2023 (6) TMI 337 - AT - Income Tax

TP adjustment of specified domestic transaction of sale of power by eligible unit to the manufacturing unit - HELD THAT - As in the instant facts, it is a well settled principle that where an assessee, being a captive power plant provided electricity to its associated enterprises and claimed deduction u/s. 80-IA, then for the purpose of deduction, market value of power, supplied by the assessee to its associated enterprises should be computed considering rate of power charged by State Electricity Board for supply of electricity to industrial consumers. In the case of Shree Rayalaseema Hi Strength Hypo Ltd. 2023 (1) TMI 1115 - ITAT HYDERABAD held that where assessee, a captive thermal power plant, provided electricity to its AEs and claimed deduction under section 80-IA in respect of profits arising out of such activity, for purpose of such deduction market value of power supplied by assessee to its AEs should be computed considering rate of power charged by State Electricity Board for supply of electricity to industrial consumers and thus, assessee was justified in adopting ALP of electricity supply to its AEs at rate charged by State Electricity Board and Revenue was not justified in excluding certain heads of charges out of it Accordingly we are of the considered view that the assessee has rightly computed the ALP by adopting the rate of Rs. 6.5 per unit as the arms length rate. Accordingly ground no. 2 of assessee s appeal is allowed. Determining the arms length value for sale of steam at Rs. nil - steam generated by captive power plant of the assessee is transmitted to the plant which manufactures chemicals as well as further processed to generate power - assessee has adopted other method in transfer pricing documentation for benchmarking SDT on transfer of steam, wherein quotation was obtained by MOL from independent supplier and such quotation has been considered by the assessee as the benchmark rate - HELD THAT - While we are in agreement with assessee that the ALP of steam cannot be determined at Rs. nil , however, at the same time, we are also in agreement with the observations made by the Hon ble DRP that the quotation obtained by the assessee from SSPL also cannot be taken as the basis for benchmarking the ALP of steam supplied by the CPP of the assessee. DRP, has correctly pointed out certain infirmities in the quotation obtained by the assessee and has specifically observed that the quotation obtained by the assessee is not backed by any analysis of the evaluation of the price so quoted and the said quotation is not supported by any supporting evidences. Since appropriate exercise has not been conducted by the assessee to justify the arms length price of steam supplied to its associated enterprise, this issue is restored to the file of AO wherein the assessee may furnish supporting documents in order to justify arms length price of the steam supplied by its captive power plant to its Associated Enterprise. Accordingly, this issue is being restored to the file of AO with the above directions.

Summary

Issues Involved:

1. Adjustment of specified domestic transaction of sale of power.
2. Determination of arm's length value for the sale of steam.

Issue 1: Adjustment of Specified Domestic Transaction of Sale of Power

The assessee, engaged in manufacturing chemicals in India, operates two coal-based captive power plants and claimed deduction under section 80IA for one of these plants. The Transfer Pricing Officer (TPO) adjusted Rs. 24,42,67,731 for the sale of power by comparing the rate charged by Dakshin Gujarat Vij Company Ltd. (DGVCL), a power distribution company, with the cost of electricity generation. The TPO benchmarked the transaction using a cost of Rs. 3.06 per KWH approved by the Gujarat Electricity Regulatory Commission (GERC). The assessee argued that the price should reflect the consumer's perspective, relying on judicial precedents that define "market value" as the price in the open market. The Dispute Resolution Panel (DRP) rejected the assessee's contention, noting that the rate charged by DGVCL includes various costs not relevant to the assessee's situation. The DRP directed the Assessing Officer to determine the price per unit by adding a 15.50% return on equity to the total cost. The tribunal, following precedents from Gujarat Fluro Chemicals and Vishal Fabrics, held that the assessee correctly computed the Arm's Length Price (ALP) at Rs. 6.5 per unit and allowed the appeal.

Issue 2: Determination of Arm's Length Value for the Sale of Steam

The assessee's captive power plant generates steam, which is used in manufacturing chemicals and further power generation. The TPO rejected the assessee's benchmarking method, which used a quotation from an independent supplier, Shree Sulphurics Pvt. Ltd. (SSPL), deeming it invalid. The DRP upheld the TPO's decision, citing multiple defects, including the non-saleable nature of steam, lack of reliable measurement, and absence of separate accounts for the steam unit. The DRP concluded that the value of steam should be "nil." The tribunal disagreed with the "nil" valuation but also found the SSPL quotation unreliable. It restored the issue to the Assessing Officer for re-evaluation, directing the assessee to provide supporting documents to justify the ALP.

Assessment Year 2017-18

The issues and grounds of appeal for the assessment year 2017-18 were similar to those of 2016-17. The tribunal's observations and decisions for 2016-17 were applied to 2017-18. Ground No. 2 was allowed, and Ground No. 3 was restored to the Assessing Officer for de-novo consideration.

Conclusion

In the combined result, both appeals for the assessment years 2016-17 and 2017-18 were allowed for statistical purposes. The order was pronounced in the open court on 16-05-2023.