Commissioner of Income Tax vs Electronic Controls and Discharge Systems (P) Ltd.

C.N. Ramachandran Nair, J.—The rcspondent-assessee is an industrial unit engaged in manufacture and export of high intensity discharge lamp, igniters, luminaries, control gears etc. located in the Cochin SEZ. Being an export unit within the SEZ, assessee is entitled to income tax exemption under s. 10A of the IT Act on the profit earned on the export of goods received in convertible foreign exchange for a period of ten years. The assessee was in fact granted exemption on profit on export of goods received in convertible foreign exchange for the asst. yrs. 2003-04 and 2004-05. However, during these two years, the assessee had made sale of components to another industrial unit in the Madras SEZ for which assessee received payments in Indian rupee. Besides claiming exemption on export profits on the actual exports, assessee also claimed exemption on the profits derived on the sale of components made to the industrial unit at MSEZ for both the years. For the year 2003-04, the AO besides allowing exemption on profits derived on export, also allowed exemption on the profits derived on sale of components made by the assessee to the industrial unit at Madras against payment received in Indian rupees, which was reversed by the CIT in exercise of suo motu revisional powers under s. 263 of the IT Act because of the restriction contained in s. 10A(3) of the Act, which limits exemption on export profits only on the profits derived on actual export made against receipt of convertible foreign exchange. For the asst. yr. 2004-05, the AO allowed assessee''s claim of exemption only on the profits derived on actual exports and disallowed the claim made for sale of components to the industrial unit at MSEZ. The first appellate authority confirmed the disallowance for the year 2004-05. The assessee challenged the order issued by the CIT under s. 263 for the year 2003-04 and the first appellate order for the year 2004-05 before the Tribunal contending that sale of components to the industrial unit at MSEZ is a deemed export under the provisions of the SEZ Act, 2005, and so much so, assessee is entitled to exemption under s. 10A not only on the profits derived on actual exports, but on sale of components to another industrial unit in the MSEZ for manufacture of final products by that unit for export. The Tribunal held that convertible foreign exchange referred to in s. 10A(3) should enjoy a liberal construction covering probably Indian rupees received as well from an Indian buyer and accordingly they allowed the appeals, against which these appeals are filed by the Revenue under s. 260A of the IT Act. We have heard senior counsel Sri P.K.R. Menon appearing for the Revenue and senior counsel Sri A.K. Ganguly appearing for the respondent-assessee.

Before proceeding to consider the case on merits, what we notice from the Tribunal''s order is that the assessee filed one appeal before the Tribunal with a delay of 627 days and the other with a delay of 509 days. In spite of objection raised by the Department, the Tribunal has condoned the delay accepting the explanation of the assessee that the assessee took one to one and a half years to take "better opinion from tax experts" on the issues involved in the appeal. We are surprised in the light way the Tribunal has condoned the delay. In our view, the appeal before the Tribunal is certainly an afterthought on a matter apparently accepted by the assessee. However, since the Tribunal has exercised the discretion and allowed the delay condonation petition however unsatisfactory it may be, we proceed to ignore the same and consider the appeals on merits.

The very short question that arises for consideration is whether assessee is entitled to exemption on the profits derived on the sale of components to an industrial unit in another SEZ within India under s. 10A(3) of the IT Act, which provides for exemption on the profit derived on export sale proceeds of articles or things or computer software received or brought to India in convertible foreign exchange within a period of six months from the end of the previous year or within such period as the competent authority may allow. Convertible foreign exchange as defined under cl. (ii) of Explanation to s. 10A(8) means foreign exchange which is treated by the RBI as convertible foreign exchange for the purposes of Foreign Exchange Regulation Act, 1973 or the Rules made there under. Admittedly assessee was given full exemption on the profits received on actual exports for which payment was received in convertible foreign exchange. Dispute is only with regard to the interstate sale of components made to the unit in the MSEZ for which the payment received is also admittedly in Indian rupee and not in convertible foreign exchange. The provisions in s. 10A are comprehensive and exhaustive and there is no dispute that the mandatory conditions of s. 10A(3) have to be satisfied to get exemption on export profits. In other words, exemption is available only on actual exports and only if consideration of export is received in convertible foreign exchange. In the case in hand both the conditions are not satisfied because assessee''s sales of components are to another industrial unit in India and the sale proceeds are received in Indian rupee. The question, therefore, is whether provisions of another statute, that too, enacted after the end of both the assessment years can come to the rescue of the assessee, which is the finding of the Tribunal.

In order to consider the rival contentions we have to necessarily refer to the relevant statutory provisions of the statute which are extracted hereunder:

Sec. 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation 1.--For the purpose of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

Explanation 2.--The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

(8) Explanation 2.--For the purpose of this section,--

(ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made there under or any other corresponding law for the time being in force;

(iv) "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-s. (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.

Senior counsel appearing for the Revenue contended that the assessee''s claim of exemption is thoroughly untenable because both the conditions required for allowing the claim contained in s. 10A(3) are not satisfied inasmuch as sale is only an interstate sale and not an export sale and the consideration received is in Indian rupee and not in convertible foreign exchange. Reference is also made to the technical words used such as "foreign exchange" and "export turnover" used in s. 10A(3) and counsel contended that nowhere in the provisions of s. 10A an artificial meaning is given to "export" or "export turnover" to enable the assessee to claim exemption on so-called deemed export which is the sale of components by the assessee to another unit in the MSEZ. According to standing counsel for the Revenue, assessee''s claim is thoroughly misconceived and if exemption was to be provided for the sales made between industrial units in the export processing zone, the Act would have expressly provided so. The further contention raised by the Revenue is that the provisions of SEZ Act, 2005 relied on by the assessee which found acceptance with the Tribunal was enacted after the end of both the assessment years to which assessments relate in these appeals.

Senior counsel Sri A.K. Ganguly appearing for the respondent-assessee made elaborate argument with reference to the provisions of the SEZ Act, 2005 and the Rules made there under and the Foreign Trade Policy Guidelines issued by the Director General of Foreign Trade and contended that the claim was rightly allowed by the Tribunal as the inter-unit sale is a deemed export within the meaning of SEZ Act, 2005. Reliance is also placed on judgment of this Court in Tata Tea Ltd. Vs. Assistant Commissioner of Income Tax, . Assessee''s counsel relied on the definition of "export" contained in s. 2(m)(iii) of the SEZ Act, 2005 which is as follows:

(m) "export" means--

(i) taking goods, or providing services, out of India, from a SEZ, by land, sea or air or by any other mode, whether physical or otherwise; or

(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or developer; or

(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different SEZ,

Reference is also made to Foreign Trade Policy 2004-2009 issued by the Director General of Foreign Trade wherein "deemed export" is explained in cl. 8.1 as follows:

''Deemed Exports'' refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange.

Specific reference is made to Notification issued by the Ministry of Finance, Central Board of Excise and Customs, New Delhi, on 30th July, 2003 wherein there is a statement that SEZ will be considered as foreign territory for purposes of duties and taxes. Counsel for the assessee has also relied on decision of the Supreme Court in Satyawati Sharma (Dead) by LRs. Vs. Union of India (UOI) and Another, . Even though this decision is on Rent Control Act, assessee''s counsel submitted that the principle laid down therein has application inasmuch as there can be no discrimination in regard to taxation on the profits on exports and profits on deemed exports. So far as the decision of this Court above referred, the contention of assessee''s counsel is that the provisions of the Act should be liberally construed to achieve the object i.e., to grant exemption on export profit. On the factual position, the assessee contended that the industrial unit at MSEZ after purchasing the components from the assessee, manufacture the final products and export which qualifies for exemption from tax and assessee being the component supplier is a contributor for receipt of foreign exchange which is the basis for granting exemption.

After hearing both sides and after going through the above referred provisions of the IT Act and the provisions of the SEZ Act, 2005, we are unable to uphold the order of the Tribunal because the concept of deemed export under the SEZ Act is not incorporated in the scheme of exemption under s. 10A of the IT Act and it is the settled position that the IT Act is a self-contained code and the validity or correctness of the assessment has to be considered with reference to statutory provisions. It is not as if the SEZ Act, 2005 or the Foreign Exchange Regulation Act or the Foreign Exchange Management Act are not referred to in the IT Act. The IT Act refers to several statutes in different places and wherever required, provisions of such statutes are incorporated in the Act through reference or "by incorporation. It is not as if the Parliament is unaware of other statutes which have specific purposes. Inter-unit transfers in economic zones are treated as exports for the purpose of Customs Act and the Central Excise Act. However, when s. 10A, provides for exemption only on profits derived on export proceeds received in convertible foreign exchange, the legislature never intended the benefit to be extended to local sales made by the units in the SEZ, whether as part of domestic tariff area sales or inter-unit sales within the Zone or units in other Zones. In fact all SEZs are allowed to make 25 per cent sales to domestic tariff area and the profit derived from such sales are not entitled to exemption. Exemption under s. 10A(3) is specifically geared to profits on actual exports, that too, made against receipt of convertible foreign exchange. We are of the view that if the provisions of the SEZ Act, 2005, are brought in to extend the exemption on profits derived on inter-unit sale made by industries within the export processing zone, the Court will be re-writing the legislation which is exactly what the Tribunal has done. In fact, the unit which purchased components from the assessee must be manufacturing final products and being a unit in the SEZ will be exporting the final product, on which that unit will get exemption on the entire profits which include the value of the components supplied by the assessee. Probably the legislature did not want duplicity in exemption on export profit. That is why inter-unit sales in the export processing zone are not treated as export within the meaning of s. 10A of the IT Act, no matter such transfers are treated as exports for the purpose of customs and excise duty exemption. When the exemption is only on actual profits derived on exports made against receipt in convertible foreign exchange, the Tribunal, in our view, has no justification to extend it to profits received on local sales within India against payment received in Indian rupees. For the above reasons, we are unable to sustain the orders of the Tribunal and we, therefore, allow the appeals by reversing the orders of the Tribunal and by restoring the orders cancelled by the Tribunal.