SEZ trading deduction, ocean freight withholding, and transfer pricing comparables all favoured the assessee

ITAT Visakhapatnam held that SEZ trading activity involving import for re-export fell within section 10AA because the SEZ framework treats such trading as part of services, so the deduction was allowable. It further held that ocean freight paid to agents of foreign shipping lines was covered by CBDT Circular No. 723, making sections 194C and 195 inapplicable and preventing disallowance under section 40(a)(ia). On transfer pricing, the Tribunal rejected functionally dissimilar external comparables, preferred internal segmental comparables and internal TNMM, and treated receivables as closely linked to sales rather than a separate loan, so the adjustment was deleted.

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Issues: (i) whether profits from the SEZ unit's trading activity of importing goods for re-export qualified for deduction under section 10AA; (ii) whether ocean freight payments made to agents of foreign shipping companies were liable to disallowance for non-deduction of tax at source; (iii) whether the transfer pricing adjustment on sales and on outstanding receivables was sustainable.

Issue (i): whether profits from the SEZ unit's trading activity of importing goods for re-export qualified for deduction under section 10AA.

Analysis: The SEZ rules treated trading for the purpose of re-export as part of services, and the term "services" was not separately defined in section 10AA. The Tribunal followed its own earlier decision in the assessee's case and held that where the SEZ unit carried on trading activity in the nature of import and re-export, the profits derived from such activity fell within the scope of section 10AA.

Conclusion: The deduction under section 10AA was allowable, and the Revenue's challenge failed.

Issue (ii): whether ocean freight payments made to agents of foreign shipping companies were liable to disallowance for non-deduction of tax at source.

Analysis: The payments were held to be covered by CBDT Circular No. 723 dated 19.09.1995, under which the agent of the non-resident shipping line steps into the shoes of the principal and section 172 applies. On that basis, sections 194C and 195 were held inapplicable to the ocean freight component, and the disallowance under section 40(a)(ia) could not be sustained.

Conclusion: The deletion of the disallowance was upheld, and the Revenue failed on this issue.

Issue (iii): whether the transfer pricing adjustment on sales and on outstanding receivables was sustainable.

Analysis: The external comparables selected by the TPO were found to be functionally dissimilar, different in scale, product profile, and asset deployment, and in some cases lacked reliable segmental data. Since segmental data for AE and non-AE transactions was available, internal comparables and internal TNMM were treated as the appropriate benchmark. As to receivables, they were treated as closely linked to sales and not as a separate loan transaction warranting notional interest.

Conclusion: The transfer pricing adjustment was deleted, including the adjustment on receivables, and the Revenue's appeal failed.

Final Conclusion: The assessee succeeded on all substantive issues, and the Revenue's appeals, together with the supportive cross-objections, were dismissed.

Ratio Decidendi: Where a special statutory regime treats trading for re-export as services, internal segmental comparables are available, and trade receivables are intrinsically linked to sales, deductions and arm's length pricing must be determined on that legal and factual basis rather than by importing inapt external comparisons or imputing notional interest.

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