A Trader can claim deduction equivalent to 100% of profits derived from export of services under SEZ

While upholding ITAT’s order confirming that the Assessee was eligible for deduction under Section 10AA, by relying on definition of ‘services’ under Section 2(z) of SEZ Act and explanation provided in Rule 76 of SEZ Rules, 2006, the Delhi High Court recently held that export ‘trading’ of imported articles is eligible for deduction under Section 10AA.

Noting that the definition of the expression “services” is not provided in the 1961 Act, the Division Bench comprising of Justice Rajiv Shakdher and Justice Vikas Mahajan observed that “a plain reading of the language of Section 10AA of the 1961 Act would show that an assessee can claim deduction equivalent to 100% of profits and gains derived from export of services”.

Advocate Rohit Jain appeared for the Assessee, while the Revenue was represented by Advocate Sanjay Kumar.

Briefly, the Assessee company had set up a trading unit involving import of memory modules, flash drives and electronic chips which ultimately were re-exported. During assessment, the AO denied Section 10AA deduction on the basis that the deduction could be claimed only against articles manufactured in, or against the services which emanated from SEZ. However, on appeal, the CIT(A) deleted the disallowance.

Counsel for Revenue submitted that ITAT erred in referring to Explanation given under Rule 76 of SEZ Rules after taking recourse to the definition of the expression “services” contained in Section 2(z) of the SEZ Act.

On the other hand, the Assessee contended that since the expression “services” was not defined in the Income Tax Act, the ITAT was well within its powers to advert to the definition contained in Section 2(z) of the SEZ Act. The Assessee further submitted that the entire purpose and object of providing deduction qua profits derived from trading activities was to promote exports and earn revenue in foreign currency.

After considering the submission, the Bench noted that the definition of the expression “services” is not provided in the Income Tax Act.

Thus, from the definition of “services” under Section 2(z), the Bench observed that tradable services, which are prescribed by the Central Government for the purposes of SEZ Act, are included in the definition.

The Bench further noted that as per the Explanation to Rule 76, trading for the purposes of the Second Schedule of the SEZ Act includes import for the purposes of re-export, and accordingly, the SEZ Act provide that the expression “services” means services which are offered by way of re-export of articles that are imported into the country.

Accordingly, the Bench concluded that the deduction under Section 10AA will also be available qua those articles which, upon import to the unit located in SEZ, were thereafter re-exported.

Cause Title: PCIT vs. Om Nanotech Pvt Ltd [ITA 428/2019 / 2023-Enterslice-14-HC-Del-IT]

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