Income Tax Appellate Tribunal - Mumbai
Dy. Cit, Circle-6(2) vs Decibelle Electronics (P) Ltd. on 30 August, 2005
Equivalent citations: [2006]5SOT783(MUM)
ORDER
V.K. Gupta, A.M. This appeal is filed by the revenue. The assessment year involved is 1995-96. It is directed against the order dated 23-3-2001 passed by the Commissioner (Appeals) XLII and arises out of the assessment completed under section 147 of the Income Tax Act, 1961.
2. The short issue involves in this appeal which we have to adjudicate is whether the Commissioner (Appeals) was justified in directing the assessing officer to allow exemption under section 10A whereas the assessing officer had denied the exemption since the assessee had violated the conditions laid down in clause (i)(a) of sub-section (2) of section 10A of the Income Tax Act.
3. We have heard the parties and have also perused the materials placed on record and applicable legal position.
4. Briefly stated, facts of the case are that the assessee is a company engaged in the dealing of computer related goods & services comprising of three units viz., Domestic Unit, Computer Division (located in SEEPZ) and Consumer Electronics Division (located in SEEPZ) started in financial year 1994-95 only. The assessee was allowed exemption under section I OA in earlier assessment years and this year also it's computer division and also claimed exemption under section 10A for it's Consumer Electronics division started during the financial year under consideration in the original assessment order under section 43(3) on 18-3-1998. However, the assessing officer re-opened the assessment under section 147 on the ground that provisions of section 10A of the Act for assessment year 199596 were applicable to units located in FTZ only if such unit had exported 100% of it's production and the assessee had sold goods worth Rs. 30.20 within India out of total sales of Rs. 40.38 of it's Computer Division and in respect of Computer Electronics Division entire sales of Rs. 1.15 crores was effected in India, therefore, exemption under section 10A of the Act was wrongly allowed. The assessing officer relied on the provisions of section 10A(2)(i)(a) brought on statute with effect from 1-4-1996 to restrict the exemption under section 10A to units in FTZ exporting at least 75% of their turnover to hold that prior to this amendment, units were obliged to export their entire production to enable them to claim tax holiday under section 10A. The assessing officer also observed that the assessee's claim existed prior to the date of promulgation of STP and EHTP and relaxation as claimed by the assessee was not acceptable in the light of evidence given by the assessee. The assessing officer also observed that the assessee's claim existed prior to the date of promulgation of STP and EHTP and relaxation as claimed by the assessee was not acceptable in the light of evidence given by the assessee. The assessing officer accordingly disallowed the claim of Tax holiday of the assessee and completed assessment under section 147 of the Act. The assessee preferred appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) reversed the decision of assessing officer and recorded her findings as under :
"During the course of the appellate proceedings, the appellant's counsel drew my attention to the relevant portion of the Export Import Policy. As per this policy the EOU/EPZ units were allowed 25% of DTA sales except in the exempted categories and a 5% of rejects may be sold in the DTA subject to applicable duties. The DTA sales were subject to close monitoring wherein sale of items and value thereof needs to be approved by the Development Commissioner, SEEPZ.
The policy also permits export of third parties vide the Circular No. 4/79 of the Development Commissioner of SEEPZ.
The appellant therefore held that they are eligible to export subject to the terms and conditions laid down by the Export Import Policy.
The appellant's counsel argued the assessment under appeal is for assessment year 1995-96. Section 10A as it stood during the year under appeal stipulated the following conditions :
(i) it has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year;
(ii) commencing or after the I st day of April, 1981, in any free trade zone;
The appellant has satisfied the conditions stated therein and hence is eligible for exemption under section 10A.
Para 17 : I have considered the facts. The terms and conditions for claiming exemption under section 10A are (a) as per section 10A(2) the appellant must have begin manufacturing on or after 1-4-1981 in any FTZ, (b) commenced on or after 1-4-1994 in EHTP (c) it is not formed by splitting up or reconstruction of an existing business and (a) it is not formed by transfer to a new business of plant and machinery previously used for any purpose. It is not the argument of the assessing officer that the above conditions were not complied with. The essence of the assessment order convey an implied admission of the eligibility of the appellant company in terms of these conditions by not referring to them.
The major thrust of the assessing officer's argument is that with the introduction of 10A(2)(1a) the units in SEEPZ have to export at least 75% of its exports thereby implying that prior to the introduction of this clause the units by compulsion have to export 100% of its produce. The wording of the department circular has been interpreted to mean that in order to alleviate the problem of export the law provided a relaxation of selling 25% in the domestic market. However, a close reading of the clause reveals that the scope of the clause is limited to an undertaking which begins to manufacture or produce on or after 1-4-1995. The Computer Division was started in assessment year 1991-92. The second unit at SEEPZ was opened in financial year 1994-95 relevant to assessment year 1995-96. The clause (1a) comes into effect from 1-4-1995, i.e., with effect from assessment year 1996-97. Both the units were functioning before the introduction of clause (1a) and hence is not covered by the restrictive clause.
The decision draws support from the export import policy where detailed provision for DTA sales and reject sales were prescribed. Considering the upheavals in the export zone the policy also acknowledged and permitted third party exports albeit under close supervision and item-wise monitoring by the development Commissioner, SEEPZ. The issue seen in a comprehensive context clearly indicates that the appellant is not covered by section 10(2)(1a) and hence the restriction of exporting minimum 75% of the production does not affect the appellant's claim for exemption under section 10A, The assessing officer hence is directed to allow exemption under section 10A."
5. The learned Departmental Representative contended that the section 10A(2)(i)(a) was of clarificatory nature and, therefore, was applicable retrospectively and for this proposition he relied on the decision of Hon'ble Apex Court in the case of CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC). The learned Departmental Representative also drew our attention to the CBDT circular explaining the nature and purpose of section 10A(2)(i)(a). It was also contended that the condition of export of 100% production was to be necessarily complied to claim tax holiday under section 10A of the Act. It was also contended that provisions of section 10A(2)(i)(b) were applicable.
6. The learned counsel of the assessee besides relying on the order of learned Commissioner (Appeals) contended that section 10A(2)(i)(a) was not of clarificatory nature as it was applicable to an undertaking located in FTZ/EHTP/STP and starting manufacturing or production of any article or thing on or after 1-4-1995. The learned counsel further contended that both sections 10A(2)(i)(a) and 10A(2)(i)(b) were effective and applicable to units situated in respective locations /designated areas. He also submitted that there was no requirement of export of 100% of the production as per the requirements of Export Import Policy applicable to the assessee.
7. We have considered the rival submissions, material on record and applicable legal provisions also. Admittedly, assessee's unit came into being in the financial year 1990-91 at SEEPZ and claimed exemption under section 10A from the very beginning. The second division was started in financial year 1994-95 and exemption under section 10A was also claimed on the income earned by this unit. The exemption under section 10A of the Act is applicable to units located in areas notified by the Government from time to time. Both sections 10A(2)(i)(a)and 10A(2)(i)(b) are independent provisions and are applicable to unit located therein and, accordingly, we find no merit in the contention of the revenue that provisions of section 10A(2)(i)(a) were applicable to the assessee. We also find no merit in the contention of the learned Departmental Representative that provisions of section 10A(2)(i)(a) were clarificatory because it created new class of undertaking to be eligible for tax holiday on complying new set of conditions and, accordingly, hold that this provision as prospective only. For proper appreciation of facts, the relevant portion of CBDT Circular explaining reasons for enacting section 10A(2)(i)(a) are reproduced as under :
"Restricting five-year tax holiday under section 10A to Units in FTZs exporting at least 75 per cent of their turnover :
21.1 Under section 10A of the Income Tax Act, a five-year tax holiday is allowed to any industrial undertaking in a Free Trade Zone (FTZ) which manufactures or produces any article or thing. This tax holiday is in operation from the assessment year 1981-82. Similarly, the provisions of section 10B exempt the entire profits of 100 per cent. EOUs from the assessment year 1989-90.
21.2 Units in FTZs/100 per cent EOUs get special treatment by virtue of the fact that they export their entire produce. However, in order to provide economic flexibility to them and to allow them to dispose of the export rejects and by products, they are allowed under the scheme to sell 25 per cent of their product in the domestic market. In effect, such units get exemption for five years even in respect of profits from the 25 per cent domestic sales allowed to them.
21.3 As long as domestic sales are within reasonable limits (up to 25 per cent of total sales), the exemption of profits in the case of units in FTZs/100 per cent EOUs can be justified as a concession incidental to export. Recently, however, it has come to notice that several units approved as 100 per cent EOUs/FTZs are allowed to sell more than 25 per cent of their produce in the domestic market.
21.4 In view of this undue benefit, last year, in the case of 100 per cent EOUs exemption under section 10B was restricted only to units exporting at least 75 per cent of their turnover. It has now been provided that, in the case of units in FTZ also, exemption under section 10A be restricted to units exporting at least 75 per cent of their turnover. Units which export less than 75 per cent of their turnovercan avail themselves of the normal 100 per cent deduction under section 80HHC to the extent of the export profits. The restriction will apply to new units which begin to manufacture or produce an article or thing on or after 1-4-1995.
21.5 This amendment will take effect from 1-4-1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years."
From the bare perusal of para 21.2 of above circular, it emerges that even in earlier years, units were allowed to sell 25% of their production in DTA. As per para 21.3, it is noticed that in some cases units situated in FTZ were allowed to sell more than 25% of their produce in the domestic market and, therefore, to check this undue benefit an obligation has been cast upon new units, which begin to manufacture or produce an article or thing on or after 1-4-1995 to export at least 75% of their turnover. After taking into consideration above position, if is absolutely clear that there was no requirement of 100% export in the impugned year to avail the benefit of section 10A of the Act.
8. In view of above discussion, we are of the considered opinion that the learned Commissioner (Appeals)'s order is in accordance with law and, therefore, we decline to interfere in the same. Thus, this ground of the revenue is rejected.
9. In the result, appeal filed by the revenue is dismissed.