ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOLHAPUR vs. RAFIQ NAIK EXPORTS P LTD., , RATNAGIRI
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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI S.S.VISWANETHRA RAVI
PER R.S.SYAL, VP :
This appeal by the Revenue and Cross Objection by the
assessee arise out of the order dated 14-10-2022 passed by the
CIT(A)-13, Pune in relation to the assessment year 2016-17.
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There is a delay of 03 days in presenting the appeal by the
Revenue. The ld. AR did not raise any objection. We, therefore,
condone the delay and admit the appeal for disposal on merits.
Broadly, there are two issues in the Departmental appeal,
viz., Comparables and Computation of the arm’s length price
(ALP) under the dataset. We will espouse these issues in seriatim.
I. COMPARABLES
The first two grounds raised by the Revenue are against the
exclusion by the ld. CIT(A) of certain companies from the list of
comparables finalized by the Transfer Pricing Officer (TPO).
Briefly stated, the facts of the case are that the assessee filed
its return declaring total income at Rs.1,65,79,300/-. This return
was accompanied by the Audit Report in Form No.3CEB
containing details of certain Specified Domestic Transactions
(SDT). The Assessing Officer (AO) made a reference to the TPO
for determining the ALP. The latter recommended transfer pricing
adjustment of Rs.11.68 crore. The draft order was notified
accordingly. The ld. CIT(A) allowed part relief, inter alia, by
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excluding eight companies from the list of comparables, against
which the Revenue has come up in appeal.
The assessee’s functional profile has been recorded by the
TPO as, being, a company engaged in the retail trade of frozen
fish and other seafood products both in the domestic as well as
overseas markets and not carrying out any processing activity. The
final product of the assessee is not ready to cook and eat but needs
to be processed by its customers till it reaches that stage. The
assessee made specified domestic transactions of purchase of
frozen fish and seafood from its three Associated Enterprises.
During the course of transfer pricing proceedings, the assessee
adopted the Resale Price Method (RPM) as the most appropriate
method for benchmarking these transactions. Its own Profit Level
Indicator (PLI), i.e. Gross Profit/Turnover was computed at 7.99%.
Three companies were chosen as comparables with their mean PLI
of 8.32% for demonstrating that the specified domestic
transactions were at ALP. The TPO did not dispute the application
of the RPM as the most appropriate method. He, however,
excluded one company from the assessee’s list of comparables,
namely, Phillips Foods India Pvt. Ltd. and added ten new
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companies making a total of twelve comparables. The assessee
went in appeal before the ld. CIT(A), challenging, inter alia, the
inclusion of companies by the TPO and also one of its own
comparables, namely, Tolar Ocean Products Pvt. Ltd. The ld.
CIT(A) removed the assessee’s own selected company as well as
seven others from the final list of comparables drawn by the TPO.
As such, only four companies left as comparables. The Revenue
has come up before the Tribunal against the exclusion of such
eight companies by the ld. CIT(A).
Comparability of companies can be examined only after first
properly understanding the functional profile of the assessee. As
briefly noted above, the assessee is engaged only in trading of
frozen fish and other seafood products. Further, the limited
processing of fish and seafood products is done only for the
preservance and not for making the products ready to eat. Even the
TPO also noted the assessee’s functional profile at page 2 of his
order by specifically mentioning that: “It does not carry on any
processing activities on its own”. This transpires that the
assessee’s function is confined to purchasing and selling of fish
and sea food products without making any value addition. Even
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otherwise, the assessee applied the RPM as the most appropriate
method, which is applicable in case of goods purchased from
associated enterprise sold as such without making any value
addition. The TPO also did not challenge the adoption of the RPM
as the most appropriate method. This indicates that the assessee is
engaged only in retail trade of frozen fish and other seafood
products and not its processing. Having jotted down the functional
profile of the assessee, we now proceed to examine the
comparability or otherwise of the eight companies under challenge.
(i) Tolar Ocean Products Pvt. Ltd. :
This was comparable chosen by the assessee not objected to
by the TPO. However, the assessee assailed its suo motu inclusion
in the list of comparables before the ld. CIT(A), who concurred
with the assessee’s submissions and expelled it from the list.
This company is engaged in diverse activities and also in
processing of marine products. It has outside processing as well.
As against that, the assessee is only in retail trade of fish and sea
products. Since the assessee is not in processing of any marine
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products, we hold that the ld. CIT(A) was justified in excluding
this company from the list of comparables.
(ii) Forstar Frozen Foods Private Limited :
This company was chosen by the TPO as a comparable. The
assessee’s objection that it was engaged in processing and export
of ready to eat fish with large shelf life did not weigh with the
TPO, who included it in his list. The ld. CIT(A) deleted the same.
This company is engaged in the business of manufacturing
and export of fish and fish products which has ready to eat
different packaged products using individually quick frozen
technology. This company has also installed the breeding line
instruments producing ready to eat value added seafood in Unit
No.2. These facts indicate that this company was rightly excluded
by the ld. CIT(A) from the list of comparables. We, therefore,
countenance the same.
(iii) Nekkanti Sea Foods Ltd. :
This was comparable chosen by the TPO. The assessee
objected to its inclusion along with five other companies proposed
by the TPO. Such common objections anent to the six companies
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have been noted by the TPO at page 23 of his order, who did not
agree and proceeded to include in the list of comparables. The ld.
CIT(A) removed this company from the list.
It is observed that this company is in the business of
processing and exporting. It has got state of art processing plants
in four locations by integrating functions of deep-sea trawling and
processing seafood. These facts indicate that it is substantially
different from the assessee, which is engaged only in trading of
fish and seafood products. We, therefore, approve the view point
of the ld. CIT(A) on this score.
(iv) Asvini Fisheries Private Limited :
This company was proposed by the TPO for inclusion. The
assessee objected to its inclusion in a common manner, which did
not got the TPO’s nod. The ld. CIT(A) excluded it from the list.
This company is in the business of processing and export of
shrimps. It has a processing facility at Bhimavaram, Andhra
Pradesh and Tuticorin, Tamilnadu. It has a huge fixed asset base
of Rs.62.94 crore. As against it, the assessee is only in trading of
fish and seafood products without having any manufacturing
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facility. We, therefore, approve the action of the ld. CIT(A) in
excluding this company from the list of comparables.
(v) Apex Frozen Foods :
This company was included by the TPO in the list of
comparables, which got excluded in the first appeal.
It is engaged in processing and export of ready to eat
aquaculture products with large shelf life. It has its own
intangibles, under which the ready products are sold to direct
consumers. Further, it is engaged in shrimp farming activity and
hatchery in addition to the business of export of frozen shrimps. In
our view, this company was rightly excluded by the ld. CIT(A).
(vi) Shree Datt Aquaculture Farms Pvt. Ltd.:
The assessee objected to the inclusion of this company in the
list of comparables which was not accepted by the TPO. The ld.
CIT(A) removed it.
This company is engaged in not only fish processing but also
other business segments like food processing, tobacco products
and further no segmental data is available. Such a contention
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raised before the TPO remained uncontroverted. The ld. CIT(A)
further observed that this company is engaged in the business of
manufacture, marine farming and sale of marine products.
Obviously, the assessee is not into any manufacture or marine
farming. In our view, the ld. CIT(A) rightly excluded it from the
list of comparables.
(vii) Uniroyal Marine Exports Ltd. :
The TPO included this company in the list of comparables.
The assessee’s general objections did not got the concurrence of
the TPO. The ld. CIT(A) excluded it from the list.
This company is engaged in diverse activities of
manufacturing shrimps and squids. As the assessee is not into
manufacture of shrimps and only in their marketing, we hold that
the ld. CIT(A) was right in excluding it from the list of
comparables.
(viii) Gadre Marine Exports Pvt. Ltd. :
This company was included by the TPO in the list of
comparables, which got excluded at the hands of the ld. CIT(A).
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It is a manufacturer and exporter of frozen seafood and
manufactures a wide range of products including marinated, ready
to cook fish and cut-n-clean raw fish. This company has factories
across four locations of west coast of India. Its main business is
manufacture and sale of Surimi value added products and fish
meal. This company has operational wind mill at its facility at
Sadawaghapur, Patan, Satara. These points eminently show its
incomparability with the assessee company. This company is also
held to have been rightly excluded.
II. COMPUTATION OF ALP UNDER DATASET
The sum and substance of the grievance of the Revenue
through the last ground is against the direction of the ld. CIT(A) in
upholding the assessee’s contention of using the current year data
and taking the mean margin of the comparables for benchmarking
the specified domestic transaction.
The facts of this issue are that during the course of transfer
pricing proceedings, the assessee urged to compute the ALP by
taking the simple average of current year data of the comparables.
The TPO rejected the assessee’s contention. When the matter
came up before the ld. CIT(A), he held that Rule 10B(4) read with
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its proviso along with Rule 10B(5) suggest that the approach
adopted by the assessee in determining the ALP of its Specified
Domestic Transactions by using the current year data and taking
the mean margin of the comparables, was correct. Aggrieved
thereby, the Revenue has approached the Tribunal.
Before proceeding further, it is worthwhile to mention that the
hitherto mechanism of determining the ALP under the prescribed
methods by considering the arithmetic mean of the PLI of
comparables by primarily considering the relevant data for the
current year, has undergone change with the insertion of the third
proviso to section 92C(2), which applies to the international and
SDTs undertaken on or after 1.4.2014. Under the new regime, the
concepts of dataset in ascending order; the computation of the PLI
of comparables on the basis of the data for the current year plus up
to two preceding years; consideration of the values of the dataset between 35th percentile and 65th percentile for the arm’s length
range; and value at median of the dataset etc., have come into
place. The new rule provides that where more than one price is
determined by the most appropriate method, the ALP shall be
computed in such manner as may be prescribed and accordingly
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the first and second proviso shall not apply. The first and the
second provisos of section 92C(2) read with rule 10B(4) and (5)
dealt with the computation of the ALP with reference to the
arithmetical mean of the PLI of the comparables computed by
considering, usually, the figures for the current year only.
Simultaneous with making the first and second provisos
inoperative through the third proviso to section 92C(2), rule 10CA
has been inserted by the 16th amendment rules. Sub-rule (1) of
rule 10CA provides that the ALP of the international or SDTs
`shall be computed in accordance with the provisions of this rule’.
This shows that where there are more than one comparable, then
the ALP for the relevant years, including the year under
consideration 2016-17, should be governed by rule 10CA.
Sub-rule (2) of Rule 10CA provides that dataset shall be
constructed by placing the values of comparables in ascending
order. The first proviso to this sub-rule is relevant for our purpose,
which reads as under:-
`Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise
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undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,—
(i) the most appropriate method used to determine the price of the comparable uncontrolled transaction undertaken in the current year shall be applied in similar manner to the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and
(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1):’
This proviso deals with a case referred to in Rule 10B(5)(i).
The relevant part of rule 10B(5)(i) states that where, inter alia, the
RPM is used, then, usually, the data of the comparables for the
current year should be used. Coming back to the first proviso of
rule 10CA(2), it says that where the comparable, having data for
the current year, has in either or both of the two financial years
immediately preceding the current year undertaken the same
or similar comparable uncontrolled transaction, then the data
for the comparable uncontrolled transaction should be considered
for the aforesaid period, that is, the current year plus either or
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both of the two immediately preceding years in which same or
similar transactions were undertaken by the comparable. Between
the clauses (i) and (ii) of the first proviso to rule 10CA(2), the
word `and’ has been used. The first clause of the proviso says that
the data of the current and earlier two preceding years etc. should
be used and the second clause further states that the weighted
average of the prices, of the comparable uncontrolled transactions
undertaken in the current year and in the aforesaid period
preceding it shall be included in the dataset. The manner of
determination of the weighted average has been enshrined in rule
10CA(3). To summarize, the crux of rule 10CA(2) is that the PLI
of the comparables for the purpose of inclusion in the dataset
should be computed by considering the weighted average values
for the current year plus two preceding years. However, it is useful
to mention that the adoption of values for the current plus
preceding two years is only qua the comparables and not qua the
computation of the PLI of the assessee, which should be computed
only w.r.t. the current year values. This becomes glaring from the
use of the bracketed part in the first proviso to rule 10CA(2)
excluding `not being the enterprise undertaking the international
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transaction or the specified domestic transaction referred to in sub-
rule (1)’.
Then comes sub-rule (4) of 10CA, which provides that where
the most appropriate method is, inter alia, the RPM `and the
dataset constructed in accordance with sub-rule (2) consists of
six or more entries, then the arm’s length range beginning from 35th percentile of the dataset and ending with 65th percentile of the
dataset shall be constructed and the arm’s length price shall be
computed in accordance with sub-rule (5) and sub-rule (6)’. These
two sub-rules provide for computing the ALP, with which there is
no dispute in the extant case.
Sub-rule (7) of 10CA is relevant for our purpose, which
provides that : `In a case where the provisions of sub-rule (4) are
not applicable, the arm’s length price shall be the arithmetical
mean of all the values included in the dataset..’. Sub-rule (4)
covers the cases of a dataset consisting of six or more comparable
uncontrolled transactions. The sequitur is that sub-rule (7) will
govern the cases where the dataset consists of comparables
numbering between two to five. When a case falls under sub-rule
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(7), the ALP is determined by considering the arithmetical mean of
the values included in the dataset. While discussing sub-rule (2) of
rule 10CA, we have noted above that the dataset under the new
system requires consideration of the PLI of the comparables, not
only determined on the basis of the current year values but also of
the two preceding years, whose weighted average is finally
considered. Irrespective of the number of comparables, whether
less or more than six, the ALP needs to be determined by preparing
dataset, which always consists of the PLI of comparables
determined on the basis of the weighted values for the current and
preceding two years. If the comparables are six or more, the ALP
is determined under sub-rule (4) read with sub-rules (5) and (6) by
considering the arm’s length range of such weighted values, but
when the comparables are between two to five, the ALP is
determined under sub-rule (7) by taking the arithmetical mean of
such weighted values. In both the cases, PLI of the comparables is
computed under sub-rule (2) read with sub-rule (3) by considering
the weighted average of the value of current year plus two
preceding years. Since the arm’s length range is not available
under sub-rule (7), the proviso to this sub-rule extends benefit in
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case variation between the transacted price and the ALP does not
exceed the prescribed percentage, not exceeding three percent.
Reverting to the facts of the instant case, the assessee
benchmarked the SDT with three comparables. The TPO expanded
the list of comparables to twelve. The ld. CIT(A) reduced it to
four, which we have countenanced above. As the surviving
comparables are four, which is less than six, the case gets covered
under sub-rule (7) of 10CA. Going with this sub-rule, the ALP
shall be the arithmetical mean of the PLI of the comparables
computed by considering the weighted values of current plus two
preceding years, which will be further subjected to the benefit
enshrined in the proviso. In our considered opinion, the ld. CIT(A)
was not justified in taking recourse to rules 10B(4) and 10B(5),
when the ALP was required to be mandatorily computed as per
rule 10CA. In that view of the matter, the direction of the ld.
CIT(A) that the assessee adopted a correct approach by using the
current year data and taking the mean margin of the comparables,
is fallacious and needs modification. It is therefore, held that,
firstly, the ALP should be determined w.r.t. rule 10CA and not rule
10B and secondly, sub-rule (7) of rule 10CA will apply mandating
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the determination of the ALP by considering the arithmetical mean
of the PLI of the four comparables computed by taking weighted
average of the figures of the current plus two preceding years.
Ground No.3 of the Departmental appeal is against the ld.
CIT(A) computing the gross profit considering direct costs, such
as, expenditure on power and fuel, freight, labour cost and
processing charges etc. The ld. DR fairly admitted that this ground
does not arise from the impugned order. Further, he could not
point out any relevant discussion of the TPO on this issue. As
such, this ground is dismissed as infructuous.
The ld. AR did not press the Cross objection.
In the ultimate analysis, we set aside the impugned order and
remit the matter to the file of the AO/TPO with a direction to
recompute the ALP of the SDT of `Purchase of Frozen fish and sea
food’ in the hue of the discussion made above. Needless to say, the
assessee will be allowed a reasonable opportunity of hearing.
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In the result, the appeal of the Revenue is partly allowed and
the Cross objection of the assessee is dismissed.
Order pronounced in the Open Court on 27th September,
2023
Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 27th September, 2023 Satish आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2. 3. The Pr.CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / 4. DR ‘C’, ITAT, Pune गाड� फाईल / Guard file 5. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
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Date 1. Draft dictated on 26-09-2023 Sr.PS 2. Draft placed before author 27-09-2023 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *
