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Issues: (i) Whether trading activity of importing diamonds for re-export from a Special Economic Zone unit qualifies as eligible "services" for deduction under section 10AA; (ii) Whether foreign exchange gains arising from export receivables are eligible for deduction under section 10AA.
Issue (i): Whether trading activity of importing diamonds for re-export from a Special Economic Zone unit qualifies as eligible "services" for deduction under section 10AA.
Analysis: Section 10AA grants deduction to units in a Special Economic Zone in respect of profits derived from export of articles or things manufactured or produced, or from services. The definition of "services" under the Special Economic Zones Rules is inclusive and specifically covers trading where the expression means import for the purposes of re-export. The Special Economic Zones Act also contains an overriding clause, so the SEZ framework prevails where its provisions are relevant to the claim. Since the assessee carried on import of diamonds for re-export from a registered SEZ unit, the activity fell within the SEZ concept of services.
Conclusion: The issue was decided in favour of the assessee.
Issue (ii): Whether foreign exchange gains arising from export receivables are eligible for deduction under section 10AA.
Analysis: Foreign exchange gains that arise from realization of export sale proceeds are directly connected with the export business and have a first-degree nexus with the export turnover. Where the underlying export activity is eligible for deduction under section 10AA, gains forming part of or deriving from the export consideration cannot be excluded merely because they arise from exchange fluctuation or later realization of receivables. The foreign exchange gain was therefore treated as part of the export-linked profit of the SEZ unit.
Conclusion: The issue was decided in favour of the assessee.
Final Conclusion: The deduction under section 10AA was allowed for both the SEZ trading activity and the connected foreign exchange gains, with the appeal succeeding only to that extent.
Ratio Decidendi: For an SEZ unit, a trading activity expressly treated as "services" under the SEZ framework can qualify for deduction under section 10AA, and foreign exchange gains having a direct nexus with export proceeds form part of the deductible export profit.
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