2025 (1) TMI 1185 - AT - Income Tax

Occasion of application of section 92BA when the assessee has not claimed deduction u/s 80IA - as per AO assessee has set up a captive thermal plant which is eligible for deduction u/s 80IA - HELD THAT - The assessee by purchasing the power at a higher rate has increased its expenditure and thereby entered into reducing its income/profit. In our view the relationship between the two is squarely covered by the provision of sections 80IA(8) and 80IA(10). Hence the transaction is a qualified transaction within the meaning of section 92BA. It is amply clear that for the invocation of section 92BA there is no necessity for the assessee for opting the deduction u/s. 80IA during the AY under consideration. The option is with the assessee to claim the deduction u/s. 80IA for any 10 consecutive assessment years out of the 15 years as per section 80IA(2) of the Act. Merely because the assessee has not exercised the option will not make the eligible transaction falling either in section 80IA(8) or section 80IA(10) become ineligible. The eligible business is defined in section 80IA(4) which is not dependent upon the exercise of option by the assessee. As held by us the determination of ALP adjustment under Section 92BA is not dependent upon seeking the direction under Section 80IA by the assessee. Both provisions operate in different fields and were inserted for different reasons. The argument of the assessee that the assessee has not claimed deduction u/s. 80IA therefore the provisions of section 92BA are not attracted are devoid of any merit and the objection is dismissed. Arm s Length Price - Assessee itself has taken the CUP method as most appropriate method in terms of 92C read with 92F of the Income Tax Act and has benchmarked the transactions. Thus it is not the case of the assessee that the transaction is to be benchmarked on the basis of (i) of Explanation to Section 80IA(8) of the Act. Whether the electricity sold by the assessee to 14 consumers would be the market value of the goods or services supplied by the assessee or not? - In the present case assessee has not given the value of the electricity sold in open market and had merely relied upon the prices charged by the State Distribution Company namely GSEB. Admittedly the assessee has not sold the electricity in the open market either to the State Utility or the Electricity Power Exchange or to any other person through the open access as per Section 42 of the Electricity Act. Quiet contrary to this the assessee had sold the surplus electricity to 14 individuals by way of a Power Purchase Agreement with them. In the absence of any availability of price of the electricity in the open market the best alternative available with the TPO was to benchmark the transactions under the Act in accordance with the computation of Arm Length Price Principle as mentioned in Section 92C r.w. Rule 10B of Income Tax Rules. There is another reason to apply the principle as referred in Section 92C r.w. Rule 10B of I.T. Rules is that the prices charged by the State Distribution Utility from the consumer is dependent upon to various factors and are not comparable on FAR analysis. The assessee is a power generator and the prices charged by the assessee are required to be compared with the prices charged by an independent third party having the thermal power plant and not with the transmission company or the distribution company. We are of the opinion that the learned lower authorities were right in computing the arm-length price on the basis of the internal comparable available in the form of supplying electricity to 14 electricity consumers. Whether electricity tariff charged by the State distribution utility cannot be compared with the tariff charged by the assessee for supplying the electricity to itself? - Assessee has brought to our notice that the tariff charged by any power generator company who has set up the thermal power plant to show that the prices charged by the said thermal power plant can be comparable with the price of Rs. 7.85 per unit benchmarked by the assessee. In view of the above we found that the argument of the assessee that State Utility which is supplying the electricity at Rs. 7.85 paise is not comparable with the assessee and therefore the argument of the ld.AR is rejected. Assessee was supplying the power to the other units at an average of Rs. 2.97/- whereas in the TP study the assessee has adopted the rate at Rs. 7.85/- per unit as per GSEB tariff. The argument that the rate of electricity as charged by the State Electricity Board is required to be considered for benchmarking the power supply between the related parties is not applicable to the facts of the present case as the internal comparable in the form of the power supply to the 14 companies were available with the Ld. TPO and therefore TPO had rightly applied the arithmetic mean of power supply by it to 14 consumers. Decided against assessee.

Summary

The Tribunal considered several issues in this appeal involving the determination of the Arm's Length Price (ALP) for specified domestic transactions under the Income Tax Act, particularly concerning Section 92BA and Section 80IA. The core issues revolved around whether the provisions of Section 92BA apply when the assessee has not claimed deductions under Section 80IA, the appropriate method for determining ALP, and the validity of reallocating expenses.

Issue 1: Applicability of Section 92BA without Claiming Deduction under Section 80IA

The primary issue was whether the provisions of Section 92BA, which deals with specified domestic transactions, apply even when the assessee has not claimed any deduction under Section 80IA. The assessee contended that since no deduction was claimed under Section 80IA due to losses, the transactions should not be considered specified domestic transactions under Section 92BA. The Tribunal, however, disagreed, emphasizing that the applicability of Section 92BA does not depend on whether the deduction under Section 80IA is claimed. The Tribunal noted that the provisions are intended to ensure that transactions within eligible businesses are conducted at market value, irrespective of the deduction claim status. The Tribunal highlighted that the option to claim deductions under Section 80IA is available for any ten consecutive years out of fifteen, and not exercising this option does not exempt the transactions from being evaluated under Section 92BA.

Issue 2: Determination of Arm's Length Price (ALP)

The Tribunal evaluated the method used to determine the ALP for power transferred between the assessee's eligible and non-eligible units. The assessee used the Comparable Uncontrolled Price (CUP) method, referencing the tariff rate charged by the Gujarat State Electricity Board (GSEB) as a benchmark. The Tribunal found this approach inappropriate due to the differences in the functions, assets, and risks between the state utility and the assessee's power generation unit. Instead, the Tribunal upheld the TPO's decision to use internal comparables, specifically the rates at which the assessee sold power to independent third parties, as a more accurate reflection of the market value.

The Tribunal noted that the assessee had sold power to 14 third-party consumers at an average rate of Rs. 2.97 per unit, which was significantly lower than the Rs. 7.85 per unit rate used for internal transactions. The Tribunal agreed with the TPO's adjustment based on this internal comparable, emphasizing that the internal transactions should reflect the market value as determined by actual sales to third parties.

Issue 3: Reallocation of Expenses

The Tribunal also addressed the reallocation of employee benefits and other expenses to the power unit based on turnover. The assessee argued that this reallocation was incorrect and unscientific. However, the Tribunal upheld the TPO's decision, noting inconsistencies in the segmental accounts and the lack of expenses attributed to the power unit, which indicated that many costs were being absorbed by other units. The Tribunal found the reallocation justified to reflect a more accurate distribution of expenses across the units.

Significant Holdings

The Tribunal concluded that the provisions of Section 92BA apply regardless of whether deductions under Section 80IA are claimed, as the focus is on ensuring transactions are conducted at market value. It upheld the use of internal comparables for determining ALP, rejecting the use of state utility tariffs due to the lack of comparability. The Tribunal also supported the reallocation of expenses to ensure a fair representation of costs associated with the power unit.

In summary, the Tribunal dismissed the appeal, affirming the adjustments made by the TPO and the DRP. The Tribunal emphasized the importance of adhering to the principles of transfer pricing to ensure that profits and expenses are accurately reflected in transactions between related entities.