SEZ Compliance & Annual Performance Reports

The Annual Performance Report is the primary statutory submission that every SEZ unit must file with the Development Commissioner's office after the close of each financial year. It covers: export earnings (foreign currency invoice-wise and aggregate), capital goods and consumables imported (with Bill of Entry references), Net Foreign Exchange Earnings (NFE) computation for the year and cumulatively, employment data (headcount, total salaries), DTA sales (if any), inter-unit transfers, and the current status of the capital goods register. The DC uses the APR as the basis for confirming that the unit is compliant with its LOA commitments and that the bond remains in order. The due date is specified by the DC office — typically within 3–6 months of financial year end.

NFE is the net balance of foreign exchange earned by the SEZ unit over its operating period. The basic formula is: NFE = Foreign Exchange Earned (FEE) minus Foreign Exchange Spent (FES). FEE includes all export receipts realised in foreign currency — the sum of FIRCs/BRCs received against export invoices for the year. FES includes: CIF value of capital goods and consumables imported, salary and allowances paid to foreign technicians or personnel (remitted abroad), dividends, royalties, and technical fees paid to foreign entities, and other foreign exchange outflows directly attributable to the SEZ unit. NFE must be positive over the 5-year monitoring period specified in the LOA. An annual NFE figure can be negative in a particular year (for example, a year of heavy capital goods import with low initial exports) as long as the cumulative 5-year NFE is positive.

A negative cumulative NFE at the end of the 5-year monitoring period constitutes a breach of the unit's bond undertaking. The Development Commissioner is empowered under the SEZ Rules to: issue a show-cause notice to the unit, call for the unit's explanation, and initiate bond enforcement proceedings — which can result in a demand for customs duty on the import shortfall (i.e., the duty that would have been payable had the goods not been imported duty-free, adjusted for the shortfall in NFE). The DC can also suspend or cancel the LOA. In practice, where a genuine shortfall exists, PNPC engages with the DC office with a documented explanation, regularisation plan, and evidence of efforts made — which has historically resulted in more measured DC responses where the shortfall is not wilful.

Yes. The SEZ Rules and the LOA conditions require the unit to maintain a Capital Goods Register for every item of capital goods imported duty-free or sourced from the DTA under SEZ-specific provisions. The register must contain, at minimum: item description, quantity, Bill of Entry number and date (for imports) or CT-3 form details (for DTA procurement), CIF value or transaction value, customs duty saved, date of receipt into the SEZ premises, current physical location within the premises, and the date and manner of disposal (re-export Shipping Bill reference, or duty payment challan for domestic clearance). The register must be available for inspection by the DC's officers at any time — and discrepancies between the register and the physical location or condition of the goods are the primary source of duty demands during inspections.

Yes, an SEZ unit can supply goods or services to the Domestic Tariff Area, but only with prior approval from the Development Commissioner. DTA sales from an SEZ are treated as 'deemed imports' from the perspective of the DTA buyer — meaning the DTA buyer is required to pay full customs duty and IGST as if the goods had been imported from abroad. For services (IT/ITES), the DTA sale is treated as a domestic taxable supply — full GST applies. DTA sales are counted as foreign exchange spent (not earned) in the NFE computation: they reduce the NFE figure for the year. An SEZ unit with significant DTA sales may find its NFE trajectory negatively affected, reducing the Section 10AA benefit base.

Yes, in important ways. Under the IGST Act 2017, SEZ supplies fall under two special categories: (a) supplies of goods or services TO an SEZ unit or developer from India (DTA) are zero-rated — the DTA supplier does not charge IGST and can claim a refund of input tax credit; (b) supplies FROM the SEZ unit to export markets are zero-rated exports under Section 16 of the IGST Act, with the unit filing a Letter of Undertaking (LUT) to export without paying IGST. For a unit with both SEZ operations and DTA operations under the same PAN, the SEZ establishment has a separate GSTIN. Supplies between the DTA entity and the SEZ entity — even within the same company — are treated as inter-entity supplies and may be subject to GST depending on the nature of the supply.

Section 10AA of the Income-tax Act provides a deduction from the total income of an SEZ unit that begins manufacturing or providing services on or after 1 April 2005. The deduction is applied to the 'unit profit' attributable to export — computed as: (Profit of the SEZ Undertaking × Export Turnover) / Total Turnover. The three phases are: Phase 1 (Years 1–5 of the undertaking's assessment window): 100% of the export profit is deductible. Phase 2 (Years 6–10): 50% of the export profit is deductible. Phase 3 (Years 11–15): 50% of the amount transferred to the Special Economic Zone Reinvestment Reserve Account from the export profit is deductible, subject to the reserve being utilised for plant, machinery, or working capital within 3 years. The window runs from the assessment year in which the unit commences manufacturing or service provision.

Form 10CCB is the audit report required from a Chartered Accountant certifying the Section 10AA deduction claimed in the income-tax return. The CA certifies: that the unit qualifies as an SEZ unit under the Act, the computation of the unit's profits from export, the export turnover and total turnover figures used in the formula, the deduction percentage applicable, and that the conditions of Section 10AA are satisfied. Form 10CCB must be filed electronically on the income-tax portal before or simultaneously with the ITR-6. A Section 10AA deduction claimed without Form 10CCB is not valid — the Assessing Officer can disallow the entire deduction on this ground alone, without examining the merits.

An SEZ unit providing services to a foreign parent or group company is engaged in an 'international transaction' under Section 92B of the Income-tax Act. The price charged must be at arm's length under one of the six prescribed methods. For IT captive centres, the most commonly used method is the Transactional Net Margin Method (TNMM), which compares the unit's operating margin to comparable independent IT companies. The export profit available for Section 10AA deduction is the arm's length profit — if the Transfer Pricing Officer adjusts the transfer price downward, the Section 10AA deduction is correspondingly reduced. Contemporaneous TP documentation must be maintained each year when international transactions exceed ₹1 crore.

SEZ units are required to file quarterly performance returns with the Development Commissioner's office. The quarterly return typically covers: export earnings for the quarter (foreign currency and INR equivalent), imports made during the quarter (capital goods and consumables, with BENumber references), employment figures as of the quarter end, DTA sales made during the quarter (with DC approval references), and any inter-unit transfers. The DC uses quarterly returns to monitor the unit's ongoing compliance between annual APRs — and a unit that consistently files complete and accurate quarterly returns builds a compliance track record that works in its favour during APR review and LOA renewal.

Yes. Before any capital goods are imported duty-free under the LOA, the unit must submit an import list to the Development Commissioner's office and obtain approval for the specific items. The approval is typically issued within a few weeks and specifies the items, quantities, and values approved for duty-free import. The Bill of Entry filed at customs must reference the DC approval and the applicable customs notification. Importing goods without DC approval — or importing goods not on the approved list — means the duty-free exemption does not apply and customs may raise a duty demand. The DC approval also forms the basis for the capital goods register entry.

Any change in the business activities undertaken by the SEZ unit — expanding from software development to also include ITES, adding hardware engineering services, or commencing manufacturing alongside IT — requires an amendment to the Letter of Approval from the Development Commissioner. The amendment application must be filed with the DC before the new activities commence. Revenue earned from activities not covered by the approved LOA activities does not qualify for Section 10AA deduction — and may also constitute a violation of the LOA conditions. The DC evaluates the amendment application and may require updated NFE projections and a revised project description.

The Development Commissioner may: issue a show-cause notice requiring the unit to explain the non-filing or deficiency within a specified period; initiate a bond review proceeding to assess whether the bond is still adequate; suspend or cancel the LOA if the non-compliance is repeated or if the unit does not respond adequately to the show-cause; and refer the matter to Customs for enforcement action on the bond. Beyond the DC framework, an incomplete APR can trigger scrutiny of Section 10AA deductions (if the APR data does not align with the income-tax return), GST department queries on export turnover, and FEMA queries on unrealised export proceeds.

Yes. SEZ registration and MSME (Udyam) registration are independent and non-conflicting — an SEZ unit that meets the investment and turnover criteria can simultaneously hold Udyam registration and benefit from MSME schemes including priority lending, credit guarantee, and GeM marketplace eligibility. DPIIT startup recognition is also fully compatible with SEZ registration. However, the income-tax benefit of Section 80-IAC (Startup India profit exemption for 3 years out of the first 10) and Section 10AA (SEZ profit exemption for up to 15 years) cannot both apply to the same profit in the same assessment year — the taxpayer must choose which deduction to claim for each year. PNPC models this choice across the company's projected profitability trajectory.

Every export from an SEZ unit — goods or services — must be realised in foreign currency within the prescribed period. For export of software and IT services, the current RBI guidance allows realisation within 9 months from the date of the export invoice, though this may be extended by the RBI on application. Each realisation must be evidenced by a Foreign Inward Remittance Certificate (FIRC) or Bank Realisation Certificate (BRC) obtained from the receiving bank. Unrealised export proceeds beyond the permitted period must be reported to the authorised dealer bank and, if unresolved, a compounding application must be filed with the RBI. FEMA compliance records are reviewed by the DC during APR and inspection cycles.

The APR is filed with the Development Commissioner and focuses on the SEZ scheme compliance metrics: NFE, export/import data, employment figures, and capital goods register movement. The income-tax return (ITR-6) is filed with the income-tax department and reflects total income from all sources, including the Section 10AA deduction computation based on audited financial data. Both documents draw from the same underlying audited books, but they serve different regulatory purposes. However, the export turnover figures in the APR and the export turnover used in the Section 10AA formula in the ITR must be consistent — any discrepancy between the two is a red flag for tax authorities and can trigger a scrutiny assessment or DC query.

No. A specific unit (with a specific set of premises and activities) cannot simultaneously hold both an STPI registration and an SEZ Letter of Approval. STPI and SEZ are alternative frameworks — both designed for export-oriented businesses, but administered by different authorities and with different compliance obligations. An entity can operate multiple establishments, and one may be an STPI unit while another (at a different physical location within an SEZ) is an SEZ unit — but the same premises and the same unit cannot hold both registrations. The scheme applicable to a unit determines the customs treatment, the income-tax benefit (if any), and the compliance framework for that unit.

The DC and the SEZ Customs formation are two separate regulatory authorities that both have jurisdiction over an SEZ unit, though with different responsibilities. The Development Commissioner: issues and manages the LOA, approves capital goods import lists, approves DTA sales, conducts performance reviews (APR), and can suspend/cancel the LOA. The SEZ Customs formation: processes Bills of Entry for duty-free capital goods imports, processes Shipping Bills for exports, conducts physical verification of goods entering and leaving the SEZ, manages the bond documentation (Form F and security), and can initiate duty proceedings independently of the DC. An SEZ unit must comply with both authorities — and a notice from one does not automatically close the matter with the other.

An SEZ Letter of Approval is issued to a specific legal entity. When that entity is acquired, merged into another entity, or changes its name, the LOA does not automatically transfer. The successor entity must file an amendment application with the Development Commissioner to transfer or amend the LOA to reflect the new entity name or structure. This requires prior DC approval — any capital goods imports or exports in the period between the M&A effective date and the LOA amendment can be exposed to duty risk if they were conducted under the old entity name. The bond must also be reviewed — the sureties or bank guarantee executant may need to be updated to reflect the new entity.

Foreign national employees working in an India SEZ unit require a valid Employment Visa and must be registered with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival. Their salary paid in India is subject to TDS under Section 192. If the employee is a tax resident of a country with which India has a DTAA, the applicable treaty may reduce or eliminate the Indian withholding rate — but TDS at the applicable rate must still be deducted on each salary payment. Salary remitted abroad to the foreign employee (or their account in the home country) is subject to TDS under Section 195 and requires FEMA documentation for outward remittance. The outward remittance is treated as 'foreign exchange spent' in the SEZ unit's NFE computation.

The SEZ Reinvestment Reserve Account is a balance sheet reserve created from the profit eligible for the third phase of Section 10AA deduction (Years 11–15 from commencement). Under Section 10AA(1)(ii)(b) and Section 10AA(2), the unit must transfer from its export profits an amount to this reserve before the end of the previous year (i.e., before 31 March of the year in which the deduction is claimed). The amount transferred must be used within 3 years from the end of the financial year in which it was credited, for: (a) purchase of new plant and machinery for use in the SEZ business, or (b) as working capital in the SEZ business (for the period until it is used). If the reserve is not utilised within 3 years for these purposes, the unutilised amount is taxed at 120% in the year the period expires.

No — TDS compliance for an SEZ unit follows the standard Income-tax Act provisions. The same TAN used by the company for its other deductions applies. Salary paid to employees is subject to TDS under Section 192. Rent paid to the SEZ developer or landlord is subject to TDS under Section 194I. Professional fees, technical fees, and contract payments are subject to TDS under Sections 194J, 194C, etc. There is no special TDS treatment for payments made within the SEZ framework. For international payments — royalties, technical fees to the foreign parent, salary remittances to foreign employees — Section 195 applies with the DTAA overlay. The TDS return (Form 26Q / 27Q) must be filed quarterly as for any Indian entity.

Yes. A DTA supplier supplying goods or services to an SEZ unit or SEZ developer treats the supply as a zero-rated supply under Section 16(1)(b) of the IGST Act. The DTA supplier does not charge IGST (or charges IGST and claims refund). The SEZ unit, as the recipient, can use the input tax credit reflected in its GSTR-2B for inputs received. However, the ITC can only be used for the SEZ unit's own zero-rated exports (as credit to be carried forward and claimed as refund) — it cannot be transferred to the DTA GSTIN of the same company. The apportionment between SEZ zero-rated use and DTA taxable use must follow Rule 42/43 if the same input services are shared.

Conducting business activities at SEZ premises not specified in the LOA — whether through informal expansion into adjacent space without DC approval, or by operating additional services not covered by the approved activity description — constitutes a violation of the LOA conditions. Consequences can include: customs duty demands on all capital goods imported duty-free that are found to be used for non-approved activities, disallowance of Section 10AA deduction on revenue from non-approved activities, LOA amendment requirement (with retrospective exposure for the period of unapproved activity), and in serious cases, LOA cancellation. The physical demarcation of the SEZ unit's approved area is the reference point — any activity outside that demarcation is outside the scheme.

PNPC undertakes a structured regularisation engagement for SEZ units that have accumulated gaps — typically covering: a compliance gap audit across all five regulatory frameworks (DC, Customs, GST, Income-tax, FEMA); reconstruction of the capital goods register and FIRC register from underlying import and bank documents; preparation of arrear APRs and quarterly returns; engagement with the DC office to file the arrear returns and manage any show-cause proceedings; penalty assessment and minimisation strategy; and setup of a clean forward-looking compliance system from the regularisation point. The regularisation engagement is typically a separate fixed-fee project, followed by the ongoing compliance retainer.

The SEZ Rules 2006 prescribe the format for periodic returns in the schedules to the Rules. Form I is the half-yearly or quarterly performance report (the exact frequency and format may differ by DC office and notification); the annual APR is typically a more comprehensive form covering the full financial year. These are filed directly with the Development Commissioner's office — either physically or, where the DC office has an online submission portal, electronically. The exact format and filing mode should be confirmed with the specific DC office (MEPZ, TIDEL Park, Noida, Hyderabad, Pune, etc.) as each office may have local procedural preferences.

The LOA is issued for an initial period specified by the DC — commonly 5 years, subject to extension. As the renewal date approaches, the unit must file a renewal application with the Development Commissioner, typically supported by: a cumulative NFE audit for the full initial period (CA-certified); performance data for all years covered (export/import summary, employment data); updated forward-looking projection for the next period; and a board resolution authorising the renewal application. The DC reviews the NFE track record, compliance history (were all APRs filed? were all DC approvals obtained?), and the business case for the next period. A clean compliance record is the single most important factor in obtaining a straightforward LOA renewal.

PNPC's ongoing SEZ compliance engagement is structured as an annual retainer covering: monthly NFE tracking and FIRC reconciliation; quarterly DC return preparation and filing; annual APR preparation and filing; annual GST LUT renewal; quarterly ITC refund applications; annual Section 10AA deduction computation and Form 10CCB sign-off by a senior CA; annual ITR-6 preparation incorporating the 10AA claim; Transfer Pricing documentation for related-party exporters; capital goods register maintenance with quarterly updates; DC approval applications for capital goods imports, DTA sales, and operational changes; bond review and bank guarantee renewal coordination; and ongoing advisory on DC queries, customs issues, and FEMA matters. The engagement is managed by a dedicated PNPC CA team with continuity across years — no context loss at each annual cycle.

PNPC Global has been managing SEZ compliance since the SEZ Act came into force in 2005. Our Chennai, Bangalore, and Hyderabad CA teams have filed Annual Performance Reports with the Development Commissioner offices at MEPZ (Madras Export Processing Zone / Chennai SEZ), TIDEL Park SEZ, the IT SEZ clusters in Bangalore and Hyderabad, and with Customs formations at multiple SEZ locations. We have managed Section 10AA deduction claims across all three phases of the benefit window — including the Reinvestment Reserve mechanism in the third phase. We have represented clients in DC show-cause proceedings arising from NFE shortfalls and regularisation matters, and managed the full de-bonding process for units that exited the SEZ scheme. Our Dubai office coordinates the India-UAE DTAA and ODI compliance for SEZ units that are part of India-UAE group structures — a dimension that requires simultaneous understanding of Indian FEMA and UAE regulatory frameworks.

Based on our experience across multiple SEZ units and DC offices, the most common compliance failures are: (1) Capital Goods Register not updated after the first year of operation — leading to discrepancies at DC inspection; (2) APR filed late or not filed at all for 1–2 years during a period of business disruption, creating a backlog that triggers DC notices; (3) FIRC Register not maintained separately — NFE computation prepared from aggregate bank statements rather than invoice-matched FIRCs; (4) DTA sales made without prior DC approval — sometimes because the business team did not know approval was required; (5) Section 10AA deduction not claimed in years when the unit was profitable — missed benefit that cannot be recovered retrospectively after the ITR filing period; (6) GST LUT not renewed on April 1 — resulting in the first few export invoices of the year not having LUT coverage; (7) LOA expiry date not tracked — unit continues operating post-expiry without a renewed LOA; (8) Capital goods removed from SEZ premises for repair or maintenance without Customs permission — constituting an unofficial clearance.