sales orders - Held that - Be that it may be but learned CIT(A) has not adjudicated this issue in its appellate order on merits for impugned assessment year under consideration and has simply dismissed appeal of the assessee at threshold on the ground that no written submissions are filed by assessee on this issue and in the interest of substantial justice, this issue need to be restored to the file of learned CIT(A) for fresh adjudication on merits in accordance with law.
Issues Involved:
1. Adequate opportunity to the Assessee. 2. Denial of deduction under Section 10AA of the Income Tax Act. 3. Application of Section 40(a)(i) with respect to payments. 4. Disallowance of sales commission paid to foreign agents. Detailed Analysis: 1. Adequate Opportunity to the Assessee: The assessee argued that the CIT(A) passed the order without providing an adequate opportunity to represent the matter. The Tribunal noted that the CIT(A) based the order on written submissions made during the first hearing and adjourned the matter to various dates, including 27/07/2017, which was acknowledged by the department. The Tribunal found that the CIT(A) did not provide the right of audience to the assessee, which is contrary to the principles of law. 2. Denial of Deduction under Section 10AA: The assessee claimed a deduction of ?47,19,678/- under Section 10AA for the assessment year 2011-12. The AO disallowed this deduction, stating that the assessee had already availed of the benefit under Section 10A for ten consecutive assessment years from AY 2001-02 to AY 2010-11. The AO held that the unit is not eligible for deduction under Section 10AA as it began manufacturing in AY 2001-02, not AY 2006-07 onwards. The CIT(A) upheld this disallowance. However, the Tribunal observed that the assessee's unit, initially in MEPZ, converted into an SEZ unit effective from 01.01.2003. The Tribunal noted that the assessee claimed deduction under Section 10A for ten years and switched to Section 10AA from AY 2011-12. The Tribunal found that the assessee is entitled to deduction under Section 10AA for the unexpired period of ten consecutive assessment years and further for five years under Section 10AA(1)(ii), subject to other conditions. 3. Application of Section 40(a)(i): The AO disallowed sales commission of ?34,98,309/- paid to foreign agents for procuring sales orders, citing non-deduction of TDS under Section 195 read with Section 40(a)(i) and Section 9(1)(vii). The AO classified the payments as "fees for technical services." The CIT(A) upheld this disallowance, noting the absence of evidence from the assessee to prove otherwise. The Tribunal observed that the assessee did not provide written submissions before the CIT(A) but had made elaborate arguments in the statement of facts and grounds of appeal. The Tribunal found that the CIT(A) failed to pass a speaking and reasoned order on merits and remanded the matter back to the CIT(A) for fresh adjudication on merits. 4. Disallowance of Sales Commission Paid to Foreign Agents: The Tribunal noted that the assessee entered into agreements with foreign agents for sales commission and argued that these payments do not fall under "fees for technical services" as per Section 9(1)(vii) and relevant DTAAs. The Tribunal found that the CIT(A) dismissed the appeal without proper adjudication on merits. The Tribunal remanded the issue back to the CIT(A) for fresh adjudication, allowing the assessee to produce evidence and explanations in its defense. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to provide an adequate opportunity to the assessee and to adjudicate the issues on merits, considering the legal provisions and evidence presented.
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