Tribunal recalculates arm's length price, directs reevaluation of domestic transactions under Resale Price Method

The Tribunal partly allowed the Revenue's appeal challenging the exclusion of companies by the CIT(A) from the list of comparables for computing the arm's length price (ALP) under the Resale Price Method. The Tribunal directed the AO/TPO to recompute the ALP of specified domestic transactions using current year data and applying Rule 10CA for datasets with fewer than six comparables. The appeal of the Revenue was partly allowed, and the Cross objection of the assessee was dismissed.

---

---

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.

---