As we know the Finance Act 2012 has extended the scope of Transfer Pricing provisions to ‘Specified Domestic Transactions’ (SDT) between related parties w.e.f. AY 2013-14 by inserting section 92BA. Since its introduction there was ambiguity on its applicability to cooperative societies. There was no doubt of its applicability to cooperative societies claiming profit linked deductions under 80A(6) engaged in the transactions of intra transfer of goods and services. But SDT also covers expenditure related transactions in respect of which payment has been made or is to be made to a person referred section 40A(2)(b). So whether transfer pricing provisions were applicable for the transaction of purchase from members by the co-operative societies was a debatable issue. The issue also has significant importance in Gujarat because the whole White Revolution was on the co-operative model wherein the co-operative societies purchase raw milk from its members.

Deciphering Section 40A(2) & ambiguity on SDT for co-operative societies till date

By interpreting section 40A(2)(b), it can be understood that it specifically talks about individual, Company, Firm, HUF and Association of Person and their related parties only. In absence of explicit mention of ‘co-operative society’ in section 40A(2)(b) whereas making explicit provisions for co-operative societies in other provisions of the law [e.g. section 36(1)(ia), 80P, etc.], it could be argued that provisions of section 40A(2)(b) cannot be applied to co-operative societies. Conversely, while co-operative society has not been explicitly mentioned in section 40A(2)(b), it is possible to treat it as incorporated ‘association of person’ from the perspective of section 2(31) and in such case, section 40A(2)(b) would be applicable to co-operative societies as well.

The issue of 40A(2)(b) was taken to ITAT Pune Bench in the renowned case of Shivamrut Dudh Utapadak Sah. Sangh Matyadit 71 ITD 157 (Pune). The issue in this case was Assessing Officer found that the price at which cooperative society purchased milk from the factories owned by the brother of the Chairman of the Society was much higher than the prevailing market rate. Therefore, he made additions under section 40A(2)(a). On which ITAT Pune held that 40A(2)(a) applies to the persons referred in clause (b) of this sub-section and the persons mentioned there are company, firm, AOP or HUF. ITAT held that in its wisdom, the Legislature specifically left out a cooperative society from the purview of section 40A(2)(a) and the co-operative society is distinct from AOP. The Bombay High Court (Tax Appeal 62 of 1999) dismissed the appeal of the revenue and confirmed the decision of the Tribunal and held that 40A(2) does not apply to co-operative societies.

Recently, Bombay High Court in the case of Manjara Shetkari Sahakari Sakhar Karkhana Ltd (2008) 166 Taxman 287 (Bom), gave the same view favouring cooperative societies in the light of its own decision of Shivamrut (supra). It is important to note that the Special Leave Petition against the decision of Bombay High Court in case of Manjara Shetkar (supra) has been admitted by the Supreme Court.

Relying on above judgements, it was possible to contend that cooperative societies are not to be covered under domestic transfer pricing provisions for 40A(2) transactions. However, it would remain only a position until finality is achieved through ruling of the Supreme Court.

Safe Harbour Provisions for Dairy Co-operative societies under SDT

Recently, Central Board of Direct Taxes has announced Safe Harbour Rules for dairy co-operatives in respect of purchase of milk from its members vide notification dated December 8th, 2015. As per this notification from now onwards Dairy Co-operative Societies will be able to apply for Domestic Safe Harbour for purchase of milk and milk products from its members by filing Form 3CEFB before 31st December, 2015 for all the three assessment years beginning from AY 2013-14 to 2015-16. Safe Harbour provisions include certain conditions on approach of price determination and if the co-operative fulfils such conditions, price paid to the members for purchase of milk or milk products would be considered to be arm’s length. Apparently it appears to be a welcoming opportunity for dairy cooperative societies as they can now apply for safe harbour and can be saved from the additions made during assessments.

But by issuing this notification government has clearly stated its intention of covering dairy co-operative societies in domestic transfer pricing regime right from AY 2013-14. While granting safe harbour does not automatically imply that co-operative societies are covered by section 40A(2)(b), it at least makes clear the government interpretation on this front.

However, with the safe harbour provisions being notified, it may provide an opportunity to the dairy co-operative societies who have not complied with the Domestic Transfer Pricing provisions (due to the uncertainty) to comply with them forthwith. The conditions for applying safe harbour appears to be reasonable and if that be the case dairy co-operative societies may apply for Safe Harbour by filing for 3CEFB before 31st December 2015 for AY 2013-14 to 2015-16.

Where the society claims safe harbour provisions, it effectively (though impliedly) admits applicability of domestic transfer pricing provisions. Accordingly, if they have not complied with requirements of section 92D (Documentation) or 92E (TP Audit Report), it should be complied with at the earliest. Societies may be able to argue ‘bonafide belief’ of non-applicability of section 40A(2)(b) for non-compliance until now [based on decisions of Bombay High Court], however, upon tacitly accepting applicability of Transfer Pricing (by filing Form 3CEFB), they may not have the said argument in their favour for continuing the said non-compliance. So societies filing form 3CEFB should ideally also file Form 3CEB for all the related assessment years even after the respective due dates and also prepare Documentation as required under section 92D.

Way Forward

Co-operative society meeting requirements of safe harbour conditions may ideally opt for it by filing Form 3CEFB in a real short time (only a week left with number of holidays). Filing Return is the only pre-condition for filing Form 3CEFB and therefore even if Form 3CEB is filed beyond December 31, 2015 should not hamper the claim of safe harbour.

This article is contributed by Ms. Shradha Khemka, Assistant Manager, K C Mehta & Co., Chartered Accountants and she can be reached via The views contained in this article are author’s personal view for the purpose of general understanding of the subject and not a substitute for professional advice. It is recommended that the readers should take professional advice before acting on the same.

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October 2020