IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F , MUMBAI Before Shri G S Pannu, Accountant Member &ShriSanjay Garg, Judicial Member ITA No. 2329/A/2008 A.Y 2005-06 ITA No. 1142/A/2010 A.Y 2006-07 ITO Ward 4(3), Forever Precious Jewellery& Ahmedabad. Diamonds Ltd., Vs. Mumbai PAN AAACF4594P (Appellant) (Respondent) ITA No. 3775/Mum/2011 A.Y. 2005-06 ITA No.3776/Mum/2011 A.Y. 2006-07 ITA No.3783/Mum/2011 A.Y. 2007-08 ITA No.4295/Mum/2013 A.Y 2007-08 Dy. CIT Cent. Cir. 1, Forever Precious Jewellery& Mumbai Diamonds Ltd., Vs. Mumbai PAN AAACF4594P (Appellant) Respondent) Appellant By : Shri G M Doss CIT -DR Respondent By : S/Shri F V Irani& Rajesh Shah Date of Hearing :29.06.2016 Date of Pronouncement : 30.09.2016 ORDER Per Sanjay Garg (Judicial Member) : above captioned appeals, all by Revenue relating to same assessee, have been heard together and are being disposed off by this consolidated order. Before proceeding, we would like to mention that appealsinITA Nos.2329/A/2008 &1142/A/2010 for A.Ys2005-06&2006-07 2 M/s. Forever Precious Jewellery& Diamonds Ltd. respectively have been transferred from Ahmedabad Benches to Mumbai Benches vide order of Hon ble President dated 24.0.2012. 2. appeals in ITA Nos. 2329/A/2008, 1142/A/2010 & 4295/Mum/2013 for A.Ys. 2005-06, 2006-07 & 2007-08 respectively, are in respect of assessment proceedings completed u/s. 143(3) of Act, whereas appeals in ITA Nos. ITA No. 3775, 3776 & 3783/Mum/2011 for A.Ys. 2005-06 2006-07&2007-08respectively are in respect of assessment proceedings carried out u/s. 143(3) r.w.s. 153C of Act. 3. We shall first take up appeal in ITA No. 2329/A/2008 for A.Y. 2005-06 in relation to assessment proceedings u/s. 143(3) of Act as lead case. In said appeal, Revenue has taken following grounds of appeal: 1.The Ld. CIT(A) has erred in law and on facts of case in deleting addition of Rs.1,51,33,873/- made u/s. 68 on account of share application money received from ShriAshish Jain. Ld. CIT(A) has also erred in admitting fresh evidence in violation of Rule 46A. 2. Ld. CIT(A) has erred in law and on facts of case in deleting disallowance of deduction u/s. 10A at Rs.74,72,739/- 3. LdCIT(A) has erred in law and on facts of case in deleting addition of Rs.89,33,998/- on account of valuation of closing stock. 4. Ld. CIT(A) has erred in law and on facts of case in stating that addition to closing stock has been made on basis of market price of raw materials after year ending 31.3.2005. 5. On facts and in circumstances of case, Ld. CIT(A) ought to have upheld order of Assessing Officer. 6. It is, therefore, prayed that order of Ld. CIT(A) may be cancelled and that of Assessing Officer may be restored to above effect. Ground No.1 4. Vide ground no.1, Revenue has agitated action of CIT(A) in deleting addition of Rs.1,51,33,873/- made by AO u/s. 68 of I.T 3 M/s. Forever Precious Jewellery& Diamonds Ltd. Act. During assessment proceedings, AO noticed that assessee company had issued shares to two Indian Companies and to non-resident Indian settled in Hong Kong namely Mr. Ashish Jain.The AO got satisfied about investments made by two companies; however, in case of investments made by Mr. Ashish Jain, AO observed that assessee could not submit sufficient evidence regarding his creditworthiness and even about genuineness of transactions. AO also observed that assessee has also not paid any dividend to its share holders including ShriAshish Jain. He also observed that share capital from Ashish Jain had been remitted through banking channel from New York whereas said Mr. Jain was residing at Hong Kong. He therefore made impugned additions u/s. 68 of Act holding that above money was introduced by assessee itself. Being aggrieved, assessee preferred appeal before CIT(A). 5. learned CIT(A) deleted additions so made by AO observing as under: I have considered submissions of A.R. carefully and gone through cases cited by A.R. A.O. has made addition of share capital received from ShriAshish Jain to tune of Rs.1.51 crores on ground that appellant has not proved creditworthiness of share holder and genuineness of transaction. In this case appellant has furnished confirmation letter from ShriAshish Jain and he has stated that he is Non Resident Indian settled in Hong Kong and appellant has furnished copy of Certificate of foreign inward remittance issued by Standard Chartered Bank in support of receipt of money from ShriAshish Jain. However, A.O. made addition on ground that ShriAshish Jain did not furnish any details about his tax assessment particulars. I find from details furnished by A.R. that identity of shareholder is proved and also receipt of money from ShriAshish Jain through banking channel is proved. appellant has furnished certificate regarding remittance from Standard Chartered Bank, New York, copy of share certificate of ShriAshish Jain was also furnished. A.R. has cited several decisions to claim that only identity of share applicant was required to be proved. To meet objections raised by A.O. appellant has also filed statement of net worth of ShriAshish Jain duly certified by auditors Peter Y. H. Lam & Co., Certified Public Accountants, Hong Kong which clarifies that ShriAshish Jain is carrying on business activity in name of M/s. Alma Diamonds Co. Limited of 4 M/s. Forever Precious Jewellery& Diamonds Ltd. which he is Managing Director and that his company is enjoying credit limit of US $ 1 Million and it also confirms that he has remitted US Dollars of 329,935 for share capital in appellant company. It also confirmed that ShriAshish Jain as tax payer in Hong Kong. In view of above details furnished it is held that creditworthiness of share holder is proved. Hence on consideration of acts and details filed and case laws relied upon by A.R., I hold that addition of unexplained share capital cannot be sustained and same is therefore, deleted. Being aggrieved by above order of CIT(A), Revenue has come in appeal before us. 6. We have heard rival contentions and have also gone through record. We find that learned CIT(A) has given well-reasoned finding. assessee has not only furnished confirmation letter from Mr. Ashish Jain but also evidence in shape of certificate of foreign inward remittance issued by Standard Chartered Bank in this respect. learned CIT(A) has categorically held that not only identity of share holder but also receipt of money by assessee from Mr. Ashish Jain through banking channel has been proved. Moreover, learned CIT(A) has also observed that assessee has also filed statement of net worth of Mr. Ashish Jain duly certified by his auditors. We do not find any infirmity in above well-reasoned order of CIT(A) on this issue. This ground of appeal of Revenue is therefore, dismissed. Ground No.2 7. With respect to ground no.2, learned AR of assessee has fairly stated that claim regarding deduction u/s. 10A in respect to Surat unit regarding which impugned disallowance has been made by AO has been withdrawn by assessee and corresponding income has been offered for taxation in return of income filed u/s. 153C pursuant to search action carried out in case of Group Company. Since assessee itself has offered income in subsequent return filed u/s. 153C of Act, this ground of appeal becomes infructuous and does not need any adjudication. 5 M/s. Forever Precious Jewellery& Diamonds Ltd. Ground No.3 8. Vide ground nos. 3 & 4 Revenue has agitated action of CIT(A) in deleting addition of Rs. 89,33,998/- on account of valuation of closing stock. This issue has been dealt by learned CIT(A) in para 4 of his order. AO observed that assessee was not maintaining its stock register and has valued closing stock on basis of weighted average method. In absence of maintenance of stock item-wise, A.O. held that inventory was to be valued as per FIFO method. Further, that assessee had sold articles at higher price as compared to purchase cost as on 31.3.2005. A.O worked out value of closing stock of raw materials and worked out difference in valuation of Rs.89,33,998/- after taking into account FIFO method and added same to income of assessee. 9. In appeal, learned CIT(A) deleted additions so made by AO by observing as under: I have considered submissions of A.R. carefully. A.R. has made detailed submissions saying that appellant has adopted market rate of valuation of raw materials like gold and diamond as market rate was lower as on 31.3.2005. A.O. has taken into consideration selling price of raw materials for period after 31.3.2005 and nto selling rate as on 31.3.2005. Further, A.O. has not brought on record any material nor has given any reasons to reject certificate filed by appellant from Bank of Scotia Mocatta giving rate of gold as on 31.3.2005 as USD 427.50 per OZ for 0.995 purity as evidence for cost price of gold as on 31.3.2005. Further, A.O. has increased value of loose diamonds in store and on production as WIP, but has ignored value of diamonds which have got studded in jewellery and he has not taken into account compensatory effect for increase in valuation of diamonds for diamonds used in studded jewellery as that would reduce addition to lower figure than what has been calculated by A.O. This has been explained by A.R. in para 4.13 of his submission stated hereinabove. Further, whatever addition is made to valuation of closing stock in year under consideration, same has to be given set off in subsequent year as opening stock and there will no net tax effect. In view of above facts, addition to closing stock valuation made by A.O. on basis of market price of raw materials after year ending on 31.03.2005 can not be sustained and addition is therefore deleted. 6 M/s. Forever Precious Jewellery& Diamonds Ltd. Being aggrieved by above order of CIT(A), Revenue has come in appeal before us. 10. We have heard rival contentions and have also gone through record. We find that method for valuation of stock adopted by assessee is one of recognized methods as per Accounting Standards. said method has been consistently followed by assessee. It has also been explained that inventory was being valued at lower of cost or market value as per accounting principles. It has also been explained that gold jewellery is being sold or exported in domestic and overseas market on basis of prevailing market rates at time of transaction. learned AR of assessee has further submitted that stock register was also being maintained and tax audit report has also been submitted. Further any addition in value of closing stock at end of year will increase corresponding opening stock at beginning of next financial year. learned CIT(A) therefore has rightly held that addition to closing stock made by AO on basis of market price of raw material after year ending on 31.03.2005 was not sustainable in eyes of law. We do not find any infirmity in order of CIT(A) in this respect. order of CIT(A) on this ground is therefore, upheld. 11. Ground nos. 5 & 6 are general in nature and do not require any adjudication. 12. In view of our findings given above, appeal of Revenue is dismissed. ITA No. 1142/A/2010 for A.Y 2006-07 In this appeal, Revenue has raised following grounds of appeal: 1. Ld. CIT(A) erred in law and on facts allowing claim of deduction u/s. 10AA of Act. 7 M/s. Forever Precious Jewellery& Diamonds Ltd. 1.1 Ld. CIT(A) has erred in law and on facts in not appreciating fact that assessee is not owner of unit but has got it sub-contracted through unit in SEZ Zone. 1.2 Ld. CIT(A) erred in law and on facts in not appreciating fact that assessee who is claiming deduction u/s. 10AA of Act should manufacture goods itself by employing its machinery or equipments. 1.3 In doing so, Ld. CIT(A) has erred in law and facts in not appreciating that assessee was not entrepreneur as defined in section 2 of SEZ Act 2005 and was not even granted letter of approval by concerned Development Commissioner. 2. Ld. CIT(A) erred in law and on facts in deleting disallowance of Rs.62,35,814/- made on account of incorrect valuation of closing stock. 2.1 In doing so, Ld. CIT(A) erred in law and on facts in observing that assessee Company is showing profits in subsequent years without appreciating that assessee cannot be given benefit of wrong valuation of inventory. 3. On facts and in circumstances of case, Ld. CIT(A) ought to have upheld order of Assessing Officer. 4. On facts it is therefore prayed that order of Ld. CIT(A) may be set aside and that of A.O. may be restored to above extent. 13. perusal of above grounds of appeal, it reveals that there are two effective issues raised by Revenue. issue raised in grounds nos. 1 to 1.3 relates to claim of deduction u/s. 10AA of Act, whereas issue raised vide ground nos. 2 and 2.1 relates to disallowance made on account of valuation of closing stock. Ground nos. 3 & 4 are general in nature. Grounds No. 1 to 1.3 14. grievance of Revenue raised vide ground no.1 to 1.3 is in relation to action of CIT(A) in allowing claim of deduction to assessee u/s. 10AA of Act in respect of its Chennai unit. brief facts of case are that assessee had been running unit in SEZ in Chennai during relevant period and it earned foreign exchange through export of 8 M/s. Forever Precious Jewellery& Diamonds Ltd. manufacturing goods. AO, however, rejected assessee s claim for deduction u/s. 10AA of I.T.Act on following ground: (i) appellant had not manufactured goods (in terms of provisions of sec. 10AA) therefore it was not entitled for deduction under section; (ii) A.O. has further observed that convertible foreign exchange was not brought into India within time of six months as envisaged in section; (iii) appellant filed Form No. 56F required for claiming deduction u/s. 10AA only during assessment proceedings. learned CIT(A) however allowed claim of assessee observing as under: 6.10 As held by my Ld. Predecessor in appellate order for A.Y. 2005-06 there is no stipulation in section 10A or 10AA that assessee who is claiming deduction under these sections should manufacture goods itself by employing its machinery or equipment. It may further be pointed out that scope of section 10AA is wider than section 10A. Sub section (1) of section 10AA provides that subject to provisions of this section, in computing total income of assessee, being entrepreneur as referred to in clause (j) of section 2 of Special Economic Zones Act, 2005, from his unit who begins to manufacture or produce articles or things or provide any services during previous year relevant to any assessment year commencing on or after 1st day of April 2006 shall be allowed specified deduction. It is clear from language of section that deduction is available in respect of manufacture or production of articles or things or providing any services. Further, for purposes of section manufacture have been assigned same meaning as laid down in clause (r) of section 2 of Special Economic Zones Act, 2005. 6.11 As per provisions of section 2 of SEZ Act 2005 manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, new product having distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. This itself shows that word manufacture used in section 10AA takes various activities in its compass. Further, even for sake of argument if we hold that appellant was not 9 M/s. Forever Precious Jewellery& Diamonds Ltd. engaged in manufacturing activity yet it cannot be denied deduction u/s. 10AA simply because persons who are providing any kind of services are also entitled for deduction under section. word services has not been defined in section as well as in SEZ Act 2005 therefore, it has to be understood in its general connotation. 6.12 As regards Assessing Officer s finding that appellant did ot bring into India convertible foreign exchange within six months of Export. I may be seen that units situated in SEZs were permitted to realize and repatriate to India full export value within period of 12 months from date of export. In terms of Circular No.91 dated 1.4.2003 issued by RBI in connection with Export of Goods and Services Facilities of Units in Special Economic Zones (SEZ) , units situated in SEZ have been permitted to realize and repatriate to India full value of goods or software within period of 12 months or beyond. Since appellant has brought convertible foreign exchange within 12 months of Export t is within time so far as RBI guidelines is concerned. 6.13 In so far as Assessing Officer s objection with regard to filing of form No. 56F for claiming deduction u/s. 10AA beyond prescribed time is concerned it may be seen that it is well settled law that filing of Audit report for claiming deduction in specified Form is procedural requirement. Therefore non filing of requisite Form along with return of income does not impair appellant s claim for deduction unless there are other material reasons on which such claim could be rejected. In this regard reliance is placed on decision of Hon ble Calcutta High Court in case of CIT vs Berger Paints (India) Ltd. 254 ITR 503 Abd decisions of Hon ble Kerala High Court in case of CIT vs. G.Krishnan Nair 259 ITR 727 6.14 Therefore, keeping in view legal position as stated above I don t find any reason to deviate from findings of my ld. Predecessor in this regard. In given circumstances, there is no ground under which deduction claimed by appellant u/s. 10AA can be refused. In view of this, A.O. is directed to allow appellant deduction under section 10AA of Act accordingly. 15. Being aggrieved by above order of CIT(A) Revenue has come in appeal before us. 16. learned DR has vehemently contented before us that no manufacturing activity has been carried out by assessee at its SEZ units. 10 M/s. Forever Precious Jewellery& Diamonds Ltd. entire work was outsourced to third party and, therefore, assessee was not entitled to claim deduction u/s. 10AA of Act. learned AR, on other hand, while relying on decision of Hon ble Bombay High Court in case of Neo Pharma Private Ltd. [1982] 137 ITR 879 has contended that under agreement assessee had got articles manufactured in another company under its direct supervision and quality control and raw material was also supplied by assessee. Under such circumstances risk was of assessee for entire operation undertaken and products manufactured at assessee s cost were property of assessee. That, under such circumstances, itis to be deemed that resultant products were manufactured by assessee and, therefore, assessee has rightly claimed deduction u/s. 10AA. learned AR has further relied upon findings of learned CIT(A) as reproduced above. He has further contended that even under provisions of section 10AA word services has also been used. He has therefore contended that it is not only production or manufacturing activity in respect of which deduction u/s. 10AA of Act can be claimed but also for services also. He, therefore, has contended if assessee has obtained services of third party who is situated in same SEZ, then in light of decision of Hon ble Bombay High Court in case of Neo Pharma Private Ltd.(supra) it will be deemed that goods have been manufactured by assessee itself. 17. We have considered rival contentions and have gone through impugned order of CIT(A). Before further deliberating upon matter, we find it fit it to reproduce relevant part of provisions of section 10AA of Act: - 10AA. (1) Subject to provisions of this section, in computing total income of assessee, being entrepreneur as referred to in clause (j) of section 2 of Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during previous year relevant to any assessment year commencing on or after 1st day of 93[April, 2006, deduction of] 11 M/s. Forever Precious Jewellery& Diamonds Ltd. (i) hundred per cent of profits and gains derived from export, of such articles or things or from services for period of five consecutive assessment years beginning with assessment year relevant to previous year in which Unit begins to manufacture or produce such articles or things or provide services, as case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for next five consecutive assessment years, so much of amount not exceeding fifty per cent of profit as is debited to profit and loss account of previous year in respect of which deduction is to be allowed and credited to reserve account (to be called "Special Economic Zone Re- investment Reserve Account") to be created and utilized for purposes of business of assessee in manner laid down in sub-section (2). .. perusal of above provision reveals that to be eligible to claim deduction u/s. 10AA, assessee should be entrepreneur as referred to in clause (j) of section 2 of SEZ Act 2005. Further income of assessee referred to is not of unit but relevant words are from his unit .Thirdly, assessee must begin to manufactureor to produce articles or things or provide any services during relevant previous year. perusal of above reproduced provisions and further from reading of entire provisions of section 10AA, it reveals that location of unit is very important. To claim deduction u/s. 10AA, unit must be established in SEZ. These SEZs are established by Central Government or State Government or by third parties with permission or sanction of Government for purpose of development of area and for encouraging exports. Even preamble of Special Economic Zones Act, 2005 reads as under: Act to provide for establishment, development and management of SpecialEconomic Zones for promotion of exports and for matters connected therewith orincidental thereto. definition of entrepreneur as referred to in clause (j) of section 2 of SEZ Act 2005 reads as under: (j) entrepreneur means person who has been granted letter of approval by Development Commissioner under sub-section (9) of section 15 . Now sub-section (9) of section 15 is read as under: (9) Development Commissioner may, after approval of proposal referred to in sub- section (3), grant letter of approval to person concerned to set up Unit and undertake 12 M/s. Forever Precious Jewellery& Diamonds Ltd. such operations which Development Commissioner may authorise and every such operation so authorised shall be mentioned in letter of approval. Further Rule 19 of SEZ Rules 2006 read as under: 19. Letter of Approval to Unit. (1) On approval of proposal under rules 18 and 19, Development Commissioner shall issue Letter of Approval in Form G, for setting up of Unit. (2) Letter of Approval shall specify items of manufacture or particulars of service activity, including trading or warehousing, projected annual export and Net Foreign Exchange Earning for first five years of operations, limitations, if any on Domestic Tariff Area sale of finished goods, by-products and rejects and other terms and conditions, if any, stipulated by Board or Approval Committee: learned AR of assessee in this respect has relied upon letter of approval dated 21.09.2005 issued by Development Commissioner, which reads as under: Sir, Sub : Your application for permission under Special Economic Zone Scheme for setting up manufacturing & trading unit in MEPZ SEZ reg. Ref: Your application dated 17/8/2005 With reference to above-mentioned application, Government/Development Commissioner is pleased to extend to you all facilities and privileges admissible and subject to provisions as envisaged in Special Economic Zone Scheme 2004-2009 for establishment of new undertaking at MEPZ Special Economic Zone for manufacture & trading of following items up to capacities specified below on basis of maximum utilization of plant and machinery. Item(s) of manufacture/trading Unit Annual capacity Plain Gold Jewellery (for manufacture)KG 500 Cut & Polished Diamonds (for trading) Carats 6000 above permission is subject to conditions stipulated in Annexure in addition to following conditions: .. x) You shall be required to enter into Legal Agreement in prescribed form (Appendix 14-1 F) with Development Commissioner, MEPZ- SEZ for fulfilling terms and conditions mentioned in LOP 13 M/s. Forever Precious Jewellery& Diamonds Ltd. xi) You are requested to confirm acceptance of above terms and conditions to Development Commissioner, MEPZ SEZ within 45 days. xii) If you fail to comply with condition stipulated above, this letter of approval is liable for cancellation/revocation. xiii) In case of any adverse remarks noticed against Directors of your company, LOP will be cancelled. xiv) All future correspondence for amendments/changes in terms and conditions of approval letter or for extension of its validity, if required etc., may be addressed to Development Commissioner, MEPZ SEZ. This issues with approval of Development Commissioner, MEPZ SEZ Yours faithfully, SD/- (C.R.KALAVATHY) ASST. DEVELOPMENT COMMISSIONER FOR DEVELOPMENT COMMISSIONER above reproduced approval letter read with section 15(9) of SEZ Act 2005 and Rule 19 of SEZ Rules 2006 reveals that facilities and privileges as admissible to units situated in SEZ have been granted to assessee for manufacture of plain gold jewelleryupto 500 kg on basis of maximum utilization of plant and machinery. assessee has also been granted facilities and privileges as admissible for trading activity in gold and polished diamonds as noted above. It is pertinent to note here that Development Commissioner has to particularly specify as to what activities or authorized operation are allowed to be carried out in SEZ unit for claim of privileges and benefits under SEZ Act. Now question comes whether above provisions of SEZ Act and SEZ Rules can be invoked to decide benefits admissible to assessee under Income Tax Act. Section 57 of SEZ Act is relevant in this respect which read as under: 14 M/s. Forever Precious Jewellery& Diamonds Ltd. 57. With effect from such date as Central Government may by notification appoint, enactments specified in Third Schedule shall be amended in manner specified therein: Provided that different dates may be appointed on which amendments specified in Third Schedule shall apply to particular Special Economic Zone or class of Special Economic Zones or all Special Economic Zones. After going through relevant provisions of above statutes, we find that SEZ Act is main Act under provides to give certain incentives to SEZ units. To give effect to provisions of SEZ Act, corresponding amendments have been made in relevant provisions of various related Acts as mentioned in Third Schedule to Act, relaxing conditions or providing for incentives or deductions to SEZ units. It is to be mentioned here that Income Tax Act 1961 inter alia is also included in Third Schedule and it has also been provided as to what amendments are made into provisions of Income Tax Act to give effect to provisions of SEZ Act 2005. Further sections 27 and 57 of SEZ Act are also relevant in this respect which read as under: 27. provisions of Income-tax Act, 1961, as in force for time being, shall apply to, or in relation to, Developer or entrepreneur for carrying on authorised operations in Special Economic Zone or Unit subject to modifications specified in Second Schedule. 51. (1) provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for time being in force or in any instrument having effect by virtue of any law other than this Act. So perusal of relevant provisions reveal beyond doubt that to get income tax benefits under Act there must be some manufacture or production of thing or providing of services by unit situated in SEZ and having approval of competent authority in this respect. manufacturing activity or services activity should be provided by unit situated in SEZ. location of unit in SEZ and required approvals of competent authority to carry out operations are very much necessary. Hence as per provisions of section 10AA of Income Tax Act 1961, assessee is entitled to deduction on manufacturing activity only as approved in above reproduced approval letter of Development Commissioner of SEZ. assessee s unit has not been approved for providing of any services. 15 M/s. Forever Precious Jewellery& Diamonds Ltd. Even, we find that in case in hand assessee has allegedly imported raw material/gold and exported jewellery. It is not case that assessee has offered /provided any services to itsoff shore customers. assessee, in fact, had obtained services of third party for getting jewellery manufactured. incentives under provisions of Act are available on offer or for providing of services and not for taking services from third party. Event it is not that each or any service can be provided by unit in SEZ to get benefits. What services can be carried out to avail benefits by units situated in SEZ has also been mentioned under provisions of SEZ Rules 2006 . relevant Rule is reproduced as under: : 76. services for purposes of [1][clause] (z) of section 2 shall be following, namely: Trading, warehousing, research and development services, computer software services, including information enabled services such as back-office operations, call centres, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centres and web-site services, off-shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport. Explanation: expression trading , for purposes of Second Schedule of Act, shall mean import for purposes of re- export. 18. As discussed above, even assessee has not been authorized to provide any services from its SEZ unit. Hence contention of Ld. AR that assessee is entitled to deduction U/s 10AA because it is providing services is not tenable. 19. Now question before us comes whether production or manufacturing activity is to be carried out in unit itself or it can be outsourced to some other party. We find that there are provisions in this respect under SEZ Rules 2005. relevant part of said Rules is reproduced as under: 16 M/s. Forever Precious Jewellery& Diamonds Ltd. 41. Sub-contracting (1) Unit may sub-contract part of its production or any production process, to unit(s) in Domestic Tariff Area or in Special Economic Zone or Export Oriented Unit or unit in Electronic Hardware Technology Park unit or Software Technology Park unit or Bio-technology Park unit with prior permission of Specified Officer to be given on annual basis and subject to following conditions, namely: (a) finished goods requiring further processing or semi-finished goods including studded jewellery, taken outside Special Economic Zone for sub- contracting shall be brought back into Unit within one hundred and twenty days or within such period as may be extended by Specified Officer for reasons to be recorded in writing for grant of such extension; (b) cut and polished diamonds and precious and semi-precious stones (except rough diamonds, precious or semi-precious stones having zero duty) shall not be allowed to be taken outside Special Economic Zone for sub-contracting; (c) gem and jewellery Unit may receive plain gold or silver or platinum jewellery from Domestic Tariff Area or from Export Oriented Unit or from Unit in same or another Special Economic Zone in exchange of equivalent content of gold or silver or platinum contained in said jewellery after adjusting permissible wastage or manufacturing loss allowed under provisions of Foreign Trade Policy read with Handbook of Procedures; (d) in sub-contracting or exchange, wastage shall be permitted as per wastage norms admissible under Foreign Trade Policy read with Handbook of Procedures: Provided that total wastage of Unit, including wastage of sub- contractor or supplier of jewellery on exchange basis, shall not in any case exceed wastage permissible under Foreign Trade Policy read with Handbook of Procedures; (e) Domestic Tariff Area Unit undertaking sub-contracting or supplying jewellery against exchange of gold or silver or platinum shall not be entitled to export entitlements; (f) value of sub-contracted production of Unit in any financial year shall not exceed value of goods produced by Unit within its own premises in immediately preceding financial year: Provided that Unit, sub-contracting part of production or production process to other Unit in same Special Economic Zone shall not require permission of Specified Officer provided that both supplying and receiving Units shall maintain proper account of goods involved in subcontracting. Explanation : For removal of doubts it is clarified that expression sub- contracting of part of its production under this rule shall mean sub- contracting all production processes for conversion of raw material into finished products but only for part of quantity of finished products exported during year or in first year of production, value of goods sub-contracted shall not exceed value of goods produced by unit in its own premises during first year of production; 17 M/s. Forever Precious Jewellery& Diamonds Ltd. (g) Unit engaged in trading or warehousing shall not be allowed facility of sub-contracting of production or production process in domestic tariff area; (h) Unit may remove, with permission of Specified Officer, moulds or jigs or tools or fixtures or tackles or instruments or hangers and patterns and drawings to premises of subcontractor(s), subject to condition that these shall be brought back to premises of Unit immediately on expiry of such sub- contracting arrangement and submission of quarterly verification report from Central Excise Officer having jurisdiction over sub-contractor that such goods are lying in sub-contractor s premises and are being used for production of goods on account of Unit; (i) raw materials, components and consumables excluding fuel may be sent along with these goods, or separately. (2) Development Commissioner may also permit sub-contracting of part of production process abroad and in such cases, goods may be exported from sub-contractor s premises abroad subject to following conditions, namely: (a) sub-contracting charges shall be declared in export declaration forms and invoices and other related documents; (b) export proceeds shall be fully repatriated in favour of Unit. (3) Developer or co-developer or on their behalf their contractor, as case may be, may also temporarily remove goods, procured or imported duty free by them for their authorized operations, to place in Domestic Tariff Area or unit in same or another Special Economic Zone or Export Oriented Unit or unit in Electronic Hardware Technology Park Unit or Software Technology Park Unit or Bio-technology Park Unit, for sub-contracting process, with prior permission of and subject to such conditions as may be prescribed by Approval Committee.] 42. Procedure for sub-contracting in Domestic Tariff Area or in Unit in other Special Economic Zones or in Export Oriented Unit or in Electronic Hardware Technology Park Unit or in Software Technology Park Unit or Bio-technology Park Unit or sub-contracting abroad (1) Unit may take goods, including finished goods requiring further processing or semi-finished or semi-processed goods, including studded jewellery or inputs to sub-contractor s premises (i) for sub-contracting any production process; or (ii) part of production, without payment of duty, subject to following conditions, namely: (a) Unit shall wherever possible apply for permission at time of project approval itself and based on such initial approval, Specified Officer shall permit subcontracting of part of production process(es) or part of production; (b) where permission has not been taken at time of project approval or new permission is sought, unit shall file application containing name 18 M/s. Forever Precious Jewellery& Diamonds Ltd. and address of subcontractor(s), Central Excise registration number in case of Domestic Tariff Area sub-contractor, if registered, and details of processes to be carried out or quantum of production sought to be carried out at sub-contractor s premises and self certified input-output ratio for said processes; (c) after examination of details under sub-clause (b), Specified Officer may grant annual permission for sub-contracting any production process or sub- contracting part of production, as case may be; (d) Unit, removing raw materials, consumables excluding fuel and components, imported or domestically procured without any processing, for sub- contracting into Domestic Tariff Area, shall furnish bank guarantee to Specified Officer to cover duty foregone on such materials being taken out for subcontracting: Provided that bank guarantee shall not be required by unit whose turnover is rupees one crore or above or where unit is in Special Economic Zone for more than period of two years with unblemished track record; (e) Specified Officer or Authorized Officer may make random checks either at job worker s premises or after receipt of goods from job worker at Special Economic Zone gate for purpose of verification of goods which were sent and received: Provided that where precious metal in bullion form, having marking of fineness or purity or make or serial number is taken out of Special Economic Zone for sub-contracting, appraisement of precious metals shall not be mandatory; (f) Unit shall remove goods under serial numbered challans pre- authenticated by owner or Managing Director or working partner or company secretary or by any person duly authorized in this behalf by company or firm, as case may be, and complete description of goods shall be provided on challan; (g) authorized officer at Special Economic Zone gate shall note down identification marks of goods for verification of goods when received back after sub-contracting: Provided that where sensitive items are sent out for subcontracting, based on risk profile or past performance of unit, sample may be drawn and retained by Specified Officer, if required: Provided further that for gem and jewellery Units, there shall be no requirement for drawal of samples; (h) goods sent out for sub-contracting shall be returned to Unit within one hundred and twenty days from date of removal or within such period as may be extended by Specified Officer for reasons to be recorded in writing for granting such extension; (i) in case of failure by Unit to bring back goods after sub-contracting within period under sub-clause (h), action shall be taken by Specified Officer to recover duty on goods taken out for sub-contracting. 19 M/s. Forever Precious Jewellery& Diamonds Ltd. (2) Specified Officer may permit Unit to export finished goods directly from sub-contractor s premises subject to following conditions, namely: (i) sub-contractor is Export Oriented Unit or Electronic Hardware Technology Park Unit or Bio-technology Park Unit or Special Economic Zone Unit or Domestic Tariff Area Unit which is registered with Central Excise Department; (ii) export of finished goods from sub-contractor s premises shall be allowed only by way of direct export and not through third party; (iii) sample of goods exported from sub-contractor s premises shall be sent by sub-contractor in sealed condition, to Specified Officer for establishing identity of goods exported with sample drawn at time of taking out of goods to sub-contractor; (iv) Shipping Bill for duty free goods shall be processed at port of export as in case of normal export and shipping bill shall be filed in name of Unit and sub-contractor; (v) goods for such export shall be removed from sub-contractor s premises under bond: Provided that in case of sub-contracting abroad, goods shall either be returned to Unit or may be sold to buyers in that country or any third country. (3) Waste, scrap or remnants generated during process at subcontractor s premises may either be returned to Unit or may be cleared on payment of duty as if said waste or scrap or remnants have been cleared by Unit or may be destroyed at sub-contactor s premises in presence of jurisdictional Central Excise Officer if sub-contractor is Central Excise registrant: Provided that in case of clearance of waste or scrap at subcontractor s premises on payment of duty or destruction thereof same shall be in accordance with Standard Input Output Norms notified for Duty Exemption Entitlement Scheme under Foreign Trade Policy or as fixed by Approval Committee: Provided further that where sub-contractor s premises are located abroad, scrap, waste or remnants generated at sub-contractor s premises may either be returned to Unit or may be disposed off abroad. (4) Unit may sub-contract part of production or production process in another Unit within same Special Economic Zone subject to following conditions, namely: (i) movement of goods shall be under serially numbered challans and record of such movement of goods shall be maintained by Unit; (ii) raw material imported or procured by Unit for manufacture of capital goods may be transferred to another unit for purpose of manufacture or fabrication of capital goods for use by Unit which had imported or procured raw materials. 20 M/s. Forever Precious Jewellery& Diamonds Ltd. (5) Developer or co-developer or on their behalf their contractor, as case may be, shall follow same procedure for subcontracting in Domestic Tariff area or in Unit in other Special Economic Zones or in Export Oriented Unit or in Electronic Hardware Technology Park Unit or Software Technology Park Unit as prescribed for sub-contracting by SEZ Units in sub-rule (1) above : Provided that Bank Guarantee to cover duty foregone on materials being sent for sub-contracting shall apply only in case of temporary removal of goods by contractor.] 43. Sub-contracting for Domestic Tariff Area unit for export Unit may, on basis of annual permission from Specified Officer, undertake sub- contracting for export on behalf of Domestic Tariff Area exporter, subject to following conditions, namely: (a) all raw materials including semi-finished goods and consumables including fuel shall be supplied by Domestic Tariff Area exporter; (b) finished goods shall be exported directly by Unit on behalf of Domestic Tariff Area exporter: Provided that in case of sub-contracting on behalf of Export Oriented Unit or Electronic Hardware Technology Park unit or Software Technology Park unit or Bio-technology Park unit, finished goods may be exported either from Unit or from Export Oriented Unit or Electronic Hardware Technology Pak unit or Software Technology Park unit or Biotechnology Park unit; (c) export document shall be jointly in name of Domestic Tariff Area exporter and Unit; (d) Domestic Tariff Area exporter shall be eligible for refund of duty paid on inputs by way of brand rate of duty drawback. 20. We find that claim of assessee is required to be examined in light of provisions of SEZ Act/ SEZ Rules and also provisions as envisaged in SEZ scheme 2007 to 2009 as referred to in approval letter of Development Commissioner dated 21.09.2005. perusal of order of AO and impugned order of CIT(A) reveals that lower authorities have not examined issue in light of provisions of SEZ Act/ SEZ Rules and other related provisions. impugned order of CIT(A) is therefore set aside and matter is restored on this issue to file of AO for decision afresh after giving reasonable of being heard to assessee in light of above stated SEZ Act/Rules and case laws as may be available or relied upon. 21 M/s. Forever Precious Jewellery& Diamonds Ltd. Ground No.2 21. Ground no.2 pertains to addition on account of valuation of closing stock. This issue is identical to one we have discussed while deciding appeal for A.Y. 2005-06 above. For reasons stated therein, order of CIT(A) on this ground is upheld and ground is rejected. 22. In result, this appeal is partly allowed. ITA No.4295 for A.Y. 2007-08 23. only issue raised in this appeal is identical to issue as discussed above vide ground No.1 in Revenue s appeal for A.Y. 2006-07. In view of our finding given above this appeal is restored to file of AO in terms of our directions given above. ITA No.3775/M/2011 for A.Y. 2005-06 ITA No.3776/M/2011 for A.Y. 2006-07 ITA No.3783/M/2011 for A.Y. 2007-08 24. These appeals are in relation to assessment proceedings carried out under section 143(3) read with section 153C of Act. No new additions have been made pursuant to search action. AO has retained same additions as were made during original assessment proceedings under section 143(3) of Act. 25. In view of our observations made above, appeal bearing ITA No.3775/M/2011 is treated as dismissed as per our decision given for relevant assessment year 2005-06 in relation to original proceedings under section 143(3) of Act whereas ITA No.3776 & 3783/Mum/2011 for A.Y.2006- 07 & 2007-08respectively are treated as partly allowed in terms of our order in relation to appeal nos. 1142/A/2010 & 4295/Mum/2013 for 2006-07 & 2007- 22 M/s. Forever Precious Jewellery& Diamonds Ltd. 08 respectively filed in respect of original assessment proceedings carried out u/s 143(3) of Act. Order pronounced in open court on 30.09.2016. Sd/- Sd/- (G S Pannu) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, Dt : 30.09.2016 Copy forwarded to : 1. Appellant 2. Respondent 3. C.I.T. concerned Mumbai 4. CIT (A) concerned Mumbai 5. DR, F - Bench, ITAT, Mumbai //True Copy// BY ORDER ASSISTANT REGISTRAR ITAT, Mumbai Benches, Mumbai ITO Ward 4(3), Ahmedabad v. Forever Precious Jewellery& Diamonds Ltd