FAQ’s on Section 10AA – Deduction available to units in SEZ

1. What is Section 10AA?

• Section 10AA is a deduction under the Income Tax Act, 1961, available to enterprises located in the Special Economic Zone, deriving profits or gains through export of goods/articles/services.

2. What are the essential conditions to be fulfilled for claiming deduction under Section 10AA?

The following are the essential conditions to be fulfilled for claiming deduction under Section 10AA:

• The assessee shall be an entrepreneur as referred to in Section 2(j) of the Special Economic Zones Act, 2005.
• The SEZ unit has begun to manufacture articles or things or provides any service during the year relevant to the assessment year commencing on or after 1.4.2006 but before 1.4.2021.
• The SEZ unit is not formed by any splitting up, or the reconstruction of business that is already in existence. However, such a condition shall not apply to a unit formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any undertaking as referred to in Section 33B.
• The SEZ unit is not formed by any transfer of plant and machinery, previously used for any purpose to a new business.

3. How does Section 2(j) of the SEZ Act, 2005 define an entrepreneur?

• As per section 2(j) of the SEZ Act, 2005, an entrepreneur shall be a person who has been granted a letter of approval by the Development Commissioner under Section 15(9).

4. Who is not eligible to claim deduction under Section 10AA?

• Units who have already enjoyed the benefit of deduction under Section 10A (Section 10AA was a replacement for this section) for a continuous period of 10 years before commencement of SEZ Act, 2005 shall not be eligible to claim deduction under Section 10AA of the Income Tax Act.

5. How is the deduction under Section 10AA calculated?

• Deduction under Section 10AA is provided as a percentage of export profits for a period of 15 consecutive assessment years. (Refer FAQ No 6)
• Export Profit = (Profits of business of SEZ unit* Export turnover of SEZ unit) / Total turnover of SEZ unit

6. What do you mean by “Export turnover” for the purpose of calculating export profit?

• Export turnover of the unit means the consideration relating to export by the undertaking received in or brought into India by the assessee.
• In other words, Export turnover means amount brought into India in convertible foreign exchange within 9 months from the date of export
• Such turnover/consideration does not include freight, telecommunication charges or insurance expenses incurred for the delivery of a product or outside India or any other expense incurred in foreign exchange for the rendering of services outside India.
• Any amount which becomes irrecoverable shall be EXCLUDED from export turnover for the purpose of calculating export profit

7. What is the quantum of deduction allowed under section 10AA for the 15 AY’s?

• The deduction under Section 10AA is allowed in the following manner,

8. Whether on-site development of Computer Software qualify as an export activity for availing benefits under Section 10AA?

• Yes, Computer software developed abroad at a client’s place would be eligible for benefits under this section, as it would amount to ‘Deemed Export’.

9. Is the deduction under Section 10AA available for an assessee who has opted for the new tax regime under section 115BAC?

• No, an assessee who has opted for new tax regime under section 115BAC cannot claim deduction under Section 10AA.

10. Is filing of return of income within due date mandatory for claiming deduction under Section 10AA?

• Deduction under Section 10AA shall not be allowed to an assessee who does not furnish his return of income on or before the due date under section 139(1).

11. What are the consequences of the mis-utilization or non-utilization of reserve as per Section 10AA(3)?

• Where any amount credited to Special Economic Zone Re-Investment Reserve Account has been utilised for any purpose other than the purchase of machinery or plant, the amount so utilised shall be deemed to be the profits of the year in which the amount from the reserve is mis-utilised and shall be charged to tax in that year
• Similarly, if the amount credited to Special Economic Zone Re-Investment Reserve Account has not been utilised before the expiry of the aforesaid period of 3 years, the amount not so utilised shall be deemed to be the profits of the year immediately following the expiry of the said 3 years and shall be charged to tax in that year

12. What shall be the tax treatment under Section 10AA if an SEZ unit is transferred or amalgamated?

• The deduction under Section 10AA shall not be available to the amalgamating or demerged unit, as the case maybe, for the previous year in which the amalgamation or demerger has taken place.
• Deduction is available to the Amalgamated/Resulting company for the remaining period (I.e. from the previous year of amalgamation /demerger till completion of balance portion)

13. Conversion of FTZ/EPZ to SEZ – Deduction of S.10AA for the units located in FTZ/EPZ

• Where a unit/undertaking is initially located in any Free Trade Zone (FTZ) or Export Processing Zone (EPZ) and such FTZ/EPZ is converted into a SEZ,
• The period of deduction under section 10AA for 10 consecutive assessment years shall begin from the assessment year relevant to the previous year in which such unit began to manufacture, or produce or process such articles or things or services in such FTZ or EPZ.

14. Will an assessee availing deduction under section 10AA be eligible to claim deduction under section 35AD?

• Double deduction of profits under both the sections will not be allowed. An entity can claim deduction of profits either under Section 10AA or under section 35AD.

15. Whether the benefits under section 10AA can be enjoyed by an eligible unit consequent to its transfer to another SEZ?

• The benefits of section 10AA can be availed even if there is a physical relocation of an eligible unit from one SEZ to another.