Ita/232/2010 Of The Commissionr Of Income Tax v. M/S. Electronic Controls & Discharge

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY WEDNESDAY, THE 27TH JULY 2011 / 5TH SRAVANA 1933 ITA.No. 232 of 2010() --------------------- APPELLANT/RESPONDENT: ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT: --------------- M/S.ELECTRONIC CONTROLS & DISCHARGE SYSTEMS (P) LTD., PLOT NO.16A, GARMENT COMPLEX, CESZ, KAKKANAD, KOCHI-37. BY ADV. SRI.A.K.GANGULY, SENIOR ADVOCATE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ALONG WITH ITA NO.217/2010 ON 23/06/2011, THE COURT ON 27/07/2011 DELIVERED THE FOLLOWING: APPENDIX (ITA NO.232/2010) ANNEXURE A: COPY OF ASSESSMENT ORDER 143(3) DT.30.11.2006 FOR THE ASSESSMENTYEAR 2004-05. ANNEXURE B: COPY OF ORDER DT.19.12.2007 OF THE COMMISSIONER OF INCOME TAX(APPEALS). ANNEXURE C: COPY OF ORDER DT.6.11.2009 OF THE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH ITA NO.416/COCH/2009. TRUE COPY P.S. TO JUDGE C.N.RAMACHANDRAN NAIR &BHABANI PRASAD RAY, JJ..................................................................... I.T. Appeal Nos.217 & 232 of 2010....................................................................Dated this the 27th day of July, 2011. C.R. JUDGMENT Ramachandran Nair, J. The respondent-assessee is an industrial unit engaged inmanufacture and export of high intensity discharge lamp, igniters,luminaries, control gears etc. located in the Cochin Special EconomicZone. Being an export unit within the Special Economic Zone,assessee is entitled to income tax exemption under Section 10A of theIncome Tax Act on the profit earned on the export of goods received inconvertible foreign exchange for a period of ten years. The assesseewas in fact granted exemption on profit on export of goods received inconvertible foreign exchange for the assessment years 2003-2004 and2004-2005. However, during these two years, the assessee had madesale of components to another industrial unit in the Madras SpecialEconomic Zone for which assessee received payments in Indian rupee.Besides claiming exemption on export profits on the actual exports, ITA 217&232/2010 assessee also claimed exemption on the profits derived on the sale ofcomponents made to the industrial unit at MSEZ for both the years.For the year 2003-2004, the Assessing Officer besides allowingexemption on profits derived on export, also allowed exemption on theprofits derived on sale of components made by the assessee to theindustrial unit at Madras against payment received in Indian rupees,which was reversed by the Commissioner of Income Tax in exercise ofsuo moto revisional powers under Section 263 of the Income Tax Actbecause of the restriction contained in Section 10A(3) of the Act,which limits exemption on export profits only on the profits derivedon actual export made against receipt of convertible foreign exchange.For the assessment year 2004-2005, the Assessing Officer allowedassessee's claim of exemption only on the profits derived on actualexports and disallowed the claim made for sale of components to theindustrial unit at MSEZ. The first appellate authority confirmed thedisallowance for the year 2004-2005. The assessee challenged theorder issued by the Commissioner under Section 263 for the year 2003-2004 and the first appellate order for the year 2004-2005 before the ITA 217&232/2010 ITA 217&232/2010 Tribunal contending that sale of components to the industrial unit atMSEZ is a deemed export under the provisions of the SpecialEconomic Zones Act, 2005, and so much so, assessee is entitled toexemption under Section 10A not only on the profits derived on actualexports, but on sale of components to another industrial unit in theMSEZ for manufacture of final products by that unit for export. TheTribunal held that convertible foreign exchange referred to in Section10A(3) should enjoy a liberal construction covering probably Indianrupees received as well from an Indian buyer and accordingly theyallowed the appeals, against which these appeals are filed by theRevenue under Section 260A of the Income Tax Act. We have heardSenior counsel Sri.P.K.R.Menon appearing for the Revenue and Seniorcounsel Sri.A.K.Ganguly appearing for the respondent-assessee. 2. Before proceeding to consider the case on merits, what wenotice from the Tribunal's order is that the assessee filed one appealbefore the Tribunal with a delay of 627 days and the other with a delayof 509 days. Inspite of objection raised by the department, the Tribunalhas condoned the delay accepting the explanation of the assessee that ITA 217&232/2010 the assessee took one to one and a half years to take "better opinionfrom tax experts" on the issues involved in the appeal. We aresurprised in the light way the Tribunal has condoned the delay. In ourview, the appeal before the Tribunal is certainly an afterthought on amatter apparently accepted by the assessee. However, since theTribunal has exercised the discretion and allowed the delaycondonation petition however unsatisfactory it may be, we proceed toignore the same and consider the appeals on merits. 3. The very short question that arises for consideration is whetherassessee is entitled to exemption on the profits derived on the sale ofcomponents to an industrial unit in another Special Economic Zonewithin India under Section 10A(3) of the Income Tax Act, whichprovides for exemption on the profit derived on export sale proceeds ofarticles or things or computer software received or brought to India inconvertible foreign exchange within a period of six months from theend of the previous year or within such period as the competentauthority may allow. Convertible foreign exchange as defined underclause (ii) of Explanation to Section 10A(8) means foreign exchange ITA 217&232/2010 which is treated by the RBI as convertible foreign exchange for thepurposes of Foreign Exchange Regulation Act, 1973 or the Rules madethereunder. Admittedly assessee was given full exemption on theprofits received on actual exports for which payment was received inconvertible foreign exchange. Dispute is only with regard to theinterstate sale of components made to the unit in the MSEZ for whichthe payment received is also admittedly in Indian rupee and not inconvertible foreign exchange. The provisions in Section 10A arecomprehensive and exhaustive and there is no dispute that themandatory conditions of Section 10A(3) have to be satisfied to getexemption on export profits. In other words, exemption is availableonly on actual exports and only if consideration of export is received inconvertible foreign exchange. In the case in hand both the conditionsare not satisfied because assessee's sales of components are to anotherindustrial unit in India and the sale proceeds are received in Indianrupee. The question, therefore, is whether provisions of anotherstatute, that too, enacted after the end of both the assessment years cancome to the rescue of the assessee, which is the finding of the Tribunal. ITA 217&232/2010 4. In order to consider the rival contentions we have to necessarily refer to the relevant statutory provisions of the statutewhich are extracted hereunder: ITA 217&232/2010 4. In order to consider the rival contentions we have to necessarily refer to the relevant statutory provisions of the statutewhich are extracted hereunder: "S.10A(1) Subject to the provisions of this section, adeduction of such profits and gains as are derived by anundertaking from the export of articles or things orcomputer software for a period of ten consecutiveassessment years beginning with the assessment yearrelevant to the previous year in which the undertakingbegins to manufacture or produce such articles or things orcomputer software, as the case may be, shall be allowedfrom the total income of the assessee: ......... (3) This section applies to the undertaking, if the saleproceeds of articles or things or computer software exportedout of India are received in, or brought into, India by theassessee in convertible foreign exchange, within a period ofsix months from the end of the previous year or, within suchfurther period as the competent authority may allow in thisbehalf. Explanation 1:- For the purpose of this sub-section,the expression "competent authority" means the ReserveBank of India or such other authority as authorised underany law for the time being in force for regulating paymentsand dealings in foreign exchange. Explanation 2:- The sale proceeds referred to in thissub-section shall be deemed to have been received in Indiawhere such sale proceeds are credited to a separate accountmaintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank ofIndia. (8) Explanation 2:- For the purpose of this section,-- ........ (ii) "convertible foreign exchange" means foreignexchange which is for the time being treated by the ReserveBank of India as convertible foreign exchange for thepurposes of the Foreign Exchange Regulation Act, 1973 (46of 1973), and any rules made thereunder or any othercorresponding law for the time being in force; (iv) "export turnover" means the consideration inrespect of export by the undertaking of articles or things orcomputer software received in, or brought into, India by theassessee in covertible foreign exchange in accordance withsub-section (3), but does not include freight,telecommunication charges or insurance attributable to thedelivery of the articles or things or computer softwareoutside India or expenses, if any, incurred in foreignexchange 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 theconditions required for allowing the claim contained in Section 10A(3)are not satisfied in as much as sale is only an interstate sale and not anexport sale and the consideration received is in Indian rupee and not inconvertible foreign exchange. Reference is also made to the technical ITA 217&232/2010 words used such as “foreign exchange” and “export turnover” used inSection 10A(3) and counsel contended that nowhere in the provisionsof Section 10A an artificial meaning is given to “export” or “exportturnover” to enable the assessee to claim exemption on so-calleddeemed export which is the sale of components by the assessee toanother unit in the MSEZ. According to Standing Counsel for theRevenue, assessee's claim is thoroughly misconceived and if exemptionwas to be provided for the sales made between industrial units in theExport Processing Zone, the Act would have expressly provided so.The further contention raised by the Revenue is that the provisions ofSpecial Economic Zone Act, 2005 relied on by the assessee whichfound acceptance with the Tribunal was enacted after the end of boththe assessment years to which assessments relate in these appeals. 5. Senior counsel Sri.A.K.Ganguly appearing for the respondent-assessee made elaborate argument with reference to the provisions ofthe Special Economic Zones Act, 2005 and the Rules made thereunderand the Foreign Trade Policy Guidelines issued by the Director Generalof Foreign Trade and contended that the claim was rightly allowed by ITA 217&232/2010 9 the Tribunal as the inter-unit sale is a deemed export within themeaning of Special Economic Zones Act, 2005. Reliance is also placedon judgment of this court in TATA TEA LTD. VS. ASSISTANTCOMMISSIONER OF INCOME-TAX reported in 2010(189)TAXMAN 303. Assessee's counsel relied on the definition of "export" contained in Section 2(m)(iii) of the Special Economic Zones Act,2005 which is as follows: "(m) "export" means -- (i) taking goods, or providing services, out of India,from a Special Economic Zone, by land, sea or air or byany other mode, whether physical or otherwise; or (ii) supplying goods, or providing services, from theDomestic Tariff Area to a Unit or Developer; or (iii) supplying goods, or providing services, from oneUnit to another Unit or Developer, in the same or differentSpecial Economic Zone." Reference is also made to Foreign Trade Policy 2004-2009 issued by the Director General of Foreign Trade wherein "deemed export" isexplained in clause 8.1 as follows: "Deemed Exports" refers to those transactions inwhich the goods supplied do not leave the country and thepayment for such supplies is received either in Indian ITA 217&232/2010 rupees or in free foreign exchange. Specific reference is made to Notification issued by the Ministry ofFinance, Central Board of Excise & Customs, New Delhi, on 30.7.2003wherein there is a statement that Special Economic Zone will beconsidered as foreign territory for purposes of duties and taxes.Counsel for the assessee has also relied on decision of the SupremeCourt in SATYAWATI SHARMA VS. UNION OF INDIA reported in(2008) 5 SCC 287. Even though this decision is on Rent Control Act,assessee's counsel submitted that the principle laid down therein hasapplication in as much as there can be no discrimination in regard totaxation on the profits on exports and profits on deemed exports. Sofar as the decision of this court above referred, the contention ofassessee's counsel is that the provisions of the Act should be liberallyconstrued to achieve the object i.e. to grant exemption on export profit.On the factual position, the assessee contended that the industrial unitat MSEZ after purchasing the components from the assessee,manufacture the final products and export which qualifies forexemption from tax and assessee being the component supplier is a ITA 217&232/2010 contributor for receipt of foreign exchange which is the basis forgranting exemption. 6. After hearing both sides and after going through the abovereferred provisions of the Income Tax Act and the provisions of theSpecial Economic Zones Act, 2005, we are unable to uphold the orderof the Tribunal because the concept of deemed export under the SpecialEconomic Zones Act is not incorporated in the scheme of exemptionunder Section 10A of the Income Tax Act and it is the settled positionthat the Income Tax Act is a self-contained code and the validity orcorrectness of the assessment has to be considered with reference tostatutory provisions. It is not as if the Special Economic Zones Act,2005 or the Foreign Exchange Regulation Act or the Foreign ExchangeManagement Act are not referred to in the Income Tax Act. TheIncome Tax Act refers to several statutes in different places andwherever required, provisions of such statutes are incorporated in theAct through reference or by incorporation. It is not as if the Parliamentis unaware of other statutes which have specific purposes. Inter-unittransfers in Economic Zones are treated as exports for the purpose of ITA 217&232/2010 ITA 217&232/2010 Customs Act and the Central Excise Act. However, when Section 10Aprovides for exemption only on profits derived on export proceedsreceived in convertible foreign exchange, the Legislature neverintended the benefit to be extended to local sales made by the units inthe Special Economic Zone, whether as part of Domestic Tariff Areasales or inter-unit sales within the Zone or units in other Zones. In factall Special Economic Zones are allowed to make 25% sales toDomestic Tariff Area and the profit derived from such sales are notentitled to exemption. Exemption under Section 10A(3) is specificallygeared to profits on actual exports, that too, made against receipt ofconvertible foreign exchange. We are of the view that if the provisionsof the Special Economic Zones Act, 2005, are brought in to extend theexemption on profits derived on inter-unit sale made by industrieswithin the Export Processing Zone, the court will be re-writing thelegislation which is exactly what the Tribunal has done. In fact, theunit which purchased components from the assessee must bemanufacturing final products and being a unit in the Special EconomicZone will be exporting the final product, on which that unit will get exemption on the entire profits which include the value of thecomponents supplied by the assessee. Probably the Legislature did notwant duplicity in exemption on export profit. That is why inter-unitsales in the Export Processing Zone are not treated as export within themeaning of Section 10A of the Income Tax Act, no matter suchtransfers are treated as exports for the purpose of Customs and Exciseduty exemption. When the exemption is only on actual profits derivedon exports made against receipt in convertible foreign exchange, theTribunal, in our view, has no justification to extend it to profitsreceived on local sales within India against payment received in Indianrupees. For the above reasons, we are unable to sustain the orders ofthe Tribunal and we, therefore, allow the appeals by reversing theorders of the Tribunal and by restoring the orders cancelled by theTribunal. C.N.RAMACHANDRAN NAIRJudge BHABANI PRASAD RAYJudge