Shree Ulka LLP Vs The ACIT (ITAT Mumbai)
Section 10AA & Transfer Pricing Are Two Sides of Same SEZ Profit: Mumbai ITAT Orders Fresh, Coordinated Examination
Summary: The assessee, Shree Ulka LLP, was engaged in production, processing & preservation of fish & fish products from its unit situated in the Mangalore Special Economic Zone. AY 2020-21 was the first year in which it claimed deduction u/s 10AA.
For AY 2021-22, the assessee filed its return declaring nil income after claiming deduction of ₹4,46,69,638 u/s 10AA. It also entered into specified domestic transactions with its associated enterprise, Ulka Sea Foods Private Limited, including purchase of goods of ₹115,17,16,462.
The assessee benchmarked the purchase transactions by applying the “other method” prescribed in Rule 10AB & also furnished a corroborative TNMM analysis. The TPO noted that USFPL identified vendors, negotiated procurement terms & coordinated logistics, though raw material moved directly from third-party vendors to the assessee.
Rejecting the assessee’s benchmarking in an ex parte order, the TPO applied an average EBIT margin of 9.17% & proposed a TP adjustment of ₹7,47,46,398.
The AO also denied deduction u/s 10AA, principally relying upon findings recorded for AY 2020-21. He held that the SEZ undertaking was formed by splitting up or reconstruction of the existing business of USFPL. After the DRP rejected the objections, total income was determined at ₹11,94,16,036.
For AY 2022-23, deduction of ₹4,38,66,415 u/s 10AA was disallowed & a TP adjustment of ₹11,71,94,036 was made on similar facts.
Issues before the Tribunal
The first issue was whether the SEZ undertaking was an independent new unit eligible for deduction u/s 10AA or merely a reconstruction of USFPL’s existing business.
The second issue was whether purchases from USFPL were correctly benchmarked & whether the TPO was justified in rejecting the assessee’s “other method” analysis.
The larger question was whether these issues could be decided separately when the purchase price directly affected the profit of the SEZ unit & consequently the quantum of deduction u/s 10AA.
Assessee’s submissions
The assessee submitted that the SEZ unit was established through fresh capital, independent plant & machinery, separate statutory approvals & a distinct geographical location. No fixed assets were transferred from USFPL.
It filed additional evidence under Rule 29, including the procurement & payment agreement dated 8 July 2019, relevant resolution, factory design approved by the Karnataka Industrial Areas Development Board, factory licence, approval for commencement of production from the Development Commissioner, Mangalore SEZ, pollution-control consent & machinery invoices.
These documents, according to the assessee, went to the root of the allegation of splitting up or reconstruction & required examination by the lower authorities.
The assessee emphasised that AY 2020-21 was the first year of the section 10AA claim & the appeal for that year was still pending before the CIT(A). Since the AO had relied upon findings from that year for denying deduction in subsequent years, the first-year determination had a direct bearing upon both appeals.
Regarding transfer pricing, the assessee explained that USFPL facilitated payments to fishermen & supplied raw material at cost without retaining any margin. Goods moved directly from the Mangalore coast to the SEZ unit, while pricing was also influenced by the applicable customs framework.
It argued that any alteration in purchase price would change the profit of the eligible undertaking & therefore the deduction u/s 10AA. Both issues required a holistic examination.
Revenue’s contentions
The Revenue relied upon the TPO’s orders, final assessment orders & DRP directions. It supported the allegation that USFPL performed significant procurement functions, while the assessee’s benchmarking did not adequately reflect those functions.
However, the Revenue submitted that if the additional evidence was admitted & the matter restored, the AO should be permitted to verify all documents & decide the issues independently in accordance with law.
Tribunal’s findings & legal reasoning
The Tribunal found that the additional evidence consisted largely of statutory approvals, contemporaneous agreements, licences & machinery invoices relating directly to establishment & operation of the SEZ unit.
Relying upon Tek Ram v. CIT, the Tribunal held that relevant documents having a material bearing on the controversy should be considered. It therefore admitted the additional evidence in the interest of substantial justice.
The Tribunal observed that the foundational facts required coordinated verification: source & deployment of capital, acquisition of machinery, geographical separation, nature of products, customer profile, continuity of USFPL’s business & functional arrangement between the entities.
Since the first-year appeal remained pending, the AO was directed to consider its outcome, if available, during fresh adjudication.
The Tribunal further held that the TP issue could not be examined in isolation. Functional analysis, procurement arrangements, movement of raw material, customs requirements & impact of arm’s-length pricing upon eligible profit were interconnected with the section 10AA claim.
Accordingly, without expressing any view on merits, the Tribunal set aside both final assessment orders on the disputed issues & restored them to the AO for fresh examination. All contentions were left open.
Practical implications
The decision confirms that eligibility u/s 10AA must be examined through the commercial substance of the new undertaking, not merely similarities with an associated enterprise’s business.
Statutory approvals, independent machinery, separate premises, capital deployment, employees, products & customer arrangements are crucial evidence against an allegation of reconstruction.
The ruling also recognises that TP adjustments affecting purchases of an eligible unit directly alter its section 10AA profit. Such issues require consistent examination rather than isolated adjudication.
Importantly, no deduction or TP relief has yet been granted. The central principle is that when arm’s-length pricing determines SEZ profit, transfer pricing & section 10AA eligibility must be examined together, on complete evidence.
Cases Discussed
- Tek Ram v. CIT [2013] 357 ITR 133 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
These two appeals filed by the assessee are directed against the final assessment orders passed under section 143(3) read with sections 92CA and 144C(13) of the Income-tax Act, 1961 (“the Act”) for the assessment years 2021–22 and 2022–23, pursuant to the respective directions issued by the Dispute Resolution Panel (“DRP”). Since common facts and identical issues are involved, both the appeals were heard together and are disposed of by this consolidated order. With the consent of the parties, the appeal for A.Y. 2021–22 is taken as the lead case.
2. The assessee filed revised grounds of appeal. The revised grounds are concise and arise from the issues already contested in the original grounds. Accordingly, the revised grounds are admitted and are taken up for adjudication.
ITA No. 9233/Mum/2025 – A.Y. 2021–22
3. In the revised grounds, the assessee has challenged:
(i) disallowance of deduction under section 10AA of the Act amounting to ₹4,46,69,638 on the ground that the eligible undertaking was formed by splitting up or reconstruction of a business already in existence; and
(ii) transfer-pricing adjustment of ₹7,47,46,398 in respect of specified domestic transactions of purchase of goods from its associated enterprise, Ulka Sea Foods Private Limited (“USFPL”). The assessee has also contended that the transfer-pricing adjustment would be revenue neutral if the deduction under section 10AA is allowed and that the benchmarking undertaken by it under the “other method” prescribed in rule 10AB ought not to have been rejected.
4. Briefly stated, the assessee is a limited liability partnership engaged in production, processing and preservation of fish and fish products from its unit situated in Mangalore Special Economic Zone. A.Y. 2020–21 was the first year in which the assessee claimed deduction under section 10AA. For the year under consideration, the assessee filed its return declaring nil income after claiming deduction of ₹4,46,69,638 under section 10AA. It had entered into specified domestic transactions with USFPL, including purchase of goods amounting to ₹115,17,16,462.
5. The matter was referred to the Transfer Pricing Officer (“TPO”). The assessee benchmarked the purchase transactions by applying the “other method” as the most appropriate method and also carried out a corroborative analysis under the transactional net margin method. The TPO, inter alia, observed that USFPL identified and selected vendors, negotiated procurement terms and coordinated procurement logistics, while the raw material moved directly from third-party vendors to the assessee. On the basis of the functional analysis and material gathered during search proceedings in the group, the TPO in the ex parte order, rejected the benchmarking adopted by the assessee. By applying an average EBIT margin of 9.17 per cent, he determined the arm’s-length price of the purchases at ₹122,64,62,860 and proposed an adjustment of ₹7,47,46,398.
6. In the draft assessment order, the Assessing Officer also proposed disallowance of the deduction under section 10AA. He relied substantially upon the findings recorded for A.Y. 2020–21 and held that the SEZ undertaking was formed by splitting up or reconstruction of the existing business of USFPL. The objections raised by the assessee were rejected by the DRP. Pursuant to the directions of the DRP, the Assessing Officer passed the final assessment order determining total income at ₹11,94,16,036 after making the transfer-pricing adjustment of ₹7,47,46,398 and disallowing deduction under section 10AA of ₹4,46,69,638.
7. Before us, the learned Authorised Representative submitted that the principal issue in both the appeals is the eligibility of the assessee’s SEZ undertaking for deduction under section 10AA. He submitted that A.Y. 2020–21 is the first year of the claim and the appeal for that year is presently pending before the learned CIT(A). The Assessing Officer has relied upon the findings for A.Y. 2020–21 while denying the claim in the years before us. Therefore, according to him, the material and the eventual determination for the first year have a direct bearing upon the present appeals.
8. The learned Authorised Representative further submitted that the assessee has filed additional evidence under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. The additional evidence includes the procurement and payment agreement between the assessee and USFPL dated 08.07.2019, the corresponding resolution, the factory design/outline approved by the Karnataka Industrial Area Development Board, factory licence, approval for commencement of production issued by the Development Commissioner, Mangalore Special Economic Zone, consent for operation issued by the Karnataka State Pollution Control Board, and bills for machinery. It was submitted that these documents are relevant to demonstrate that the assessee’s unit was established with fresh capital and independent plant and machinery, at a separate geographical location, for distinct manufacturing activity, without transfer of the fixed assets of USFPL. The evidence, therefore, goes to the root of the allegation of splitting up or reconstruction and requires examination by the lower authority.
9. As regards the transfer-pricing issue, the learned Authorised Representative submitted that it is interlinked with the claim under section 10AA because any alteration in the purchase price affects the profit of the eligible undertaking and consequently the quantum of deduction. He explained that USFPL facilitated payment to fishermen and supplied raw material at cost without retaining a margin; the goods moved directly from the Mangalore coast to the assessee’s SEZ unit; and the pricing was also governed by the applicable customs framework. It was accordingly prayed that, having regard to the additional evidence , the pendency of the appeal for the first year and ex parte order of TPO , both issues may be restored to the Assessing Officer for a fresh and holistic examination.
10. The learned Departmental Representative relied upon the orders of the TPO, the Assessing Officer and the directions of the DRP. He, however, submitted that if the additional evidence is admitted and the matter is restored, the Assessing Officer should be given liberty to verify the evidence and decide the issues in accordance with law.
11. We have heard the rival submissions and perused the material available on record. The additional evidence consists substantially of statutory approvals, licences, contemporaneous agreements and invoices relating to establishment and operation of the SEZ undertaking. The Hon’ble Supreme Court in Tek Ram v. CIT [2013] 357 ITR 133 (SC) has, in substance, held that relevant documents having a bearing on the issue should be considered while deciding the controversy. Having regard to the nature of the evidence and the controversy before us, we admit the additional evidence in the interest of substantial justice.
12. We also find that the eligibility of the undertaking under section 10AA was first examined in A.Y. 2020–21. The Assessing Officer has expressly drawn support from the findings recorded for that year while denying the deduction in A.Y. 2021–22. The appeal for the first year is stated to be pending before the learned CIT(A), where similar additional evidence is also proposed to be filed. Thus, the foundational facts concerning the formation of the undertaking, source and deployment of capital, acquisition of plant and machinery, nature of products, geographical separation, continuity or otherwise of USFPL’s business, customer profile and the functional arrangement between the two entities require a coordinated examination.
13. The transfer-pricing issue cannot be examined in isolation from these facts. The functional analysis of USFPL and the assessee, the commercial arrangement for procurement and payment, the movement of raw material, applicable customs requirements, and the impact of the arm’s-length determination upon the profit of the eligible unit are interconnected with the claim under section 10AA. Since the relevant primary evidence has not been examined by the lower authorities and the determination for the first year is still pending, we are of the considered view that the entire matter should be examined afresh by the Assessing Officer.
14. Accordingly, without expressing any opinion on the merits, we set aside the final assessment order for A.Y. 2021–22 on the issues raised in the present appeal and restore the matter to the file of the Assessing Officer. The Assessing Officer shall consider the additional evidence filed before the Tribunal, permit the assessee to place such further evidence as may be relevant, and examine the claim under section 10AA as well as the transfer-pricing adjustment afresh in accordance with law. While doing so, he shall also take into consideration the relevant material and the outcome of the appellate proceedings for A.Y. 2020–21, if available by the time of fresh adjudication. Needless to state, a reasonable opportunity of being heard shall be granted to the assessee. The assessee is directed to cooperate and furnish the requisite details promptly. All contentions on merits are left open.
ITA No. 9234/Mum/2025 – A.Y. 2022–23
15. The parties submitted that the facts and issues involved in A.Y. 2022–23 are identical to those in A.Y. 2021–22. In this year, the assessee has challenged the disallowance of deduction under section 10AA amounting to ₹4,38,66,415 and the transfer-pricing adjustment of ₹11,71,94,036 in respect of the specified domestic transactions of purchase of goods from USFPL. The additional evidence and the submissions concerning the first year of the claim are also common.
16. For the reasons recorded while deciding the appeal for A.Y. 2021–22, the issues arising in A.Y. 2022–23 are also set aside and restored to the file of the Assessing Officer with identical directions. The Assessing Officer shall decide the claim under section 10AA and the transfer-pricing issue afresh after considering the additional evidence, the relevant material and the outcome of the proceedings for A.Y. 2020–21, if then available, and after affording reasonable opportunity of hearing to the assessee. All contentions on merits are left open.
17. In the result, both appeals filed by the assessee are allowed for statistical purposes.
Order pronounced in the open court on 27/08/2026.
