Migration to SEZ – not all options are closed.
Yesterday's DDT carried a comment from one of our experts,
Now with this deletion this transfer of used plant and machinery is allowed. This gives a tremendous opportunity for all the EOUs to migrate to SEZs.
DDT stated “Not exactly!”, fully understanding that there will be a strong backlash.
Expectedly, it came as soon as DDT hit the web.
I stated that the existing EOUs have tremendous opportunity by deletion of clause g of Rule 18(4) of SEZ Rules because the deletion of this clause was necessitated by the new sub clause 4 of Section 10AA of IT Act, 1961 which was introduced in the Finance Act, 2007. This new clause essentially states that Section 10AA shall apply to any undertaking which fulfills the three conditions mentioned therein. They are (i) the unit has begun or begins to manufacture articles or provides services in the assessment year 2006-07; such unit is not formed by splitting up or reconstruction of a business already in existence provided that such business is being revived after damaged by natural causes or reasons like arson, riots etc (section 33B); such unit is not formed by the transfer to a new business, of machinery or plant previously used for any purpose. An explanation is also introduced under this sub-clause 4 which states that explanations 1 and 2 to sub-section 3 of Section 80IA shall apply to clause (iii) herein as they apply to clause (ii) therein.
These two explanations provide an interesting angle. The first explanation is meant for used plant and machinery imported from outside India. This is of not much help to an EOU which is in India [of course an existing EOU can still import used capital goods and without installation in its premises divert it to a newly set up unit in SEZ (belonging to the same entity) by virtue of this explanation without violating any of the existing conditions in 10AA especially the new sub-clause 4 or Chapter 6 of the FTP ( in terms of Para 6.13) ]. The second explanation is very important. It states that if a unit transfers any used plant and machinery to a new business, and if the value of such plant and machinery so transferred shall not exceed twenty percent of the value of plant and machinery of the new business, then the conditions mentioned [in clause (iii) of section 10AA] are deemed to have been complied with. Though the two explanations are meant for clause (ii) of sub section 3 of section 80IA, by virtue of explanation to section 4 of new section 10AA, they are also applicable to the clause (iii) of this new 10AA.
So there is still hope for the existing EOUs to migrate to an SEZ (belonging to the same entity) with the existing plant and machinery provided they have to plan the migration in stages and systematically so as not to violate the conditions prescribed in SEZ Act, or IT Act or FTP. After complete migration, the EOU unit can be dissolved. This strategy can be tested but is workable. Impossible is nothing - as the Adidas tagline says, the only requirement is that such an impossible task has to be tackled in a systematic way to overcome at least some of the conditions of all the laws.