Lotus Footwear Enterprises Limited Vs DCIT (ITAT Chennai)
Fresh Capital, Not Splitting: Employee Transfers No Bar- ITAT Chennai Allows 100% SEZ Deduction u/s 10AA
Lotus Footwear Enterprises Ltd., India Branch (a BVI company branch) operates two SEZ units (LU1 & LU2) in SIPCOT Industrial Park, Tamil Nadu, manufacturing NIKE footwear. LU1 commenced in 2008 & LU2 in April 2014 after SEZ approval with investment exceeding ₹76 Cr.
AO restricted deduction claimed u/s 10AA for LU2 to 50% (instead of 100%) holding LU2 was formed by splitting up of LU1, transferring employees & machinery, producing same products, & being interdependent. AO also denied deduction prior to set-off of losses & unabsorbed depreciation. CIT(A)/ DRP upheld this.
Tribunal noted earlier order (20.11.2024) had rejected 100% claim citing >20% used machinery transfer but had ignored assessee’s evidence on CWIP & other grounds. On Miscellaneous Application, order was recalled for fresh adjudication.
On merits, Tribunal examined detailed submissions:
- LU2 was separately approved as new SEZ unit, with fresh capital outlay, independent premises & departments.
- Transfer of some employees is commercially permissible & not a statutory bar; SEZ instruction No.70 allows manpower transfers.
- Turnover & profits of LU1 increased even after LU2 started, showing no splitting/reconstruction.
- Inclusion of CWIP/new machinery reduced used machinery ratio below 20%, satisfying sec.10AA(4)(iii).
- Producing same “Young Athlete” shoes initially by LU2 was only due to skill building of new workers; later LU1 focused on complex models with higher profits.
Tribunal, relying on SC in Sociedade de Fomento Industrial (443 ITR 34) & Delhi HC in Macquarie Global Services, held LU2 was a new undertaking & not formed by splitting/reconstruction. Accordingly, 100% deduction u/s 10AA for LU2 was allowed. Tribunal also clarified that deduction u/s 10AA should be computed before setting off brought forward losses & depreciation, following earlier ITAT rulings. Appeals of Assessee were allowed, granting full relief for AYs 2016-17 to 2019-20.
