www.pwc.com/in Sharing insights News Alert 8 February, 2012 Trading by way of re-export of imported goods from Special Economic Zone eligible for tax holiday In brief The Jaipur Income-tax Appellate Tribunal (the Tribunal) in its recent decision in the case of Goenka Diamond & Jewellers Ltd. 1 (the assessee) has held that income earned from trading activity involving re-export of imported goods is eligible for deduction under section 10AA of Income-tax Act, 1961 (the Act). Facts The assessee company is engaged in the business of trading and manufacturing of precious and semi-precious stones, diamonds and studded gold jewellery. It was carrying out trading activities involving re-export of imported goods from its Surat unit located in a special economic zone (SEZ). It had claimed deduction under section 10AA of the Act on income earned by it from trading as well as manufacturing activities for assessment year (AY) (and in AY 2007-08) 2008-09. The assessing officer (AO) disallowed the claim under section 10AA of the Act contending that the deduction under section 10AA of the Act shall not be 1 DCIT v. Goenka Diamonds and Jewellers Ltd [TS-57-ITAT-2012(JPR)] 1
available to the assessee as it is engaged in trading activities and trading is not in the nature of a service. The Commissioner of Income-tax Appeals (CIT(A)) deleted the disallowance on the basis that the activity of import for re-export was covered by the definition of services as per the Special Economic Zones Act, 2005 (the SEZ Act) and accordingly deduction under section 10AA of the Act was available. Aggrieved with the order of CIT(A), the revenue authorities appealed to the Tribunal. Issue Whether the meaning of the term services as appearing in section 10AA of the Act can be construed from the definition of services in the SEZ Act? Whether deduction under section 10AA of the Act is available for the trading activity with respect to re-export of imported goods? Revenue s contentions The deduction under section 10AA of the Act is available only if the assessee is engaged in manufacturing or production of articles or providing any services. The term services is not defined in the Act. The provisions which conferred the benefit to the assessee should be interpreted in a stricter sense 2. Accordingly, the definition as given by the SEZ Act cannot be applied in the absence of express provision in the Act 3. Section 10AA was introduced in the Act by the SEZ Act only as a matter of legislative convenience. Accordingly, this should not be interpreted to include something which the legislature did not intend. The legislature intended to include only the definition of manufacture from the SEZ Act in the Act and the definition of services as per the SEZ Act should not be imported to the Act in the absence of express mention of this. Furthermore, the non obstante provisions of section 51 of the SEZ Act would have an overriding effect over the other laws only to the extent of matters related to implementation of the SEZ Act. Accordingly, it would not override the provisions of section 10AA of the Act and this should be interpreted independently of the SEZ Act. In light of the above, the term services as per section 10AA of the Act should be interpreted in a general sense and not to cover the trading activity carried out by the assessee. Accordingly, the deduction under section 10AA of the Act should not be allowed to the assessee. The assessee did not have fixed assets to carry out any manufacturing activity. Furthermore, the assessee did not have any man power to manufacture or process jewellery, precious and semi-precious stones or diamonds. Accordingly, the assessee was only carrying out trading activity without any value addition. 2 3 Reliance placed on : Kota Co-operative Marketing Society Ltd. v. CIT [1994] CIT 207 ITR 608 (Raj.) CIT(A) v. Orissa State Warehousing Corporation [1993] 201 ITR 729 (Orissa) Renuka Datla v. CIT [1999] 240 ITR 463 (AP) Novopan India Limited v. Commissioner of Central Excise, [1994] 73 ELT 769 (SC) Reliance placed on : CIT v. Vasan Publications Pvt. Ltd. [1986] 159 ITR 381 (Mad.) CIT v.. Buhari sons Pvt. Ltd. [1983] 144 ITR 12 (Mad.) Laxmanda Pranchand & Ors v. UOI [1998] 234 ITR 261 (M.P) CIT v. R.J. Trivedi & Sons [1990] 183 ITR 420 (M.P) 2
Assessee s contentions Section 10AA of the Act originates from the SEZ Act and not the Finance Act. Furthermore, the SEZ Act would have an overriding effect on all the other enactments (in view of sections 27 and 51 of the SEZ Act). Accordingly, the term services should be interpreted as defined in the SEZ Act. The AO was not correct in contending that this should be given the meaning in common parlance. The definition of the term services in the SEZ Act includes trading. Furthermore, this definition has been qualified specifically for the purpose of the Act to mean the activity of re-export of imported goods. Accordingly, the assessee is eligible to claim deduction under section 10AA of the Act with respect to its trading activity limited to re-export of imported goods. The assessee-company was granted a letter of approval by the Development Commissioner of Surat to undertake trading activities. Furthermore, as per the Instruction no. 4/2006 dated 24 June 2006, issued by the Ministry of Commerce, the deduction under section 10AA would be available to trading in the nature of re-export of imported goods. The Development Commissioner, Surat had also clarified vide his letter dated 18 March 2001 that the benefit of section 10AA is available to the unit engaged in trading activities with respect to re-export of imported goods. It was further clarified that in case of conflict between the provisions of the Act and the provisions of the SEZ Act, the provisions of the SEZ Act shall prevail. The intention behind introduction of section 10AA of the Act was to encourage international trade. Accordingly, the re-export of imported goods should be eligible for availing deduction under section 10AA of the Act. The CIT(A) had examined all the relevant provisions of the Act and SEZ Act before coming to the conclusion that deduction under section 10AA can be availed with respect to re-export of imported goods. Furthermore, the AO had allowed the deduction under section 10AA of the Act during the earlier year. Tribunal ruling Provisions in a taxing statute for promoting growth and development should be construed liberally. The Supreme Court s decision in case of Bajaj Tempo Ltd. 4 was relied upon in this regard. In the case of Girnar Industries, 5 the Kerala High Court in order to interpret the expression manufacture for the purposes of section 10A (not defined in the provisions applicable for AY 2004-05 which was under consideration in that case) referred to the meaning of manufacture contained in the Export Import Policy of India and the provisions of section 10AA of the Act introduced w.e.f. 10 February 2006. The approach of the Kerala High Court was based on the decision of the Supreme Court in case of Gwalior Rayon Silk Manufacturing Co. Ltd 6 wherein it has been held that the provision for deduction/exemption should be construed reasonably and in favour of the assessee. Section 27 of the SEZ Act provides that the provisions of the SEZ Act shall apply to the Developer or entrepreneur for carrying on the authorised operations in a SEZ or unit subject to the modifications specified in the second schedule. 4 5 6 Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 168 (SC) Girnar Industries v. CIT [2010] 230 CTR 401 (Ker.) CIT v. Gwalior Rayons Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 (SC) 3
Therefore, if the operations are authorised by the Development Commissioner then the provisions of the Act shall be subject to the modifications carried out by the SEZ Act. Instruction No. 4/2006 dated 24 May 2006 has made clear that deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported goods. There is a promissory estoppel by the Government to units in a SEZ that the benefit under section 10AA will be available to trading in the nature of reexport of imported goods. Furthermore, the principle of promissory estoppel has been held to be applicable to public authorities by the Supreme Court in various cases 7. The Delhi High Court in case of Vasisth Chay Vyapar Ltd. 9 had held that when there is a provision in another enactment which contains a non obstante clause, then that would override the provisions of the Act. In view of the above, the assessee was entitled to claim deduction under section 10AA of the Act. Conclusion The above decision would be useful for SEZ Units carrying out trading activities by of re-export. Importantly, the Tribunal has held that the provisions of SEZ Act would override the provisions of the Act. The Revenue was not been able to show that Instruction No. 4/2006 was withdrawn or that the Central Board of Direct Taxes had issued separate instruction that Instruction No. 4/2006 will not be applicable for the purpose of allowing deduction under section 10AA of the Act. As per provisions of section 51 of the SEZ Act, anything inconsistent to the provisions of the SEZ Act will not be considered. Thus, the word services contained in section 10AA of the Act cannot be construed inconsistently with the definition of service as given in the SEZ Act. The decision of the Supreme Court 8 has been relied upon in this regard. 7 8 Motilal Padmpat Sugar Mills Co. Ltd v. State of Uttar Pradesh [1979] 118 ITR 326 (SC) and State of Haryana v. Mahabir Vegetable Oils Pvt. Ltd. [2011-TIOL-24-SC-CT] TRO v. Custodian appointed under the Special Court [2007] 293 ITR 369 (SC) 9 CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Del.) 4
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