ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOLHAPUR vs. RAFIQ NAIK EXPORTS P LTD., , RATNAGIRI

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.

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 CO No.11/PUN/2023 Rafiq Naik Exports Private Limited 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.

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

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.

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.

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

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.

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

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).

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

The TPO included this company in the list of comparables.

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.

This company was included by the TPO in the list of comparables, which got excluded at the hands of the ld. CIT(A).

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.

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.

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

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:-

This proviso deals with a case referred to in Rule 10B(5)(i).

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

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

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.

In the result, the appeal of the Revenue is partly allowed and the Cross objection of the assessee is dismissed.

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