TORRY HARRIS SEA FOODS LTD,ALAPPUZHA vs. THE ACIT, ALAPPUZHA

Per CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the assessment order

passed u/s. 143(3) r.w.s. 92CA(3) of the I.T. Act dated 27/01/2016, consequent

to the direction of the DRP u/s. 144C(5) of the Act dated 25/08/2016. The

relevant assessment year is 2012-13.

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assessee in its Transfer Pricing study had concluded that CUP method was the

most appropriate for benchmarking international transactions in the seafood

industry. According to the TPO, the assessee had used the export rates published

by MPEDA i.e. the Marine Products Export Development Authority as a

comparable in its CUP analysis. According to the TPO, the MPEDA was

constituted under the Marine Products Export development Authority Act, 1992

and MPEDA is a quasi-government body monitoring seafood exports and its

prices. MPEDA data released on a biweekly basis gives input of the types of the

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products and this was taken as per benchmark for arriving at Arm's Length

Pricing. The TPO observed that the asessee was required to produce the

detailed comparison under CUP method. On verification of the details produced,

it was seen that there were instances where the assessee had exported the

products to its AE at a price lower than the one published by MPEDA for the

corresponding period and for similar products. According to the assessee, the

adjustment at 3% was made to the sale price in each sale made to its AE so as

to bring it under Arm's Length Price. However, according to the TPO no evidence

was produced to substantiate this adjustment claimed. Hence, a showcause was

issued by TPO to the assessee on 10.12.2015 proposing to reject the arbitrary

weightage claimed and to compute Arm's Length Price accordingly. The relevant

portion of the showcause notice is reproduced below:-

"As per the Transfer Pricing (TP) document furnished for the A. Y. 2012-13, the taxpayer company has sold products to Associated Enterprises (AEsJ of Rs.79,50,26,341/-. While going through the Transfer Pricing study submitted by you for A. Y 2012-13, it is seen that you have adopted Comparable Uncontrolled Price Method as the most appropriate method while benchmarking the international transactions undertaken with Associated Enterprises. You have compared your AE sale price with the rates published by The Marine Products Export Development weekly data released by MPEDA based on the type of the product is seen taken as the benchmark for arriving at arm's length price.

However, you have claimed adjustments @3% to the sale price in each sale made to AE so as to bring it within the Arm's length price. However this is not in accordance with the transfer pricing provisions. You have claimed uniform adjustments @ 3% in all cases, without providing any clear rationale for the same. Adjustments have been claimed in an arbitrary manner without any factual and scientific basis being given. 'You have not submitted the quantification process adopted by you to arrive at the adjustments, claimed. The fact is that 3% adjustment was claimed on all transactions, without

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specifying the factors that affected the price as well as proper quantification of adjustment.

In the above circumstances, it is proposed that the arbitrary adjustments claimed by you without supporting rationale and proof be rejected. Hence TPO proceeds to compare the sale price to AE with the MPEDA data for the. corresponding period and for the corresponding product and country, without granting any adjustment. Whenever the corresponding MPEDA rate is higher than the rate at which sale is made to Associated Enterprise, MPEDA rate will be taken as Arm's Length Price and based on the same, upward adjustments will be made to the income of the assesses. Objections, if any, may be furnished on or before 18.12.2015."

3.1 Before the TPO, the assessee vide letter dated 22.12.2015 explained the

reason for adopting the 3 % weightage. The assessee submitted that certain

grades U/ 1 and 1/2 of Cuttlefish is processed and packed with 25% glaze (glaze

indicates the extent of water or ice per Kg of product), whereas the price

indicated in MPEDA website is for products with 20 % glaze. Hence, the assessee

had claimed a weightage of 3% to account for such differences. After analyzing

the assessee’s claim, the TPO found to have no merit. The assessee claimed that

Cuttlefish exported by them to the AE was of 25 % glaze. However while going

through the export invoices of the assessee, it was seen that the assessee was

exporting to its AE Cuttlefish of various glazes ranging from 15 % to 25%, the 15

% glaze product was having lesser water content and hence should fetch higher

price than the 20% glazed product. Hence, it was submitted that any loss that

the assessee suffers by way of comparison of their 25 % glaze product with price

of 20 % glazed product published by MPEDA should be duly compensated. It

was also found that many of the invoices of the assessee was not mentioning

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any details of the glaze of the product. Also, the assessee had not produced any

basis as to how the differences in glaze leads to a uniform 3 % adjustment on all

invoices. Hence, the assessee's arbitrary claim for 3 % weightage on their export

price to AE was rejected and ALP was determined accordingly.

other documents produced by the assessee and the order of the TPO, the DRP

observed that the assessee could not controvert the findings of the TPO with

evidence that it is exporting to its AE Cuttlefish of various glazes ranging from

15% to 25%. It was also observed that the assessee could not controvert the

findings of the TPO that any loss that the assessee suffers by way of comparison

of their 25% glaze product (with price of 20% glazed product published by

MPEDA) will be duly compensated by the comparison of their 15% glaze produce

(with price of 20% glazed product published by MPEDA). The DRP observed that

the assessee could not give reasons why many of the invoices do not mention

any details of the glaze of the product. Also, it was observed that the assessee

had not produced any basis as to how the differences in glaze leads to a

uniform 3% adjustment on all invoices. Further, the assessee could not give

evidence as to higher glazing necessarily means lower price. According to the

DRP, TPO had made adjustments as per each invoice and the assessee had not

made any argument on how adjustment on any invoice is incorrect. The

assessee did not controvert the entry wise adjustment details and only lump sum

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adjustment was sought by the assessee. In view of the above findings, the DRP

upheld the order of the TPO and rejected the objections of the assessee.

having relied on CUP method as the most appropriate method for bench marking

international transactions, they have relied on export rates published by MPEDA,

which is a quasi govt. Body and the data released on a weekly basis gave input

of the types of products and this was taken as benchmark for arriving at Arms

Length Pricing. According to the Ld. AR, the main products exported by the

assessee are cuttlefish, squids and Octopus of various sizes/grades with different

glaze percentages. The Ld. AR submitted that Glaze represents the percentage of

water content in the product. For instance 1kg of Cuttlefish grade U/1 with 25%

glaze, will effectively have only 750 gms of cuttlefish and 250 gms of water.

Similarly, it was submitted that one kg of squid U/5 with 15% glaze will have 850

gms of Squid and 150 gms of water. The glazes of different products exported

by the company to Associates are as follows:

CUTTLEFISH:

SQUID: 3. 20% 4. 15% 5. 10%

OCTOPUS 6. 20%

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MPEDA data gave the price of Cuttlefish with 10%, 20% and price without glaze.

It was submitted that MPEDA did not list the price of Cuttlefish with 25% glaze

and this product with 25% glaze is one of the main glazed products which they

export which meant that the price of product with 25% glaze needs to be

adjusted by 5% (i.e. 25% less 20%) in order to have a fair comparison with a

product of 20% glaze listed in MPEDA data. It was submitted that 25% glazed

Cuttlefish product would be cheaper by 5% than the same product with 20%

glaze. It was submitted while comparing SQUID PRICE in MPEDA data,. MPEDA

data gives the price of SQUID without glaze only. It was submitted that MPEDA

did not list the price of Squid with 10%, 15% and 20% glazes. It was submitted

that the assessee was exporting squid products with 10% glaze, 15% glaze and

20% glaze which meant that the price of Squid products with 10%, 15% and

20% glaze need to be adjusted in order to have a fair comparison with a squid

product listed in MPEDA data without any glaze. It was submitted that the squid

products on an average should be priced much lesser due to the glazes as

compared to the squid price listed in MPEDA which do not show any glaze. To

sum up, it was submitted that cuttlefish and squid products exported have this

reduction in price due to glaze varying between 5% to 20%. Hence, according

to the Ld. AR, it was only reasonable to claim an average reduction in prices,

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that too at a very nominal percentage of 3% in order to compensate for the

glaze difference in the assessee’s products and those listed in MPEDA data.

made adjustment after examining the invoice produced by the assessee that it

has exported products having glazes ranging from 15% to 25%. The product of

the assessee is having various glazes ranging from 15% to 25%, as such, the

assessee’s product could be compared with the price list published by MPEDA

which is for 20% glaze after making suitable adjustment which the TPO has

done. Further, the assessee has not brought on any evidence to show that the

assessee’s product is having 25% glazes so that it cannot be compared with the

price list published by MPEDA. Being so, we do not find any merit in the

argument of the Ld. AR and the same is rejected. Thus, Ground Nos. 2 to 4 of

the assessee are dismissed.

Monitoring fee paid to Export Inspection Agency, for non deduction of tax.

monitoring fee to Export Inspection Agency. The assessee had not deducted tax

at source on this payment. Since the Export Inspection Agencies are autonomous

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bodies established by the Central Government under the (Export Quality Control

&Inspection) Act, 1963 (22 of 1963), as the field organizations for implementing

the policies of the Central Government with respect to Quality Control and/or

shipment and inspection of Export Commodities from India as such TDS u/s 194]

will be attracted in this case for the payment paid to autonomous bodies and

non-deduction of tax will attract provisions of 40a(i)(a) of the Income Tax Act,

1961. Hence an amount of Rs.18,02,930/- was disallowed u/s 40a(i)(a).

of which is as under:

“1. It is true, as mentioned by Mr. Norbert Karikkasserry on the matter of TDS deduction and the corresponding credits in the exporter's passbook on GIA Monitoring fees, has been discussed with the Director, EIC division, decision arrived at but not implemented. Though not put in writing, the matter has also been discussed with Jt. Secretary, MOC.

Implementing the above, I would request

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a) Each member to submit the details of TDS deductions made by their company on such monitoring fees to enable us to follow up with the Director, EIC and his team on giving credits, in the EIA passbooks with immediate effect, as promised. b) I would also request all the members to inform about any disallowances having taken place in their assessment by IT Authorities for not deducting such TDS from the EIA fees.

I had written letters previously to all the members advising them to deduct TDS on payment of EIA monitoring fees. 1 got no response from any of the members. This gives a feeling that almost all the members barring a few are having no issue in their assessment with the IT authorities for not deducting TDS from EIA fees.. This may be so, but the fact remains that this matter can be brought up by IT authorities, any time.

Having said this. I request all the Regional Presidents to prevail on the respective members to submit the details urgently, for us to take the appropriate action without any delay. This submission may not have priority with majority of the members but I still maintain that every member should pay serious attention to this issue as some of our members have been disallowed EIA fee as expenditure in their income tax assessment.”

clear that even as late as 7.3.2016 no circular has been issued by the Govt. of

India exempting EIC/ EIA from Income tax. Further, no other document was

submitted by the assessee showing that the income of the assessee is exempt.

Further, it was found that no certificate for non-deduction of TDS was produced

before AO or even before the DRP. Therefore, the DRP upheld the action of the

AO and the objection was rejected.

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also the Ld. AR was not able to show that the payment to Export Inspection

Agency is not liable for deduction of TDS so as to attract the provisions of section

40(a)(ia) of the Act. In view of this, we do not find any merit in the argument

of the Ld. AR and uphold the order of the lower authorities. Thus, this ground of

appeal of the assessee is dismissed.

Order pronounced in the open Court on this 5th July, 2018.

sd/- sd/- ( GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Dated: 5th July, 2018 GJ Copy to: 1. Torry Harris Sea Foods Pvt. Ltd., 9/572, Thirumala Ward, Chungam, C.C.S.B. Road, Alappuzha-688 010. 2. The Assistant Commissioner of Income Tax, Circle-1, Alappuzha. 3. The Pr. Commissioner of Income-tax, Kottayam. 4. D.R., I.T.A.T., Cochin Bench, Cochin. 5. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin