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TMI Blog2020 (3) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. As such we are inclined to elaborate the services eligible for deduction under section 10AA Trading activity carried out by the assessee is also eligible for 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 531113 Metric Tons and generated the sales of ₹ 1127,97,15,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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 deduction under section 10AA of the Act. As such the services defined under section 2(z) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 pertaining to the year 2013-14. As such the AO never demanded the assessee to furnish these reports for the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 insulated to maintain temperature. Specific IT systems are installed at storage terminal to have better control over temperature, dip measurement, level of cargo. The above submission of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 modes of transport, pipelines transport. [Explanation- The expression "Trading", for the purposes of the Second Schedule of the Act, shall mean import for the purposes of re-export.] On reading of the above rule, it is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Income Tax Act which contains the definition of various words. Deduction under section 10AA is available in case the unit begins to manufacture or produce such article or things or provide services. It is not disputed that the unit of the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 will have to consider the implication of section 51 of the SEZ Act. It means that anything inconsistent to the provision of the SEZ Act will not be considered. Thus, the word 'services' as mentioned in section 10AA cannot be construed in consistently with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 187101 - 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 accordingly disallowed the impugned loss against the business income. Hence the AO disallowed the loss of ₹ 4,81,48,554/- (41649032+6499522) and added to the total income of the assessee. Aggrieved assessee preferred an appeal to the learned CIT (A). 11. The assessee before the learned CIT (A) regarding the loss of ₹ 64,99,522/- submitted that the impugned loss was against the sale purchase of the commodities with the AE Chemoil Europe B.V. As such the nature of such loss is identical to the loss incurred to provide the security against the price fluctuation for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncrease 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 learned counsel for the assessee has also not produced any documentary evidence at the time of hearing before us suggesting that the impugned losses were not speculative in nature. Thus in the absence of any information/documentary evidence we hold that such losses are speculative in nature and therefore the same cannot be setoff against the non-speculative income. 15.1 However, we are conscious to the fact that the income of the assessee from the SEZ unit shall stand increased on account of the disallowance of the impugned loss and the assessee shall be eligible for deduction on such enhanced income. Thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment 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 the addition made by the AO. Hence the ground of appeal of the assessee was allowed. Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us. 20. Both the learned DR and the AR before us relied on the order of the authorities below as favorable to them. 21. We have heard the rival contentions of both the parties and considered the materials available on record. In the instant case, the allegation of the AO was that the assessee has diverted its borrowed fund into the investments of mutual fund and the dividend income from the mutual fund is exempted under the Act. Accordingly, he was of the view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 upholding the disallowance of deduction for.hedging loss of ₹ 4,81,48,554 made 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ground that no appeal lies against mere initiation of penalty proceedings. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the respondent's case, there being absolutely no warrant/justification for initiating the penalty proceedings, they deserved to be dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation. 7. 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. 23. At the outset we note that the issue raised by the assessee in its CO has already been adjudicated along with the appeal bearing No. 1555/AHD/2016 filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 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 assessee in the 1st ground of the CO has challenged the validity of the assessment order passed by the AO on the reasoning that it was passed beyond the time prescribed under section 153 of the Act. 27. The learned AR before us submitted that the AO has made the reference to the TPO for the international transactions entered by the assessee. However the TPO has not made any adjustment on account of such international transactions in his order dated 31 July 2014. Accordingly, the learned AR claimed that the assessee is not the eligible assessee as defined under clause (b) to section 144C(1) of the Act. 27.1 However, the AR further claimed that the time limit for passing the assessment order under section 143(3) of the Act was of 31st March 2015 whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans" 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 in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. In view of the which, neither of the two conditions are satisfied in the case of the petitioner and thus the petitioner for the purposes of Section 144C(15)(b) is not an "eligible assessee". Since the petitioner is not an eligible assessee in terms of Section 144C(15)(b), no draft order can be passed in the case of the petitioner under Section 144C(1). 13. Similar is the view taken by the High Court of Gujarat in Pankaj Extrusion Ltd. v. Asstt. CIT [2011] 198 Taxman 6/10 taxmann.com 17, which has held as under:- '7. Plain reading of clause (b) of sub-section (15) of section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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