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TMI Blog2023 (1) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... idue (difference between the Interest Earned and the Finance Loan and other Charges etc) if any, by our clients is nothing but an outcome of undertaking an Import Export Transaction which is in the normal course of trading business of diamonds eligible for exemption u/s. 10AA - The above income can be compared to the Forex Gains which is earned due to Currency Fluctuations. Fluctuations in Forex Gains is considered to be a part of the business activity and is treated as a resultant of the Import Export Activity undertaken, thus exempt u/s. 10AA of the Income Tax Act. On similar lines, since the Interest on Fixed Deposits are attributable and incidental to the trading business carried on by the assessee, the same has rightly been claimed as exempt u/s. 10AA - In the result, the results declared by the assessee after netting off the FDR Interest with interest paid and Forex loss are eligible to be adjusted against Business Profit. Ground raised by the assessee are allowed. - ITA No. 2316/Mum/2014 , ITA No. 2426/Mum/2014 - - - Dated:- 14-9-2022 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER For the Appellant : Sh. Jayant Bhatt For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diate preceding year which was the first year of business assessee achieved turnover of Rs. 92,33,44,065/- and NP at Rs. 10,13,80,418/- (GP @ 11% and NP @ 10.89%) this issue is pending before ITAT against the order of Ld. CIT (A). 4. Ground Nos. 1, 2 and 3 are substantive in nature and ground no 4 is general ground raise .Hence our adjudication is limited up to ground no 1, 2 and 3. 5. Ground no -1 we have gone through the order of the A.O which is against the assessee, order of Ld. CIT (A)-25 (Mum) in response to assessee s appeal and various workings and judicial precedents submitted by the assessee in the form of paper-book. a) In this year of appeal under consideration, there are 4 (four) main grounds of appeal and over and above the income derived from manufacturing activity, there are two more sources of income for which the appellant have claimed as deduction u/s. 10 AA of the Act but the AO has rejected the total income and made additions in respect of the total income of the appellant. b) The total consolidated taxable income of the appellant in respect of the above three sources as shown in the P L Account is Rs.13,13,55,314/- The Id. ARs have bifurcated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant, the AO has without going into the facts and documents and circumstances of the case and without any concrete basis has come to the conclusion that there was no manufacturing activities carried out by the assessee at SEZ Unit at Sachin, Surat. The AO while passing the assessment order u/s 143 ( 3) of the Act has denied the allowance of deduction u/s. 10 AA of the Income Tax Act based on the following assumptions which are summarized as under: There is no manufacturing activity carried on by the appellant so as to allow the deduction. The profits shown by the appellant is on a higher side and needs to be read in conjunction with section 10 AA and section 80IA of the Income Tax Act. Gross profit ratio of the appellant is compared with those of other concerns and a conclusion drawn that the GP ratio is on a higher side. A further conclusion is drawn by the AO, stating that in case deduction u/s 10 AA is to be allowed then the same has to be restricted to reasonable profits of 2% and excess profits accordingly are liable to be disallowed. 6. Based on above facts 3 basic question arisen for our consideration to adjudicate ground no-1 i Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from Dubai to be kept in the strong room for manufacturing at the SEZ Unit. This receipt is issued by a Government undertaking which is responsible for keeping the goods in strong room. Custom Bill of Entry prepared at Surat Customs Department mentioning therein the description, weight, quantity value etc. Payment made to C F Agent, B.V. Chinai Co. (India) Pvt. Ltd. towards warehousing charges, sundry and shipping charges, D.O. Charges and Agency charges towards import of goods from Dubai. Payment advice from bank on sending Foreign Outward Remittance to supplier of raw material towards the cost of Import made by assessee. Receipt of Diamond Gem Development Corporation Limited, SEZ Unit, Sachin, being custodian charges for gold medallions manufactured at SEZ Unit to be exported and kept in the strong room for delivery. This receipt is issued by a Government undertaking which is responsible for keeping the goods in strong room. Export Invoice copy of assessee along with the Packing List mentioning therein the seller's address, the description of finished goods, the value of Invoice including the additional value achieved in USD and duly cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contradict by the A.O. moreover each and every activity under the SEZ is being controlled by the customs, there is a clear chain of documents between assessee, SEZ authorities and customs. Taking into consideration all the facts and evidences on record we can reasonably hold that assessee had carried out manufacturing activity for the purposes of sec 10AA. ii Whether income from trading activity in SEZ Zone tantamount to service for the purposes of sec10AA. In response to (ii) above we are reproducing relevant instructions issued by department of Commerce and Industry, Govt of India and relevant provisions of SEZ Act, 2005. During the year under consideration, assessee has been involved in the trading activity of Diamonds through the SEZ Unit in Sachin, Surat. There are total of 17 number of trading transactions during the year under consideration. The chart of the same is attached herewith. (P.B. No. 208 to P. B. No. 209). We observed that assessee have been granted permission by the Development commissioner SEZ, to carry on business of manufacturing as well as trading in their SEZ unit (P.B. No. 211 to P.B. No 213). We hereby found the letter is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The word manufacture have been defined in sub-clause (r) of section 2 of SEZ Act, 2005. (r) Manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering, and includes agricultural, aquaculture, animal husbandry, floriculture, horticulture, poultry, sericulture, viticulture and mining. The word services have been defined in sub clause (z) of section 2 of SEZ Act, 2005. (z) Services means such tradable services which i. are covered under the General Agreement on Trade in Services annexed as IB to the Agreement the 15th day establishing of April,1994.the World Trade Organisation concluded at Marrakesh. ii. May earn be foreign prescribed exchange; by the Central Government for the purpose of this Act: and The Central Government has defined the services in the rule 76 of the SEZ Rules, 2006 which inter alia includes trading. The extract of the rule 76 is reproduced as under: Trading, warehousing, research and development services, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable on the web site of Govt. of India www.sezindia.gov.in Assessee thus fulfils all the primary conditions of section 10AA for getting the exemption i.e. a. Assessee is an entrepreneur (i.e. person who has granted approval by Development Commissioner) as per sec. 2(i) of SEZ Act, 2005. b. The unit has started to provide services (trading i.e. import for the purpose of re-export only) and manufacturing activity during the previous year relevant to assessment year under proceeding. c. Assessee has exported goods or services by filing bills of entry/shipping bill in physical mode. Assessee has claimed profits and gains of manufactured goods as well as of trading of goods as exempt w/s 10AA. Thus total net profit of SEZ units does not include only profit of trading but that of manufacturing also. The Ld. A.O. held that assessee company is not providing any service in respect to the goods it exported from its Surat SEZ unit but merely purchasing and selling goods without applying any skills on it or improving its value quotient and transactions are devoid of basic fundaments of services and so cannot be termed as service also and so cannot be termed serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of re-export of imported goods is eligible for benefit under section 10AA. The assessee company on the activity of trading in the nature of re-export of imported goods claims benefit under Section 10AA justifying its classification under service (referred to as provide any service under the said section). As the Income Tax Act does not define the term service , the assessee company has to take reference to the definition of service referred to in the SEZ Act, 2005 (given that the Section 10AA was introduced by SEZ Act, 2005 and referred to in the Second Schedule to the said Act) and further the SEZ Act, 2005 has overriding effect on all other enactments by virtue of section 51 of SEZ Act, 2005 which reads as under: - The provisions of this Act shall have effect 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 Ld. A.O. has taken a stand on the issue which is not a logical interpretation, instead every effort has been made by him to overlook and misinterpret the meaning and logic behind the introduction of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above under the SEZ Act 2005 trading is included in the services provided for export of imported goods. As per sec 51 of the SEZ Act 2005 notwithstanding anything inconsistent therewith contained in any law for the time being in force, the provisions of SEZ Act 2005 will prevail. To substantiate our view we have relied on ITAT decision in the case of M/s Goenka Diamond and Jewellers Ltd Vs DCIT, ITA No 509/JP/2011, M/s Geetanjali Exports Co Ltd Vs ACIT, ITA No. 6947,6948,6781,6783,6949,6950,6785 and 6787/Mum/2011 In view of the above we are of the considered view that trading activity carried out by the assessee is entitled for deduction benefit u/s 10AA. iii Whether without rejection of books of accounts accounting results declared by the assessee can be disturbed? We have gone through the findings of the A.O and Ld CIT(A) .In this case focus of the A.O was on establishing the fact that the assessee had not carried out any manufacturing activity and his activity of trading is not entitled for the benefit provided in sec 10AA. In this regard we would like to go by the basic principle of accepting the books of accounts is a rule and rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g but an outcome of undertaking an Import Export Transaction which is in the normal course of trading business of diamonds eligible for exemption u/s. 10 AA of the IT Act. The above income can be compared to the Forex Gains which is earned due to Currency Fluctuations. Fluctuations in Forex Gains is considered to be a part of the business activity and is treated as a resultant of the Import Export Activity undertaken, thus exempt u/s. 10 AA of the Income Tax Act. Therefore on similar lines, since the Interest on Fixed Deposits are attributable and incidental to the trading business carried on by the assessee, the same has rightly been claimed as exempt u/s. 10AA of the I T Act. In the result, the results declared by the assessee after netting off the FDR Interest with interest paid and Forex loss are eligible to be adjusted against Business Profit. Ground No.2 3 raised by the assessee are allowed. ITA No. 2426/Mum/2014 A.Y. 2010-11 by Revenue The Revenue has raised the following grounds of appeal: 1. The Ld. CIT (A) has erred in law as well on the fact in allowing deduction u/s 10AA of the Act by ignoring the fact that, the assessee has never conducted any manufacturin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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