Income Tax Appellate Tribunal - Ahmedabad
Zaveri & Co. Pvt.Ltd.,, Ahmedabad vs Assessee on 6 March, 2014
आयकर अपीलीय अिधकरण,
अिधकरण अहमदाबाद ᭠यायपीठ
यायपीठ 'ए
ए' अहमदाबाद
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH,
AHMEDABAD
᮰ी एन0एस
एन एस0
एस सैनी,
ी लेखा सद᭭य एवं ᮰ी कु ल भारत,
भारत ᭠याियक
याियक सद᭭य के समᭃ
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER &
SHRI KUL BHARAT, JUDICIAL MEMBER
ITA No. 1395/Ahd/2013
(Assessment Year 2009-10)
&
ITA No. 1396/Ahd/2013
(Assessment Year 2010-11)
M/s Zaveri & Co. Pvt. Ltd. V/S The Commissioner of
Swagat Building, C.G. Road Income-tax-IV,
Ahmedabad-380009. Ahmedabad.
PAN: AAACZ2014N
(Appellant)/अपीलाथᱮ (Respondent)/ᮧ᭜यथᱮ
Appellant by : Shri Mehul K. Patel with
Shri J.C. Shavedalal, AR
Respondent by : Shri R.K. Dhanesta, Sr. DR with
Sh. K.R.Meghwal & Sh. Subhash Bains, DR
सुनवाई कᳱ तारीख/ Date of Hearing : 06-03-2014
घोषणा कᳱ तारीख/ Date of Pronouncement : 07-05-2014
आदेश)/ORDER
(आदे
PER SHRI N.S. SAINI, ACCOUNTANT MEMBER:
These are the two appeals filed by the assessee against the orders passed u/s 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax, both dated 19.04.2013 in respect of Assessment Years 2009-10 and 2010-11.
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -2-
2. The assessee challenged the validity of the orders passed u/s 263 on the following grounds in its appeal for Assessment Year 2009-10:
1. That on facts, and in law, the learned CIT-IV, Ahmadabad has grievously erred in assuming jurisdiction u/s 263 of the Act.
2. That on facts and in law, the learned CIT-IV, Ahmadabad has grievously erred in holding that the learned AO has not done any inquiry nor any verification, whereas, in fact, the assessment order is passed u/s 143(3) of the Act after thorough inquiry through show-cause notice and replies, and verification of all the issues sought to be revised.
3. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant's SEZ unit is not entitled to deduction u/s 10AA of the Act of Rs 76.11 crores.
4. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant is not entitled to deduction u/s 10AA of the Act while computing book profit u/s 115JB of the Act.
5. On facts and in law, the entire income of appellant SEZ unit is not includible while calculating the book profit for the purpose of section 115JB of the Act.
6. That on facts and in law, the learned CIT-IV, Ahmadabad has grievously erred in holding that the interest income is required to be taxed as income from other sources, and that the appellant is not entitled to deduction u/s 10AA of the Act on the interest income.
7. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant is not entitled for set-off of brought forward business loss against income from other sources.
8. That on facts and in law, the learned CIT-IV, Ahmadabad has grievously erred in setting aside and directing the AO to examine the correctness, genuineness and allowability of Foreign Exchange Fluctuation Loss of Rs 70.97 crores, resulting into multiplicity of proceedings.
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -3- The assessee has raised following grounds in its appeal for Assessment Year 2010-11:
1. That on facts, and in law, the learned CIT-IV, Ahmedabad has grievously erred in assuming jurisdiction u/s 263 of the Act.
2. That on facts and in law, the learned CIT-IV, Ahmedabad has grievously erred in holding that the learned AO has not done any inquiry nor any verification, whereas, in fact, the assessment order is passed u/s 143(3) of the Act after thorough inquiry through show-cause notice and replies, and verification of all the issues sought to be revised.
3. That the learned CIT-IV, Ahmedabad has grievously erred in law and on facts in holding that the appellant's SEZ unit is not entitled to deduction u/s 10AA of the Act of Rs. 38.20 crores.
4. That the learned CIT-IV, Ahmedabad has grievously erred -in law and on facts in holding that the appellant is not entitled to deduction u/s 10AA of the Act while computing book profit u/s 115JB of the Act.
5. On facts and in law, the entire income of appellant SEZ unit is not includible while calculating the book profit for the purpose of section 115JB of the Act.
6. That on facts and in law, the learned CIT-IV, Ahmedabad has grievously erred in holding that the interest income is required to be taxed as income from other sources, and that the appellant is not entitled to deduction u/s 10AA of the Act on the interest income.
7. That the learned CIT-IV, Ahmedabad has grievously erred in law and on facts in holding that the appellant is not entitled for set-off of brought forward business loss against income from other sources.
8. That on facts and in law the learned CIT-IV, Ahmedabad has grievously erred in setting aside and directing the AO to examine the correctness, genuineness and allowability of Foreign Exchange Fluctuation Loss of Rs 2.01 Crores, resulting into multiplicity of proceedings.
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -4-
3. As the grounds of appeal and the issues involved in the Assessment Year 2010-11 are same as in the Assessment Year 2009-10, both the parties before us admitted that adjudication of appeal for the Assessment Year 2009-10 will also adjudicate the appeal for the Assessment Year 2010-11. So, we proceed to adjudicate the appeal for Assessment Year 2009-10.
4. We have heard the rival submissions, perused the written submissions filed by both the parties and gone through all the materials brought on record and the decisions relied upon by both the parties.
5. It is a settled position that the provision of section 263 provides power of suo motu revision upon the Commissioner of Income Tax when the order passed by the Assessing Officer is found both erroneous as well as prejudicial to the interest of the Revenue.
6. Further, the assessment order can be considered as erroneous when it is found by the Commissioner of Income Tax that the order contains some mis-application of law or mis-construction of facts or non-application of mind on the part of the Assessing Officer.
7. Non-application of mind in the context means acceptance of the claim of the assessee without making any inquiry.
8. It is also an accepted position of law that the lack of inquiry on part of the Assessing Officer will result in the order being termed as erroneous but merely because the inquiry though made ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -5- was considered by the Commissioner of Income Tax as insufficient or not in the manner in which the Commissioner of Income Tax would have liked to be done will not make the order of the Assessing Officer erroneous within the meaning of section 263 of the Act.
9. Further, it is also an established position that when two views are possible and the Assessing Officer has adopted one of the possible views, then such an order of the Assessing Officer cannot be called erroneous.
10. Further, the provisions of section 263 cannot be invoked for merely providing the Assessing Officer a second innings to play unless the order passed by the Assessing Officer is found by the Commissioner of Income Tax as erroneous.
11. On the touchstone of the above settled position of law, the validity of the orders passed u/s 263 are to be tested.
12. In the instant case, the Commissioner of Income Tax has considered the order of assessment as erroneous as well as prejudicial to the interest of the Revenue and has ordered as under:
"In view of the discussion made in the aforesaid paragraphs, the assessment order passed on 19th Dec. 2011, u/s. 143(3) of the Act by the Assessing Officer is treated as erroneous and prejudicial to interest of revenue hence same is set aside and to be modified as under:
(i) As Assessee has not fulfilled the conditions for eligibility of deduction under Section 10AA for carrying out the services as per Section 2(z) of SEZ Act, 2005 i.e. import for the purpose of re-export and has not earned any foreign exchange for the country, which is the main intention behind the provisions of Section 10AA of the Act, as discussed herein above, Assessee ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -6- is not entitled to exemption under Section 10AA of the Act, both while computing income as per normal provisions of the Act and book profit u/s 115JB of the Act.
(ii) The assessing officer will examine the correctness, genuineness and allowability of Foreign Exchange Fluctuation Loss of Rs 70.97 Crores and decide the issue afresh after giving opportunity to the assessee.
(iii) The interest income earned by Assessee on bank FDR is required to be taxed as income from other sources, as discussed in detail hereinabove and the same cannot be treated as profit derived from export of service outside India and eligible business activity as per SEZ Act, 2005. The Assessee will not be entitled to exemption u/s 10AA on interest income earned on Bank FDRs.
(iv) As interest income earned on FDRs is to be taxed as income from other sources, Assessee would not be entitled for set off of brought forward business loss, if any available, against income from other sources."
13. The first contention of the Ld. Authorized Representative of the assessee before us is that the Assessing Officer had during the course of assessment proceedings called for the explanation of the assessee for its claim of deduction u/s 10AA, brought forward loss, interest receipt from bank on fixed deposits and computation of income u/s 115JB of the Act and the assessee in reply submitted its explanation with evidences and supporting decisions.
14. The Assessing Officer after making inquiries and considering the submissions of the assessee accepted the claim of the assessee for deduction u/s 10AA, set off of brought forward business loss, interest income on fixed deposit receipts as part of business income and computation of income u/s 115JB of the Act. The Ld. Authorized Representative in support of the above ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -7- arguments drew our attention to the notice issued by the Assessing Officer u/s 142(1) of the Act. In view of the above, the contention of the Ld. Authorized Representative was that as the above claims were accepted by the Assessing Officer after making due inquiries, therefore, the order of the Assessing Officer cannot be considered as erroneous.
15. Further, the Ld. Authorized Representative also contended that as a possible view in respect of the above issues was adopted by the Assessing Officer in the assessment order, therefore, the Commissioner of Income Tax was not justified in passing the impugned order in respect of above issues merely for taking a different view. In support of the above contentions, the Ld. Authorized Representative relied upon the decisions in the case of CIT Vs. Max India Limited 295 ITR 282 (SC) and Malabar Industrial Limited 243 ITR 82 (SC) and CIT Vs. Arvind Jewellers 259 ITR 502 (Guj.).
16. We find that in the impugned order, Commissioner of Income Tax has modified the order of the Assessing Officer as Commissioner of Income Tax has held that the assessee is not eligible for deduction u/s 10AA of the Act, under both computation i.e. computation u/s 115JB of the Act as well as under normal computation (computation as per other provisions of the Act except 115JB), interest income earned by the assessee on fixed deposit receipt is assessable under the head "income from other sources"
and not under the head "profit and gains of business and profession". Consequentially, the assessee is not entitled for deduction u/s 10AA in respect of such interest income and the assessee is also not entitled for set-off of brought forward business loss against such interest income. Thus, the Commissioner of ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -8- Income Tax found that the view in respect of above issues adopted by the Assessing Officer in the assessment order is unsustainable.
17. Therefore, it cannot be held that Commissioner of Income Tax has considered the order of the Assessing Officer as erroneous in respect of above issues on the ground that the Assessing Officer accepted the claim of the assessee without application of mind, but rather the substance of the order of the Commissioner of Income Tax is that the view adopted by the Assessing officer in respect of above issues is unsustainable i.e. not a possible view in view of the facts of the case. Hence, we have to adjudicate whether the view adopted by the Assessing Officer in respect of above issues was a possible view or not.
18. The first issue is in respect of eligibility of deduction u/s 10AA of the Act. The Commissioner of Income Tax considered that the assessee was not entitled for deduction u/s 10AA on the ground that the assessee has not fulfilled the conditions for eligibility of deduction u/s 10AA for carrying out the services as per section 2(z) of the SEZ Act, 2005 i.e. import for the purposes of re-export and has not earned any foreign exchange for the country which is the main intention behind the provisions of section 10AA of the Act. In view of this, the Commissioner of Income Tax ordered that the assessee is not entitled to exemption u/s 10AA of the Act, both while computing income as per normal provisions of the Act and book profit u/s 115JB of the Act. For the above issue, it is necessary to give a look at the provisions of the sub-section (1) of section 10AA of the Act which reads as under:
"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 of the ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11 -9- 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--
(i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter;
(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2)."
19. In the instant case, we find that it is an undisputed fact that the assessee in its SEZ unit is engaged in carrying on business of trading in gold, platinum and diamond. The SEZ unit inter alia imports goods from supplier of Dubai and re-exports it.
20. It is not in dispute that the income from above activity qualifies for deduction u/s 10AA of the Act. The above view is supported by the instruction no. 4 dated 24.05.2006 issued by Government of India, Ministry of Commerce & Industry wherein it is stated as under:
"This Department has been receiving representations on difficulties faced by the existing SEZ units holding approval to do trading, that their exports are adversely affected and also that several of their orders are held up due to the restriction on trading on account of the above instruction. Taking cognizance of these representations, partial modification of the above referred Instruction dated 24th ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 10 -
March, 2006, it has been decided that while units in the Special Economic Zone who hold approval to do trading activities will be allowed to carry out all forms of trading activity, the benefits under Section 10AA will exclude trading other than trading in the nature of export of imported goods. Appropriate amendments in this regard are being issued.
2. In the meantime, sourcing from domestic area may be permitted by units in the SEZs which are allowed to do trading, subject to this circular being cited and on production of an undertaking by the concerned unit that no income tax benefits will be available by the unit for trading, except in the nature of re-export of imported goods."
21. Thus, it is clear that SEZ units are not entitled for deduction u/s 10AA in respect of trading goods exported from SEZ when such goods were procured from Domestic Tariff Area and the assessee is entitled for income tax benefit u/s 10AA in respect of trading which is in the nature of re-export of imported goods. To the same effect is the decision of the Jaipur Bench of the Tribunal in the case of DCIT Vs. M/s Goenka Diamond & Jewellers Limited ITA No. 509/JP/2011 Assessment Year 2008-09.
22. Further, it is also not in dispute that the above activity of the assessee was started during the Assessment Year 2008-09. Thus, the only other condition is that the assessee must be an entrepreneur as referred to in clause (j) of section 2 of SEZ Act, 2005. The Section 2(j) of SEZ Act, 2005 reads as under:
"Entrepreneur" means a person who has been granted a letter of approval by the Development Commissioner under sub- section (9) of section 15."
23. Sub-section (9) of section 15 of SEZ Act, 2005 reads as under:
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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"The Development Commissioner may, after approval of the proposal referred to in sub- section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Development Commissioner may authorize and every such operation so authorized shall be mentioned in the letter of approval."
24. In the instant case, it is not in dispute that the assessee has been granted an approval by the Development Commissioner under sub-section (9) of section 15 of the SEZ Act, 2005. A copy of the said approval vide letter no. SSEZ/II/18/2007-08/603 dated 30.10.2007 is placed at page no. 908 of the Paper Book.
25. Further, originally Development Commissioner, Surat Special Economic Zone granted approval to the assessee's SEZ unit in respect of manufacturing of Gold, Silver, Platinum, Palladium, Coins (other than legal tenders), Plain Jewellery, Studded Jewellery & Articles thereof or combination thereof with or without Diamonds and/or semiprecious stones, Cut & Polished Diamonds, Semi Precious Stones {under chapter-71 of ITC (HS)} vide letter no. SSEZ/II/18/2007-08/663 dated 30.08.2007, copy of which is placed at page nos. 908 to 910 of Paper Book-III. However, the said certificate was amended vide letter no. SSEZ/II/018/2007- 08/824 dated 18.10.2007 wherein the assessee was granted approval for trading also which reads as under:
"Government of India Ministry of Commerce & Industry, Office of the Development Commissioner Surat Special Economic Zone Near Sachin Railway Station, Diamond Park, Sachin, SURAT-394230.
Phone No. (0261)2399247; 2397667;
Fax No. (0261) 2399247.
No. SSEZ/II/018/2007-08/824 Dated: 18th October, 2007 ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 12 -
M/s Zaveri & Co. Pvt. Ltd.
"Swagat", C.G. Road, AHMEDABAD-380009.
Sub: Your proposal for Trading Activity in the Surat Special Economic Zone.
Reference:- LOA No. SSEZ/II/18/2007-08/663 dated 30-08- 2007 Dear Sirs, I am directed to refer to your letter dated 18-09-2007, on the above subject and to convey the approval of the Competent Authority/Development Commissioner for broad- banding of Letter of Approval No. SSEZ/II/18/2007-08/663 dated 30-08-2007 as amended, and to include Trading and Export of the following items with all the facilities and entitlements admissible to a unit in the Surat Special Economic Zone subject to the provisions of the Special Economic Zones Act, 2005 and the rules and orders made thereunder, from Unit No. 364, on Plot No. 239, Surat Special Economic Zone, Sachin, Surat in the State of Gujarat.
Authorized Operations:-
Sr. No. Activity 01. TRADING:-
Trading of Gold, Silver, Platinum, Palladium, Bars, Coins (other than legal tenders) and Medallions. {under chapter-71 of ITC (HS)} (1) CONDITIONS:-
(i) You shall export the goods procured/imported, as per provisions of the Special Economic Zones Act, 2005 and Rules made there-under for a period of five years from the date of commencement of trading activities.
For this purpose, you shall execute a fresh Bond- Cum-Legal Undertaking as prescribed under the Special Economic Zone Rules, 2006, for both manufacturing and trading operation consolidated.
(II) You shall achieve positive Net Foreign Exchange (NFE) as prescribed in the Special Economic Zone Rules, 2006 for the period you operate as a Unit in the Special economic from the commencement of ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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production, failing which you shall be liable for penal action under the Foreign Trade (Development and Regulation) Act, 1992.
(iii) You may import or procure from the Domestic Tariff Area all the items required for your authorized operations under this approval, except those promoted under the ITC (HS) Classifications of Export and Import Items.
(iv) The benefits under Section-10AA of the Income Tax Act, shall exclude trading other than trading in the nature of re-export of imported goods only. If you envisage DTA procurement, you shall maintain separate account, etc. as provided under SEZ Act and Rules there-under.
(v) Date of commencement of trading activities shall be intimated to the Development Commissioner.
(vi) You shall undertake trading activities in a segregated premises and separate account shall be maintained with proper identification.
(vii) You shall follow the RBI Regulations.
(2) If you fail to comply with the conditions stipulated above, this Letter of Approval shall be cancelled as per the provisions of the Special Economic Zones Act, 2005 and the rules and orders made there-under.
(3) This letter may be kept attached with the original
Letter of Approval, as amended. All future
correspondence may be addressed to the
Development Commissioner, Surat SEZ.
Yours faithfully
(R.P. Vaidya)
Officer on Special Duty,
For Development Commissioner
Surat Special Economic Zone"
Copy of the said letter is placed at page nos. 911 to 913 of Paper Book-III. Further, validity of approval was renewed till 25.10.2017 vide letter no. SSEZ/II/18/2007-08/1229 dated 17.01.2013, copy of which is placed at page no. 1282 of the Paper Book-IV.
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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26. Thus, we find that the assessee is entrepreneur as referred to in clause (j) of section 2 of the SEZ Act, 2005 who began to provide services during the previous year relevant to the Assessment Year 2008-09. Therefore, in our opinion, the Assessing Officer's view that the assessee is entitled for deduction u/s 10AA cannot be held as an impossible view on the basis of the language employed u/s 10AA of the Act. The Commissioner of Income Tax considered that the assessee is not entitled for deduction u/s 10AA of the Act on the ground that net foreign exchange earning for the said unit is negative. In calculating net foreign exchange earning as negative, the Commissioner of Income Tax relied upon Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 and viewed that the purchases made by the assessee from domestic tariff area should be treated as import and therefore, the purchase value should be reduced from the foreign exchange earnings of the assessee for calculating net foreign exchange earning.
27. The Ld. Authorized Representative of the assessee pointed out that the said Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 contains only a proposed change in Rule 53 of SEZ Rules, 2006 but that change has not yet been incorporated. In support of the above, the Authorized Representative of the assessee filed before us clarification dated 27.02.2014 issued by Export Promotion Council for EOUS and SEZS no. EDC/SEZ/AM04/A.14 dated 26.02.2014 which reads as under:
"From EPCES HO [email protected] Sent: Thu, 27 Feb. 2014 13:02:02:05 To "Mr. Mrugesh Shah" [email protected] Subject: Clarification-reg.
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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Export Promotion Council for EOUS and SEZS Ministry of Commerce & Industry, Government of India 8G, Hansalaya Building, 15, Barakhamba Road, New Delhi-110001.
Tel:23329767, 23329768, 23329769 Fax No. 011-23329770 O.P.Kapoor No. EPC/SEZ/AM04/A.14 Dy. Director General February 26 2014 Mobile: 9810850501 Dear Sir, This is with reference to your email regarding applicability of circulars on SEZs, in this regard, we are to inform you as under:
1. As regards circular issued by EPCES N.16/2007-08 dated 11/7/07, kindly note that this circular is meant for EOUs only.
2. As regards EPCES Circular No. 42 dated 26/3/07, this suggestion was not included in SEZ Rule 53. To read the updated SEZ Rule 53, please visit website www.sezindia.nic.in.
3. As regards Circular No. 12/2008-Customs dated 24/7/08, this circular is also meant for EOUs only.
Kindly note that EPCES has shifted its premises from Bhikaji Cama Bhawan to its own premises as the address mentioned above, kindly note the new address and contact details.
With warm regards, Yours Sincerely (O.P. Kapoor) Dy. Director General"
28. The Authorized Representative of the assessee also submitted before us a clarification issued by the Government of India, Ministry of Economic and Industry, office of the Development Commissioner, Surat Special Economic Zone dated 03.03.2014 which reads as under:
ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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"Government of India Ministry of Commerce & Industry, Office of the Development Commissioner Surat Special Economic Zone Near Sachin Railway Station, Diamond Park, Sachin, Surat.
No. SSEZ/II/18/2007-08/1408 dated 3rd March 2014- To, M/s Zaveri & Co. Pvt. Ltd.Unit No. 364 on Plot No. 239
Surat Special Economic Zone, Surat.
Gentlemen, Sub: Request for clarification -reg.
Please refer to your letter 27.02.2014 on the above mentioned subject and in this connection it is to clarify that:
a. EPCES Circular No. 16/2007 is not applicable to SEZs. It pertains to EOUs only.
b. Regarding EPCES Circular No. 42, it is only a suggestion by EPCES however, the suggestions have not been incorporated in SEZ Act/Rules so far. c. Circular No. 12/2008-Cus is not applicable to SEZs. It pertains to EOUs only.
2. It is also to clarify that though SEZs and EOUs, both are export promotion schemes, they are governed by different provisions. SEZs are governed by SEZ Act, 2005 and Rules framed thereunder. 100% EOUs are governed by Foreign Trade Policy.
Yours sincerely (Vijay N Shewale) Development Commissioner Surat Special Economic Zone"
29. Further, the Ld. Authorized Representative of the assessee pointed out that the assessee has received a renewal from Development Commissioner, Surat Special Economic Zone on ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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17.01.2013 upto a period of 5 years i.e. upto 25.10.2017 which conclusively proves that the annual performance report submitted by the assessee before the SEZ authorities showing positive net foreign exchange earnings were in accordance with the SEZ Act and SEZ Rules and the assessee complied with SEZ Act and SEZ Rules.
30. The Ld. Authorized Representative also pointed out that the approval committee of SEZ, who examined and approved the annual performance report filed by the assessee consists of various persons including Commissioner of Income Tax and they have not found any defect while monitoring assessee's working achieving positive net foreign exchange earnings as submitted in the annual performance report.
31. We find that no material has been brought on record by the Revenue to controvert the above submission of the assessee. Further, we find that the Hon'ble Supreme Court in the case of Gestatner Duplicators Private Ltd. Vs. CIT 117 ITR 1 (SC) held as under:
"In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the Assessee's provident fund did not satisfy any particular condition mentioned in r.4. It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implied that the provident fund satisfies all the conditions under r. 4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the CIT under r. 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during the assessment proceedings for any particular assessment year the taxing authority finds that the provident fund maintained by an assessee has contravened any of the conditions of recognition, he may ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
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refer the question of withdrawal of recognition to the CIT but until the CIT acting under the powers reserved to him withdraws such recognition the taxing authority must proceed on the basis that the provident fund has satisfied all the requisite conditions for its recognition for that year; any other course is bound to result in chaos and uncertainty which has to be avoided."
32. To the same effect is the decision of the Hon'ble Gujarat High Court in the case of Nitin P. Shah alias Modi Vs. DCIT (2005) 276 ITR 411 (Guj.) and decision of the Ahmedabad Bench of the Tribunal in the case of Gujarat Information Technology Fund 64 DTR 169(Ahd.). In our considered view, it was not open to the Commissioner of Income Tax to take the view contrary to the approval already granted by the approval committee appointed under SEZ Act, 2005 and SEZ Rules, 2006.
33. Thus, we do not find any material to arrive at the finding that the assessee has violated any provision of SEZ Act, 2005 or SEZ Rules, 2006 or that the assessee was not an entrepreneur referred to in clause (j) of section 2 of SEZ Act, 2005. Therefore, in our considered view, it cannot be held that the view adopted by the Assessing Officer in holding that the assessee is entitled for deduction u/s 10AA of the Act was not a possible view. Therefore, the interference by the Commissioner of Income Tax with that view of the Assessing Officer in purported exercise of power available to him u/s 263 cannot be sustained. We, therefore, cancel the order of the Commissioner of Income Tax on this issue.
34. As a consequence of our finding, we delete the order of the Commissioner of Income Tax to the extent it was held the assessee is not entitled to exemption u/s 10AA of the Act both ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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while computing the income as per normal provisions of the Act and book profit u/s 115JB of the Act.
35. Before parting with this issue, we would like to observe that in view of the instruction no. 4 of 24.05.2006 quoted above, deduction u/s 10AA is not available to the assessee in respect of profit relating to trading activities wherein goods for export were procured from domestic tariff area. However, we find that in the instant case, it is not the case of the Revenue that benefit of section 10AA was allowed to the assessee by the Assessing Officer in the assessment order in respect of income arising from goods exported by procuring the same from domestic tariff area. Therefore, no interference by us in this respect is called for.
36. The next issue relates to the order of Commissioner of Income Tax whereby it was held that interest income earned by the assessee on its fixed deposit receipts with the bank is to be taxed under the head "income from other sources" and consequentially not entitled to exemption u/s 10AA of the Act and consequentially interest income is to be excluded for calculating benefit allowable u/s 10AA of the Act.
37. The undisputed facts relating to this issue are that the assessee imports goods on credit and re-exports the same from its SEZ unit. The import is made on a credit of 360/90 days against letter of credit. For obtaining the letter of credit, the assessee is required to offer fixed deposit receipt to the bank as a security. On expiry of the letter of credit period, the bank liquidates the fixed deposit receipt and makes payment to the importer. Further, the exports are made on immediate payment basis. Therefore, as the purchases are made on credit basis, the purchase value is higher ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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than the prevailing rate on the date of purchase from purchases which are made on immediate payment basis. The exports are made on immediate payment basis at the market value which is prevalent on the date of payment. Normally, the assessee's purchase value is therefore more than its sale value. However, as the assessee receives payment for sales immediately and the payment for purchases are made at a later date and interest income earned by the assessee during the intervening period on sale value, the transaction were considered as commercially expedient and results in overall income to the assessee. The interest income in question are interest income which are earned by the assessee on fixed deposit receipts which are kept or pledged by the assessee with its bank for obtaining the Letter of Credit against its purchases is not in dispute.
38. On the above undisputed facts, the interest income earned by the assessee was assessed as business income of the assessee by the Assessing Officer in the assessment order. This view of the Assessing Officer was considered as not a possible view by the Commissioner of Income Tax in the impugned order passed u/s 263 of the Act and the Commissioner of Income Tax had held that the interest are mandatorily assessable under the head "income from other sources".
39. We find that in the instant case, it is not in dispute that the interest income which were earned by the assessee were from fixed deposit receipts with bank which were made by the assessee in the course of its trading business of import for the purposes of re-export, for obtaining Letter of Credit for its purchases. We thus find that the relevant fixed deposit receipts on which interest were earned were business assets of the assessee acquired in the course ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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and for the purposes of its business. The fixed deposit receipts being business assets, we find no reason as to why interest income earned from such fixed deposit receipts could not be assessed as business income of the assessee. Our above view finds support from the recent decisions of the Hon'ble Karnataka High Court in the case of CIT & anr. Vs. Motorola India Electronics (P) Limited (2014) 265 CTR 94 (Kar.) wherein it was held that:
"No doubt Sub-section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Sub- section (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub-section (4) says that profits derived from export of articles or things or computer software shall be the amount which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles are different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provision like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking.
8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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derived from the consideration realized by export of articles. In view of the definition of 'Income from Profits and Gains' incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals."
40. In view of the above, we find that the view adopted by the Assessing Officer showing interest income under consideration is business income cannot be held as not a possible view and therefore, the Commissioner of Income Tax was not justified in interfering with the said view in the impugned order.
41. The other connected issue is that as per the view of the Commissioner of Income Tax, the interest income in question being derived by the assessee from Indian Bank, the same is to be excluded while computing profits derived from the export of articles or things or services for the purpose of section 10AA of the Act. Sub-section (7) of section 10AA provides the manner in which the profits derived from "export of articles or things or services" is to be computed for the purposes of section 10AA of the Act. Therefore, in view of the above specific provision in the section itself, "profits derived from the export of articles or things or services" cannot be computed in any other manner. Sub-section (7) of Section 10AA reads as under:
"For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on [by the undertaking]:
[Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.]"
42. Thus, a perusal of the aforesaid sub-section takes us to the "profits of the business of the undertakings". Now, the profits of the business of the undertakings are to be computed as per the provisions of chapter-IVD of the Act and the only adjustment which is permitted by the legislature to be made to such profits of the business is to apportion the same in the proportion of exports turnover of the eligible services to the total turnover of the business carried on by the assessee. It is significant to note here that the specific provision like explanation (baa) of section 80HHC which provides for exclusion of 90% of interest income from the profits of business to arrive at the profits of the business has not been provided by the legislature in section 10AA of the Act. In absence of such a provision enacted by the Parliament in section 10AA of the Act, it is not possible for any other person to read such provision in section 10AA of the Act. Hon'ble Supreme Court in the case of Sm. Tarulata Shyam Vs. CIT (1971) 108 ITR 345 (SC) held that there is no scope for importing in the statute words which are not there. Further, Hon'ble Supreme Court in the case of CIT Vs. Shann Finance Private Limited (1998) 231 ITR 308 (SC) went on to hold that in interpreting fiscal statute, court cannot proceed to make good the deficiencies if there be any. The court must interpret the statute as it stands, and in case of doubt, in a manner favourable to taxpayer. Thus, we find no provision in the statute on the basis of which it can be held that the interest income which forms part of the profits of the business is to be excluded for arriving at profits derived from "export of articles or things or services" as prescribed under sub-section (7) of section 10AA of the Act. Our above view also finds support from the decision of the ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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Bangalore Bench of the Tribunal in the case of Rajesh Exports Limited Vs. ACIT, (2008) TIOL-457-ITAT-Bangalore wherein it was held that:
"In the light of the aforesaid discussion, it seems to us that the expression "profits of the business of the undertaking"
appearing in section 10B(4) has to be construed in a wider sense than the expression "profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things" appearing in section 10B(1) of the Act. We have already noticed that sub-section (1) has been expressly made subject to the provisions of the Section. Therefore, the meaning to be ascribed to the words used in that sub-section should be controlled or tempered by the language used in sub-section (4). So constructed it appears to us that the profits of the business of the undertaking includes not merely the profits derived by or from the undertaking, but also include any profits or income which are incidental to the carrying on of the business of the undertaking."
To the same effect is the decision of the Hon'ble Karnataka High Court in the case of Motorola India Electronics (P) Limited (supra).
43. In view of the above, we find that the view adopted by the Assessing Officer in this regard in the assessment order of not excluding interest income which was assessed as business income of the assessee for computing "profits derived from export of articles or things or services" was a possible view and therefore, the same could not be interfered in exercise of powers available u/s 263 of the Act.
44. We also observe that the Commissioner of Income Tax in the impugned order has observed that the assessee was indulging in financial arbitrage only in its SEZ unit. In other words, the true business of the assessee in its SEZ unit was that of financial arbitrage and not of trading by way of re-export of ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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imported goods. The Commissioner of Income Tax formed the above view as he observed that on exclusion of interest income, the result of the activities of the assessee are negative or loss only.
45. We find that the assessee was duly granted approval by SEZ authorities to set up SEZ unit for engaging in trading by way of re-export of the imported goods. The activities carried out by the assessee in the SEZ unit are monitored by the competent SEZ authorities. The annual performance report of the assessee are monitored and verified by approval committee formed under the SEZ Act. The assessee is recognized as an entrepreneur under the SEZ Act. After taking into consideration the activities of the assessee in the SEZ unit, the assessee was also granted renewal of approval for trading by competent authority under the SEZ Act. Keeping in view the above fact, in our considered view, it would be not proper to characterize the activity of the assessee which consists of re-export of the imported goods and inter alia to acquire fixed deposits for obtaining letter of credit for receiving goods on credit in the case of import as merely financial arbitrage and not as trading by way of re-export of imported goods and consequentially service under the SEZ Act. In the above facts and circumstances, we set aside the order of the Commissioner of Income Tax to the extent the Commissioner of Income Tax held that interest income earned by the assessee on bank fixed deposit receipts is required to be taxed as "income from other sources" and such interest income is to be excluded from arriving at profits derived from export of services for the purposes of section 10AA of the Act.
46. The next issue relates to the set-off of brought forward loss. The above issue is consequential to the finding of the Commissioner of Income Tax in respect of head under which the ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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interest income earned by the assessee on fixed deposit receipts is to be assessed. As we find that the view adopted by the Assessing Officer in the assessment order that interest income earned by the assessee on fixed deposit receipts are assessable under the head "business income" on the facts of the instant case was found to be a possible view and therefore, we have to also hold that set-off of brought forward business loss against such business income as done by the Assessing Officer in the assessment order was a possible view. Therefore, we set aside the order of the Commissioner of Income Tax to the extent it directed that as interest income earned on fixed deposit receipts taxed as income from other sources, the assessee would not be entitled for set-off of brought forward business loss against such interest income.
47. The last issue relates to the order of the Commissioner of Income Tax whereby Commissioner of Income Tax directed the Assessing Officer to examine the correctness, genuineness and allowability of foreign exchange fluctuation loss of Rs 70.97 crores and to decide the issue afresh.
48. According to the Commissioner of Income Tax, the Assessing Officer has not examined the correctness, genuineness and allowability of huge loss claimed by the assessee under the head "foreign exchange fluctuation".
49. We find from page no. 111 of paper book filed by the assessee that a query was raised by the Assessing Officer during the course of assessment proceedings which reads as under:
"Give details of legal & professional charges, other expenses, repair & maintenance exp., Foreign exchange and Fluctuation, Exchange charges exp."
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50. In reply thereto, the assessee furnished break-up of foreign exchange loss distinguishing between exchange loss on export and exchange loss on import of trading goods, copy of which is placed at page no. 115 of Paper Book-I. Further, in reply to consequential inquiry by the Assessing Officer, the assessee submitted transaction-wise details of exchange fluctuation loss before him, copies of which are placed at page nos. 131 to 164 of the Paper Book-I.
51. On the basis of the above document, it was contended by the Authorized Representative that it cannot be held that the Assessing Officer accepted the exchange fluctuation loss of the assessee without application of mind. The Assessing Officer was fully alive to the fact of incurring of foreign exchange loss by the assessee and the Assessing Officer after due application of mind, accepted the said exchange fluctuation loss as genuine, correct and allowable. The view of the Assessing Officer is supported by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India Private Limited 312 ITR 254 (SC).
52. We find that the Hon'ble Delhi High Court in the case of CIT Vs. Honda Siel Power 333 ITR 547 (Del.) has held as under:
"While passing an order u/s 263, Commissioner of Income Tax has to examine not only the assessment order but the entire records. When a regular assessment is made u/s 143(3), a presumption can be raised that the order has been passed upon an application of mind."
53. No doubt this presumption is rebuttable, but there must be some material to indicate that the Assessing Officer had not ITA Nos.1395 & 1396 of 2013 M/s Zaveri & Co. Vs. CIT-IV, Ahd..
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applied his mind. We find that no material could be brought on record in the impugned order passed u/s 263 to show that the Assessing Officer had accepted the claim of exchange fluctuation loss without application of mind when record shows that the Assessing Officer during the assessment proceedings called for details of exchange fluctuation loss and a number of documents and details were filed by the assessee before the Assessing Officer during the course of the assessment proceedings in support of its claim for deduction of exchange fluctuation loss. In view of the above, in our considered view, the Commissioner of Income Tax was not justified in concluding that the Assessing Officer accepted the correctness, genuineness and allowability of the exchange fluctuation loss without any application of mind. We, therefore, set aside the order of the Commissioner of Income Tax on this issue.
54. In the result, both the appeals of the assessee are allowed.
Order pronounced in the Court on Wednesday, the 7th of May, 2014 at Ahmedabad.
Sd/- Sd/-
(KUL BHARAT) (N.S. SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 07/05/2014
Ghanshyam Maurya, Sr. P.S.