Income Exempt from Tax/ Tax Holiday

Exemption u/s 10AA

Exemption or Tax Holiday in respect of Newly Established

Undertakings/ Units Located in Special Economic Zone
➢ Although termed as exemption u/s 10AA, it is actually a deduction from Gross Total
Income (GTI) provided to SEZ units from their profit on export turnover.
Deduction should be claimed in the return of income.

➢ The assessee is an entrepreneur as defined in section 2 (j) of SEZ Act., 2005.

Entrepreneur is a person who has been granted a letter of approval by the
Development Commission to set a unit in Special Economic Zone.

➢ A special economic zone (SEZ) is an area in which the business and trade laws are
different from the rest of the country. SEZs are located within a country's national
borders. Their aims include increased trade balance, employment, increased
investment, job creation and effective administration. To encourage businesses to
set up in the zone, financial policies are introduced. These policies typically
encompass investing, taxation, trading, quotas, customs and labour regulations.
Additionally, companies may be offered tax holidays, where upon establishing
themselves in a zone, they are granted a period of lower taxation. The benefits a
company gains by being in a special economic zone may mean that it can produce
and trade goods at a lower price, aimed at being globally competitive

➢ Special Economic Zone (SEZ) eligible for Exemption u/s 10AA should begin to
manufacture or produce articles or things or provide services on or after April 1,
2005 but before April 1, 2020. (the benefits of section 10AA will not be available to
units commencing activities on or after April 1, 2020).

➢ The SEZ should not be formed by the splitting up, or reconstruction, of a business
already in existence.

➢ SEZ should not be formed by the transfer to a new business of old plant or
machinery. However, it can be formed by transfer of old plant or machinery to the
extent of 20%.

➢ The assessee has exported goods or provided services out of India from SEZ by
land, sea, air or by any other mode whether physical or otherwise.

➢ If deduction is claimed in respect of a specified business (as specified u/s 35AD)

under section 10AA, no deduction in respect of that business is available u/s 35AD.

❖ Who will get the deduction?

SEZ who are associated with manufacturing business or manufactures software are
eligible for exemption u/s 10AA
❖ What is the amount of deduction?

Amount of deduction depends upon quantum of profit derived from export of articles
or things. The amount of deduction is calculated as follows:

Profits of the business of the undertaking X Export Turnover

carried on by the assessee
Total Turnover of the business
Conditions:
Tax Holiday for 15years
1. Amount of deduction for first 5 years = 100% of profit and gains from export
2. Amount of deduction for next 5 years = 50% of profit and gains from export
3. Amount of deduction for last 5 years = 50% 0f profit and gains from export
OR
Amount debited to P/L A/c and credited to SEZ
Reinvestment Allowance Reserve A/c
(Whichever is lower)

Illustration:
An undertaking is set up in a SEZ and begins manufacturing on 15.10.2006. The
deduction under section 10AA shall be allowed as under:

a) 100% of profits of such undertaking from exports from the A.Y. 2007-08 to A.Y.
2011-12 (1st Five Years)
b) 50% of profits of such undertaking from export from A.Y. 2012-13 to A.Y. 2016-17
(2nd Five Years)
c) 50% of profits of amount invested in SEZRAR (whichever is lower) of such
undertaking from exports from the A.Y. 2017-18 to A.Y. 2021-22 (Last Five years)

❖ What is export profit?

It is the amount of profit from the SEZ unit from business activity only. If SEZ earns
anything from Cash Compensatory Support or Duty Drawback that will not be
considered in calculating the profit.

❖ What is export turnover?

• It means the consideration in respect of export brought into India in convertible

foreign currency within 6 months from the end of the previous year or as the time
permitted by RBI.
• If an account is opened outside India through RBI’s approval and money from the
transaction is transferred in that account, then also it will be considered that the
money has been transferred to India.
• Export turnover shall not include freight, telecommunication charges, insurance
or expenses for providing services outside India. Further export turnover shall not
include expenses, if any incurred in foreign exchange for providing technical
services (including computer software) outside India

❖ What is total turnover?

Total turnover shall not include freight, telecommunication charges, insurance or

expenses for providing services outside India. Further export turnover shall not
include Cash Compensatory Support, Duty Drawback and profit on sale of import
entitlement licenses. Total turnover includes Export Turnover and Domestic
Turnover and it further includes even the portion of export turnover which is not
received in convertible foreign exchange.

❖ What is the purpose of SEZ Reinvestment Allowance Reserve?

Amount credited to SEZ Reinvestment Allowance Reserve A/c should be utilised

for acquiring new plant and machinery and it should be put to use within 3 years
from the end of the previous year in which reserve was created. If amount is mis-
utilised or un-utilised then deduction claimed earlier shall be taxable as profits and
gains from business or profession.

• If the reserve has been utilised for non-specified purpose, then the deduction
will be added back in the year in which wrongly utilised.
• If the reserve has not been utilised till the expiry of the time limit, then the
deduction will be added in the year immediately following the period of 3 years.

➢ Amendment in section 10AA by the Finance Act, 2017

An explanation is inserted in section 10AA (1) by the finance Act, 2017 w.e.f.
01.04.2018 i.e., on and from A.Y. 2018-19 to clarify that the amount of deduction
under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act, before giving effect to the
provisions of this section and the deduction under section 10AA shall not exceed
such total income of the assessee.

In other words,

a) Amount of deduction u/s 10AA shall be allowed from the total income of the
assessee computed under the Act before giving effect of deduction u/s 10AA and
b) Deduction u/s 10AA shall not exceed (a) above.
 ➢ Clarification of certain points based on Circular No. 1/2013 dated
17/1/2013

a) Profits and gains derived from on-site development of computer software

(including services for development of software) outside India shall be deemed
to be profits and gains from the export of computer software outside India.

b) It is further clarified that the profit earned as a result of deployment of technical

manpower at a client’s place abroad specifically for software development shall
be eligible for 10AA pursuant to a contract between both the parties.

c) It is clarified that when an undertaking is transferred to another company

under a scheme of amalgamation or demerger, the deduction u/s 10AA shall be
allowable in the hands of the amalgamated or the resulting company for the
unexpired period. However, no deduction shall be admissible under this section
to the amalgamating company or the demerged company for the previous year
in which amalgamation or demerger takes place.

d) It has been clarified that the tax holiday should not be denied merely on the
ground of physical reallocation of an eligible SEZ unit from one place to another
SEZ unit.

➢ Case law Relating to Total & Export Turnover

It was held by the apex court i.e., Supreme Court that export through
Southern Sea Foods Vs JCIT
Export House and receipt of the sum in Indian currency constitutes
[2016] (SC)
export turnover for the purpose of eligibility for deduction u/s 10AA.

It was held in that section 10AA statutorily flexes the quantum of

Mysodet P. Ltd. Vs CIT deduction to be allowed on the basis of proportion of business profits
[2008] (SC) irrespective of the fact whether actual profits have been derived by
the assessee or not.

It was held in that expenditure incurred in foreign exchange for

CIT Vs Sak Soft Ltd. [2009]
freight is specifically excluded from the export turnover, hence will
(Chennai)
also not form a part of total turnover.

CIT Vs M/S HCL

Technologies Limited [2018] It was held that expenditure incurred in foreign exchange for
(SC) 404 ITR 719 provision of technical services outside India, which is deductible for
& computing export turnover, be excluded from total turnover also for
CBDT Circular No. 4/2018, the purpose of computing deduction under section 10AA.
Dated 14.98.2018
 #Problems
1. X Ltd., is a manufacturing and trading company. It owns 3 units. Unit A
manufactures goods in a Special Economic Zone since 2018 for export purposes
and qualified for exemption under section 10AA. Unit B is a manufacturing unit
and goods are sold in domestic market. It is not qualified for any tax holiday. Unit
C owns retail outlets in different parts of the country. From the information given
below, find out net income of X Ltd. For the assessment year 2021-22:
(Rs. in lakh)
Particulars Unit A Unit B Unit C
Net profit as per P/L A/c 90 (-) 40 10
Turnover 1200 400 150
Out of which how much is export turnover 1180 10 -
Amount remitted in convertible foreign exchange
1002 2 -
up to September 30, 2021.
Freight and insurance (charged over and above
sale price from importers and included in the
10 - -
amount remitted in convertible foreign exchange
as well as turnover given below)

2. ITR Ltd. Has one unit at Special Economic Zone (SEZ) and other unit at Domestic
Traffic Area (DTA). The company provides the following details for the previous
year 2020-21
Unit at DTA
Particulars ITR Ltd. (Rs.)
(Rs.)
Total Turnover 6,30,000 2,00,000
Export Turnover 4,90,000 1,60,000
Net Profit 80,000 20,000

Additional Information
The export sales proceeds of Unit located at SEZ include charges for freight, insurance
for delivery of the article amounting to Rs. 30,000. Calculate the eligible deduction
u/s 10AA of the IT Act, 1961, for the A.Y. 2021-22, in the following situation:
i) If both the units were set up and they started manufacturing on 01.06.2013.
ii) If both the units were set up and they started manufacturing on 01.06.2018.

3. RBM Ltd. Has two units i.e., X & Y. Unit X is situated in SEZ and started production
on 1.4.19. Other information for the previous year 2020-21 are as follows: -

i) Unit X
a) Total Sales is Rs. 180,00,000.
 b) Export Sales (inclusive of Rs. 10,00,000 due to onsite development of computer
software outside India) Rs. 120,00,000.
c) 110,00,000 realised out of export sales in time (which includes Rs. 10,00,000
towards freight of delivery of goods) and balance of Rs. 10,00,000 became
irrecoverable due to bankruptcy of foreign buyer.
d) Profit after considering depreciation of Rs. 4,50,000 @ 15% under Straight Line
Method is Rs. 63,00,000.
e) Brought forward business loss is Rs. 10,30,000.

Unit Y
a) Taxable income is Rs. 8,00,000.
Compute
a) Allowable deduction u/s 10AA and taxable income of RBM ltd. For the A.Y. 2020-
21.
b) What will be the allowable deduction u/s 10AA, if RBM started production during
2010-2011 and transferred Rs.15, 37, 500 to SEZ Reinvest Allowance Reserve?
c) What will be the allowable deduction u/s 10AA, if RBM started production during
2015-16?
d) If Unit X is taken over by T Ltd. Under the scheme of amalgamation then what will
be the consequence.
e) What would be the total income of the company for the A.Y. 2021-22 if it had filed
a belated return for the same year?

4. A Ltd. Is engaged in development of software and providing IT enabled services

through two units namely Unit P and Unit Q. Unit P is setup in SEZ and Unit Q is
setup in Domestic Tariff Area (DTA). A Ltd. Furnishes the following information
relating to its 4th year of operations ended 31.03.21.

Amount (Rs.)
Particulars
Unit P Unit Q
Export Turnover 120,00,000 920,00,000
Domestic Turnover 200,00,000 460,00,000
Duty Drawback 38,00,000 38,00,000
Profit on sale of Import Entitlement 24,00,000 NIL
Salaries paid 540,00,000 192,00,000
Other expenses 420,00,000 473,00,000
Net profit as per P/L A/c 502,00,000 753,00,000

Additional Information
 i) Unit P: Expenses of Rs. 24,00,000 are disallowable u/s 43B and export sale
proceeds remitted to India in convertible foreign exchange up to 30/9/2021
amounts to Rs. 1040,00,000. Export sales of Rs. 120,00,000 include freight
and insurance of Rs. 2,00,000 and realisation of Rs. 1040,00,000 includes
amount of insurance and freight charges of Rs. 140,00,000.

ii) Unit Q: Export sales remitted to India in convertible foreign exchange up to Rs.
30.09.2021 is Rs. 850,00,000. Expenses charged and are to be disallowed u/s
40 A(3) are Rs. 47,00,000.

iii) A Ltd. has no other source of income for the previous year 2020-21. A Ltd. paid
Rs. 26,00,000 to a recognised political party of India. It also made donation of
Rs. 31 lakhs to the Clean Ganga Fund set up by the Centra l Govt. in pursuance
of CSR initiative u/s 135(5) of the Co. Act, 2013.

Compute Total Income of A Ltd. for the A.Y. 2021-22

5. A Ltd. Is running two industrial undertakings, one in SEZ (Unit A) and another in
DTA (Unit B). The brief details for the year ending 31 st March 2021 are as follows:

(Rs. in lakh)

Particulars Unit A Unit B

Export Turnover 120,00,000 NIL

Domestic Turnover 10,00,000 100,00,000
Gross Profit 20,00,000 10,00,000
(-) Expenses and depreciation 7,00,000 6,00,000
Profits derived from the units 13,00,000 4,00,000
Additional Information
The brought forward business loss pertaining to the assessment year 2018-19 for Unit
B is Rs. 3,20,000. The assessee has no other sources of income except those shown
above.
a) Briefly compute the business income and total income of the assessee after
considering the eligible deduction u/s 10AA of the Income Tax Act, 1961, for the
assessment year 2021-22, in the following situations:

i) If both the units were set up and they started manufacturing from
10.03.2012
ii) If both the units were set up and they started manufacturing from
12.08.2017
 b) What would be the effect on total income for the assessment year 2021-22 under
the above two situations if A Ltd. is eligible for a deduction of Rs. 4,00,000 under
sec. 80G.

6. X Technologies Ltd. Has two units developing and exporting computer software.
Unit A is in a SEZ and qualifies for exemption u/s 10AA and the previous year
2020-21 is the 3rd year of its operation. Unit B is located in Non-SEZ area. The
following information relating to two units are given below:
Statement of Profit & Loss
For the year ended 31st March,2021

(Rs. in lakh)

Particulars Unit A Unit B Particulars Unit A Unit B

Salaries 200 - Exports 500 700

Administrative Expenses 150 420 Domestic Sales 40 200

Cash Compensatory
10 50
Support (CCS)
Duty Drawback 20 30
Profit on sale of Import
Net Profit 225 560 5 -
Entitlement License
575 980 575 980

Additional Information
(i) Unit A: Expenses of Rs. 5 lakhs are disallowable u/s 43B and export sale
proceeds remitted to India in convertible foreign currency up to 30 th
September 2021 is amounted to Rs. 400 lakhs. Export of Rs. 500 lakhs above
includes freight and insurance of Rs. 50 lakhs. Export realisation of Rs. 400
lakhs includes insurance and freight of Rs. 40 lakhs. The above export
turnover includes an export to UAE amounting to Rs. 50 lakhs through a
leading Indian Export House. The said sum has been received by the assessee
in INR on 28th April, 2021.
(ii) Unit B: Foreign exchange received in India in convertible foreign exchange
up to 3oth September 2021 is Rs. 600 lakhs. Expenses of Rs. 40 lakhs are
disallowed under the Income Tax Act, 1961.

a) Compute the total income of X Technologies Pvt Ltd. For the A.Y. 2021-22
considering it has no other source of income except those stated above.
b) What would happen to the above situation if Unit A was set up on 04.05.2008
and it started developing and exporting software from that date and the company
has transferred Rs, 50 lakhs in special reserve account out of profits for the year
ended 31st March 2021