2023 (9) TMI 1337 - AT - Income Tax

TP Adjustment - comparable selection - assessee s functional profile 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 - HELD THAT - Tolar Ocean Products Pvt. Ltd 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 products, we hold that the ld. CIT(A) was justified in excluding this company from the list of comparables. Forstar Frozen Foods Private Limited 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. Nekkanti Sea Foods Ltd - 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. Asvini Fisheries Private Limited 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 facility. We, therefore, approve the action of the ld. CIT(A) in excluding this company from the list of comparables. Apex Frozen Foods 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). Shree Datt Aquaculture Farms Pvt. Ltd. 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 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. Uniroyal Marine Exports Ltd 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. Gadre Marine Exports Pvt. Ltd. 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. Computation of ALP under dataset - 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 - HELD THAT - 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. 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. 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 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. 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

Summary

Issues Involved:
1. Comparables
2. Computation of the arm's length price (ALP) under the dataset

Summary:

I. Comparables:

Exclusion of Companies by CIT(A): The Revenue's appeal challenges the exclusion by the CIT(A) of eight companies from the list of comparables finalized by the Transfer Pricing Officer (TPO). The assessee, engaged in the retail trade of frozen fish and other seafood products without processing, used the Resale Price Method (RPM) for benchmarking specified domestic transactions. The TPO included twelve comparables, which the CIT(A) reduced to four, excluding the rest based on functional dissimilarity.

Tolar Ocean Products Pvt. Ltd.: This company, engaged in diverse activities including processing, was excluded by CIT(A) due to its functional dissimilarity with the assessee.

Forstar Frozen Foods Private Limited: Engaged in manufacturing and exporting ready-to-eat fish products, this company was excluded by CIT(A) for its processing activities.

Nekkanti Sea Foods Ltd.: With state-of-the-art processing plants, this company was excluded by CIT(A) due to its substantial differences from the assessee's trading activities.

Asvini Fisheries Private Limited: Engaged in processing and export of shrimps, this company was excluded by CIT(A) due to its processing facilities and fixed asset base.

Apex Frozen Foods: Engaged in processing and exporting ready-to-eat aquaculture products, this company was excluded by CIT(A) for its functional dissimilarity.

Shree Datt Aquaculture Farms Pvt. Ltd.: This company, involved in fish processing and other business segments, was excluded by CIT(A) due to its diverse activities and lack of segmental data.

Uniroyal Marine Exports Ltd.: Engaged in manufacturing shrimps and squids, this company was excluded by CIT(A) due to its manufacturing activities.

Gadre Marine Exports Pvt. Ltd.: A manufacturer and exporter of frozen seafood, this company was excluded by CIT(A) due to its diverse product range and manufacturing activities.

II. Computation of ALP under Dataset:

Use of Current Year Data: The Revenue's grievance is against CIT(A)'s direction to use current year data for computing ALP. The CIT(A) upheld the assessee's approach based on Rule 10B(4) and 10B(5), suggesting that current year data was appropriate. However, the Tribunal noted the change in the mechanism with the insertion of the third proviso to section 92C(2) and Rule 10CA, which mandates the use of weighted average values for the current year plus two preceding years for comparables.

Application of Rule 10CA: The Tribunal held that the ALP should be determined as per Rule 10CA, specifically sub-rule (7), which applies when the dataset consists of fewer than six comparables. The ALP should be the arithmetical mean of the PLI of the comparables computed by taking the weighted average of the current plus two preceding years.

Dismissal of Ground No.3: The ground regarding the computation of gross profit considering direct costs was dismissed as it did not arise from the impugned order.

Conclusion:

The Tribunal set aside the impugned order and remitted the matter to the AO/TPO to recompute the ALP of the specified domestic transactions in line with the discussion. The appeal of the Revenue was partly allowed, and the Cross objection of the assessee was dismissed.

Order pronounced in the Open Court on 27th September, 2023.