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TMI Blog2020 (10) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEZ Act, which states that a Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations . CBEC issued a clarification vide Circular No. 1001/8/2015-CX.8 dated 28.4.2015 with regard to rebate of duty on goods cleared from DTA to SEZ, which clearly explains the concept of a deemed export and also states that the provisions of the SEZ Act shall have overriding effect of the provisions of the Income Tax Act in case of any inconsistency. In the instant case, there was no inconsistency. Rather, the provisions of the Income Tax Act resorts to the provisions of the SEZ Act while considering as to whether the assessee would be entitled for the benefit under Section 10A or 10B of the Act. The receipt was routed through the banking channel by convertible foreign exchange - Decided in favour of assessee. Allowance of expenditure incurred towards telecommunication u/s 10A - whether it has inextricable nexus to the export made by the appellant ? - HELD THAT:- This second substantial question of law admitted is, in effect, a question of fact and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year under consideration namely 2009-10, the assessee filed its return of income on 29.9.2009 admitting a total income of ₹ 21,08,581/- under normal computation and ₹ 1,75,11,355/- under Section 115JB of the Act. The assessee s case was subsequently selected for scrutiny and a notice under Section 143(2) of the Act along with a questionnaire under Section 142(1) of the Act was issued on 13.9.2011. The assessment was completed under Section 143(3) of the Act by order dated 30.11.2011 arriving at an assessed income of ₹ 78,79,453/- as per normal computation and ₹ 1,75,11,355/- as per Section 115JB of the Act. 6. The assessee included a sum of ₹ 1,23,66,641/- as export receipt, which was stated to be a deemed export towards software development to another Software Technology Park (STP) Unit. The contention of the assessee was that if software was supplied to an STP Unit, it should be a deemed support as per the Foreign Trade Policy vis-a-vis the Income Tax Act, 1961. The Assessing Officer held that as per the contract agreement between the assessee and the principal, the work had to be carried out in India. Further, he found that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development work done by the said assessee for the recipient was exported out of India by the recipient. When the Assessing Officer called upon the assessee therein to explain as to why the amount should not be treated as a domestic sales from Section 10A Unit, the aforementioned explanation was given by the assessee therein explaining the nature of transaction and stating that it was a deemed export and that they would be entitled for deduction under Section 10A of the Act as they satisfied the condition in Clauses (a) and (b). The substantial question of law, which was framed for consideration, was as to whether the Tribunal was right in holding that the computer software sales made to the recipient therein did not fall under the expression export turnover for the purpose of deduction under Section 10A of the Act. 11. After noting the statutory provisions and examining the factual position in the said case, the Karnataka High Court held in favour of the assessee in the following terms : 20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. 12. The aforesaid decision was relied upon by the Karnataka High Court in the case of PCIT, Bangalore Vs. International Stones India (P) Ltd. [reported in (2018) 95 Taxmann.com 287] wherein it has been held as follows : 17. We cannot accept the aforesaid submission for two reasons: (i) Firstly, sub-section (2), in our opinion, only determines the eligibility of the unit in question, while sub-section(1) of S.10B is the main provision which grants the deduction in respect of profit and gains to the assessee-unit in question. It is true that the assessee-unit in question in order to be entitled to avail the benefit of S.10B of the Act has to be a manufacturing unit and it cannot be merely a trading house, but on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the present case, the entity through whom the export has been made by the assessee is not 100% Export Oriented Unit and therefore, the benefit of S.10B should be denied to the Respondent-assessee before this Court. 20. We are unable to accept even this submission of learned counsel for the appellant-Revenue. We do not find any good reason to take a narrow and pedantic approach in construing the words by an Undertaking and restricting the benefit u/s.10B of the Act only in respect of the direct export of such goods manufactured by such Unit as contended by the learned counsel for the appellant-Revenue. 21. As held by the Division Bench of this Court in M/s. Tata Elxsi's Ltd. case, the purpose of giving these deductions in these special provisions is to encourage exports and fetch foreign currency in terms of Exim Policy propounded and announced by the Union of India. The 'Deemed Export' by the assessee Undertaking even through a third party who has exported such goods to a Foreign country and has fetched Foreign Currency for India, still remains a 'Deemed Export' in the hands of the assessee undertaking also. If the Parliament intended to put any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee and failed to examine the copies of invoices raised on M/s.Microsoft Global Services Centre (India) Limited (MGSCIL), which had exported the services rendered by the assessee and the copies of payment advices received from the bank against the foreign exchange receipt. It is emphasized that the invoices clearly show that they had been received in foreign currency, that the payment was received in foreign currency and that the Assessing Officer committed a factual mistake in stating that the receipts were made in Indian currency and not foreign currency. The concept of a deemed export was explained by producing agreements and invoices and stating that the agreement was for the onsite development of software for M/s.Agilent Technologies, USA, which was the client of M/s.MGSCIL, to whom, the assessee deputed its employees in the place of business of M/s.MGSCIL, for developing software for the US company. 14. It is further submitted by the learned counsel for the appellant - assessee that there is no dispute to the fact that M/s.MGSCIL, is an STP Unit and in this regard, he has drawn our attention to the Notification issued by the Ministry of Electronics and Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A), while dismissing the assessee s appeal, had rightly relied upon the decision of the Kerala High Court in the case of CIT, Cochin Vs. Electronic Controls and Discharge Systems (P) Limited [reported in (2011) 13 Taxman.com 193] wherein it has been held that the benefit of exemption under Section 10A of the Act cannot be extended to local sales made by a unit in SEZ whether as part of DTA sales or as inter unit sales within the zone or units in other zones. The appeals were allowed in favour of the Revenue and in this regard, the learned Senior Standing Counsel has drawn the attention of this Court to paragraph 6, which reads as follows : After hearing both sides and after going through the above referred provisions of the Income-tax Act and the provisions of the Special Economic Zones Act, 2005, we are unable to uphold the order of the Tribunal because the concept of deemed export under the Special Economic Zones Act is not incorporated in the scheme of exemption under section 10A of the Income-tax Act and it is the settled position that the Income-tax Act is a self-contained code and the validity or correctness of the assessment has to be considered with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived on local sales within India against payment received in Indian rupees. For the above reasons, we are unable to sustain the orders of the Tribunal and we, therefore, allow the appeals by reversing the orders of the Tribunal and by restoring the orders cancelled by the Tribunal. 19. It is further submitted by the learned Senior Standing Counsel appearing for the Revenue that in both the decisions of the Karnataka High Court in the case of Tata Elxsi Ltd., and in the case of International Stones India Private Ltd., the Court did not consider the effect of Section 27 of the SEZ Act, which states that the provisions of the Income-tax Act, 1961 (Act 43 of 1961), as in force for the time being, shall apply to, or in relation to, the developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule. It is her submission that the concept of deemed export is alien to the provisions of the Income Tax Act, 1961 as rightly held in the decision of the Kerala High Court in the case of Electronic Controls and Discharge Systems (P) Limited., and that the Income Tax Act is a complete Code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its applicability cannot be expanded or widened and remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature. 21. It is argued that Section 27 of the SEZ Act clearly states that the provisions of the Income Tax Act, subject to modifications specified in the Second Schedule, will be applicable, which itself shows that the provisions of the Income Tax Act will prevail. In this regard, the learned Senior Standing Counsel appearing for the Revenue has referred to the Second Schedule as well as Section 10A and Section 10AA, which was inserted in April 2006. Therefore, it is submitted that both the decisions of the Karnataka High Court in the case of Tata Elxsi Ltd., and in the case of International Stones India Private Ltd., cannot be applied, as those decisions were rendered without taking note of the provisions of Section 27 of the SEZ Act. 22. We have carefully considered the contentions raised by the learned counsel on either side. 23. The first aspect that has to be considered is as to whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule. 26. The emphasis laid by the learned Senior Standing Counsel appearing for the Revenue is on the expression subject to the modifications specified in the Second Schedule . It is argued that the expression subject to the modifications specified in the Second Schedule will clearly indicate that the Income Tax Act will prevail over the SEZ Act. 27. For appreciating such an argument, we need to refer to the Second Schedule, the relevant portions of which are as follows : (a) in Section 10, (A) in clause (15), after sub-clause (vii), the following clause shall be inserted at the end, namely: (viii) any income by way of interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit made on or after the 1st day of April, 2005, in an Offshore Banking Unit referred to in clause (u) of section 2 of the Special Economic Zones Act, 2005; ; (B) in clause (23G), after the words, brackets, figures and letters sub-section (4) of section 80-IA, the words, brackets, figures and letters or subsection (3) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hings or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone. Therefore, the expression occurring in Section 27 of the SEZ Act namely subject to modifications specified in the Second Schedule is the modification, which was made in 2006 by introducing Sub-Section (7B) in Section 10A and inserting Section 10AA of the Act. 29. Therefore, a proper reading of Section 27 of the SEZ Act would mean that the benefit, which will accrue to the assessee will be subject to the modification specified in the Second Schedule and it would mean fulfillment of certain conditions for being entitled to the benefit of the special provision namely Section 10AA of the Act. The provisions of the SEZ Act cannot be ignored because of the fact that the terms developer , entrepreneur and authorized operations are not defined under the Income Tax Act, but they are defined under the SEZ Act, which, being a special Statute, will have to be applied to consider as to whether the transaction is an export or a deemed export . This is amply made clear by the provisions of Section 53 of the SEZ Act, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was routed through the banking channel by convertible foreign exchange. Secondly, the Court had not decided the effect of the provisions of the SEZ Act 2005, the Rules framed thereunder and the Foreign Trade Policy Guidelines issued by the Director General of Foreign Trade as well as the decision of the Kerala High Court in the case of Tata Tea Limited Vs. ACIT [reported in (2010) 189 Taxmann.com 303]. It is not out of place to mention that as against the decision in the case of Tata Tea Limited, a special leave petition was filed by the Revenue before the Hon ble Apex Court and it was dismissed on the ground of low tax effect in the decision reported in [2020] 115 taxmann.com 347. Therefore, the decision in the case of Electronic Controls and Discharge Systems (P) Limited is distinguishable and cannot be applied to the assessee s case. For all the above reasons, the assessee is entitled to succeed. 36. For all the above reasons, the tax case appeal is allowed and the first substantial question of law, which is the only substantial question law framed, is answered in favour of the assessee. 37. So far as the other issue is concerned namely regarding deduction of interest on b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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