L. B. Singhal
Director General

Sub : Tax holiday under section 10b of the income tax act to DTA units converted into 100% EOUs

Paragraph 6.37.1 of Handbook of Procedures, Vol. I made a provision that if a DTA unit is converted into 100% EOU then it shall be entitled for income tax exemption but limited to the period of 10 years from original commencement of manufacture or that prescribed under Section 10 of the Income Tax Act, whichever is earlier.

After incorporation of this provision, EPCES had taken up the matter with CBDT requesting that a corresponding notification/clarification may also be issued by CBDT so that there is no ambiguity and the field formation of the income tax authorities provide uniform interpretation. EPCES had a meeting with the Revenue Secretary also on 6th January 2005 and the Revenue Secretary promised that by today evening the clarification would be issued.

This was also discussed in open house meeting held in Hyderabad on 4-1-2005 and Director (CBDT) assured that clarification would be issued shortly.

I am happy to inform you that CBDT has issued Circular No. 1/2005 dated 6-1-2005 which has clarified as follows:-

“ 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.”

A copy of this circular is enclosed for your information. I would like to further inform that in the Revenue Secretary meeting EPCES has taken up major issues relating to EOUs & SEZs. Some of the issues taken up are mentioned as follows:-

ISSUES RELATED TO CBDT

1. Income Tax Exemption, Removal of Sunset Clause

2. Section 10A of the Income Tax Act, 1961 to cover

“Inter-Uit Transfer”, and Re-export of surplus goods” by SEZ

3. Income Tax benefits to be extended to the Trading Activities

4. Restoration of Income Tax Exemption to Old SEZ Units

5. Sub-Section (3) of Section 10B of Income Tax Act

6. Income Tax Benefits for DTA Units converted to EOUs

7. Exemption from Withholding Tax

8. Transfer Pricing Regulations (Section 92 of the Income Tax Act, 1961)

9. Netting off Interest earned on deposits against interest

paid on the loans

10. Definition of Manufacturing

ISSUES RELATED TO CST ACT

11. Exemption from Central Sales Tax for Supplies from DTA to EOUs/SEZs

ISSUES RELATED TO CBEC

12. Service Tax Exemption

13. Fast Track Clearance Scheme

14. DEPB Benefits for Supply of goods from DTA to SEZ

for the period 1-4-03 to 11-5-04

15. Problem faced by EOUs/SEZ Units on procurement of HSD

16. Exemption from Additional Excise Duty on supply of HSD to

EOUs/SEZ Units : Amendment to Finance Act, 1999

17. Exemption from Central Excise Duty to SEZ Developers

18. Abolition of Cost Recovery Charges

19. Repeated Registration with different ports and delay in registration with Customs Authorities.

20. Disbursement of Drawback to SEZ Units/SEZ Developers

21. Notification of SEZ as a Customs Port

22. Doing Away with the requirement of Procurement Certificate

23. Time frame for various activities to be performed by Customs/ Central Field formations : in respect of EOUs/SEZs

24. Impact of Value Added Tax implementation on EOUs/SEZs

 

This is for your information please.

_________________________

Circular No. 01/2005F.No. 149/194/2004-TPL
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)
New Delhi, the 6th January, 2005

To
All Chief Commissioners/
Directors General of Income-tax.

Sub : Tax holiday under section 10B of the Income-tax Act to 100% Export Oriented Undertaking – Certain clarification – reg.

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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:-

(i) it manufactures or produces any article or thing or computer software;

(ii) 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.

(iii) 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:-

(i) 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 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.

(ii) 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.

(iii) 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 purpose of Section 10B. In financial year 2002-03, it acquires more than 20% of old plant & 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.

(iv) 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.

(v) 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 AY 2005-06.

Sd/-
(Chandrajit Singh)
Under Secretary to the Govt. of India