Interlinked Review of Section 10AA Deduction and Transfer Pricing: Key Takeaways from Shree Ulka LLP Vs The ACIT (ITAT Mumbai)

The Mumbai Bench of the Income Tax Appellate Tribunal in Shree Ulka LLP Vs The ACIT (ITA No. 9233 & 9234/Mum/2025, order dated 27/08/2026, A.Y. 2021-22 and 2022-23) has remanded to the Assessing Officer a combined dispute involving deduction under Section 10AA of the Income Tax Act 1961 and transfer pricing (TP) adjustment on specified domestic transactions.

The ruling underscores that, for a Special Economic Zone (SEZ) unit, the determination of arm’s-length price of purchases from an associated enterprise directly influences the profits eligible for Section 10AA deduction. Accordingly, TP analysis and Section 10AA eligibility cannot be decided in watertight compartments when they revolve around the same SEZ profits.

Background of the Case

Business profile and SEZ unit

  • The assessee, Shree Ulka LLP, is engaged in the business of production, processing and preservation of fish and fish products.
  • Its operations relevant for the present appeals are carried out from a unit located in the Mangalore Special Economic Zone.
  • A.Y. 2020-21 was the first year in which the assessee claimed deduction under Section 10AA in respect of this SEZ undertaking.

Claim for A.Y. 2021-22

  • For A.Y. 2021-22, the assessee filed its return of income declaring nil income.
  • This was arrived at after claiming deduction of ₹4,46,69,638 under Section 10AA.
  • During the year, the assessee entered into specified domestic transactions with its associated enterprise, Ulka Sea Foods Private Limited (USFPL).
  • The major transaction in question was purchase of goods amounting to ₹115,17,16,462 from USFPL.

Transfer Pricing approach adopted by the assessee

  • For benchmarking these purchases, the assessee treated the “other method” under Rule 10AB as the most appropriate method.
  • In addition, a corroborative analysis was performed using the Transactional Net Margin Method (TNMM).

Key findings of the TPO

The Transfer Pricing Officer (TPO), after analyzing the group’s functional structure and relying on material gathered in search proceedings, concluded that:

  • USFPL was responsible for:
    • Identifying and shortlisting vendors,
    • Negotiating procurement terms, and
    • Coordinating logistics.
  • Although the raw material physically moved directly from third-party vendors to the assessee’s SEZ unit, USFPL was effectively managing the procurement process.
  • In an ex parte order, the TPO:
    • Rejected the assessee’s “other method” benchmarking,
    • Determined an average EBIT margin of 9.17%, and
    • Computed the arm’s-length price (ALP) of purchases at ₹122,64,62,860.
  • This resulted in a TP adjustment of ₹7,47,46,398.

Denial of Section 10AA deduction by the AO

  • In the draft assessment order for A.Y. 2021-22, the Assessing Officer (AO) proposed to disallow the entire deduction under Section 10AA claimed at ₹4,46,69,638.
  • The AO relied heavily on findings recorded in the assessment for A.Y. 2020-21.
  • He concluded that the SEZ unit had been formed by splitting up or reconstruction of the existing business carried on by USFPL, thereby violating the basic eligibility conditions of Section 10AA.
  • The assessee’s objections before the Dispute Resolution Panel (DRP) were rejected.
  • Following the DRP’s directions, the final assessment order was passed, determining total income at ₹11,94,16,036, after:
    • Disallowing the Section 10AA deduction of ₹4,46,69,638, and
    • Making the TP adjustment of ₹7,47,46,398.

Position for A.Y. 2022-23

  • For A.Y. 2022-23, similar issues arose on substantially identical facts.
  • The AO:
    • Disallowed Section 10AA deduction of ₹4,38,66,415, and
    • Made a TP adjustment of ₹11,71,94,036 on purchases from USFPL.
  • The assessee carried these issues in appeal to the Tribunal in ITA No. 9234/Mum/2025.

Issues before the Tribunal

The Tribunal was required to address three closely related questions:

  1. Whether the SEZ undertaking qualifies as a new, independent unit for Section 10AA purposes, or whether it was merely a reconstruction or splitting up of USFPL’s existing business.
  2. Whether the assessee’s benchmarking of purchases from USFPL under the “other method” in Rule 10AB was valid, and whether the TPO was justified in discarding it and substituting his own ALP determination.
  3. Whether the TP and Section 10AA issues can be examined independently, given that any alteration in purchase price directly affects SEZ unit profit and thereby the quantum of deduction under Section 10AA.

The Tribunal dealt with A.Y. 2021-22 as the lead year, with A.Y. 2022-23 following the same reasoning.

Assessee’s Submissions

On Section 10AA eligibility and nature of the SEZ unit