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2021 (9) TMI 1420 - AT - Income TaxTP Adjustment - MAM - specified domestic transaction has been with regard to sale of electricity units to the other unit for manufacturing process of pharma and phyto-chemical products - whether the sale of electricity unit rate by the eligible unit to its non eligible unit is as per the market rate or not i.e. whether it is an Arms Length Price? - HELD THAT - What is required to be seen here is whether in the open market what is the rate of power or electricity is available to the consumer. If in open market the power is available to a customer from State Electricity Board at the rate charged by it then it is to be reckoned as market rate. Once there was a direct internal CUP i.e. the assessee company had purchased electricity from Punjab State Power Corporation at Rs.7.57 then it represents the market rate on which any industry undertaking or consumer is getting the electricity. Thus we do not find any reason as to why such market rate or CUP should be rejected. Nowhere it has been brought by the TPO as to why the average trading rate in Indian Energy Exchange should be applied as external CUP. Accordingly we hold that the sale of electricity @ 6.72 per unit is at Arms Length and no adjustment is required in this segment/unit. Adjustment in the transfer of steam it is an undisputed fact that steam has been used for generation of electricity unit and for manufacturing process purely for captive consumption by the assessee and therefore it is fully eligible for deduction u/s.80IA. In the transfer pricing study report the assessee had justified the price of transfer; firstly by taking CUP in the manner specified hereinabove The cost plus method was adopted and also the ld. TPO has required the assessee to furnish the cost of the steam produced. In response the assessee has filed a report from approved senior chartered engineer who has given his report and the details of working. TPO without any cogent material or any expert report has rejected the working. Even if the cost plus method is adopted as held by the TPO then how can he take the cost of steam at Nil and held that it is biomass which is byproduct therefore there is no cost. Such an observation of the TPO is de hors any proper reasoning because from a bare perusal of the calculation as given in the report as incorporated we find that formula has been given as to how one ton rice husk has generated 3.96 MT of steam and also the basis for working of steam based on various factors including the steam from boiler sent to turbine at 100%. It has been demonstrated before the authorities below that the total steam generated in turbines was 232, 688, 432 M Kcal out of which 46, 526, 053 M Kcal steam (20%) has been used for generating electricity units and balance (80%) steam was used for generating steam for transferring to manufacturing processes. Thus there was a clearly cost for steam generation as per the report approved by chartered engineer and the steam unit taken for the purpose of captive power plant in profit ratio has been shown at 22.58% and therefore the transfer pricing of Rs. 2, 160/- per MT was taken at Arms Length Price. TPO has erroneously treated the assessee s power plant as Biomass Gasifier Power Plant in which no steam is generated instead of Biomass Steam Power Plants has wrongly came to conclusion that the cost of Steam generation is Nil as against Rs. 2160/ MT. Ld. TPO has failed to understand the operational working of Husk based power plants in which total expenditure is incurred first on generation of steam and thereafter part of steam is used for generation of electricity units and majority of steam is transferred to manufacturing processes of Pharma units of the assessee. Steam is a form of power eligible for deduction u/s.80IA and same cannot be denied by taking its steam cost at Nil. Further. He has grossly erred in ignoring the audited certificate by Senior Chartered Engineer who is an approved valuer by Income Tax Department and the Cost Accountant appointed by the Central Government without any accounts report without any agency or expert. Accordingly for this unit also we hold that no transfer pricing adjustment is required. Appeal of assessee allowed.
Issues Involved:
1. Validity of the assessment order. 2. Determination of the Arm's Length Price (ALP) for electricity units transferred from eligible to non-eligible units. 3. Determination of the ALP for steam transferred from eligible to non-eligible units. 4. Restriction of addition under Chapter VI-A. Issue-Wise Detailed Analysis: 1. Validity of the Assessment Order: The assessee challenged the assessment order passed by the Assessing Officer (AO) in pursuance of the directions issued by the Dispute Resolution Panel (DRP), stating that the DRP erred both on facts and in law. The AO's consideration of the assessee's power plants as "Biomass Gasifier Power Plants" instead of "Biomass Steam Power Plants" was contested. The raw materials and operational working of both power plants are different, as clarified by the assessee through a letter and a Chartered Engineer Certificate. 2. Determination of the ALP for Electricity Units: The AO/TPO determined the ALP of the assessee's specified domestic transactions pertaining to the transfer of power units from eligible to non-eligible units at Rs. 4.609545 per unit, against the assessee's declared rate of Rs. 6.72 per unit. The TPO used the average rate from the Indian Energy Exchange (IEX) and the tariff fixed by the Punjab State Electricity Regulatory Commission (PSERC) as a base for comparability under the Comparable Uncontrolled Price (CUP) method. The assessee contended that the IEX rates were not applicable as there was no actual delivery/supply of power traded at the energy exchange by husk-based power plant companies in Punjab or anywhere in India. The assessee argued that the market value should be based on the sale price of electricity boards or the purchase price of electricity boards for captive power plants. The Tribunal found that the assessee had sold electricity at Rs. 6.72 per unit, which was justified by the rates charged by the Punjab State Power Corporation Limited (PSPCL) and the average rate fixed by the PSERC. The Tribunal held that the sale of electricity at Rs. 6.72 per unit was at Arm's Length and no adjustment was required. 3. Determination of the ALP for Steam: The AO/TPO determined the ALP of the assessee's specified domestic transactions pertaining to the transfer of steam from eligible to non-eligible units at "Nil" against the assessee's declared rate of Rs. 2160 per MT. The TPO treated the assessee's power plant as a Biomass Gasifier Power Plant, where no steam is generated, instead of a Biomass Steam Power Plant. The TPO rejected the assessee's cost certificate and determined that the cost of steam was "Nil" as it was considered a by-product of power generation. The Tribunal found that the steam generated was used for both power generation and manufacturing processes. The Tribunal accepted the assessee's method of calculating the cost of steam based on the report of a Senior Chartered Engineer and the Cost Accountant. The Tribunal held that the transfer pricing of Rs. 2160 per MT for steam was at Arm's Length and no adjustment was required. 4. Restriction of Addition under Chapter VI-A: The AO/TPO made an addition of Rs. 33,36,66,839/- for transfer pricing adjustments. The assessee contended that the addition should be restricted to Rs. 31,87,41,278/-. The Tribunal directed the deletion of the additions made by the AO, allowing the appeal of the assessee. Decision: The Tribunal concluded that the sale of electricity at Rs. 6.72 per unit and the transfer of steam at Rs. 2160 per MT were at Arm's Length and no adjustments were required. The Tribunal directed the deletion of the additions made by the AO, allowing the appeal of the assessee. The order was pronounced in the open Court on 13th September 2021.
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