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Issues: Whether deduction under section 10AA of the Income-tax Act, 1961 was available to an SEZ unit engaged in trading by way of re-export of imported rough or polished diamonds, and whether such trading activity could be treated as a qualifying service under the Special Economic Zones framework.
Analysis: The assessee held approval as an entrepreneur for authorized operations in the SEZ, and the revised letter of approval permitted trading of rough or polished diamonds, subject to the condition relating to deduction under section 10AA. The governing SEZ provisions were relied upon to hold that the Income-tax Act applies to developers and entrepreneurs subject to modifications in the SEZ regime, and that the SEZ law has overriding effect. Rule 76 of the SEZ Rules, 2006 was treated as defining services to include trading, with trading for that purpose meaning import for re-export. On that basis, the activity of re-export of imported diamonds was treated as falling within the eligible zone of operations and consistent with earlier Tribunal decisions on the same point.
Conclusion: Deduction under section 10AA was held allowable on profits derived from the assessee's re-export trading activity, and the disallowance made by the Assessing Officer was not sustained.
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