Endurub Technology P Ltd., CHENNAI V. DCIT, CHENNAI

ITA 446/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7961 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 04-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Cost of acquisition
• Section: 10AA; 10B; 27

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI . . . , . . ' #$ , % &' ( [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D. S. SUNDER SINGH, ACCOUNTANT MEMBER ] ./ I.T.A.NO.446 OF 2015 / ASSESSMENT YEAR: 2009-10 AND ./ ITA NO.447 OF 2015 / ASSESSMENT YEAR:2010-11 M/S.ENDURUB TECHNOLOGY P LTD., C/O SEINSA AUTOFREN INDIA PVT. LTD., C7 PHASE I MEPZ SEZ, TAMBARAM, CHENNAI 600 045 VS. THE DY. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II (1), CHENNAI 600 034. [PAN: AABCE4733E] ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. R. VIJAYARAGHAVAN, ADVOCATE /RESPONDENT BY : MR. SHIVA SRINIVAS, JCIT / DATE OF HEARING : 26 . 10 . 2016 ! / DATE OF PRONOUNCEMENT : 30 . 11 . 2016 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER THESE APPEALS OF THE ASSESSEE ARE DIRECTED AGAINS T THE ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-II IN ITA NOS.638 & 1502/2013-14 DATED 27.10.2014 AND PERTAINS TO ASSES SMENT YEAR 2009- 10 & 2010-11 RESPECTIVELY. ITA NO.446/MDS/2015 :- 2 -: 2. ALL THE GROUNDS OF APPEAL ARE RELATED TO THE REJ ECTION OF CLAIM U/S.10A/10AA OF INCOME TAX ACT MADE BY THE ASSESSEE . IN THE RETURN OF INCOME THE ASSESSEE CLAIMED THE DEDUCTION OF RS.1,0 2,46,567/- FOR A.Y.2009-10 AND RS.48,14,383/- FOR THE A.Y.2010-11 U/S.10A. LATER ON THE ASSESSEE REVISED THE CLAIMS U/S10AA INSTEAD OF 10A. THE AO EXAMINED THE CLAIM OF THE ASSESSEE AND REJECTED THE CLAIM ON TWO GROUNDS. FIRSTLY, THE ASSESSING OFFICER HELD THAT THE ASSESSEE IS NOT CARRYING ON THE BUSINESS OF MANUFACTURING/PRODUCING THE ARTICLES/THINGS AS REQUIRED U/S10AA OF THE ACT AND SECONDLY THE A.O NOTICED THAT THE ASSESSEE COMPANY HAD COMMENCED THE PRODUCTION ON 12 .08.2005 AND TO BE ELIGIBLE FOR DEDUCTION U/S.10AA THE UNIT SHOULD HAVE COMMENCED PRODUCTION IN SEZ ON OR AFTER 01.04.2006. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE CIT(A) DISMISSED THE APPE AL OF ASSESSEE. THE LD.CIT(A) OBSERVED THAT THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF MANUFACTURE/PRODUCTION OF ARTICLES OR THINGS AND ME RELY IN THE ACTIVITY OF TRADING AND HELD THAT THE ASSESSEE HAS NOT SATISFI ED THE CONDITIONS LAID DOWN FOR ALLOWING THE DEDUCTION U/S.10AA. THE LD.CI T(A) ANALYZED THE TRADING ACCOUNT AND CONCLUDED THAT THE ACTIVITY OF THE ASSESSEE IS MERE TRADING BUT NOT MANUFACTURING/PRODUCTION. FOR THE S AKE OF CONVENIENCE, WE EXTRACT RELEVANT PARAGRAPHS OF CIT(A) ORDER, WHI CH READS AS UNDER: ITA NO.446/MDS/2015 :- 3 -: I HAVE CONSIDERED THE ASSESSEE'S SUBMISSIONS CAREF ULLY. THE ASSESSEE'S CONTENTIONS ARE TWOFOLD, I.E. (I) THAT IT IS ENGAGED IN ASSEMBLING AND PACKING THE RU BBER COMPONENTS AND HENCE AMOUNTS MANUFACTURING ACTIVITY (II) ALTERNATIVELY, IF TREATED AS A MERE TRADING ACTIVITY, EVEN THEN, SUCH TRADING ACTI VITY, EVEN THEN, SUCH TRADING ACTIVITY, ONCE LOCATED IN S.E.Z, IS ELIGIBLE FOR DEDUCTION U/ S.10AA OF THE ACT. THE ASSESSEE'S UNIT IS LOCATED IN A SPECIAL ECONOM IC ZONE (S.E.Z). AS COULD BE SEEN FROM THE ANNUAL FINANCIAL STATEMENTS, THE INST ANT ASSESSEE WAS BUYING 'FINISHED PRODUCTS' ONLY. THERE WERE NO MANUFACTURING EXPENSE S DEBITED IN THE P&L ACCOUNT. THE PURCHASES OF PACKING MATERIAL AND PACKING EXPEN SES ARE HIGHLY INSIGNIFICANT AND HARDLY FORMS 1 TO L.5% OF THE PURCHASE COST OF 'FIN ISHED PRODUCTS'. THE DETAILS ARE AS UNDER: PARTICULARS A.Y. 2009-10 A.Y. 2010-11 PURCHASE OF FINISHED GOODS 1,69,57,486 1,41,01,004 PACKING MATERIAL CONSUMED 1,20,203 1,37,445 RAW MATERIAL CONSUMED 17,439 11,246 FROM THE ABOVE DETAILS, IT IS CLEAR THAT THE ASSES SEE HAS BEEN PURCHASING THE 'FINISHED GOODS' ONLY. IF THE COMPANY WAS ENGAGED I N THE ACTIVITY OF 'ASSEMBLING', THEN THE DESCRIPTION OF THE GOODS PURCHASED WOULD HAVE BEEN DIFFERENT FROM THOSE SOLD. UNFORTUNATELY, IN THE ASSESSEE'S CASE THE GOODS PURCHASED ARE SOLD AS SUC H. THIS CLEARLY PROVES THAT THE ASSESSEE IS NOT ENGAGED IN ANY 'ASSEMBLING' ACTIVITY. THE NEXT ISSU E TO BE SEEN IS THE NATURE OF PACKING. MERE 'PACKING' OR 'RE-PACKING' OF THE GOODS PER SE WILL NOT AMOUNT TO MANUFACTURING OF THINGS OR ARTICLES. IF IT WAS ASSOCIATED WITH SOME OTHER ACTIVITY, IT M AY AMOUNT TO MANUFACTURING ACTIVITY. FOR EXAMPLE, 'IMPORTING OF JUMBO 'FILM ROLLS, CUTTING THEM INTO SMALL SIZES AND RE-PACKING' MAY AMOUNT TO MANUFACTURING ACTIVITY. BUT IN THE INSTANT CASE, IT WAS ONLY A SIMPLE PACKING. HENCE, SUCH SIMPLE PACKING BY NO STRETCH OF IMAGINATION, WILL AMOUNT T O MANUFACTURING ACTIVITY. FROM THE ABOVE DETAILS, IT IS CLEAR THAT THE ASSESSEE IS NOT ENGAGED IN ANY MANUFACTURING' OR PRODUCTION OF A THING OR ARTICLE ' ACTIVITY. HENCE THE ASSESSEE IS NOT ENTITLED FOR DE DUCTION U/S.10AA OF THE ACT, ON THIS COUNT. THE ASSESSING OFFICER'S ACTION IN THIS REGARD, IS AS PE R THE LAW AND JUSTIFIED. 4. MR.VIJAYARAGHAVAN, LD.SR.COUNSEL APPEARING FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY STARTED ITS BUS INESS ON 12/08/2005 AND MANUFACTURING METAL REINFORCED RUBBER COMPONENT S FOR BRAKES, CLUTCH ELEMENTS OF AUTOMOBILES. THE ASSESSEE HAS B EEN CARRYING ON ITS BUSINESS IN MEPZ/ SEZ AS 100% EXPORT ORIENTED UNI T AFTER TAKING ITA NO.446/MDS/2015 :- 4 -: NECESSARY APPROVALS FROM THE SEZ. THE APPELLANT CA RRIED ON THE BUSINESS BY PROCURING EXPORT ORDER FOR RUBBER COMPO NENTS AND SOURCING THE COMPONENTS AS PER SPECIFICATION FROM VENDORS, T HEN FURTHER PROCESSED, RE-PACKED AND EXPORTED. THE ENTIRE PROCE SS AND ACTIVITIES ARE SUPERVISED AND CONTINUOUSLY MONITORED BY THE MEPZ A UTHORITIES TO COMPLY WITH THE TERMS AND CONDITIONS OF THE APPROVA L. THE AUTHORITIES HAVING SATISFIED WITH THE TERMS OF APPROVAL HAVE PE RMITTED THE ASSESSEE TO HAVE EXPORT OF PRODUCTS CONTINUED. THE APPELLAN T CLAIMED THE DEDUCTION U/S.10AA OF INCOME TAX ACT, WAS DENIED ON THE GROUND THAT THE COMPANY IS NOT ENGAGED IN THE BUSINESS OF MANUF ACTURING, PRODUCING ARTICLES/OR THINGS AND HAS COMMENCED PRODUCTION ON 12.08.2005 AND TO BE ELIGIBLE FOR DEDUCTION U/S.10AA, THE UNIT SHOULD HAVE COMMENCED PRODUCTION IN SEZ ON OR AFTER 01.04.2006. AS THE U NIT IS ESTABLISHED ON 12/08/2005 THE ASSESSEES A.R SUBMITTED THAT THE CO MPANY IS ELIGIBLE FOR DEDUCTION U/S.10AA. 4.1 FURTHER, THE LD.AR SUBMITTED THAT IT HAS OU TSOURCED THE FOLLOWING ACTIVITIES TO THE VENDOR/THIRD PARTY, DUE TO THE RE STRICTIONS PROVIDED IN THE SEZ APPROVAL: A) MANUFACTURE OF MOULD BASED ON THE DESIGN PROVIDE BY THE COMPANY. THE DESIGN IS PREPARED BY THE COMPANY IN CONSULTATION WITH THE BUYER (I.E. SEGURIDAD INDUSTRI ES S.A. SPAIN). SINCE THE SAID ACTIVITY WOULD CREATE VIBRA TIONS WITHIN THE SEZ UNIT, THE SAME HAS BEEN OUTSOURCED T O THIRD ITA NO.446/MDS/2015 :- 5 -: PARTY VENDOR. ONCE THE MOULDS ARE MANUFACTURED, TH E SAME ARE OWNED BY THE COMPANY AS FIXED ASSET AND IT IS NOT SOLD TO ANY PARTY. IN OTHER WORDS, THE MOULD B ECOMES THE PROPERTY OF THE COMPANY. B) MANUFACTURE OF MOULDED RUBBER PARTS BASED ON THE MO ULDS PROVIDED BY THE COMPANY. SINCE THE SAID PROCESS WO ULD CREATE VIBRATIONS, IT HAS BEEN OUTSOURCED TO THE VE NDOR. C) PAINTING OF METAL AND INSERTION OF THE SAME IN THE MOULDED RUBBER PART. SINCE, THE SAID PROCESS REQUIRES PLAN T & MACHINERY WHICH WOULD CREATE VIBRATIONS HAVE BEEN OUTSOURCED TO THE VENDOR. 4.2 THE ACTIVITIES ARE PERFORMED BY THE THIRD PARTY VENDOR UNDER THE SUPERVISION AND CONTROL OF THE COMPANY. THE A.R. AR GUED THAT THE AO FAILED TO APPRECIATE THAT THE SECTION 10AA DOES NO T SPECIFICALLY MANDATE TO MANUFACTURE/PRODUCE ARTICLES/THINGS BY THE ASSE SSEE ITSELF AND IT CAN OUTSOURCE THE PRODUCT AND COMPONENTS AND PROCESS AN D ASSEMBLE THE GOODS AND THE SAME IS HELD TO BE MANUFACTURE/ PRODU CTION AS HELD BY THE HONBLE ITAT, KOLKATA, IN THE CASE OF ITO V TEC HDRIVE INDIA PVT. LTD [(2008) 25 SOT 152], RELYING ON THE DECISION OF HON BLE CALCUTTA HIGH COURT IN THE CASE OF ADDL. CIT V A.MUKERJEE & CO. PVT. LTD HAS HELD THAT IT IS NOT NECESSARY THAT THE APPELLANT SHOULD OWN P LANT AND EQUIPMENT. THE MANUFACTURING PROCESS CAN BE CARRIED OUT THROUG H OTHER ENTITIES WHICH HAVE THE NECESSARY FACILITIES AND INFRASTRUCT URE SUBJECT TO THE CONDITION THAT THE ASSESSEE EXERCISES SUFFICIENT CO NTROL AND SUPERVISION ITA NO.446/MDS/2015 :- 6 -: OVER THE PROCESS . IN THE INSTANT CASE, THE OUTSOURCED PRODUCTION P ROCESS IS ACCORDING TO SPECIFICATIONS AND SUPERVISION OF T HE ASSESSEE. THEREFORE, LD.AR CONTENDED THAT THE ASSESSEE HAS EXERCISED THE SUPERVISION OVER THE PRODUCTIONS WHICH WAS MANUFACTURED/EXPORTED WHI CH IS SUFFICIENT COMPLIANCE FOR THE DEDUCTION U/S10AA. SECTION 10AA OF THE INCOME TAX ACT ORIGINATES FROM SEZ ACT AND NOT THE FINANCE ACT . THE A.R FURTHER ARGUED WITHOUT CONCEDING THE CLAIM OF MANUFACTURING , EVEN IF THE ACTIVITY OF THE ASSESSEE IS NOT HELD TO BE MANUFACTURING ACT IVITY, STILL THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S.10AA, SINCE, THE ASSE SSEE IS ENGAGED IN TRADING IN THE UNIT SETUP IN SEZ. AS PER SEZ ACT, T HE TRADING ALSO COMES UNDER THEN SERVICES PROVIDED AND THE TERM SERVICE S HOULD BE INTERPRETED AS DEFINED IN THE SEZ ACT AND IT INCLUDES TRADING. THE SEZ ACT WOULD HAVE AN OVERRIDING EFFECT ON ALL OTHER ENACTMENTS. ACCOR DING TO THE A.R EVEN IF THE AO CONSIDERS THE ACTIVITY OF THE ASSESSEE IS TR ADING AO HAS NO OPTION EXCEPT TO ALLOW THE DEDUCTION U/S 10AA OF THE ACT. 4.3 ON THE OTHER HAND THE LD.D.R ARGUED THAT BOTH T HE CIT(A) AND THE AO HAVE GIVEN CLEAR FINDING THAT THE ASSESSEE IS NO T ENGAGED IN THE MANUFACTURING/PRODUCTION OF ARTICLES OR THINGS AND NO PROCESSING ACTIVITY WAS CARRIED ON BY THE ASSESSEE FROM THE SEZ UNIT. A .O AND THE CIT(A) IN THEIR ORDER MADE AN OBSERVATION THAT THE ASSESSEE I S CARRYING ON MERE TRADING ACTIVITY FROM THE UNIT OF SEZ. FROM THE EXP ENDITURE DEBITED TO THE P&L ACCOUNT IT AMPLY CLEAR THAT NO PROCESSING OR AN Y OTHER ACTIVITY IS CARRIED ON FROM THE SEZ UNIT. IT IS CLEAR FROM THE TRADING ACCOUNT THAT THE ITA NO.446/MDS/2015 :- 7 -: ASSESSEE IS PURCHASING THE FINISHED GOODS FROM THE VENDOR AND EXPORTING THE SAME. THE D.R FURTHER SUBMITTED THAT THE SEZ UN IT IS LOCATED IN TAMBARAM AND THE VENDORS UNIT M/S.JMJ RUBBER INTERN ATIONAL IS LOCATED AT MADURAI NOT IN THE VICINITY OF MPEZ/SEZ ZONE. TH ERE WAS NO EVIDENCE FOR SUPERVISION AND CONTROL BY THE ASSESSEE OR THE SEZ AUTHORITIES FOR THE PRODUCTION PROCESS. THE PURCHASE AGREEMENT ENTERED INTO BY THE ASSESSEE IS A SELF SERVING AGREEMENT AND NO EVIDENC E PLACED BY THE ASSESSEE FOR SUPERVISION CONTROL AFFECTED BY THE AS SESSEE. THE D.R FURTHER SUBMITTED THAT IT IS CLEAR FROM THE ASSESSE ES STATEMENT AND THE SEZS LETTER THAT IT HAS NO INFRASTRUCTURE TO PRODU CE THE ARTICLES/THINGS FROM THE SEZ THEREFORE THE SEZ AUTHORITIES HAS GIVE N PERMISSION TO PRODUCE THE THINGS OUTSIDE THE SEZ PREMISES WHICH M AKES IT CLEAR THAT THE ASSESSEE HAS NOT CARRIED ON THE BUSINESS OF MANUFACTURING/PRODUCTION OF ARTICLES OR THINGS BY I TSELF. SEZ MAY BE COMPETENT TO GIVE PERMISSION TO PRODUCE FROM OUTSID E THE ZONE AND EXPORT FROM THE SEZ UNIT BUT IT DOES NOT ENTITLE TH E ASSESSEE GET DEDUCTION U/S 10AA UNLESS THE ASSESSEE COMPLIES WIT H THE INCOME TAX LAWS. THOUGH SECTION 10AA TAKES BIRTH FROM THE SEZ ACT, FOR DEDUCTION U/S 10AA THE INTERPRETATION HAS TO BE GIVEN IN ACCO RDANCE WITH THE I.T ACT UNLESS SPECIFICALLY PROVIDED FOR AND THERE IS NO ME RIT IN THE ARGUMENT OF THE A.R THAT EVEN IF IT IS TRADING THE DEDUCTION CA NNOT BE DENIED. THE CASE LAWS RELIED UP ON BY THE ASSESSEE ARE DISTINGU ISHABLE DO NOT RELATE ITA NO.446/MDS/2015 :- 8 -: TO THE DEDUCTION U/S10AA. ACCORDING TO THE D.R THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S.10AA OF I.T ACT. 5.0 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL PLACED BEFORE US. 5.1 THE A.R HAS MADE FOUR FOLD ARGUMENTS IN SUPPORT OF THE ASSESSEES CLAIM U/S.10AA(I). FIRSTLY, THE ASSESSEE ARGUED THA T THE COMPANY HAS COMMENCED PRODUCTION ON 12.08.2005 RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND ELIGIBLE FOR DEDUCTION U/S.10A OF INC OME TAX ACT. (II) SECONDLY, THE CONTENTION OF THE A.R. WAS THAT THE A SSESSEE IS ENGAGED IN THE ACTIVITY OF MANUFACTURING OF GOODS OR ARTICLES WITHIN THE MEANING OF SECTION 10AA/SEZ ACT HENCE THE A.O AND THE LD.CIT( A) ARE NOT CORRECT IN HOLDING THAT THE ASSESSEE IS A MERE TRADER.(III) TH IRDLY THE ASSESSEE STATED THAT SOME OPERATIONS WERE OUT SOURCED TO THI RD PARTY VENDOR AND THE GOODS ARE MANUFACTURED UNDER THE SUPERVISION OF THE ASSESSEE AND AFTER SOME PROCESSING, THE GOODS ARE EXPORTED HENCE THE A.O CANNOT DENY THE BENEFIT OF DEDUCTION U/S 10AA.(IV) ALTERNA TELY AS PER SECTION 10AA EVEN TRADING IS ELIGIBLE FOR DEDUCTION U/S10AA . 5.2 AS PER THE INFORMATION AVAILABLE ON RECORD, T HE ASSESSEE HAS COMMENCED THE PRODUCTION ON 12.08.2005 WHICH IS REL EVANT TO THE ASSESSMENT YEAR 2006-07. AS PER SECTION 10AA, WHO BEGINS TO MANUFACTURE/PRODUCE ARTICLES/THINGS OR PROVIDING SE RVICE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMME NCING ON OR AFTER ITA NO.446/MDS/2015 :- 9 -: 1 ST DAY OF APRIL, 2006 IS ELIGIBLE FOR DEDUCTION U/S .10AA. IN THE CASE OF ASSESSEE, ASSESSEE HAS COMMENCED PRODUCTION ON 12.0 8.2005 WHICH IS RELEVANT TO THE ASSESSMENT YEAR 2006-07. THEREFORE , THE ASSESSEE CASE FALLS WITHIN THE TIME FRAME FIXED IN THE ACT FOR CL AIMING DEDUCTION U/S.10AA. 5.3. THE NEXT ARGUMENT OF THE AR IS THAT THE ASSES SEE IS ENGAGED IN THE MANUFACTURING, PRODUCTION, OF ARTICLES OR THINGS AN D ELIGIBLE FOR DEDUCTION U/S.10AA OF I.T. ACT. THE AR SUBMITTED DURING THE APPEAL PROCEEDINGS THAT IT HAS OUTSOURCED THE FOLLOWING ACTIVITIES TO THE VENDOR/THIRD PARTY, DUE TO THE RESTRICTIONS IN THE SEZ DUE TO SENSITIVE NESS AND THE VIBRATIONS CAUSED DURING THE PROCESS OF PRODUCTION. A) MANUFACTURE OF MOULD BASED ON THE DESIGN PROVIDE BY THE COMPANY. THE DESIGN IS PREPARED BY THE COMPANY IN CONSULTATI ON WITH THE BUYER (I.E. SEGURIDAD INDUSTRIES S.A. SPAIN). SINCE THE SAID ACTIVITY WOULD CREATE VIBRATIONS WITHIN THE SEZ UNIT, THE SAME HAS BEEN OUTSOURCED TO THIRD PARTY VENDOR. ONCE THE MOULDS ARE MANUFAC TURED, THE SAME ARE OWNED BY THE COMPANY AS FIXED ASSET AND IT IS N OT SOLD TO ANY PARTY. IN OTHER WORDS, THE MOULD BECOMES THE PROPE RTY OF THE COMPANY. B) MANUFACTURE OF MOULDED RUBBER PARTS BASED ON THE MO ULDS PROVIDED BY THE COMPANY. SINCE THE SAID PROCESS WOULD CREAT E VIBRATIONS, IT HAS BEEN OUTSOURCED TO THE VENDOR. C) PAINTING OF METAL AND INSERTION OF THE SAME IN THE MOULDED RUBBER PART. SINCE, THE SAID PROCESS REQUIRES PLANT & MAC HINERY WHICH WOULD CREATE VIBRATIONS HAVE BEEN OUTSOURCED TO THE VENDO R. ITA NO.446/MDS/2015 :- 10 -: 5.4 FROM THE TRADING ACCOUNT IT IS NOTICED THAT THE ASS ESSEE HAS PURCHASED FINISHED PRODUCT AND EXPORTED THE SAME. T HOUGH THE ASSESSEE IS CLAIMING THAT IT HAS DONE SOME PROCESS AND PACKI NG, THE TRADING AND PROFIT AND LOSS ACCOUNT DID NOT SUPPORT ANY SUCH PR OCESSING ACTIVITY EXCEPT SMALL PACKING WORK. THE CARRIAGE INWARDS AND OUTWARDS ALSO DO NOT THROW ANY LIGHT ON THE PRODUCTION ACTIVITY CARR IED ON BY THE ASSESSEE. IT IS CLEAR FROM THE VENDORS AGREEMENT THAT THE VEN DOR IS MANUFACTURING THE ARTICLE/THINGS AND SELLING THE PRODUCT TO THE A SSESSEE AS PER THE SPECIFICATIONS AND DESIGNS OF THE ASSESSEE. THE SU PPLY AGREEMENT ENTERED INTO BY THE ASSESSEE WITH M/S.JMJ RUBBER IN TERNATIONAL, PALAGANATHAN, MADURAI, EVIDENCED THAT THE ASSESSEE HAS NOT CARRIED ON ANY MANUFACTURING/PRODUCTION OF ARTICLES OR THINGS IN HIS UNITS SEZ. NO OTHER EVIDENCE FURNISHED BY THE ASSESSEE TO PROVE T HAT THE ASSESSEE IS ENGAGED IN PRODUCTION OF ARTICLES OR THINGS. THEREF ORE, WE AGREE WITH THE CIT(A) THAT THE ASSESSEE IS NOT CARRYING ON THE BU SINESS OF MANUFACTURING/PRODUCTION OF THINGS OR ARTICLES AND MERELY TRADING THE FINISHED PRODUCT PURCHASED BY HIM. NOW THE ISSUE BE FORE US IS WHETHER THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10AA EVE N IF IT ACQUIRES THE PRODUCT BY OUTSOURCING. BEFORE ANSWERING THE QUEST ION WE REFER SEC. 10AA WHICH READS AS UNDER: 10AA. (1) SUBJECT TO THE PROVISIONS OF THIS SECTION, IN C OMPUTING THE TOTAL INCOME OF AN ASSESSEE, BEING AN ENTREPREN EUR AS REFERRED TO IN CLAUSE ( J ) OF SECTION 2 47 OF THE SPECIAL ECONOMIC ZONES ACT, ITA NO.446/MDS/2015 :- 11 -: 2005, FROM HIS UNIT, WHO BEGINS TO MANUFACTURE OR P RODUCE ARTICLES OR THINGS OR PROVIDE ANY SERVICES DURING THE PREVIO US YEAR RELEVANT TO ANY ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1 ST DAY OF 48 [ APRIL, 2006, ] THE MEANING OF MANUFACTURE AS PER SUB CLAUSE (I II) OF EXPL-1 OF SECTION 10AA ASSIGNS THE DEFINITION IN SEZ ACT CLAU SE (R ) OF SECTION 2 WHICH READS AS UNDER: MANUFACTURE MEANS TO MAKE, PRODUCE, FABRICATE, AS SEMBLE PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUC T HAVING A DISTINCTIVE NAME, CHARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH A S REFRIGERATORS CUTTING, POLISHING, BLENDING, REPAIR, RE-MAKING, RE-ENGINEER ING AND INCLUDES AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDRY, FLORICULTURE, HORTIC ULTURE, PISCICULTURE, POULTRY, SERICULTURE, VITICULTURE AND MINING. COMBINED READING OF SECTION 10AA AND SEZ ACT CLARI FIES THAT, FOR THE PURPOSE OF DEDUCTION U/S10AA THE ASSESSEE SHOUL D SATISFY THE FOLLOWING CONDITIONS CUMULATIVELY. I. ASSESSEE SHOULD BE AN ENTREPRENEUR II. MANUFACTURING ARTICLES/THINGS OR PROVIDE SERVICE S FROM HIS UNIT. III. PRODUCTION OR MANUFACTURE SHOULD COMMENCE ON OR AFT ER THE F.Y.2005-06. IN THE CASE OF THE ASSESSEE, THE ASSESSEE IS AN EN TREPRENEUR AND DEVELOPMENT COMMISSION HAS GIVEN LOP TO SET UP AN U NDERTAKING AND THE PRODUCTION HAS COMMENCED DURING THE F.Y 2005-06 BUT THE PRODUCTION OR MANUFACTURING ACTIVITY WAS NOT CARRIED ON FROM HIS UNIT AS ENVISAGED IN ITA NO.446/MDS/2015 :- 12 -: THE IT ACT. THE ACTIVITY OF PRODUCTION/MANUFACTURIN G WAS GIVEN TO THE VENDOR AND THE VENDORS UNIT IS NOT LOCATED IN THE S EZ UNIT AND LOCATED AT MADURAI. THE ASSESSEE IS PURCHASING THE GOODS FROM THE VENDOR AND EXPORTING THE SAME. THE ASSESSEE HAS NOT SATISFIED THE CONDITION THAT THE ACTIVITY OF MANUFACTURING/PRODUCTION OF ARTICLE S OR THINGS SHOULD BE CARRIED ON FROM HIS UNIT, WHICH IS ONE OF THE CONDI TIONS FOR ALLOWING THE DEDUCTION U/S.10AA. THEREFORE WE HOLD THAT THE AS SESSEE HAS NOT SATISFIED THE CONDITIONS LAID DOWN IN SECTION 10AA AND ACCORDINGLY NOT ELIGIBLE FOR DEDUCTION U/S 10AA. 5.5 THE ASSESSEE RELIED ON THE DECISION OF HONBLE ITAT, KOLKATA, IN THE CASE OF ITO V. TECHDRIVE INDIA PVT. LTD [(20 08) 25 SOT 152]. THE COORDINATE BENCH OF KOLKATA, ITAT REFERRED NUMB ER OF DECISIONS AND EXAMINED THE MEANING OF MANUFACTURING FOR THE PURPOSE OF DEDUCTION U/S.10B. IN THE CASE LAW RELIED UP ON BY THE ASSESSEE THE PRODUCTION WAS CARRIED ON BY THE GROUP COMPANY AND LOCATED IN SEZ UNIT. SECTION 10B DO NOT PLACE ANY RESTRICTION ON PRODUCTION OR MANUFACTURING. IN THE CASE OF ASSESSEE, SECTION 10A A IS PLACED RESTRICTION SPECIFICALLY TO PRODUCE/MANUFACTURE ART ICLE OR THING FROM HIS UNIT IN SEZ. THEREFORE, THE CASE LAWS RELIED UP ON BY THE ASSESSEE ARE NOT APPLICABLE TO THE ASSESSEE. THE AS SESSEE ALSO RELIED ON OTHER CASE LAWS AND CIRCULAR NO.347 DATED 07/07/1982 AND THE FACTS OF THE CASE LAWS ARE NOT RELATED TO P URCHASES MADE FROM OUTSIDE/GOODS OUTSOURCED AND THE ISSUES ARE NO T RELATED TO THE DEDUCTION U/S.10AA WHICH PLACES RESTRICTION OF PRODUCTION OF GOODS/ARTICLES THINGS FROM HIS UNIT. THEREFORE THE CASE LAWS RELIED UP ON BY THE ASSESSEE CANNOT COME TO ITS HELP AND T HE ASSESSEES GROUND ON THE ABOVE ISSUES ARE DISMISSED. 6.0 THE NEXT CONTENTION OF THE ASSESSEE WAS EVEN IF THE ASSESSEE IS NOT ENGAGED IN PRODUCTION/MANUFACTURE OF THINGS/ARTICLE S, ASSESSEE IS ELIGIBLE ITA NO.446/MDS/2015 :- 13 -: FOR DEDUCTION U/S.10AA ON TRADING ALSO. THE ASSESS EE ARGUED THAT EVEN THOUGH, ASSESSEE IS NOT ENGAGED IN PRODUCTION/MANUF ACTURE OF THINGS/ARTICLES AS PER SECTION 10AA, THE ASSESSEE I S ELIGIBLE FOR DEDUCTION U/S.10AA EVEN IF HE IS ENGAGED THE TRADING AS PER S EZ ACT. THE AR FURTHER STATED THAT THE TERM SERVICES SHOULD BE INT ERPRETED AS PER THE MEANING GIVEN IN SEZ ACT WHICH INCLUDES TRADING. ON THE OTHER HAND LD.D.R. RELIED ON THE ORDER OF THE CIT(A). 6.1 THE LD.CIT(A) HAS CONSIDERED THIS ISSUE IN HIS ORDER AND DISMISSED THE ASSESSEES CONTENTION IN HIS ORDER AS UNDER: THE NEXT CONTENTION OF THE ASSESSEE IS THAT EVEN A TRADING ACTIVITY UNDERTAKEN BY 'INDUSTRIAL UNDERTAKINGS' LOCATED IN SEZS IS ELI GIBLE FOR DEDUCTION U/S.10AA OF THE ACT. THIS CLAIM OF THE ASSESSEE IS ALSO NOT VALID. THE PROVISIONS OF S ECTION 10AA OF THE ACT ARE CLEAR AND UNAMBIGUOUS. AS PER THE PROVISIONS OF SECTIONS 10A OR 10AA OF TH E ACT ONLY THREE ACTIVITIES UNDERTAKEN BY THE INDUSTRIAL UNDERTAKINGS ARE ELIGIBLE FOR DEDUCTIONS I.E. (I) MANUFACTURING OR PRODUCTION OF THINGS OR ARTICL ES: (II) DEVELOPMENT OF COMPUTER SOFTWARE (U/S.10A ONLY ) (III) PROVIDING OF SERVICES (U/S.10AA ONLY) EACH OF THE ABOVE ACTIVITIES IS SELF EXPLANATORY. SERVICES ARE ALWAYS WITH REFERENCE TO THE PHYSICAL (MANUAL) AND INTELLECTUAL SERVICES RENDERE D BY THE HUMAN BEINGS DIRECTLY. THESE SERVICES MAY BE PROFESSIONAL (DOCTORS/ENGINEERS/LAWYERS ETC. ), CONSULTANCY/MANAGERIAL SERVICES, LABOUR SERVICES ETC. PURCHASE AND/ OR SALE OF GOODS WILL N OT COME UNDER THE CATEGORY OF SERVICES UNDER ANY STANDARDS. THEREFORE, THE ACTIVITY OF 'TRADING OF G OODS' IS TOTALLY OUTSIDE THE PURVIEW OF THE PROVISI ONS OF SECTION 10AA OF THE ACT. THE JAIPUR BENCH OF ITAT (DCIT V. GOENKA DIAMOND A ND JEWELLERS LTD - 50 SOT 307) RELIED ON BY THE ASSESSEE HAS HELD THAT EVEN T RADING OF DIAMONDS IS ELIGIBLE FOR DEDUCTION U/S.10AA OF THE ACT. THE BASIS FOR SUCH DECISION WA S THAT MINISTRY OF COMMERCE ALLOWS THE 'TRADING ACTIVITIES' UNDER THE SEZS AND THE CBDT HAS NOT ISS UED ANY CIRCULARS INSTRUCTIONS EXCLUDING THE TRADING CONCERNS FROM CLAIMING DEDUCTION U/S.10AA O F THE ACT. SPECIAL ECONOMIC ZONES OR SEZS ARE THE SPECIFIED A REAS NOTIFIED BY THE GOVT. OF INDIA. VARIOUS BENEFITS ARE GRANTED TO THE ENTREPRE NEURS WHO OPEN THEIR UNITS/ UNDERTAKINGS IN THESE SEZS. THE BENEFITS MAY BE VAR IOUS SUBSIDIES, GRANTS, TAX CONCESSIONS ETC. THE MINISTRY OF COMMERCE MAY ALLOW /INVITE VARIOUS TYPES OF ENTREPRENEURS FOR ESTABLISHING THEIR UNITS FOR VARI OUS ACTIVITIES BUT ALL SUCH ACTIVITIES ARE NOT NECESSARILY ELIGIBLE FOR DEDUCTIONS U/S.10AA OF THE ACT. THE PROVISIONS OF SECTION 10AA ARE INDEPENDENT AND UNAMBIGUOUS. THERE IS NO REFERENCE OR DEPENDENCE TO THE MINISTRY OR THE RULES OF THE SEZS, IN THE INCOME TAX STATUTES, WHILE CONSIDE RING THE DEDUCTION U/S.10AA IS CONCERNED. NOR IT ITA NO.446/MDS/2015 :- 14 -: WAS THE INTENSION OF THE LEGISLATURE TO ALLOW DEDUC TION U/S.10AA ON ALL BUSINESS ACTIVITIES UNDERTAKEN BY THE UNDERTAKINGS LOCATED IN THE SEZS. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORD ERS OF THE LOWER AUTHORITIES AND GONE THROUGH THE COORDINATE B ENCH DECISION IN THE CASE OF GOENKA DIAMONDS CITED SUPRA. WE ARE UNABLE TO AGREE WITH THE LD.CIT(A) CONTENTION THAT THE COORDINATE BENCH HAS ALLOWED THE DEDUCTION U/S.10AA, MERELY ON THE BASIS OF THE DECISION OF MINISTRY OF COMMERCE WHICH ALLOWS THE 'TRADING ACTIVITIES' UNDE R THE SEZS. THE CIT(A) CONTENTION OF NOT ADOPTING THE MEANING OF SE RVICES FOR DEDUCTION U/S.10AA AS GIVEN IN SEZ ACT INCORRECT PROPOSITIO N IN OUR VIEW. THE TERM SERVICES IS NOT DEFINED IN INCOME TAX AND IN N ORMAL PRACTICE THE DICTIONARY MEANING OF SERVICES HAS TO BE ADOPTED. BUT, SEC.10AA HAS TAKEN BIRTH FROM THE SEZ ACT AND THE SEZ ACT DEFINE S THE MEANING OF TERMS SERVICES IN THE ACT ITSELF. SEZ ACT IS A SPEC IFIC LAW ENACTED FOR THE BENEFIT OF THE ENTREPRENEURS, WHICH HAS OVERRIDING EFFECT OVER OTHER LAWS. FURTHER, SEC.10AA IS A BENEFICIAL PROVISION AND AS PER WELL SETTLED LAW BENEFICIAL PROVISION MUST BE INTERPRETED LIBERALLY IN FAVOUR OF THE ASSESSEE. THE CBDT IN ITS INSTRUCTION NO.4/2006 DA TED 24.05.2006 HAS MODIFIED ITS EARLIER INSTRUCTION AND EXTENDED THE B ENEFIT OF DEDUCTION U/S.10AA FOR TRADING ALSO WITH CERTAIN LIMITATIONS. IN FACT ITAT, JAIPUR BENCH GONE IN TO THE DETAILS OF CIRCULARS ISSUED BY THE CBDT AND CONSIDERED VARIOUS JUDICIAL PRONOUNCEMENTS AND HELD THAT TRADING ALSO IS ELIGIBLE FOR DEDUCTION U/S.10AA AS UNDER: HELD: IT IS TRUE THAT THE WORD 'SERVICES' IS NOT MENTION ED EITHER IN SECTION 10AA OR IN SECTION 2 OF THE INCOME TAX ACT WHICH CO NTAINS THE DEFINITION OF VARIOUS WORDS. DEDUCTION UNDER SECTION 10AA IS AVAILABLE IN CASE THE UNIT BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLE OR THINGS OR PR OVIDE SERVICES. IT IS NOT DISPUTED THAT THE UNIT OF THE ASSESSEE HAS DONE TRADING ACTI VITY BY IMPORTING THE ITEMS AND THEREAFTER SELLING THEM. HOWEVER, IT IS DISPUTED BY THE REVENUE THAT THE ASSESSEE HAS DONE ONLY TRADING AND NO VALUE ADDITION HAS BEEN MA DE. [PARA 2.10] ITA NO.446/MDS/2015 :- 15 -: THE EXPLANATION 1 TO SECTION 10AA CONTAINS THE DEFINITION OF THE WOR D 'EXPORT TURNOVER', EXPORT IN RELATION TO SPECIAL ECONOMIC Z ONE, MANUFACTURE RELEVANT TO SECTION 10AA SPECIAL ECONOMIC ZONE AND UNIT. THE WO RD MANUFACTURE IS TO BE CONSIDERED TO HAVE THE SAME MEANING AS ASSIGNED IN CLAUSE ( R ) OF SECTION 2 OF SEZ ACT, 2005. SIMILARLY, SEZ UNIT WILL HAVE THE SAME M EANING AS ASSIGNED TO THEM UNDER CLAUSE ( ZA ) OF SECTION 2 OF SEZ ACT. [PARA 2.11] IT IS NOTED THAT SECTION 10AA WAS NOT INSERTED BY THE FINANCE BILL. SECTION 10AA WAS INSERTED BY THE SEZ ACT, 2005 WITH EFFECT FROM 10-2-2006. SECTION 27 OF SEZ ACT SAYS THAT PROVISION OF INCOME-TAX ACT SHALL APPLY TO, OR IN RELATION TO, THE DEVELOPER OR ENTREPRENEUR FOR CARRYING ON THE AUTHO RIZED OPERATIONS IN A SPECIAL ECONOMIC ZONE OR UNIT SUBJECT TO THE MODIFICATIONS SPECIFIED IN THE SECOND SCHEDULE. THUS, IF THE OPERATIONS ARE AUTHORIZED THEN THE PRO VISION OF THE INCOME-TAX ACT SHALL BE SUBJECT TO MODIFICATIONS OF SEZ ACT. THE SEZ ACT PROVIDES THAT SERVICES MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT FOR THE PURPOS E OF SEZ ACT AND SERVICES HAVE BEEN PRESCRIBED IN RULE 76 OF SEZ RULES. AS PER INS TRUCTION NO. 1/2006, DATED 24-3- 2006 ISSUED ON THE BASIS OF BOARD OF APPROVAL MEETI NG HELD ON 17-3-2006 ON THE ISSUE OF SETTING UP TRADING UNITS IN THE SPECIAL EC ONOMIC ZONE IT WAS STATED THAT RULE 76 OF SEZ RULES WOULD BE CONFINED TO IMPORT OF GOOD S FOR EXPORT. SUCH INSTRUCTION WAS MODIFIED VIDE INSTRUCTION NO. 4/2006, DATED 24-5-2006. [PARA 2.16 ] IN THE SAID INSTRUCTION, A REFERENCE HAS BEEN MADE TO SECTION 10AA. IT IS MADE CLEAR TO THE ENTREPRENEUR HAVING UNITS IN SEZ THAT BENEFIT UNDER SECTION 10AA WILL EXCLUDE OTHER TRADING EXCEPT IN THE NATURE OF RE-EX PORT OF IMPORTED GOODS. THUS, THERE IS A PROMISSORY ESTOPPEL BY THE GOVERNMENT TO THE ENTREPRENEUR PUTTING UP THE UNITS IN THE SEZ THAT BENEFIT UNDER SECTION 10AA WI LL BE AVAILABLE ON TRADING IN THE NATURE OF RE-EXPORT OF IMPORTED GOODS. [PARA 2.17] VIDE INSTRUCTION NO. 1/2006, DATED 24-3-2006 OF MINISTR Y OF COMMERCE, IT WAS CLARIFIED THAT TRADING UNITS CAN BE SET UP IN T HE SEZ. FURTHER, MODIFICATION WAS MADE ON 24-5-2006 IN WHICH IT WAS MADE CLEAR THAT T HE DEDUCTION UNDER SECTION 10AA WILL BE AVAILABLE IN RESPECT OF THE TRADING IN THE NATURE OF RE-EXPORT OF IMPORTED ITA NO.446/MDS/2015 :- 16 -: GOODS. THUS THE ASSESSEES WERE PROMISED THAT THEY W ILL BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10AA IN RESPECT OF THE PROFIT EARNING ON TRADING OF RE-EXPORT OF IMPORTED GOODS. THE REVENUE HAD NOT BEEN ABLE TO SH OW US THAT SUCH INSTRUCTION WAS NOT WITHDRAWN OR THE BOARD HAS ISSUED INSTRUCTION T HAT INSTRUCTION DATED 24-5-2006 FROM THE MINISTRY OF COMMERCE WILL NOT BE APPLICABL E FOR THE PURPOSE OF ALLOWING EXEMPTION UNDER SECTION 10AA. HENCE, IN VIEW OF THE DOCTRINE OF PROMISSORY ESTOPPEL, THE ASSESSEE IS ENTITLED TO DEDUCTION. [P ARA 2.19] SECTION 51 OF THE SEZ ACT MENTIONS THAT NOTWITHSTA NDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW F OR THE TIME BEING IN FORCE OR IN ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY LAW O THER THAN THIS ACT, THE PROVISION OF SEZ ACT WILL PREVAIL. THUS ONE WILL HAVE TO CONSIDE R THE IMPLICATION OF SECTION 51 OF THE SEZ ACT. IT MEANS THAT ANYTHING INCONSISTENT TO THE PROVISION OF THE SEZ ACT WILL NOT BE CONSIDERED. THUS, THE WORD 'SERVICES' AS MEN TIONED IN SECTION 10AA CANNOT BE CONSTRUED IN CONSISTENTLY WITH THE DEFINITION OF SE RVICES GIVEN IN THE SEZ ACT. UNDER THE SEZ ACT, THE TRADING IS INCLUDED IN THE SERVICE S PROVIDED THE TRADING IN EXPORT OF IMPORTED GOODS. THEREFORE, THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 10AA AND THEREFORE, THE COMMISSIONER (APPEALS) WAS JUSTI FIED IN ALLOWING THE EXEMPTION. [PARA 2.20] WE HAVE GONE THROUGH THE ORDER OF THE ITAT (SUPRA), SECTION 10AA AND THE MEANING OF SERVICES AS PROVIDED IN SEZ AC T, AND OF THE CONSIDERED OPINION THAT THE ASSESSEE IS ENTITLED F OR DEDUCTION U/S.10AA EVEN IF IT IS ENGAGED IN THE TRADING IN HIS UNIT, S UBJECT TO COMPLYING WITH THE FOLLOWING CONDITIONS: (I) ASSESSEE SHOULD HAVE OBTAINED LOP FROM THE DEVELOPM ENT COMMISSIONER FOR TRADING IN SEZ. (II) TRADING MUST BE IN THE NATURE OF RE-EXPORT OF IM PORTED GOODS. (III) THE ACTIVITY OF TRADING MUST BE CARRIED ON FROM HIS UNIT. ITA NO.446/MDS/2015 :- 17 -: IN THE INSTANT CASE, NEITHER THE LD.CIT(A) NOR THE ASSESSING OFFICER HAS GIVEN ANY FINDING ON THE ABOVE CONDITIONS. THER EFORE, WE REMIT THE MATTER BACK TO AO WITH A DIRECTION TO EXAMINE WHETH ER THE ASSESSEE HAS PERMISSION OF LOP FOR TRADING AND IMPORTED THE GOOD S FOR THE PURPOSE OF RE-EXPORT AND FITS INTO THE MEANING OF TRADING AS P ROVIDED IN SEZ ACT AND DECIDE THE ISSUE ON MERITS AFTER GIVING OPPORTUNITY TO THE ASSESSEE. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( . . ' #$ ) (D.S. SUNDER SINGH) % / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 30 TH NOVEMBER, 2016 TLN &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF