2023 (12) TMI 1331 - AT - Income Tax

TP adjustment - price of the power transferred by the captive power plant of the assessee eligible for deduction u/s 80IA to the non- eligible manufacturing units of the assessee and thereby reducing the claim of deduction claimed by the assessee u/s 80IA of the Income Tax Act - DR has strongly relied upon the observation made by the Transfer Pricing Officer and has submitted that for determination of arm s length price in relation to power supply by the captive power plants of the assessee, the average market rates at which the other power generating units sell the power to distribution companies is required to be taken HELD THAT - Assessee s main business is not of generating of power to further sell the same to the distribution companies/State Electricity Boards. The point to be noted here is that the respective captive power plants were established by the assessee for its own needs i.e. for the purpose of supply uninterrupted powers to its manufacturing units as well as to save the cost of power purchased from State Electricity Boards. Here, in the facts and circumstances, in our view, the arm s length price could not be determined by taking the average market rates of power supply units to distribution companies as the assessee is not into the said business of selling of power to distribution companies. The arm s length price in this case, in our view, has to be determined taking into mind the business perspective of the assessee which was to get uninterrupted power and to save cost of electricity paid to the State Electricity Boards. When we look into the facts in this perspective, the relevant factor in this case would be the market price of the power at which the assessee s manufacturing units purchased the power from the market or from the State Electricity Boards. Moreover, as per the Electricity Act, 2003 the captive power plants are kept outside of the regulatory mechanism and are free to supply electricity to its associate enterprises/manufacturing units or to the contracting parties and consumers, at the rates mutually settled between them. The said captive power plants are not mandatorily required to supply the electricity to the distribution companies and even are exempt of other charges which the other generating companies/distribution companies has to pay to the Government/ State Electricity Boards. The captive power plants are required only to pay wheeling charges if they use the distribution lines of the State Electricity Boards/distribution companies. Sale of electricity by the generating companies to the distribution company/state electricity board - The consumer /contracting parties will certainly want to purchase the electricity at somewhat lesser rate than the rates of the State Electricity Boards, whereas, the captive power plants/generating companies would try to get maximum rate on the sale of power in unregulated and uncontrolled transactions and under the circumstances, both the parties would settle at the mutually agreed rates, irrespective of the rates at which the State Electricity purchases power from the other generating units. When we consider this bargain power of captive units and other generating companies in uncontrolled and unregulated transactions, then market value to determine arm s length price, in our view, would not be dependent upon of the average market value electricity sold by other generating units to the distribution companies in controlled and regulated transactions. As observed above, the very purpose and objective of the installation of captive units by an assessee is to supply of electricity to its own manufacturing units for uninterrupted power supply and saving of electricity expenses and whatever expenses are saved that certainly would be the profit of the captive unit which, in our view, will be eligible for deduction u/s 80IA of the Income Tax Act. Considering this aspect, the contention of the Revenue that the rates determined by the Regulatory Commission for generating units for supply of electricity to the distribution companies should be taken as benchmark, in our view, would not be accurate benchmarking of the price. Thus, as discussed in the preceding paras of this order in context to the provision of Electricity Act 2003, that the market value of the power in case of supply by generating units to the distribution units cannot be said to be an uncontrolled market conditions and under the circumstances, the aforesaid observations of the Hon ble Supreme Court M/s Jindal Steel Power Ltd. 2023 (12) TMI 417 - SUPREME COURT is squarely applicable in this case also wherein held the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.That being the position Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue. In view of the above observations, we do not find any merit in the appeal of the revenue and the same is hereby dismissed.

Summary

Issues Involved:
1. Interpretation of "arm's length price" (ALP) versus "fair market value."
2. Application of Explanation to Section 80-IA in conjunction with Section 92BA.
3. Appropriateness of internal Comparable Uncontrolled Price (CUP) method for benchmarking transactions.
4. Eligibility of Captive Power Plant (CPP) for benefits under Section 80-IA.
5. Analysis of deduction claims under Section 80-IA read with Sections 92BA and 92F.
6. Determination of tested party in the application of CUP method.
7. Compensation rates for manufacturers versus distributors.
8. Validity of rates from tariff orders as CUP.
9. Differences between distribution and generation tariffs.

Issue-wise Detailed Analysis:

1. Interpretation of "arm's length price" (ALP) versus "fair market value":
The Tribunal observed that the CIT(A) erred in not appreciating the distinction between ALP and fair market value. The role of the Transfer Pricing Officer (TPO) is limited to determining the ALP, which should be applied in this context.

2. Application of Explanation to Section 80-IA in conjunction with Section 92BA:
The Tribunal noted that the CIT(A) did not correctly interpret the Explanation to Section 80-IA, which mandates that when the monetary threshold under Section 92BA is crossed, the market value must mean the ALP as per Section 92F(ii).

3. Appropriateness of internal Comparable Uncontrolled Price (CUP) method for benchmarking transactions:
The Tribunal upheld the internal CUP method applied by the assessee, where the transfer rates were benchmarked against the State Electricity Boards (SEB) rates for industrial usage. This was deemed appropriate as the rates charged by the CPPs were lower than the SEB rates, ensuring the transactions were at arm's length.

4. Eligibility of Captive Power Plant (CPP) for benefits under Section 80-IA:
The Tribunal confirmed that the CPPs at Chaliyama and Kamanda were eligible for deduction under Section 80-IA. The CPPs were set up to ensure uninterrupted power supply to the manufacturing units, which also bought power from SEBs.

5. Analysis of deduction claims under Section 80-IA read with Sections 92BA and 92F:
The Tribunal found that the TPO's adjustment, which substituted the ALP determined by the assessee with lower rates, was not justified. The TPO's approach was based on the rates at which distribution companies procured power from generating companies, which did not reflect the true market conditions for the assessee's transactions.

6. Determination of tested party in the application of CUP method:
The Tribunal agreed with the assessee's approach of using the manufacturing units as the tested party for the CUP method. This was because the manufacturing units also purchased power from SEBs, and the rates paid to SEBs were used as a benchmark.

7. Compensation rates for manufacturers versus distributors:
The Tribunal rejected the TPO's view that the rates charged by CPPs should be comparable to those charged by generating companies to distribution companies. It was noted that the functions performed by CPPs were different from those of distributors, and thus, the rates should not be compared.

8. Validity of rates from tariff orders as CUP:
The Tribunal held that the rates from tariff orders were not appropriate for benchmarking the transactions. These rates were regulated and did not reflect the market conditions under which the assessee operated. The internal CUP method, using SEB rates for industrial consumers, was deemed more appropriate.

9. Differences between distribution and generation tariffs:
The Tribunal acknowledged the significant differences between distribution and generation tariffs. It was noted that the costs associated with distribution and generation were real and not imaginary, and thus, the rates for distribution companies could not be directly applied to the CPPs.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the additions made by the Assessing Officer on account of transfer pricing adjustments. The Tribunal found that the internal CUP method, using SEB rates for industrial consumers, was the appropriate method for determining the ALP for the transactions between the CPPs and the manufacturing units. The Tribunal also noted that the rates determined by regulatory commissions for generating units were not applicable in this context, as the transactions were not regulated and occurred under uncontrolled conditions.