SEZ Computation of Profit

S. 10 AA (7): (Clause – 6 of Finance Bill, 2010)

Background:-Section 10AA was inserted in the Income-tax Act, 1961 (“the Act”) by the Special Economic Zones Act, 2005 (“the SEZ Act”) with effect from 10-2-2006. The section was enacted specially with respect to provide tax exemption to the newly established units in the Special Economic Zone (“the SEZ”). For claiming deduction under section 10AA of the Act following conditions are to be satisfied:

(i) The assessee being an entrepreneur as defined under section 2(j) of the SEZ Act has to set up a unit in the SEZ;

(ii) The unit so set up by the assessee should commence to manufacture or produce articles or things or provide any service during the previous year commencing after 1-4-2006;

(iii) The undertaking should not be formed:

(a) by splitting up, or by the reconstruction, of a business already in existence; or

(b) by a transfer to new business of machinery and plant previously used for any purpose by the assessee;

(iv) The assessee has exported goods or provided services out of India from the SEZ, whether physically or otherwise;

(v) The books of account are audited and audit report is filed along with the return of income and the assessee claims the deduction in its return of income;

If the assessee satisfied the above conditions then prior to 2009, hundred per cent (100%) of the profit or gains derived from export of goods or from services is deductible for a period of 5 (five) consecutive assessment years and thereafter, fifty per cent (50%) of the profit or gains derived from export of goods or from services is deductible for the next 5 (five) years. Profits derived from the export of articles or things or services would be the amount which bears to the profits of the business of the undertaking, being the unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the assessee. Accordingly, the formula for computing deduction under section 10AA prior to 2009 was as under:

Profits of the business of the Unit x Export Turnover of the Unit

Total Turnover of the business carried out by the assessee

This formula was seemingly created discrimination between assessees who were having multiple units in the SEZ as well as in the domestic tariff area (DTA) and the assessees who were having units only in the SEZ. Here it may be pertinent to note that section 10AA itself clarified that the word, ‘assessee’ for the purpose of this section would mean an entrepreneur referred to in section 2(j) of the SEZ Act, as such the word, ‘assessee’ referred to in the formula should be an undertaking in the SEZ.

However, in order to remove this anomaly, the aforesaid provision of the sub-section (7) of section 10AA was amended by section 6 of the Finance (No. 2) Act, 2009, so as to substitute the reference to “assessee” by the word “undertaking”. Accordingly, the exemption under section 10AA was to be computed with reference to the total turnover of the undertaking in the SEZ and not with reference to the total turnover of the business of the assessee. The said amendment made by Finance (No. 2) Act, 2009 become effective from 1-4-2010 and accordingly, applied in relation to the A.Y. 2010-11 and subsequent years. At the time when this amendment by the Finance (No. 2) Act, 2009 was made doubts were expressed as to whether the amendment should be retrospective or prospective from 2010-11 so as to streamline the provisions of the section.

Amendment Made

Now, in order to make the amendment effective for earlier years that is from the year in which the provisions of section 10AA came into force, it is amended in Finance Bill, 2010, by inserting a proviso to sub-section (7), which reads as under:

“Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.”

To provide that the provision of sub-section (7), as amended by Finance (No. 2) Act, 2009, will apply retrospectively from the A.Y. 2006-07 and subsequent assessment years.

Comments

By the amendment, now the method of computation of profits eligible for tax holiday in case of SEZ undertakings is streamlined retrospectively that is since introduction of the provisions of section 10AA of the Act.