ASSIGNMENT ON TAXATION MANAGEMENT

ASSIGNMENT ON TAXATION MANAGEMENT

SUBMITTED BY

GANESH VADDEPALLY

ROLL NO: 15-F-347

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SPECIAL ECONOMIC ZONE [SECTION 10AA]

(SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED UNITS IN SPECIAL
ECONOMIC ZONE)

1. CONDITIONS TO BE SATISFIED:

The following conditions should be satisfied to claim deduction u/s 10AA:

Condition 1: Assessee, being an entrepreneur as referred to in clause (j) of section 2 of the

Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter
of approval by the Development Commissioner to set a unit in a Special Economic Zone.

Conditions 2: The Unit in Special Economic Zone who begins to manufacture or produce
articles or things or provide any services during the previous year relevant to any
assessment year commencing on or after the 1st day of April, 2006.

Conditions 3: It is not formed by the splitting up, or reconstruction, of a business already an

existence.

Conditions 4: It not formed by the transfer to a new business, of old plant and machinery.
However, it can be formed by transfer of old plant or machinery to the extent of 20%.

Condition 5: The assessee has income from export of articles or thing or from services from
such unit. In other words, the assessee has exported goods or provided services out of India
from the Special Economic Zone by land, sea, air, or by any other mode, whether physical or
otherwise.

Conditions 6: Books of Accounts of the taxpayer should be audited. The Tax payer should
submit Audit Report in Form No.56F along with the return of income.

2. AMOUNT OF DEDUCTION:

Deduction depends upon quantum of Profit derived from Export of Articles or things or
services (including computer software). It is calculated as under

Profit of the Business of the undertaking X Export turnover

Total Turnover of the business

Deduction for First 5 Assessment Years 100% of Profits and Gains derived for a
period of five consecutive assessment years beginning with the assessment year
relevant to the previous year in which the Unit begins to manufacture or produce
such articles or things or provide services.

Deduction for 6th Assessment Year to 10th Assessment Years: 50% of such Profits
and Gains for further five assessment years and thereafter;

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Deduction for 11th Assessment Year to 15th Assessment Year: Amount not
exceeding 50% of the profit as is debited to the profit and loss account of the
previous year in respect of which the deduction is to be allowed and credited to a
reserve account (to be called the Special Economic Zone Re-investment Reserve
Account) to be created and utilized for the purposes of the business of the
assessee.

3. CONSEQUENCES FOR MERGER AND DEMERGER:

Where any undertaking is transferred, before the expiry of the period specified in this
section, to another undertaking, under a scheme of amalgamation or demerger,

(a) No deduction shall be admissible under this section to the amalgamating or the
demerged Unit for the previous year in which the amalgamation or the demerger
takes place;

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Section 10B of the Income-tax Act to 100% Export Oriented

Undertaking-Clarification
1. Section 10-B of the Income-tax Act provides for 100% deduction of profits derived by
a hundred per cent Export Oriented Undertaking, from export of articles or things or
computer software manufactured or produced by it. The deduction is available 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 articles or things or computer software. However, no deduction under
section 10-B is available after Assessment Year 2009-10.

2. The deduction u/s 10-B is available to an undertaking which fulfils all the following
conditions:
it manufactures or produces any article or thing or computer software;
it is not formed by the splitting up, or the reconstruction, of a business already in
existence, except in the circumstances specified under section 33B of the IT Act.
it is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.

3. Representations have been received from various quarters as to whether an

undertaking set up in Domestic Tariff Area, which is subsequently approved as 100%
EOU by the Board appointed by the Central Government in exercise of powers
conferred under section 14 of the Industries (Development and Regulation) Act,
1951, is eligible for deduction u/s 10B of the Income Tax Act.

4. The matter has been examined and it is hereby clarified that an undertaking set up in
Domestic Tariff Area (DTA) and deriving profit from export of articles or things or
computer software manufactured or produced by it, which is subsequently converted
into a EOU, shall be eligible for deduction u/s 10B of the IT Act, on getting approval
as 100% export oriented undertaking. In such a case, the deduction shall be
available only from the year in which it has got the approval as 100% EOU and shall
be available only for the remaining 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 articles or things or computer
software, as a DTA unit. Further, in the year of approval, the deduction shall be
restricted to the profits derived from exports, from and after the date of approval of
the DTA unit as 100% EOU. Moreover, the deduction to such units in any case will
not be available after assessment year 2009-10.

5. To clarify the above position, certain illustrations are given as under: -

Undertaking 'A' is set up in Domestic Tariff Area and starts manufacture or
production of computer software in Financial Year 1999-2000 relevant to
assessment year 2000-01. It gets approval as 100% EOU on 10th September
2004 in the Financial Year 2004-05 relevant to assessment year 2005-06.
Accordingly, it shall be eligible for deduction under section 10B from assessment
year 2005-06 i.e., the year in which it fulfils the basic condition of being a 100%
EOU. Further, the deduction shall be available only for the remaining period of ten

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years i.e. from A.Y. 2005-06 to A.Y. 2009-10. This deduction under section 10B
for A.Y. 2005-06 shall be restricted to the profits derived from exports, from and
after the date of approval of the DTA unit as 100% EOU.
Undertaking 'B' set up in Domestic Tariff Area, begins to manufacture or produce
computer software in financial year 96-97 relevant to assessment year 1997-98. It
gets approval as 100% EOU in financial year 2007-08 relevant to assessment
year 2008-09. No deduction under section 10B shall be admissible to undertaking
B as the period of 10 years expires in F.Y. 2005-06 relevant to A.Y. 2006-07, prior
to its approval as 100% EOU.
Undertaking 'C' is set up in Domestic Tariff Area in the 'financial year 2000-01
relevant to assessment year 2001-02 and engaged in the business of providing
computer related services, other than those notified by the Board for the purposes
of section 10B. In financial year 2002-03, it acquires more than 20% of old plant
and machinery and starts manufacturing computer software. It also gets approval
as 100% EOU in financial year 2002-03. Undertaking 'C' shall not be eligible for
deduction under section 10B, as there has been transfer of old plant and
machinery.
Undertaking 'D' is set up and starts producing computer software in financial year
2003-04 relevant to AY 2004-05. It gets approval as 100% EOU in FY 2006-07
relevant to AY 2007-08. It shall be eligible for deduction u/s 10B from AY 2007-
08. However, the deduction shall not be available after AY 2009-10.
Undertaking "E" is set up and starts producing computer software prior to
31.3.1994. It gets approval as 100% EOU in FY 2004-05 relevant to AY 2005-06.
Undertaking E' shall not be eligible for deduction u/s 10B as the period of
deduction of 10 years expires prior to A.Y. 2005-06.

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INCOME FROM EXPORT OF ARTISTIC HANDMADE Wooden

Articles [Section-10BA]
A deduction of such profits and gains as are derived by an undertaking from the export out of India of
eligible articles or things shall be allowed from the total income of the assessee.

Provided that where in computing the total income of the undertaking for any assessment year,
deduction under section 10A or section 10B has been claimed, the undertaking shall not be entitled to
the deduction under this section
No deduction under this section shall be allowed to any undertaking for the assessment year beginning
on the 1st day of April, 2010 and subsequent years.

1. CONDITIONS TO BE SATISFIED :

This section applies to any undertaking which fulfils all the following conditions, namely:-
1. it manufactures or produces the eligible articles or things without the use of imported
raw materials;
2. it is not formed by the splitting up, or the reconstruction, of a business already in
existence :
3. it is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.
4. 90% or more of its sales during the previous year relevant to the assessment year
are by way of exports of the eligible articles or things;
5. it employs 20 or more workers during the previous year in the process of
manufacture or production.
6. This section applies to the undertaking, if the sale proceeds of the eligible articles or
things 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.
7. Audit: Deduction u/s 10BA is not available unless the assessee furnishes auditors
report in Form No. 56H along with the Return of Income.
8. Deduction u/s 10A / 10B is not taken : where in computing the total income of the
undertaking for any assessment year, deduction under section 10A or section
10B has been claimed, the undertaking shall not be entitled to the deduction under
this section.

2. AMOUNT OF DEDUCTION:

If the aforesaid conditions are satisfied, the deduction u/s 10B may be computed as under :

Profit of the Business of the undertaking X Export turnover

Total Turnover of the business

Following points should be noted:

1. export turnover means the consideration in respect of export by the undertaking

of eligible articles or things received in, or brought into, India by the assessee in
convertible foreign exchange in accordance with sub-section (3), but does not
include

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- freight,
- telecommunication charges or
- insurance attributable to the delivery of the articles or things outside India.

2. The aforesaid profit is deductible for 6 Assessment Years , i.e. , assessment

years 2004-05 to 2009-10.

3. Where a deduction is allowed under this section in computing the total income of the
assessee, no deduction shall be allowed under any other section in respect of its
export profits.

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
Management Act, 1999 (42 of 1999), and any rules made thereunder or any other
corresponding law for the time being in force;

eligible articles or things

Means all hand-made articles or things, which are of artistic value and which requires
the use of wood as the main raw material;

export out of India

shall not include any transaction by way of sale or otherwise, in a shop, emporium or
any other establishment situate in India, not involving clearance of any customs
station13 as defined in the Customs Act, 1962 (52 of 1962)]