Article discusses Exemption Under Special Provisions of Sections 10A, Section 10AA and Section 10B of Income Tax Act, 1961.

A. Section 10A- Special provision in respect of newly established undertakings in free trade zone, etc.

The benefit in respect of newly established Industrial Undertaking in FTZ, EHTP SEZ or STP is Available to all Assessees on Export of Certain Articles or things or software

Subject to the following Conditions: –

(i) Should not be formed by splitting up or reconstruction of unit already in existence

(ii) Should not be formed by transferring machinery or plant previously used. In certain conditions as specified in the Act second hand machinery is allowed.

(iii) Sale proceeds should be brought in convertible forex within 6 months from the end of P.Y.

(iv) Report in Form No.56F

(v) Filing of return within due date under Section 139(1)

(vi) Tax Holiday: – For units which have begun prior to AY 2003-04,100% profit from export of such article, thing, software for 10 consecutive A.Y. from the A.Y. relevant to P.Y. in which it begun to manufacture subject to some conditions and restrictions mentioned in the Act. However for AY 2003-04 it is 90%. For units which have begun on or after AY 2003-04 the deduction is 100% for first 5 years and 50% for next 2 years and next 3 years 50% subject to creation of “Special Economic Zone Reinvestment Allowance Reserve Account” and fulfillment of conditions relating thereto failing which the unutilized or wrongly utilised Reserve would be deemed income as per the provisions of the Act and the Rules.

(vii) No deduction for A.Y.2012 – 13 or thereafter

(viii) The computation of profits is as per the following formula:-

Profit from the business of the under-taking × Export Turnover ÷ Total Turnover of Undertaking

(ix) No deduction shall be allowed under Section 80HH or Section 80HHA or Section 80-I or Section 80-IA or Section 80-IB in relation to the profits and gains of the undertaking

(x) No loss referred to in sub-section (1) of Section 72 or sub­section (1) or sub-section (3) of Section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years [ending before the 1st day of April, 2001]

(xi) In computing the depreciation allowance under Section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.

(xii) Market value of goods to be transferred to be as per market rate on the date of transfer and as per arms length price as per the provisions of sub-section (8) and sub-section (10) of Section 80-IA.

(xiii) The provisions of this section does not apply to any undertaking, being a Unit referred to in clause (zc) of section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after AY 2006-07 in any Special Economic Zone.

(xiv) Provisions related to amalgamation and demerger:- The benefit under this section is not available to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and it is available to the the amalgamated or the resulting company as it would have been available to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

2. Definitions. – For the purposes of this section, –

1. “computer software” means –

(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

(b) any customized electronic data or any product or service of similar nature, as may be notified by the Board,

which is transmitted or exported from India to any place outside India by any means;

2. “export turnover” means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

3. The Assessing Officer should look into the following important factual areas:

Section 10A:

i) The year in which the manufacture or production begins must be noted as this is very crucial for the allowance of deduction.

ii) The undertaking must be a new undertaking and must not be formed by splitting or re-construction or transfer of old machinery, plant etc.

iii) The undertaking must be in a Free Trade Zone, or Economic Trade Zone or Software Technology Park or SEZ.

iv) The sale proceeds must be obtained in foreign exchange from export outside India within 6 months from the end of previous year.

v) There must be an audit report as prescribed along with the return of income.

vi) The assessee must not be claiming deduction under Sections 80HH, 80HHA, 80I, 80IA, 80IB with respect to the same undertaking.

vii) The assessee must be allowed, even if not claimed, depreciation under Section 32.

viii) The sale proceeds of the goods must be on market value and not understated.

ix) If the claim is made for the 8th, 9th or 10th year, then it isonly allowed on creation of reserved account. This must be seen.

x) If reserved account is not utilized within the specified period, or utilized for some other purpose, it would be a deemed income.

xi) Deduction is not available for A.Y.2012-13 and subsequent years.

xii)The export turnover does not include freight, telecommunication charges or insurance attributable to the goods outside India or any expenses incurred in foreign exchange in rendering of services outside India.

xiii) The deduction is not available on other income like interest etc.

4. Critical Areas in draft of assessment order:

  • The date of issue and service of original and first notice under Section 143(2) must be mentioned in the beginning of the assessment order.
  • While drafting the assessment order, the Assessing Officers must bring out the facts very clearly on the basis of which the deduction is being reduced or disallowed.
  • If any inquiry has been made, then report of the inquiry or the statement recorded which are being used against the assessee must be confronted to the assessee before making the disallowance or reducing the claim. The fact of confronting the inquiry report to the assessee must also be brought on record and mentioned in the assessment order.
  • If statement of any third party is being relied upon against the assessee then cross-examination opportunity must be provided to the assessee. These facts of providing cross‑examination opportunity must be brought on record and mentioned in the assessment order.
  • The reply of the assessee to the inquiry report or the statement recorded under cross-examination must also be part of assessment order.

B. Section 10AA – Special provisions in respect of newly established Units in Special Economic Zones.

The benefit in respect of newly established Industrial Undertaking in SEZ is Available to all Assessees on Export of Certain Articles or things or software

Subject to the following Conditions: –

i. Begin its production, etc. on or after 01-04-2006 relevant to AY 2006-07 but before 01.04.2021

ii. Should not be formed by splitting up or reconstruction of unit already in existence
iii. Should not be formed by transferring machinery or plant previously used. In certain conditions as specified in the Act second hand machinery is allowed.
iv. Report in Form No.56Fv. Tax holiday:- 100% of the profits from the export for the first 5 years from the beginning and 50% for next 5 years and for further 5 Years 50% subject to creation of “Special Economic Zone Reinvestment Allowance Reserve Account” and fulfillment of conditions relating thereto failing which the unutilized or wrongly utilised Reserve would be deemed income as per the provisions of the Act and the Rules.
Wef A.y 2018-19, For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.

vi. The computation of profits is as per the following formula:-

Profit from the business of the under-taking × Export Turnover ÷ Total Turnover of Undertaking

vii. Loss referred to in sub-section (1) of Section 72 or sub­section (1) or sub-section (3) of Section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off

viii. No deduction shall be allowed under Section 80HH or Section 80HHA or Section 80-I or Section 80-IA or Section 80-IB in relation to the profits and gains of the undertaking
ix. No loss referred to in sub-section (1) of Section 72 or sub­section (1) or sub-section (3) of Section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years [ending before the 1st day of April, 2006]
x. In computing the depreciation allowance under Section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.
xi. The Market value of goods to be transferred to be as per market rate on the date of transfer and as per arms length price as per the provisions of sub-section (8) and sub-section (10) of Section 80-IA.
xii. The profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.
xiii. Subject to some conditions mentioned in the Act the Deduction is available only for unexpired period if claim made under Section 10A

xiv. Provisions relating to amalgamation or demerger:- The benefit under this section is not available to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and it is available to the the amalgamated or the resulting company as it would have been available to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

2. Definitions

a. “export turnover” means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;

b. “export in relation to the Special Economic Zones” means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise;

3. The Assessing Officer should look into the following important factual areas:

Section 10AA:

i) This is applicable to newly established units in SEZs and must have begun manufacture or production or articles in A.Y.2006-07 onwards. and before 01.04.2021

ii) The unit must not be formed by splitting or re-construction of an already existing business and old machineries must not be used.

iii) The assessee must file audit report along with the Income-tax return.

iv) The assessee must not be claiming deduction under Sections 80HH, 80HHA, 80I, 80IA, 80IB with respect to the same undertaking.

v) The assessee must be allowed, even if not claimed, depreciation under Section 32.

vi) The sale proceeds of the goods must be on market value and not understated.

vii) If the unit/undertaking has already claimed benefit under Section 10A, then under this section benefit is available only for unexpired period.

viii) The benefit is available for 6th year onwards only on creation of SEZ re-investment reserve account.

ix) If the amount credited to the reserve account is not utilized before the expiry of the specified period or utilized for some other purpose, then it will be treated as deemed income.

x) The export turnover does not include freight, telecommunication charges or insurance attributable to the goods outside India or any expenses incurred in foreign exchange in rendering of services outside India.

xiv) The deduction is not available on other income like interest etc.

4. Critical Areas in draft of assessment order:

  • The date of issue and service of original and first notice under Section 143(2) must be mentioned in the beginning of the assessment order.
  • While drafting the assessment order, the Assessing Officers must bring out the facts very clearly on the basis of which the deduction is being reduced or disallowed.
  • If any inquiry has been made, then report of the inquiry or the statement recorded which are being used against the assessee must be confronted to the assessee before making the disallowance or reducing the claim. The fact of confronting the inquiry report to the assessee must also be brought on record and mentioned in the assessment order.
  • If statement of any third party is being relied upon against the assessee then cross-examination opportunity must be provided to the assessee. These facts of providing cross-examination opportunity must be brought on record and mentioned in the assessment order.
  • The reply of the assessee to the inquiry report or the statement recorded under cross-examination must also be part of assessment order.

C. Section 10B – Special provisions in respect of newly established hundred percent export-oriented undertakings.

The benefit in respect of newly established 100% Export Oriented Units is Available to all Assessees on Export of Certain Articles or things or software

Subject to the following Conditions:

(i) Undertaking must be approved as a 100% EOU.

(ii) The Income Tax Return must be filed on or before the due date under Section139(1).

(iii) The assessee has a choice not to claim the deduction for any particular AY if he makes a declaration before the AO, before the due date of filing of return for that AY.

(iv) Manufacture of any article thing or software

(v) Should not be formed by splitting up or reconstruction of unit already in existence

(vi) Should not be formed by transferring machinery or plant previously used. In certain conditions as specified in the Act second hand machinery is allowed.

(vii) There must be repatriation of sale proceeds into India within 6 months.

(viii) Report in Form No.56G

(ix) Audit of Books of Accounts.

(x) Tax Holiday: – 100% profit from export of such article, thing, software for 10 consecutive A.Y. from the A.Y. relevant to P.Y. in which it begun to manufacture. The deduction is 90% for AY 2003-04.

(xi) No deduction for A.Y.2012 – 13 or thereafter

(xii) The computation of profits is as per the following formula:-

Profit from the business of the under- taking × Export Turnover ÷ Total Turnover of Undertaking

(xiii) No loss referred to in sub-section (1) of Section 72 or sub­section (1) or sub-section (3) of Section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set-off where such loss relates to any of the relevant assessment years [ending before the 1st day of April, 2001];

(xiv) No deduction shall be allowed under Section 80HH or Section 80HHA or Section 80-I or Section 80-IA or Section 80-IB in relation to the profits and gains of the undertaking; and

(xv) In computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.

(xvi) The Market value of goods to be transferred to be as per market rate on the date of transfer and as per arms length price as per the provisions of sub-section (8) and sub-section (10) of section 80-IA.

(xvii) The profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India

(xviii) For the purposes of this section, “manufacture or produce” shall include the cutting and polishing of precious and semi-precious stones

(xix) Provisions relating to amalgamation or demerger:- The benefit under this section is not available to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and it is available to the the amalgamated or the resulting company as it would have been available to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

2. Definitions

  • “export turnover” means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
  • “hundred per cent export-oriented undertaking” means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act;

3. The Assessing Officer should look into the following important factual areas:

Section 10B:

i) This is applicable to newly established 100% export oriented undertakings.

ii) No deduction is allowed under this section for any undertaking for A.Y.2012-13 and subsequent years.

iii) For claiming the deduction return has to be furnished on or before due date of filing the return.

iv) The undertaking must be a new undertaking and must not be formed by splitting or re-construction or transfer of old machinery, plant etc.

v) The sale proceeds must be obtained in foreign exchange from export outside India within 6 months from the end of previous year.

vi) There must be an audit report as prescribed along with the return of income.

vii) The assessee must not be claiming deduction under Sections 80HH, 80HHA, 80I, 80IA, 80IB with respect to the same undertaking.

viii) The assessee must be allowed, even if not claimed, depreciation under Section 32.

ix) The sale proceeds of the goods must be on market value and not understated.

x) The export turnover does not include freight, telecom­munication charges or insurance attributable to the goods outside India or any expenses incurred in foreign exchange in rendering of services outside India.

xi) The deduction is not available on other income like interest etc.

4. Critical Areas in draft of assessment order:

  • The date of issue and service of original and first notice under Section 143(2) must be mentioned in the beginning of the assessment order.
  • While drafting the assessment order, the Assessing Officers must bring out the facts very clearly on the basis of which the deduction is being reduced or disallowed.
  • If any inquiry has been made, then report of the inquiry or the statement recorded which are being used against the assessee must be confronted to the assessee before making the disallowance or reducing the claim. The fact of confronting the inquiry report to the assessee must also be brought on record and mentioned in the assessment order.
  • If statement of any third party is being relied upon against the assessee then cross-examination opportunity must be provided to the assessee. These facts of providing cross-examination opportunity must be brought on record and mentioned in the assessment order.
  • The reply of the assessee to the inquiry report or the statement recorded under cross-examination must also be part of assessment order.

D. CASE LAWS RELEVANT FOR Section 10A, Section 10AA & Section 10B

1. Condition that return should be filed within due date is mandatory.

M/s. Saffire Garments vs. ITO (ITAT Special Bench) (Rajkot) 04.12.2012

S. 10A: Condition that ROI should be filed within due date is mandatory. For AY 2006-07, the assessee filed a ROI on 31.1.2007 when the due date was 31.12.2006. The assessee claimed s. 10A deduction. The AO &CIT(A) rejected the claim by relying on the Proviso to s. 10A(1A). The Special Bench had to consider whether the Proviso to s. 10A(1A) was mandatory or directory and whether s. 10A deduction could be allowed even to a belated return. HELD by the Special Bench: The Proviso to s. 10A(1A) provides that “no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under Section 139(1)”. The assessee’s argument that the said Proviso is merely directory and not mandatory is not acceptable. The Proviso is one of the several consequences (such as interest under Section 234A) that befall an assessee if he fails to file a ROI on the due date. As the other consequences for not filing the ROI on the due date are mandatory the consequence in the Proviso cannot be held to be directory (Shivanand Electronics 209 ITR 63 (Bom) & other judgements distinguished).

2. Specific conditions of sections under which claim is made has to be followed.

Commissioner of Income tax VS. Regency Creations Ltd. [2012] 27 taxmann.com 322 (DELHI)Assessment years 2003-04, 2004-05, 2006-07 and 2007-08 – Whether though considerations which apply for granting approval under Sections 10-A and 10-B may to an extent, overlap, yet deliberate segregation of these two benefits by statute reflects Parliamentary intention, that to qualify for benefit under either, specific procedure enacted for that purpose has to be followed – Held, yes – Whether, therefore, approval granted to a 100 per cent EOU set up under Software Technology Park Scheme cannot be deemed to be an approval under section 10-B – Held, yes [Para 14] [In favour of revenue] Circulars and Notifications : Circular Nos. 1 of 2005, dated 6-1-2005, 149/194/2004/TPL, dated 6-1-2005, 200/20/2006, dated 31-3-2006 and 694, dated 23-11-1994; Instruction No. 1 of 2006, dated 6-1-2005

3. Reopening under Section 147 justifiable even after 4 years under certain conditions.

Siemens Information Systems Ltd. VS. Assistant Commissioner of Income-tax[2012] 20 taxmann.com 666 (BOM.) / [2012] 207 TAXMAN 132 (BOM.) (MAG.) / [2012] 343 ITR 188 (BOM.) Assessment year 2004-05 – Assessee-company claimed deduction under section 10A which was allowed by Assessing Officer without specifically dealing with eligibility of assessee to said claim – During course of assessment proceedings for subsequent assessment year 2006-07, materials on record revealed that units of assessee were not independent units; no independent accounts were maintained and there was an overlapping of work and use of resources amongst units and several non section 10A activities were being carried on in section 10A units – On basis of such disclosure Assessing Officer sought to reopen assessment – Whether even if reopening of assessment had taken place beyond a period of four years of end of relevant assessment year reopening assessment under section 147 was justified – Held, yes [In favour of revenue]

4. Deduction is to be allowed only after allowing depreciation.Siemens Information Systems Ltd. VS. Deputy Commissioner of Income-tax, Circle 7(2) [2012] 19 taxmann.com 6 (MUM.) / [2012] 135 ITD 196 (MUM.) / [2012] 146 TTJ 303 (MUM.) Assessment year 2006-07 – Whether deduction under section 10A/10B has to be allowed only after deducting depreciation from profits of eligible business even though such a claim for depreciation has not been raised by assessee – Held, yes [In favour of revenue]

5. Conditions for Adjustment of unabsorbed depreciation.

  • Phoenix Lamps Ltd. VS. Additional Commissioner of Income-tax, Range, Noida [2009] 29 SOT 378 (DELHI) / [2009] 126 TTJ 945 (DELHI) – Assessment year 2003-04 – Whether in view of Circular No. 7/2003, dated 5-9-2003 where unabsorbed depreciation for assessment years 1993-94 to 1995-96 pertained to period ended before 1-4- 2001, same could not be set off against income of assessment year 2003-04 – Held, yes.CBDT’s Circular No. 7 of 2003, dated 5-9-2003
  • Commissioner of Income-tax, Cochin VS. Patspin India Ltd. [2011] 15 taxmann.com 122 (KER.) / [2011] 203 TAXMAN 47 (KER.) / [2011] 245 CTR 97 (KER.)- Assessment years 200 1-02 to 2005-06 – Whether deduction under Section 10B on export profit of EOU has to be computed after setting off carried forward unabsorbed depreciation as provided under Section 32(2) – Held, yes
  • Commissioner of Income-tax, Karnataka I, Bangalore VS. HimatasingikeSeide Ltd. [2006] 156 TAXMAN 151 (KAR.) / [2006] 206 CTR 106 (KAR.) / [2006] 286 ITR 255 (KAR.) Assessment year 1994-95 – Assessee was 100 per cent export oriented industrial unit in terms of Section 10B – Assessee filed nil return claiming exemption under Section 10B and it also adjusted brought forward unabsorbed depreciation against income from other sources – Assessing Officer, accepting assessee’s claim, assessed total income at nil – Commissioner, in exercise of powers under Section 263, set aside assessment order holding that exemption under Section 10B was allowed on an inflated amount without deducting unabsorbed depreciation from export income – Whether since Section 10B provides 100 per cent exemption for export income and not for other income, assessee could not have adjusted unabsorbed depreciation against other income so as to take exemption from payment of tax even for other income – Held, yes – Whether, therefore, order of Commissioner was to be sustained – Held, yes
  • Assistant Commissioner of Income-tax VS. Jewellery Solutions International (P.) Ltd. [2009] 28 SOT 405 (MUM.) – Assessment year 2003-04 – Whether deduction under Section 10B is to be allowed from total income of assessee after adjusting unabsorbed depreciation – Held, yes

6. Carry forward of lossesSword Global (I) (P.) Ltd. VS. Income-tax Officer, Co. Ward-II(1), Chennai [2010] 122 ITD 103 (CHENNAI) / [2008] 119 TTJ 427 (CHENNAI) – Assessment year 2003-04- Whether carry forward losses of earlier assessment years have to be set off first against total income of relevant assessment year and, it is out of balance income only that deduction under Section 10B can be granted – Held, yes

7. Conversion of existing unitInfrasoft Technologies Ltd. Vs. Deputy Commissioner of Income-tax, Circle 11(1 )(, New Delhi [2012] 19 taxman.com 86 (DELHI)/[2012] 135 ITD 19 (DELHI)/[2012] 114 TTJ 622 (DELHI) – Assessment Year 2002-03 – Assessee-company set up its industrial undertaking in assessment year 1996-97 in domestic tariff area – Assessee-company received approval of STPI on 28/3/2000 – Thereupon, assessee claimed deduction under Section 10A which was rejected on two grounds (i) there was conversion of undertaking established in assessment year 1996-97 into STPI unit and (ii) ownership/beneficial interest had been transferred in year under consideration in terms of Section 10A(9) read with Explanation 1 – On instant appeal, it was noted that there was neither any whisper of a word in STP registration application suggesting that assessee had intended to set up a new unit nor such intention could be gathered from conduct of assessee while seeking STP from competent authority – Rather, assessee had categorically mentioned in application for conversion of existing unit – It was also apparent that assessee had included infrastructure, staff and skilled labour etc. of existing unit in STP registration application form – Whether on facts, finding of Commissioner (Appeals) that it was a case of conversion of an existing software export unit to STP unit which would connote conversion of a unit already set up, was to be upheld – Held, yes – Whether, moreover, since it was apparent that share holding of five persons as on 31/3/2002 had declined to 37.66 per cent from 100 per cent in the previous year when undertaking was set up, assessee’s case was squarely covered by provisions of section 10A(9) – Held, yes – Whether in view of aforesaid, revenue authorities were justified in rejecting assessee’s claim – Held, yes.

Chenab Information Technologies (P.) Ltd. VS. Income-tax Officer, Ward 8(1)2[2008] 25 SOT 432 (MUM.) – Assessment year 2001-02 – Assessee had established a software unit at SEEPZ which was not eligible for exemption under Section 10A – In order to take benefit of new policy of Government to exempt income from Software Technology Park Unit (STP Unit), assessee set up a new unit which was approved as STP unit – However, assessee’s claim for exemption under Section 10A for certain amount being income of new unit was rejected by Assessing Officer holding that software development activity in new unit had been carried out mainly by employees of existing unit and, thus, it was a mere case of splitting/reconstruction of existing business – On appeal, Commissioner (Appeals) upheld order of Assessing Officer –Whether since existing business of assessee was development of software and in new unit also, assessee had done same business using same employees, it could not be a case of different business requiring different specialization, being taken up for which setting up of a new unit could be said to have become a business necessity – Held, yes – Whether, moreover, merely because customers in new unit were different, it could not be a basis to hold that new unit was separate and independent – Held, yes – Whether, therefore, authorities below rightly concluded that new unit had been set up by splitting up of business of old unit and was, thus, not eligible for deduction under Section 10A – Held, yes

Income-tax Officer Ward-(1), Range-1, Trivandrum VS. Stabilix Solutions (P.) Ltd. [2010] 8 taxmann.com 45 (COCH) – Assessment year 2004- 05 – Assessee-company set up a 100 per cent export oriented undertaking by taking on sub-lease 4000 sq.ft. built up area from STPL which held leasehold rights in total area of 6000 sq.ft. – STPL also leased out plant and machinery to assessee-company in excess of statutory limit of 20 per cent – Both companies manufactured same product i.e., computer software and sold same to a particular company abroad – Even employees of both companies, who represented human capital were headed by same functional head – Whether, on facts, it could be concluded that assessee’s undertaking stood formed almost wholly by transfer of resources, including plant and machinery, from STPL, and, therefore, it was not entitled to deduction under Section 10B as it failed to fulfill conditions stipulated under section 10B(2) – Held, yes

8. Sale proceeds must be brought in India in foreign exchange.

  • Commissioner of Income-tax, Cochin VS. Electronic Controls & Discharge Systems (P.) Ltd. [2011] 13 taxmann.com 193 (KER.) / [2011] 202 TAXMAN 33 (KER.) / [2011] 245 CTR 465 (KER.) Assessment years 2003-04 and 2004-05 – Whether Section 1 0A provides for exemption only on profits derived on export proceeds received in convertible foreign exchange – Held, yes – Whether, therefore, benefit of exemption under section 1 0A cannot be extended to local sales made by units in Special Economic Zone, whether as part of domestic tariff area sales or as inter-unit sales within zone or units in other zones – Held, yes [In favour of revenue]
  • Swayam Consultancy (P.) Ltd. VS. Income-tax Officer[2012] 20 taxmann.com 803 (AP.) / [2011] 336 ITR 189 (AP)- Assessment year 2007-08 – Delivery of goods to a foreign buyer in India does not amount to export.
  • Assistant Commissioner of Income-tax, Range 1, Hyderabad VS. Bodhtree Consulting Ltd. [2010] 41 SOT 230 (HYD.) / [2010] 134 TTJ 214 (HYD.) – Assessment year 2004-05 –Whether in order to avail deduction under section 1 0B sale proceeds must be receivable in convertible foreign exchange – Held, yes – Whether sale proceed received in convertible foreign exchange means ‘actual receipt’ and not deemed receipt – Held, yes – Whether if that object is kept in mind, amount received by an assessee in form of investment in equity shares in foreign exchange cannot be considered to be received in form of convertible foreign exchange – Held, yes – Whether merely because an assessee takes permission from RBI to receive foreign exchange in form of equity investment it does not lead to conclusion that assessee has received export proceeds in foreign exchange, as RBI has no role to play to suggest whether any investment/income for capitalization of expenditure is genuine or otherwise in terms of section 10B – Held, yes – Whether, therefore, an assessee would not be eligible for benefit of section 10B on such investments – Held, yes

9. Transactions must be at Arm’s Length pricing and the basis of calculation of export turnover and total turnover should be same.

ADP (P.) Ltd. VS. Deputy Commissioner of Income-tax, Circle 1(1) [2011] 45 SOT 172 (HYD.) / [2011] 10 taxmann. com 160 (HYD.) / [2012] 144 TTJ 520 (HYD.) / [2012]15 ITR(TRIB.) 203 (HYD.) Assessment year 2004-05 –Whether in view of provisions of Rule 10B(4), data to be used in analyzing comparability of an uncontrolled transaction with an international transaction shall be data relating to financial year in which international transaction has been entered into, with only exception being that data of earlier two years may also be considered, if such data reveals facts which could have an influence on determination of transfer prices in relation to transactions being compared – Held, yes – Whether in view of above, data of subsequent period cannot be considered for comparison while determining arm’s length price – Held, yes. Section 10A of the Income-tax Act, 1961 – Free trade zone – Assessment year 2004-05 – Whether while computing amount of exemption under section 1 0A in respect of software development services, if data link charges are reduced from export turnover, then same should also be reduced from total turnover – Held, yes

10. What is manufacture

Deputy Commissioner of Income-tax VS. Girnar Industries [2010] 35 SOT 11 (COCH)(URO)/[2009] 124 TTJ 517 (COCH) – Assessment year 2004-05 – Assessee-firm, engaged in activities of blending and export of different grades of tea, claimed exemption under section 10A – Whether since term ‘manufacture’ as mentioned in section 10A did not include activity of ‘blending’ at relevant time, assessee’s claim could not be allowed – Held, yes

• ToniraPharma Ltd. VS. Assistant Commissioner of Income-tax, Bharuch Circle, Bharuch [2010] 39 SOT 28 (AHD.) – Assessment year 2002-03 – Whether in order to claim benefit of section 10B, essence of determining whether new article or thing is manufactured or produced lies in identity and use of commodity before undergoing processing and after processing – Held, yes – Whether if identity and character of article remain same then there is no manufacturing or production but where identity and character get transformed then it would be a manufacturing or production of new article or thing – Held, yes – Assessee­company was engaged in business of manufacturing and export of bulk drugs, drugs intermediates, fine chemicals (organic/inorganic), etc. – During relevant assessment year, assessee purchased ascorbic acid FCC Grade IV and after processing, sold it as ascorbic acid IP Grade – Assessee’s claim for exemption under section 10B was rejected –

Whether since there was no material on record to show that use of ascorbic acid FCC Grade IV and ascorbic acid IP Grade was different, it was to be held that no manufacturing or production of any new article or thing had taken place and, therefore, assessee’s claim was rightly rejected by authorities below – Held, yes

11. Income having direct nexus with export only is eligible.

  • Deputy Commissioner of Income-tax, Company Circle I(1), Chennai VS. Astron Document Management (P.) Ltd. [2011] 16 taxmann.com 33 (CHENNAI) / [2012] 49 SOT 46 (CHENNAI)(URO) – Assessment year 2004-05 – Whether gains derived by an assessee on conversions of funds from EEFC account into Indian rupee account, does not have any proximate or direct nexus with export transaction and, therefore, will not be eligible for deduction under section 1 0B – Held, yes – Section 10B of the Income-tax Act, 1961 – Export oriented undertaking – Assessment year 2004-05 –

Whether telecommunication charges attributable to delivery of software outside India by assessee­exporter had to be excluded from export turnover for working out deduction under section 1 0B whether or not billings of assessee specifically included such telecommunication expenses – Held, yes

  • Orchid Chemicals & Pharmaceuticals Ltd. VS. Joint Commissioner of Income-tax, Special Range-X[2005] 97 ITD 277 (CHENNAI) / [2005] 98 TTJ (CHENNAI) 32 – Assessment year 1997-98 –Whether an assessee is entitled to claim deduction under section 1 0B of amount which it derives as direct profit by export of goods manufactured in its newly established hundred per cent export oriented unit [EOU] and any indirect or incidental profit cannot be regarded as profit earned out of main business activity – Held, yes – Whether deduction under section 10B can be allowed on interest income earned by EOU from margin money deposited with bankers for obtaining letter of credit for import of raw materials – Held, no
  • Tocheunglee Stationery Mfg. Co. (P.) Ltd. VS. Income-tax Officer, Company Ward III(1) [2006] 5 SOT 428 (CHENNAI) – Assessment years 2000-01 and 2001-02 –

Whether for purpose of claiming deduction under section 10B, income should be derived from export business and form part of export turnover and assessee should show that profit was received from export for assessment year under consideration – Held, yes – Whether interest received by assessee on deposit made for purpose of getting bank guarantee in favour of Government of India to import goods free of duty was eligible for deduction under section 10B – Held, no

Whether excess provision towards incentives and bonus for earlier years written back in books of account under section 41(1), refund of sales-tax, and resale value of special import licence, could be construed as income from export or as forming part of export turnover so as to be eligible for deduction under section 10B – Held, no

  • Tricom India Ltd. VS. Assistant Commissioner of Income-tax, Central Circle 41, Mumbai [2010] 36 SOT 302 (MUM.) – Assessment year 2005-06 – Assessee was engaged in business of providing I.T. (Information Technology) enabled services and BPO transactions – During relevant assessment year, it claimed deduction under section 10B – On examination of details of profits, Assessing Officer found that profit declared by assessee included interest on fixed deposits, miscellaneous income, etc. – Assessing Officer opined that under section 10B(1), deduction was allowable only on profits derived from export of articles or things or computer software and, therefore, no deduction was possible on interest income – Commissioner (Appeals) upheld order of Assessing Officer –

Whether expression ‘derived from’ cannot be ignored in Section 10B(1) because said expression involves only those items of profit eligible for deduction which are derived from such undertaking – Held, yes – Whether since, in instant case, interest income was generated from interest, on FDRs and surplus funds, same could not be held to have been derived from export of I.T. Services – Held, yes – Whether, therefore, authorities below rightly rejected assessee’s claim in respect of interest income – Held, yes. Words &Phrases : Words ‘derived from’ as occurring in section 10B of the Income-tax Act, 1961

  • Taj International Jewelers VS. Income-tax Officer, Ward 33(2), New Delhi [2008] 19 SOT 587 (DELHI) – A.Y.2004-05 – Assessee entered into agreement with export house for export of its goods through them – In course of business assessee disclaimed certain export benefits in favour of export house and in lieu thereof received commission as reimbursement of expenses – Assessee claimed that said amount should have been treated as its business income for purpose of deduction allowable under section 10B – Assessing Officer did not accept assessee’s claim and held amount in question as income from other sources; consequently, he denied exemption under section 10B – Commissioner (Appeals) upheld order of Assessing Officer –

Whether since assessee had disclaimed export benefits in respect of certain goods and incentive was received in lieu of said disclaimer, proximate source of receipt was disclaimer of benefits and not export activities per se – Held, yes – Whether, therefore, while income might be attributable to export oriented unit of assessee, it could not be said that same was derived from unit – Held, yes – Whether, in such circumstances, authorities below rightly rejected assessee’s claim – Held, yes

12. Interest Income.

  • Cadila Exports (P.) Ltd. VS. Deputy Commissioner of Income-tax – [1994] 51 ITD 217 (AHD.) / [1994] 50 TTJ (AHD.) 603 Assessment year 1986-87 –

Whether income earned by way of interest on deposits of surplus funds could be regarded as incidental to production of goods at industrial undertaking established in free trade zone and, therefore, exemption under section 10A could be allowed on such income – Held, no.

  • India Comnet International VS. Income-tax Officer[2009] 185 TAXMAN 51 (MAD.) / [2008] 304 ITR 322 (MAD.) – Assessment year 2002-03 –

Whether interest income earned by assessee-company, being a 100 per cent export-oriented unit, on amount of export proceeds kept in foreign currency deposit account as permitted by FERA under Banking Regulations, would qualify for exemption under section 10A – Held, no

  • Commissioner of Income-tax VS. MenonImpex (P.) Ltd. [2003] 128 TAXMAN 11 (MAD.) / [2003] 180 CTR 40 (MAD.) / [2003] 259 ITR 403 (MAD.) – Assessment year 1985-86 – Assessee had set up a new industrial undertaking in free trade zone – In course of business, assessee was required to open letters of credit with banks for which deposits were made – Interest earned on such deposits was claimed to be exempt on ground that it was derived from newly set up industrial undertaking – Such claim was negatived by Assessing Officer but was allowed by Tribunal –

Whether mere fact that deposit made was for purpose of obtaining letters of credit which letters of credit were, in turn, used for purpose of business of industrial undertaking did not establish a direct nexus between interest and individual undertaking, and, therefore, assessee was not entitled to get benefit under section 10A – Held, yes

  • MKR Frozen Food Exports Ltd. VS. Income-tax Officer, Ward 6(1), New Delhi [2010] 126 ITD 1 (DELHI) – Assessment year 1998-99 – Assessee was engaged in business of export of frozen foods and meals – For this purpose, overdraft facilities were taken from bank to meet liquidity requirements – Subsequently, when assessee earned profit, money so generated was placed in fixed deposits with a bank – Assessee contended that deposits were placed with a view to reduce interest liability, and, therefore, interest income would partake character of profits and gains of business and became eligible for deduction under section 10B – Whether since interest earned from bank deposits did not have direct or proximate connection with business of export of EOU, same would be taxable under residuary head, i.e., ‘Income from other sources’ and was not eligible for deduction under section 1 0B – Held, yes
  • Assistant Commissioner of Income-tax VS. Shiva Shankar Granites (P.) Ltd. [2004] 89 ITD 625 (HYD.) / [2004] 83 TTJ (HYD.) 802 – Assessment year 1993-94 –

Whether interest on deposit towards bank guarantee money in favour of Central Excise & Customs Department as well as interest on deposit with State Electricity Board cannot be said to have been derived from industrial undertaking, and as such, are not eligible for benefit of exemption under section 10B – Held, yes

  • CG International (P.) Ltd. VS. Assistant Commissioner of Income-tax, Cir. 10(3), Mumbai [2007] 13 SOT 280 (MUM.)Assessment year 2001- 02 – Assessee-company, a hundred per cent export oriented unit, was engaged in business of manufacturing of plain and studded Jewellery and export thereof – Assessee claimed exemption qua interest income on ground that interest was earned during ordinary course of export business as same was earned by it from fixed deposits kept with bank for issue of bank guarantees for business purposes and from EEFC account maintained with Bank of India – Assessing Officer rejected assessee’s reply and assessed interest income as assessee’s income from other sources and, accordingly, held same as not exempt under section 1 0B – Whether Assessing Officer was justified – Held, yes

13. For computing the deduction all expenses relatable to that unit must be deducted.Nahar Spinning Mills Ltd. VS. Joint Commissioner of Income-tax, Range VII, Ludhiana[2012] 25 taxmann. com 342 (CHD.) / [2012] 54 SOT 134 (CHD.)(URO)- Assessment year 2007-08 – Whether while computing profits and gains of eligible units under section 10B all expenditure relatable to such units are to be deducted for computing eligible profits – Held, yes – Whether therefore, remuneration paid to managing director being common expenditure between eligible units and non-eligible unit run by assessee-company it needed to be allocated in order to determine eligible profits of business under section 10B – Held, yes

14. Onus is on the successor company to prove that it is the successor.Synergies Casting Ltd. VS. Dy. Commissioner of Income-tax, Circle 3(2)/ Assistant Commissioner of Income-tax, Circle 3(3), Hyderabad[2011] 13 taxmann.com 17 (HYD.) / [2011] 139 TTJ 627 (HYD.) / [2011] 47 SOT 82 (HYD.)(URO)- Assessment years 2006-07 and 2007-08 – Whether unless assessee who claims benefit under section 1 0B for unexpired period, establishes that it is a successor of a lessor and it fulfils all other necessary conditions in each year, it cannot claim benefit under section 1 0B for balance unexpired period – Held, yes – ‘SDAL’ had an industrial undertaking with facilities of manufacturing of aluminium alloy wheels and was claiming relief under section 10B – Assessee-company took said unit on lease-license for operating and maintaining same to carry on manufacturing activity – Assessee claimed continuation of relief under section 10B for balance unexpired period, which was denied by revenue –Whether since assessee-company had not proved that it was a successor to predecessor who was enjoying benefit of Section 10B and it was found to be only a lessee, having a right to use plant and machinery, claim of exemption under section 1 0B could not be allowed – Held, yes Circulars and Notifications : CBDT Circular F. .No. 15/5/63-IT[A1]

15. First year of claim must be established.

Sami Labs Ltd. VS. Assistant Commissioner of Income-tax[2012] 20 taxmann.com 785 (KAR.) /[2011] 239 CTR 510 (KAR.) / [2011] 334 ITR 157 (KAR.)- Assessment year 2002-03 – Starting point of limitation for claiming benefit flowing from section 1 0B would commence from year of manufacture or production of undertaking; assessee would not be able to claim such deduction in subsequent years unless said initial test on date of starting point of limitation has been satisfied

Income-tax Officer, Ward 31(4), New Delhi VS. VinodChhabra[2008] 20 SOT 328 (DELHI) – Assessment year 200 1-02 – For relevant assessment year, assessee, a hundred per cent export oriented undertaking (EOU), claimed exemption under section 10B – Assessing Officer denied exemption under section 10B for certain reasons – He, however, allowed deduction under section 80HHC to assessee in respect of profits and gains derived from export of goods out of India – Commissioner (Appeals), on basis of exemption allowed under section 10B to assessee for assessment year 1994-95, allowed assessee’s claim for exemption under section 10B – Whether since from assessment order for assessment year 1994-95 it was not clear as to in which year assessee started hundred per cent EOU and further since neither Assessing Officer nor Commissioner (Appeals) had examined matter in light of provisions of section 10B, issue was required to be remitted to file of Assessing Officer to examine claim of assessee in light of provisions of section 1 0B – Held, yes – Whether if exemption under section 10B would be allowed, assessee would not be eligible for deduction under section 80HHC – Held, yes. Assessment year 200 1-02 – Assessee was deriving income from a hundred per cent EOU (Export Oriented Unit) and claimed deduction under section 10B in respect of interest earned on FDRs – Whether since interest income earned by assessee on FDRs was not derived from export of eligible goods of hundred per cent EOU, assessee would not be eligible for exemption under section 10B in respect of interest income – Held, yes

16. Speculation profit not eligible.

Assistant Commissioner of Income-tax, Circle-11(5), Bangalore VS. K. Mohan & Co. (Exports) (P.) Ltd. [2010] 126 ITD 59 (BANG.) / [2010] 130 TTJ 719 (BANG.) / [2011] 7 ITR(TRIB.) 507 (BANG.) – Assessment year 2005- 06 – Assessee was engaged in business of manufacture and export of readymade garments – In order to avoid risk of loss due to foreign exchange fluctuation, it entered into forward contracts in respect of foreign exchange to be received as a result of export – During relevant assessment year, assessee claimed deduction under section 10B in respect of its entire income including profits derived from forward contracts – Whether since forward contracts had been taken in respect of 46 per cent of export turnover and it was not an isolated transaction, in view of Explanation 2 to section 28, profit from forward contracts was to be assessed as profit from speculation business – Held, yes – Whether since for purpose of computing deduction under section 10B, speculation business cannot be considered as business of undertaking, Assessing Officer was justified in rejecting assessee’s claim for deduction in respect of profits derived from forward contracts – Held, yes.

Authored by – S. K. Gupta- DIT(Exemption), Ahmedabad

(Republished With Amendments)

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2 Comments

  1. S K Agrawal says:

    At the outset I clarify that I am a STPI owner and am presently trying to defend my case with the Department by establishing that I am entitled to ten years of 100% Tax Holiday. And that is the intention of my reaction

    I refer to Exemption Under Special Provisions – Sections 10A/10AA/10B on page 13 By Ld. Sri S K Gupta.

    As per the explanation provided, sub-sections 10A(1A), 10A(1B) and 10A(1C), are all encompassing and effect all Units which enjoy Tax holiday under Sec10A.

    I am confused. Is that really so? A plain reading of these three sub-section means they are meant only for Units located in Special Economic Zone. Further this understanding of mine gets strengthened by Para 18 of EXPLANATORY NOTES ON THE PROVISIONS OF THE FINANCE ACT, 2003, CIRCULAR NO.7/2003, the 5th September, 2003. This para reads:

    18. Reinvestment allowance for units in Special Economic Zones.

    18.1 Under the existing provision contained in section 10A, a deduction is allowed on the export profits of an undertaking set up in a free trade zone, software Technology Park, electronic hardware Technology Park or a special economic zone, which is engaged in the manufacture or production of articles or things or computer software. The deduction is available to an undertaking for a period of ten consecutive assessment years. No deduction is allowable to any undertaking beyond the assessment year 2009-10. However, for a unit set up in Special Economic Zone, the deduction is equivalent to one hundred per cent of export profits for five years and thereafter, fifty per cent of profits for next two years and is available even beyond the assessment year 2009-10.

    18.2 With a view to promoting the development of Special Economic Zones, the existing sub-section (1A) of Section 10A has been substituted so as to provide for a further deduction for three consecutive years beyond the existing period eligible for deduction, which shall be equal to 50% of the profits, as are credited to a reserve account to be utilized for the purposes of the business. A new sub-section(1B) has also been inserted to provide that the reserve account is to be utilized for the acquiring a new machinery or plant which is put to use before the expiry of a period of three years. It has also been provided that until the acquisition of a new machinery or plant, the said reserve may be utilized for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

    18.3 These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years.

    18.4 Further, the reference of sub-section (1A) in subsection (4) and the reference of “this section” instead of “sub-section (1) in sub-section (5) of section 10A have also been inserted. The amendments are consequential in nature and will take effect retrospectively from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years.

    As per the explanation for Sec 10A provided in this publication, a STPI Unit established after AY 03-04 or thereafter is entitled to only seven years of exemption. No exemption for last three years because for obvious reasons that a STPI Unit will not create a “Special Economic Zone Reinvestment Allowance Reserve Account”.

    I wonder if the intention of legislature was to cut back on the Tax Holiday by introducing these three sub-sections OR promote SEZ. If it was to cut back, then why did the legislature extended 10A benefit twice in blocks of one year each.

    I shall be thankful if any body points out where am I going wrong.

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