2024 (7) TMI 569 - 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 - As per DR 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 - As decided in Rungta Mines Ltd 2023 (12) TMI 1331 - ITAT KOLKATA 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, we hold that the 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. As we have 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 is squarely applicable in this case also. In view of the above observations, we do not find any merit in the appeal of the revenue and the same is hereby dismissed. Decided in favour of assessee.

Issues Involved:
1. Arm's Length Price (ALP) vs. Fair Market Value (FMV)
2. Interpretation of Explanation to Section 80-IA
3. Applicability of Internal Comparable Uncontrolled Price (CUP) Method
4. Eligibility of Captive Power Plant (CPP) for Deduction under Section 80-IA
5. Analysis of Deduction under Section 80-IA r.w.s. 92BA and 92F
6. Requirement of Determination of Tested Party in CUP Method
7. Compensation Rates for Manufacturers vs. Distributors
8. Validity of Tariff Orders as Comparable Uncontrolled Prices (CUP)
9. Differences between Distribution Tariff and Generation Tariff

Detailed Analysis:

1. Arm's Length Price (ALP) vs. Fair Market Value (FMV):
The appellant argued that the CIT(A) failed to appreciate the difference between ALP and FMV, emphasizing that the Transfer Pricing Officer (TPO) is limited to determining the ALP. The Tribunal noted that the ALP should be determined based on the price at which the manufacturing units purchase power from unrelated third parties, specifically the State Electricity Boards (SEBs). The Tribunal affirmed that the internal CUP method applied by the assessee, which benchmarked the transaction using SEB rates, was appropriate.

2. Interpretation of Explanation to Section 80-IA:
The appellant contended that the CIT(A) misinterpreted the Explanation to Section 80-IA, which should mean that when the monetary threshold as per Section 92BA is crossed, market value should equate to ALP. The Tribunal agreed with the appellant, stating that the market value in relation to any goods or services should be the price that such goods or services would ordinarily fetch in the open market or the ALP as defined in Section 92F.

3. Applicability of Internal Comparable Uncontrolled Price (CUP) Method:
The Tribunal upheld the internal CUP method used by the assessee, which compared the rates charged by SEBs for industrial usage. The Tribunal noted that the rates charged by the SEBs to end-consumers under similar market and economic conditions were appropriate benchmarks for determining the ALP.

4. Eligibility of Captive Power Plant (CPP) for Deduction under Section 80-IA:
The Tribunal confirmed that the CPPs of the assessee were eligible for deduction under Section 80-IA. The CPPs were established to ensure uninterrupted power supply to the manufacturing units and to save costs. The Tribunal held that the benefit under Section 80-IA could be claimed based on the rates at which the manufacturing units purchased power from SEBs.

5. Analysis of Deduction under Section 80-IA r.w.s. 92BA and 92F:
The Tribunal emphasized that the CIT(A) failed to analyze the claim of deduction allowable under Section 80-IA r.w.s. 92BA and 92F. The Tribunal reiterated that the ALP should be determined based on the rates at which the manufacturing units purchased power from SEBs, which were considered to be at arm's length.

6. Requirement of Determination of Tested Party in CUP Method:
The appellant argued that the CIT(A) failed to appreciate that the application of the CUP method does not require the determination of a tested party. The Tribunal agreed, stating that the key factor in the application of the CUP method is product comparability and similar market conditions, rather than the identification of a tested party.

7. Compensation Rates for Manufacturers vs. Distributors:
The appellant contended that a manufacturer cannot be compensated based on rates meant for distributors. The Tribunal agreed, noting that the functions performed by the CPPs were those of a power generator, not a distributor. Therefore, the appropriate benchmark for determining the ALP was the rate at which the manufacturing units purchased power from SEBs.

8. Validity of Tariff Orders as Comparable Uncontrolled Prices (CUP):
The appellant argued that tariff orders are regulated but not controlled, and therefore, the rates of sale of power by generating companies to distributing companies serve as valid CUP. The Tribunal upheld this view, stating that the SEB rates provided a reliable internal CUP for benchmarking the transactions.

9. Differences between Distribution Tariff and Generation Tariff:
The appellant highlighted the significant differences between distribution tariff and generation tariff, emphasizing that these cost differences are real and not imaginary. The Tribunal agreed, noting that the rates at which power was sold by the CPPs to the manufacturing units were appropriate benchmarks for determining the ALP.

Conclusion:
The Tribunal dismissed the appeals of the revenue, upholding the CIT(A)'s decision to delete the additions made by the Assessing Officer on account of transfer pricing adjustments. The Tribunal confirmed that the internal CUP method applied by the assessee, using SEB rates as benchmarks, was appropriate for determining the ALP. The Tribunal emphasized that the CPPs were eligible for deduction under Section 80-IA based on the rates at which the manufacturing units purchased power from SEBs.

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