Dy. CIT v. Goenka Diamond & Jewellers Ltd.

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The Tax Publishers2012 TaxPub(DT) 1981 (Jp-Trib) : (2012) 046 (II) ITCL 0077 : (2012) 146 TTJ 0068 : (2012) 050 SOT 0307 : (2012) 069 DTR 0209 INCOME TAX ACT, 1961 --Exemption under section 10AA--AllowabilityAssessee engaged in trading and manufacturing of precious and semi-precious stones diamond and studded gold jewellery--The assessee firm was engaged in the business of trading and manufacturing of precious and semi-precious stones, diamond and studded gold jewellery. The assessing officer noticed that the assessee claimed deduction under section 10AA in respect of profits from the Surat Unit. The assessee is having another unit at Bombay and is having Head Office at Jaipur. During the course of assessment proceedings, the assessee was asked to justify the claim of deduction under section 10AA. Vide letter dt. 29-11-2010, it was submitted that the assessee is engaged in the business of precious and semi-precious stones. The assessing officer examined the process through which the assessee is obtaining the finished products as against initial purchase items. The assessing officer after considering the submissions of the assessee observed that deduction under section 10AA is available in case the assessee is engaged either in manufacturing or production of article or things. The services have not been defined in the IT Act. The definition of service as provided in clause 2(z) of SEZ Act cannot be imported. Only the definition of manufacture given in section 2(z) of SEZ Act was imported in section 10AA. Hence, the definition of services as provided in SEZ Act cannot be applied. The assessing officer relied on certain decisions and held that the definition of expression in one statute cannot be automatically applied to another statute. The Commissioner (Appeals) after considering the submissions of the assessee deleted the addition and directed the assessing officer to allow deduction under section 10AA. Held : Exemption under section 10AA is available in respect of trading in nature of re-export of imported goods Though vide Instruction No. 1/2006 dt. 24-03-2006, it was clarified that trading units can be set up in the SEZ. However, the modification was made on 24-05-2006 in which it was made clear that the deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported good. Thus, the assessees were promised that they will be eligible for deduction under section 10AA in respect of the profit earning on trading of re-export of imported goods. The revenue has not been able to show such instruction was not withdrawn or the Board has issued instruction that instruction dt. 24-05-2006 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction under section 10AA. Under the SEZ Act, the trading is included in the services provided the trading is export of imported goods. Therefore, the assessee is entitled to deduction under section 10AA and therefore, the Commissioner (Appeals) was justified in allowing the exemption. The CIT, DR patiently drew attention to the provision of section 10AA and the provision SEZ Act. Tribunal appreciate the efforts of CIT DR in bringing attention to the focal issue relevant in this case. It is true that the word 'services' is not mentioned either in section 10AA or in section 2, which contains 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 provide service. It is not disputed that the unit of the assessee has done trading activity 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 made. [Para 2.10] The Explanation 1 to section 10AA contains the definition of the word 'export turnover. Export in relation to Special Economic Zone, Manufacture relevant to section 10AA Special Economic Zone and Unit. The word '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 meaning as assigned to them under clause (za) of section 2 of SEZ Act. The word 'services' has been defined in SEZ Act, 2005 under section 2(z). [Para 2.11] It is interesting to note that section 10AA was not inserted by the Finance Bill. Section 10AA was inserted by the SEZ Act, 2005 w.e.f. 10-02-2006. Tribunal had earlier reproduced section 27 of SEZ Act. It says that provision of IT Act shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized 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 provision of the IT Act shall be subject to modifications of SEZ Act. The SEZ Act provides that services may be prescribed by the Central Govt. for the purpose of SEZ Act and services have been prescribed in Rule 76 of SEZ Rules. As per Instruction No. 1/2006 dt. 24-03-2006 issued on the basis of Board of Approval Meeting held on 17-03-2006 on the issue of setting up trading units in the Special Economic Zone it was stated that rule 76 of SEZ Rules would be confined to import of goods for export. Such instruction was modified vide Instruction No. 4/2006, dt. 24-05-2006. [Para 2.16] In Instruction No. 4/2006, dt. 24-5-2006, 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-export of imported goods. Thus, there is a promissory estoppel by the Government to the enterpreneur putting up the units in the SEZ that benefit under section 10AA will be available on trading in the nature of re-export of imported goods. [Para 2.17] There can, therefore, be no doubt that the doctrine of promissory estoppel is applicable against the Government in the exercise of its governmental, public or executive functions and the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel. [Para 2.17] Though vide Instruction No. 1/2006 dt. 24-03-2006, it was clarified that trading units can be set up in the SEZ. However, the modification was made on 24-05-2006 in which it was made clear that the deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported good. Thus, the assessees were promised that they will be eligible for deduction under section 10AA in respect of the profit earning on trading of re-export of imported goods. The revenue has not been able to show such instruction was not withdrawn or the Board has issued instruction that instruction dt. 24-05-2006 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction. [Para 2.19] One will have to consider the implication of section 51 of the SEZ Act. It means that anything in-consistent to the provision of the SEZ Act will not be considered. Thus, the 'word services' as mentioned in section 10AA cannot be construed in-consistently with the definition of services given in the SEZ Act. Under the SEZ Act, the trading is included in the services provided the trading is export of imported goods. Therefore, the assessee is entitled to deduction under section 10AA and therefore, the Commissioner (Appeals) was justified in allowing the exemption. [Para 2.20] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1981 (Jp-Trib) : (2012) 046 (II) ITCL 0077 : (2012) 146 TTJ 0068 : (2012) 050 SOT 0307 : (2012) 069 DTR 0209

INCOME TAX ACT, 1961

--Exemption under section 10AA--AllowabilityAssessee engaged in trading and manufacturing of precious and semi-precious stones diamond and studded gold jewellery--The assessee firm was engaged in the business of trading and manufacturing of precious and semi-precious stones, diamond and studded gold jewellery. The assessing officer noticed that the assessee claimed deduction under section 10AA in respect of profits from the Surat Unit. The assessee is having another unit at Bombay and is having Head Office at Jaipur. During the course of assessment proceedings, the assessee was asked to justify the claim of deduction under section 10AA. Vide letter dt. 29-11-2010, it was submitted that the assessee is engaged in the business of precious and semi-precious stones. The assessing officer examined the process through which the assessee is obtaining the finished products as against initial purchase items. The assessing officer after considering the submissions of the assessee observed that deduction under section 10AA is available in case the assessee is engaged either in manufacturing or production of article or things. The services have not been defined in the IT Act. The definition of service as provided in clause 2(z) of SEZ Act cannot be imported. Only the definition of manufacture given in section 2(z) of SEZ Act was imported in section 10AA. Hence, the definition of services as provided in SEZ Act cannot be applied. The assessing officer relied on certain decisions and held that the definition of expression in one statute cannot be automatically applied to another statute. The Commissioner (Appeals) after considering the submissions of the assessee deleted the addition and directed the assessing officer to allow deduction under section 10AA. Held : Exemption under section 10AA is available in respect of trading in nature of re-export of imported goods Though vide Instruction No. 1/2006 dt. 24-03-2006, it was clarified that trading units can be set up in the SEZ. However, the modification was made on 24-05-2006 in which it was made clear that the deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported good. Thus, the assessees were promised that they will be eligible for deduction under section 10AA in respect of the profit earning on trading of re-export of imported goods. The revenue has not been able to show such instruction was not withdrawn or the Board has issued instruction that instruction dt. 24-05-2006 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction under section 10AA. Under the SEZ Act, the trading is included in the services provided the trading is export of imported goods. Therefore, the assessee is entitled to deduction under section 10AA and therefore, the Commissioner (Appeals) was justified in allowing the exemption.

The CIT, DR patiently drew attention to the provision of section 10AA and the provision SEZ Act. Tribunal appreciate the efforts of CIT DR in bringing attention to the focal issue relevant in this case. It is true that the word 'services' is not mentioned either in section 10AA or in section 2, which contains 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 provide service. It is not disputed that the unit of the assessee has done trading activity 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 made. [Para 2.10] The Explanation 1 to section 10AA contains the definition of the word 'export turnover. Export in relation to Special Economic Zone, Manufacture relevant to section 10AA Special Economic Zone and Unit. The word '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 meaning as assigned to them under clause (za) of section 2 of SEZ Act. The word 'services' has been defined in SEZ Act, 2005 under section 2(z). [Para 2.11] It is interesting to note that section 10AA was not inserted by the Finance Bill. Section 10AA was inserted by the SEZ Act, 2005 w.e.f. 10-02-2006. Tribunal had earlier reproduced section 27 of SEZ Act. It says that provision of IT Act shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized 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 provision of the IT Act shall be subject to modifications of SEZ Act. The SEZ Act provides that services may be prescribed by the Central Govt. for the purpose of SEZ Act and services have been prescribed in Rule 76 of SEZ Rules. As per Instruction No. 1/2006 dt. 24-03-2006 issued on the basis of Board of Approval Meeting held on 17-03-2006 on the issue of setting up trading units in the Special Economic Zone it was stated that rule 76 of SEZ Rules would be confined to import of goods for export. Such instruction was modified vide Instruction No. 4/2006, dt. 24-05-2006. [Para 2.16] In Instruction No. 4/2006, dt. 24-5-2006, 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-export of imported goods. Thus, there is a promissory estoppel by the Government to the enterpreneur putting up the units in the SEZ that benefit under section 10AA will be available on trading in the nature of re-export of imported goods. [Para 2.17] There can, therefore, be no doubt that the doctrine of promissory estoppel is applicable against the Government in the exercise of its governmental, public or executive functions and the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel. [Para 2.17] Though vide Instruction No. 1/2006 dt. 24-03-2006, it was clarified that trading units can be set up in the SEZ. However, the modification was made on 24-05-2006 in which it was made clear that the deduction under section 10AA will be available in respect of the trading in the nature of re-export of imported good. Thus, the assessees were promised that they will be eligible for deduction under section 10AA in respect of the profit earning on trading of re-export of imported goods. The revenue has not been able to show such instruction was not withdrawn or the Board has issued instruction that instruction dt. 24-05-2006 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption under section 10AA. Hence, in view of the doctrine of promissory estoppel, the assessee is entitled to deduction. [Para 2.19] One will have to consider the implication of section 51 of the SEZ Act. It means that anything in-consistent to the provision of the SEZ Act will not be considered. Thus, the 'word services' as mentioned in section 10AA cannot be construed in-consistently with the definition of services given in the SEZ Act. Under the SEZ Act, the trading is included in the services provided the trading is export of imported goods. Therefore, the assessee is entitled to deduction under section 10AA and therefore, the Commissioner (Appeals) was justified in allowing the exemption. [Para 2.20]