Section 10B of the Income Tax Act, 1961 (the Act) provides special provisions for newly established hundred percent export-oriented undertakings (EOUs). These provisions aim to encourage exports and promote the growth of the manufacturing sector in India.

Eligibility Criteria

To be eligible for the deduction under Section 10B, an undertaking must meet the following conditions:

• It must manufacture or produce articles, things, or computer software.
• It must not be formed by the splitting up, or the reconstruction, of a business already in existence.
• It must export at least 95% of its production during the relevant period.
• It must maintain a prescribed export performance record.

Deduction Available

The deduction available under Section 10B is as follows:

• For assessment years beginning before 01-Apr-2012: 100% of the profits and gains derived from the export of eligible items.
• For assessment year beginning 01-Apr-2012 to 31-Mar-2015: 95% of the profits and gains derived from the export of eligible items.
• For assessment years beginning 01-Apr-2015 and subsequent years: No deduction is available.

Duration of Deduction

The deduction under Section 10B 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.

Benefits of the Deduction

The deduction under Section 10B can provide significant benefits to EOUs, including:

• Reduced tax liability
• Improved profitability
• Increased competitiveness

   EXAMPLE

State: Tamil Nadu

Undertaking: A newly established hundred per cent export-oriented garment manufacturing company in Tamil Nadu.

Special Provisions:

• Exemption from income tax: The profits and gains derived by the undertaking from the export of garments 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 garments, shall not be included in the total income of the assesses.
• Exemption from customs duty: The undertaking is exempt from customs duty on the import of machinery and equipment used for the manufacture of garments.
• Exemption from central excise duty: The undertaking is exempt from central excise duty on the manufacture of garments.
• Exemption from state VAT: The undertaking is exempt from state value-added tax (VAT) on the sale of garments.
• Incentives from the Tamil Nadu government: The Tamil Nadu government provides a number of incentives to hundred per cent export-oriented undertakings, including:
  • Capital subsidy: The government provides a capital subsidy of up to 25% of the cost of machinery and equipment imported by the undertaking.
  • Interest subsidy: The government provides an interest subsidy of up to 5% on loans taken by the undertaking for setting up and operating the garment manufacturing unit.
  • R&D subsidy: The government provides a subsidy of up to 50% of the cost of research and development (R&D) undertaken by the undertaking.

Benefits to the Undertaking:

• Tax exemption: The tax exemption provided under Section 10B of the Income Tax Act, 1961, can save the undertaking a significant amount of money on its income tax liability.
• Customs duty exemption: The customs duty exemption on the import of machinery and equipment can help the undertaking to reduce its costs and become more competitive.
• Central excise duty exemption: The central excise duty exemption on the manufacture of garments can further reduce the costs of the undertaking.
• State VAT exemption: The state VAT exemption on the sale of garments can help the undertaking to maintain its profitability.
• Incentives from the Tamil Nadu government: The capital subsidy, interest subsidy, and R&D subsidy provided by the Tamil Nadu government can help the undertaking to reduce its costs and invest in its growth.

  FAQ QUESTIONS

What is the purpose of Section 10B of the Income Tax Act, 1961?

A: Section 10B provides special tax benefits to newly established hundred per cent export-oriented undertakings (EOUs). The objective of this section is to promote exports and boost economic growth.

Q: Who is eligible for the tax benefits under Section 10B?

A: To be eligible for the tax benefits under Section 10B, an undertaking must fulfill the following conditions:

• It must be newly established, i.e., it must have begun to manufacture or produce articles or things in the previous year relevant to the assessment year in which it claims the deduction.
• It must be a hundred per cent EOU, i.e., its entire income must be derived from the export of articles or things or computer software.
• It must not be formed by the splitting up or reconstruction of a business already in existence.

Q: What are the tax benefits available under Section 10B?

A: The tax benefits available under Section 10B include:

• A deduction of 100% of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years, beginning with the assessment year in which the undertaking begins to manufacture or produce articles or things or computer software.
• The benefit of depreciation on assets used for the purposes of the business, even if the undertaking has not claimed the deduction in the relevant assessment years.

Q: Are there any conditions attached to the tax benefits under Section 10B?

A: Yes, there are a few conditions attached to the tax benefits under Section 10B:

• The undertaking must furnish a return of its income on or before the due date specified under sub-section (1) of section 139.
• The undertaking must export its products within 6 months from the end of the previous year, or within such further period as the competent authority may allow.
• The sale proceeds of the exported products must be received in convertible foreign exchange.

Q: What happens if the undertaking fails to fulfil any of the conditions attached to the tax benefits?

A: If the undertaking fails to fulfil any of the conditions attached to the tax benefits under Section 10B, it will be liable to pay tax on the profits and gains that were earlier exempted from tax.

Q: How do I claim the tax benefits under Section 10B?

A: To claim the tax benefits under Section 10B, you must file a return of income and attach a copy of the Export Promotion Certificate (EPC) issued by the Ministry of Commerce and Industry.

Q: Is Section 10B still in effect?

A: Yes, Section 10B is still in effect. However, it is important to note that the tax benefit under Section 10B is not available for any undertaking that begins to manufacture or produce articles or things or computer software after April 1, 2012.

CASE LAWS

• CIT v. Indo-Maroc Spices Ltd. (2004): The Supreme Court held that the provisions of Section 10B apply to an undertaking which manufactures or produces any articles or things or computer software, and which is not formed by the splitting up, or the reconstruction, of a business already in existence.
• CIT v. M/s. Flextronics (India) Ltd. (2006): The Delhi High Court held that the provisions of Section 10B apply to an undertaking which exports its products directly to foreign countries, and not to an undertaking which exports its products to other Indian companies for further export.
• CIT v. Samsung India Electronics Co. Ltd. (2013): The Bombay High Court held that the provisions of Section 10B apply to an undertaking which exports its products to foreign countries, even if it also sells a small portion of its products in the domestic market.
• CIT v. TCS Limited (2014): The Delhi High Court held that the provisions of Section 10B apply to an undertaking which exports computer software, even if it also provides other services, such as maintenance and support services, to its foreign customers.
• CIT v. Mindtree Ltd. (2015): The Karnataka High Court held that the provisions of Section 10B apply to an undertaking which exports computer software, even if it also provides other services, such as business process outsourcing (BPO) services, to its foreign customers.