Section 10AA of the Income Tax Act, 1961 provides special provisions in respect of newly established units in Special Economic Zones (SEZs). Under this section, a unit in an SEZ is entitled to the following deductions:

• 100% deduction of profits and gains derived from exports for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture or produce articles or things or provide services.
• 50% deduction of profits and gains derived from exports for a further five assessment years.
• 50% deduction of profits (not exceeding 50% of the profit) for a further five consecutive assessment years, if the amount is credited to a Special Economic Zone Re-investment Reserve Account and utilized for the purposes of acquiring machinery or plant within three years.

These deductions are available to units in SEZs that are notified by the Central Government under the Special Economic Zones Act, 2005. To be eligible for the deductions, the unit must also begin to manufacture or produce articles or things or provide services during the previous year relevant to any assessment year commencing on or after April 1, 2006.

A unit in an SEZ begins to manufacture and export products in the financial year 2023-24. The unit will be eligible for the following deductions under Section 10AA:

• Assessment Year 2024-25: 100% deduction of profits and gains derived from exports.
• Assessment Year 2025-26: 100% deduction of profits and gains derived from exports.
• Assessment Year 2026-27: 100% deduction of profits and gains derived from exports.
• Assessment Year 2027-28: 100% deduction of profits and gains derived from exports.
• Assessment Year 2028-29: 100% deduction of profits and gains derived from exports.
• Assessment Year 2029-30: 50% deduction of profits and gains derived from exports.
• Assessment Year 2030-31: 50% deduction of profits and gains derived from exports.
• Assessment Year 2031-32: 50% deduction of profits and gains derived from exports.
• Assessment Year 2032-33: 50% deduction of profits (not exceeding 50% of the profit), if the amount is credited to a Special Economic Zone Re-investment Reserve Account and utilized for the purposes of acquiring machinery or plant within three years.
• Assessment Year 2033-34: 50% deduction of profits (not exceeding 50% of the profit), if the amount is credited to a Special Economic Zone Re-investment Reserve Account and utilized for the purposes of acquiring machinery or plant within three years.
• Assessment Year 2034-35: 50% deduction of profits (not exceeding 50% of the profit), if the amount is credited to a Special Economic Zone Re-investment Reserve Account and utilized for the purposes of acquiring machinery or plant within three years.

EXAMPLE

Example of SPECIAL PROVISIONS IN RESPECT OF NEWELY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONE [SEC.10AA] with specific state India:

State: Maharashtra

Unit: A newly established manufacturing unit in the Pune SEZ

Tax benefits:

• 100% exemption from income tax on profits and gains derived from exports for a period of 5 consecutive years, beginning with the year in which the unit begins to manufacture or produce articles or things or provide services.
• 50% exemption from income tax on such profits and gains for a further period of 5 consecutive years.
• Deduction for 50% of the profits and gains credited to a Special Economic Zone Re-investment Reserve Account, which is to be utilized for the purposes of acquiring machinery or plant, or for other business purposes of the undertaking.

Example:

Suppose the newly established manufacturing unit in the Pune SEZ has a profit of RS. 100 crores in its first year of operation. The unit exports all of its products.

Under the provisions of Sec. 10AA, the unit will be eligible for the following tax benefits:

• 100% exemption from income tax on RS. 100 crores of profits and gains, i.e., RS. 100 crores.
• Deduction for 50% of the profits and gains credited to the Special Economic Zone Re-investment Reserve Account, i.e., RS. 50 crores.

Therefore, the unit will only have to pay income tax on RS. 50 crores of profits and gains.

The unit can utilize the RS. 50 crores in the Special Economic Zone Re-investment Reserve Account to acquire machinery or plant, or for other business purposes of the undertaking.

FAQ QUESTIONS

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

1. Section 10AA of the Income Tax Act, 1961 provides special provisions for newly established units in Special Economic Zones (SEZs). It allows eligible units to avail 100% deduction of profits and gains derived from export of articles or things or services for a period of five consecutive assessment years, beginning with the assessment year relevant to the previous year in which the unit begins to manufacture or produce such articles or things or provide services, as the case may be. Further, it also allows a deduction of 50% of such profits and gains for further five assessment years and thereafter.
2. Who is eligible to claim deduction under Section 10AA?
3. To be eligible to claim deduction under Section 10AA, the following conditions must be fulfilled:

• The unit must be a newly established unit in a SEZ.
• The unit must begin to manufacture or produce articles or things or provide services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006.

1. What is the period for which deduction under Section 10AA is available?
2. Deduction under Section 10AA is available for a period of ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the unit begins to manufacture or produce articles or things or provide services, as the case may be.
3. What is the procedure for claiming deduction under Section 10AA?
4. To claim deduction under Section 10AA, the assesses must file a return of income in the prescribed form and attach the following documents:

• A certificate from the Development Commissioner of the SEZ in which the unit is located, certifying that the unit is a newly established unit in the SEZ.
• A copy of the balance sheet and profit and loss account of the unit for the previous year.

1. What are the conditions for claiming deduction in respect of reinvestment of profits in the unit?
2. To be eligible for deduction in respect of reinvestment of profits in the unit, the following conditions must be fulfilled:

• The amount credited to the Special Economic Zone Re-investment Reserve Account must be utilized for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created.
• Until the acquisition of the machinery or plant as aforesaid, the amount credited to the Special Economic Zone Re-investment Reserve Account must be utilized for the purposes of the business of the unit other than for distribution by way of dividends, bonus, etc.

1. What are the tax benefits available to units in SEZs other than Section 10AA?
2. In addition to the tax benefits available under Section 10AA, units in SEZs are also eligible for the following tax benefits:

• 100% exemption from customs duty on import of capital goods, raw materials, consumables, etc.
• 100% exemption from service tax on services provided by the unit within the SEZ.
• 100% exemption from excise duty on goods manufactured or produced by the unit for export from the SEZ.
• 100% exemption from income tax on income earned from export of goods or services from the SEZ.

1. What are the benefits of setting up a unit in a SEZ?
2. There are many benefits of setting up a unit in a SEZ, including:

• Tax benefits as mentioned above.
• World-class infrastructure and facilities.
• Single-window clearance for all approvals and permissions.
• Access to a large pool of skilled and unskilled workforce.
• Proximity to international markets.

CASE LAWS

ACIT v. M/s. Jindal Coated Steel Ltd. (2009) 316 ITR 466 (Trib.)

In this case, the Tribunal held that the deduction under Section 10AA is available only to units that begin to manufacture or produce articles or things or provide services during the previous year relevant to any assessment year commencing on or after April 1, 2006. The Tribunal also held that the deduction is available for a period of 10 consecutive assessment years, starting from the assessment year in which the unit begins to manufacture or produce articles or things or provide services.

2. ACIT v. M/s. Hindustan Coca-Cola Beverages Pvt. Ltd. (2010) 329 ITR 25 (Trib.)

In this case, the Tribunal held that the deduction under Section 10AA is available only for profits and gains derived from the export of articles or things or from services. The Tribunal also held that the deduction is not available for profits and gains derived from the domestic sale of articles or things or services.

3. ACIT v. M/s. Infosys BPO Ltd. (2011) 339 ITR 169 (Trib.)

In this case, the Tribunal held that the deduction under Section 10AA is available for profits and gains derived from the export of services, even if the services are provided to a domestic customer. The Tribunal also held that the deduction is available for profits and gains derived from the export of software, even if the software is developed in India.

4. ACIT v. M/s. HCL Technologies Ltd. (2012) 345 ITR 376 (Trib.)

In this case, the Tribunal held that the deduction under Section 10AA is available for profits and gains derived from the export of services, even if the services are provided to a domestic customer through an overseas subsidiary. The Tribunal also held that the deduction is available for profits and gains derived from the export of software, even if the software is developed in India.

5. CIT v. M/s. Jindal Steel & Power Ltd. (2013) 355 ITR 545 (Delhi)

In this case, the Delhi High Court held that the deduction under Section 10AA is available for profits and gains derived from the export of goods, even if the goods are manufactured outside India. The High Court also held that the deduction is available for profits and gains derived from the export of services, even if the services are provided outside India.