Facts of the Case

The respondent/assessee, Om Nanotech Pvt Ltd, had established two units in the Noida Special Economic Zone (NSEZ), one engaged in manufacturing and the other in trading activities. The manufacturing unit produced memory modules, flash drives, and electronic chips, while the trading unit imported similar goods and re-exported them.

For Assessment Year 2010–11, the assessee claimed deduction under Section 10AA amounting to ₹14.81 crores from its profits derived from export activities. However, the Assessing Officer disallowed the deduction on the ground that trading activities did not qualify as “services” under Section 10AA.

The CIT(A) and subsequently the ITAT allowed the deduction, leading the Revenue to file an appeal before the Delhi High Court.

 Issues Involved

  1. Whether trading activities involving import and re-export qualify as “services” under Section 10AA of the Income Tax Act, 1961.
  2. Whether the Tribunal erred in relying upon the definition of “services” under the SEZ Act, 2005 and Rule 76 of the SEZ Rules, 2006 while interpreting Section 10AA.

 Petitioner’s Arguments (Revenue)

  • Deduction under Section 10AA must be interpreted strictly based on the provisions of the Income Tax Act alone.
  • The Tribunal erred in importing the definition of “services” from the SEZ Act, 2005.
  • Since the Income Tax Act does not define “services”, external definitions should not be relied upon where no inconsistency exists.

 Respondent’s Arguments (Assessee)

  • Section 10AA was introduced via the SEZ Act, 2005; therefore, its interpretation must align with the SEZ framework.
  • The term “services” is not defined under the Income Tax Act, hence reference to the SEZ Act definition is justified.
  • Trading involving import for re-export falls within the definition of “services” as per Rule 76 and the SEZ Act.
  • The purpose of Section 10AA is to promote exports and earn foreign exchange.

 Court’s Findings / Analysis

  • Section 10AA is intrinsically linked with the SEZ Act, 2005, as it was introduced through Section 27 of that Act.
  • Since “services” is not defined in the Income Tax Act, reference must be made to the SEZ Act.
  • Rule 76 of the SEZ Rules clearly includes “trading” within services, and its explanation defines trading as import for the purpose of re-export.
  • Government instructions and circulars also clarify that tax benefits apply to trading activities involving re-export.
  • Therefore, trading activities of the assessee fall within the ambit of “services” under Section 10AA.

 Court Order

  • The appeal filed by the Revenue was dismissed.
  • The decision of the ITAT allowing deduction under Section 10AA was upheld.
  • The question of law was answered in favour of the assessee and against the Revenue.

 Important Clarification

  • Trading activities qualify for Section 10AA deduction only when they involve import for the purpose of re-export.
  • Domestic trading does not qualify for such deduction.
  • Interpretation of Section 10AA must be harmonized with the SEZ Act, 2005.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS23022023ITA4282019_184005.pdf

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