9911796707
TMI Blog2023 (7) TMI 1557X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal for Ay 2016-17 is still pending and that the Hon'ble High Court is yet to decide the said issue and until such time the order of this tribunal in the assessee's own case for the assessment year 2016-17, shall be binding.
Thus, set aside the order of the lower authority, uphold the benchmark analysis undertaken by the assessee and delete the alleged downward transfer pricing adjustment and allow the effective grounds raised by the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the business of generation of power under Section 80-IA(4)(iv) of the Act. The assessee accordingly prepared stand-alone accounts of said eligible unit in terms of Section 80-IA(5)/(7) of the Act. Further, as the power generated by the assessee was actively consumed by the paper manufacturing unit, such transfer of power qualified as a reportable specified domestic transaction in terms of Section 80-IA(8) read with Section 92BA of the Act. The transfer pricing auditor duly reported this intra-unit transfer in Form 3CEB filed for AY 2016-17 and the said specified domestic transaction was benchmarked following the Comparable Uncontrolled Price Method [hereinafter referred to as CUP]. Perusal of the Transfer Pricing Study Report placed at Pages 31 to 67 of the paper-book, reveals that the non-eligible unit was taken as the 'tested party' as it was procuring power both from CPP as well as Paschimancla Vidyut Vitran Nigam Ltd i.e, State Electricity Board [hereinafter referred to as 'SEB']. The transfer price of power supplied by the CPP to the paper manufacturing unit was accordingly benchmarked at the annual average of the landed cost at which power was being purchased by the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant appeal. 5.1. On the other hand, the ld. D/R though failed to controvert the contention of the ld. Counsel for the assessee but still vehemently argued placing reliance on the finding of the lower authorities. 6. We have heard rival contentions and produced the material placed before us. We notice that the assessee runs a factory at Saharanpur, U.P.. It has set up a captive power plant (CPP) to meet the power requirements of the paper manufacturing unit. The CPP is qualified as an eligible unit engaged in the business of power generation as specified under Section 80IA(4) of the Act. The valuation of power generated by the assessee and consumed by the paper manufacturing unit being an entry unit transferring goods under the category specified for which necessary report on form 3CEB has been filed. The assessee has adopted per unit rate of Rs. 9.08/- for the valuation of the 30892190 units transferred from CPP to its manufacturing unit. However, the ld. Assessing Officer while examining the issue in the course of the assessment proceedings carried out u/s 143(3) r.w.s. 144C(13) of the Act, referred the matter to ld. TPO, for examining the ALP adopted by assessee for valuing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transaction of transfer of power from Captive Unit of Manufacturing Unit. The said order u/s. 92CA(3) of the Act was passed after taking into account the assessee's contention raised in the course of transfer pricing proceedings before the Transfer Pricing Officer. Hence, in view of the order passed u/s 92CA(3) dated 30.07.2021 by the transfer Pricing Officer, Kolkata, as addition of Rs 16,18,75,076/- was proposed to be made to the income of the assessee company in accordance with the provisions of section 92CA(4) of the Income Tax Act, 1961 which mandates that Assessing Officer has to compute the total Income of the assessee in conformity with the adjustment made by the Transfer Pricing Officer. Penalty proceeding u/s. 270A of the Income Tax Act, 1961 was also proposed to be initiated for under reporting of income as a consequence to mis-reporting thereof. Being aggrieved with the proposed addition made by the AO in draft order, assessee moved to appeal before the Ld. DRP with objections in the form of ground as discussed in the following paragraphs. "Ground 1: For that the TPO erred in making an adjustment of Rs. 16, 18,75,076/- in respect of the transfer value of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment of Rs. 16, 18,75,076/- had been made in respect of Specified Domestic Transactions (transfer of power) entered into by the assessee with its Associated Enterprises pertaining to claim of deduction u/s. 801A of the Act, during the year under consideration. Being aggrieved with the aforesaid ALP adjustment, the assessee company had filed an objection before the Ld. Dispute Resolution Panel (DRP-2), New Delhi. The Ld. DRP, after hearing to the assessee's contentions, passed its directions u/s. 144C(5) of the Income Tax Act, dt. 29.04.2022 directing the AO/TPO to take recommended action. The said order of the DRP passed u/s 144C(5) of the Income Tax Act, was received in this office on 24.05.2022. On going through the aforesaid DRP direction, it is observed that the Ld. DRP panel has co-related the current year TP proceeding with the assessee's own case for the A.Y. 2016-17 wherein the Hon'ble ITAT, Kolkata had allowed relief to the assessee and directed to delete the TP adjustment towards transfer value of power. However, the Ld. Panel has passed a conditional direction for the current year under consideration. The relevant part of the same is preproduced ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he settled judicial precedents, decided in favour of assessee observing as follows:- "11. We have heard both the parties and perused the material available on record. The admitted facts of the case are that, the assessee operates an eligible power generating undertaking at Saharanpur in the State of U.P, profits of which are eligible for deduction u/s 80-IA(8) of the Act. The power generated by the eligible unit is entirely consumed captively by the non-eligible unit. For the purposes of Section 80- IA(8) of the Act and in order to determine the stand-alone profits of the eligible unit, the assessee had ascertained the transfer value of power to non-eligible unit at Rs. 8.41 per unit with reference to average landed cost at which the non-eligible unit procured power from the SEB. The said transaction being in the nature of specified domestic transaction had been benchmarked using internal CUP Method in the transfer pricing audit report filed in Form 3CEB. There is no dispute between both the parties that the Most Appropriate Method to benchmark the transfer price of power is the CUP Method. The dispute is regarding the manner of benchmarking the transfer price of power under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices under similar conditions, as is being done between the AEs. The CUP Method, is broadly classified into two categories viz., Internal CUP Method & External CUP Method. Under the Internal CUP Method, the controlled transactions between the AEs involving buying or selling of goods, is compared with the transactions conducted by any of the AEs with unrelated parties for the same goods under similar circumstances. If reliable data is available, then internal CUP is the most appropriate method. In a case where such reliable internal data is not available, one resorts to application of external CUP which involves comparison of prices paid/charged for the same goods between two unrelated third parties, with the transaction conducted between the AEs. 14. In the facts of the present case, we note that the goods in question is 'power' which is transferred by the eligible unit to the paper manufacturing unit. Admittedly, the CPP has not sold power to any unrelated parties. On the other hand, the paper manufacturing unit has procured power throughout the year both from the CPP as well as unrelated external party i.e. the SEB. Undeniably, the product purchased by the AE from its related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the USD denominated Corporate Bond Rate. It is in this factual context that this Tribunal had rejected the bench marking analysis of the Revenue by holding that the key factor under CUP was the 'product comparability' and not 'tested party' and therefore INR denominated debt taken by the assessee from its foreign AE was required to be benchmarked with reference to INR debt issuances in India. For arriving at this conclusion, the Tribunal observed as under: "12. In wake of this background, the first and foremost issue for our adjudication is whether, while applying the CUP Method, it is necessary to identify the "tested party". Although Indian TP regulation does not laid down any specific procedure or guidelines for choice of "tested party", however, OECD provides that, as a general rule, tested party should be the one to which transfer pricing method can be applied in most reliable manner and for which most reliable comparables can be found. In other words, the tested party ought to be the enterprise that offers high degree of comparability and requires least amount of adjustment. It should be, most often the one that has least complex functional analysis. Under CUP method, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing industry. As rightly pointed out by the Ld. CIT, DR, the power tariff charged from industrial consumers is different from that of domestic & agricultural consumers, as the higher rates of the former subsidize the rates charged from the latter. Further, although India has surplus power generation capacity, it lacks adequate transmission and distribution infrastructure. As a consequence, due to the high power tariffs and unstable supply of power, there are significant cost overruns in the manufacturing unit. The captive power plant is thus set-up with the dominant intent to save power costs, which the manufacturing unit is otherwise required to incur & pay to the SEBs, and at the same time, to ensure stable supply of uninterrupted power for smooth production. This results in opportunity cost savings to the assessee company. Accordingly, while drawing up the stand-alone accounts of the eligible CPP and non-eligible manufacturing unit, the landed rate at which the manufacturing unit is procuring power from SEB is used as the comparable rate under the arm's length standards. 19. According to the Ld. CIT, DR however this landed rate at which the non- eligible unit purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & market conditions are similar, this benchmark rate adopted by the assessee is held to be fulfilling the CUP parameters. 21. As regards the Revenue's claim that the CPP and SEB being functionally dissimilar, the benchmarking of sale of CPP at the rate at which non-eligible unit brought electricity from SEB is not reliable, it is noted that this exact same argument has been considered and rejected by the coordinate Bench of this Tribunal in the case of Gujarat Flurochemicals Ltd Vs DCIT (97 taxmann.com 10) . The relevant findings of this Tribunal on this issue, are as under: "29. ... With regard to the assessment year 2013-14, the ld.DRP has observed that there is a little change in the statutory provision by virtue of section 80IA(8). The arm's length price of the goods sold by the assessee in the alleged captive power plant has to be determined. The ld.DRP thereafter observed that the TPO has determined value of the goods and services sold by its eligible units. According to the TPO captive power plant and electricity distributing companies are to be pitted at different pedestal. According to the DRP, there is a material difference between captive power plant as a seller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecording the following finding: '3. Since both the issues are covered by various judgments of this Court, we do not find it necessary to record facts at any length. Division Bench of this Court by judgment dated 22.11.2011 in Tax Appeal No. 2092/2010 in somewhat similar controversy observed as under : .......... 6. Under sub-Section(8) of Section 80IA of the Act, if it is found that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80IA in case of the eligible business as if the transfer had been made at the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture. 7. We may notice that the Tribunal did not accept the contention of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in relation to any goods or services, price that such goods or services will ordinarily fetch in the open market. To our mind sum of Rs. 4.51 per unit of electricity only represented cost of electricity generation to the assessee and not the market value thereof. It is not in dispute that the GEB charged Rs. 5 per unit for supplying electricity to other industries including non eligible unit of the assessee itself. Tribunal therefore, while adopting the said base figure and excluding excise duty therefrom to work out Rs. 4.90 as the market value of the electricity generated by the assessee, to our mind, committed no error. It can be easily seen that if the assessee were to supply such electricity or was allowed to do so in the open market, surely it would not fetch Rs. 4.51 per unit but Rs. 5 per unit as was being charged by GEB. Since the excise duty component thereof would not be retained by the assessee, Tribunal reduced the said figure by the nature of excise duty and came to the figure of Rs. 4.90 to ascertain the market value of electricity generated by the eligible unit and supplied to non eligible business of the assessee. No error was committed by the Tribunal. No questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his tariff order issued by the SEB was available in open market and determined under uncontrolled conditions and is hence a reliable external CUP available in the given facts of the case. On comparing the rates in tariff order with the rates at which other non-eligible units procured power from open market under uncontrolled conditions; it is noted therefore that the transfer value of Rs. 8.30/unit determined by the appellant is fair and reasonable. I therefore find merit in the submissions of the Ld. AR as well as the TPSR that the average landed tariff rate notified by the UPSCB is a fair, reliable and reasonable basis to benchmark the transfer value of power procured by the non-eligible undertaking from the eligible unit. 6. The Ld. TPO's reference to the judgment of the Hon'ble Calcutta High Court in ITC Limited (supra) is wholly distinguishable since the appellant has sufficiently demonstrated that not only is it is permitted to supply power independently to unrelated parties but it has actually supplied substantial quantities of power to unrelated parties. Instead I find that the issue of allowability of deduction under Section 80IA in respect of profits derived by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerating company does not have distribution costs. When a captive power plant in an industry supplies electricity to its own manufacturing unit, there is no power distribution cost. The savings of cost of power can be determined only when the rate at which the manufacturing unit of the company purchases power in the open market from the power distribution companies is considered. Imaginary costs which are not incurred cannot guide our decision. 8.14. Thus while determining the ALP under transfer pricing provisions, in our view the assessee has correctly identified the manufacturing unit as the tested party and CUP as the MAM and the purchase price of electricity in the open market from the State Electricity Board to the manufacturing units in uncontrolled conditions as the ALP. 23. Gainful reference in this regard may also be made to the following decisions of the Hon'ble High Courts. (A) CIT Vs Godavari Power & Ispat Ltd (223 Taxman 234) (Chattisgarh HC) "30. The Steel-Division of the Assessee is a consumer. The CPP of the Assessee supplies electricity to the Steel-Division. Had the Steel Division not taken power from the CPP then it had to purchase power from the Board. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Obviously, therefore the attempt on the part of the assessee was to claim larger profit under the unit which was eligible for such deduction as against this, attempt of the revenue would be see that the ineligible unit shows greater profit. 6. The Tribunal in the impugned judgment extracted extensively from the order of CIT (Appeals) and independent reasons for confirming the same. In such order CIT (Appeals) had placed reliance on an earlier judgment of the Tribunal in case of Reliance Infrastructure Ltd. v. Addl. CIT [2011] 9 taxmann.com 186 (Mum. - Trib.). Learned counsel for the assessee had placed on record a copy of the judgment of the Tribunal in case of Reliance Infrastructure limited. In such judgment an identical issue came up for consideration. The Tribunal by detailed judgment had held and observed as under:- "44. In the given facts and circumstances of the case, we are of the view that the profits of the business of generation of power worked out by the Assessee on the basis of the price that it paid to TPC for purchase of power continues to be the best basis even after the order of MERC and therefore the same has to be accepted as was done in the past and as ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P.) Ltd. [Tax Appeal No. 1646 of 2010, dated 30-1-2012] in which following observations were made:- ....... 11. Judgment of Calcutta High Court in case of CIT v. ITC Ltd. [2016] 236 Taxman 612/[2015] 64 taxmann.com 214 was also brought to our notice in which the said High Court has taken a different stand. However, since the issue has already been examined by this Court earlier and in view of the decisions of the Chhattisgarh and Gujarat High Court, we see no reason to entertain this question. 12. In the result, Income Tax Appeal is dismissed. 24. The contention of the Ld. CIT, DR that the above referred decisions are not applicable since they were rendered in the context of 'open market value' and not 'arm's length price' is found to be misplaced. We agree with the Ld. AR of the assessee that, the 'open market value' standards and 'arm's length price' standards would ordinarily yield the same results, unless the considerations and rules involved are different. On this particular issue of determination of the transfer price of power u/s 80-IA(8) of the Act, we note that the considerations taken into account under the open market valuation standards by the High Courts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' to CPPs for supply of electricity etc. The bone of contention between the parties is the adoption of the most appropriate rate at which sale of electricity would be valued for the purpose of determining the profitability of all the four CPPs. It is not in dispute that during the relevant year, the assessee operated four CPPs in the State of Karnataka, Orissa and West Bengal and the power generated was entirely supplied and consumed by manufacturing undertakings of the assessee. The A.O. per-se did not dispute the fact that the CPPs constituted separate and distinct undertakings and were eligible for claiming the deduction under section 80IA of the Act. However, on perusal of the working of the profitability, the A.O. found that the transfer price for power was considered by the assessee equal to the price at which the electricity was procured by the manufacturing undertakings from the respective SEBs. Referring to explanation to section 80IA, the A.O. held that for the purposes of section 80IA,the term 'market value' means the price that such goods or services would ordinarily fetch in the open market. According to the A.O., such market value was to be ascertained fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in his detailed presentation (supra) has brought out the salient features of the Electricity Act 2003 by which CPPs were granted 'open access' by law. In terms of the 'open access' granted, the power generating companies were free to sell the power to any third party at the prices mutually agreed and in such case, the regulatory commission was required to determine only the 'wheeling charges' which the transmission companies / authorities could levy. In this regard, the useful reference may also be made to KERC's order dated 27.02.2007. In this order, the commission explained the salient features of the National Electricity Policy issued by the Government of India on 12.02.2005 with regard to captive generation. The said order explains that the Electricity Act 2003, put in place highly liberal frame work for power generation wherein there is no requirement of licensing for generation of power. The requirement of techno-economic clearance of CEA for thermal generation was no longer there. Captive generation has been freed from all controls. The said policy further clarified that the captive generating plants were permitted to sell electricity to licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record including the paper book and the relevant provisions of the Electricity Act, 2003 as detailed supra. We find that the main thrust of order of ld CITA was by placing reliance on the decision of this tribunal in the case of ITC Ltd, which was modified by the Hon'ble Jurisdictional High Court. The ld AR fairly brought to our attention the decision of Hon'ble Jurisdictional High Court in the case of ITC Ltd before us and had duly distinguished the same as not applicable to the facts of the instant case , as admittedly, the Asst Year before Hon'ble Calcutta High Court in ITC Ltd was Asst Year 200203. The said decision in ITC Ltd for Asst Year 2002- 03 was rendered by taking into account the relevant provisions of Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948. These Acts were repealed and a new Electricity Act 2003 was introduced with effect from 10.6.2003. Hence for the Asst Years 2008-09 and 2009-10 (i.e the years under appeal before us) , the assessee would be governed by the provisions of Electricity Act, 2003. 5.6.1. We have already seen that the ITC's case in Hon'ble Calcutta High Court, proceeded on the basis that the open market f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections are identical to Assessment Year 2016-17, the ld. DRP has only directed the assessing officer to ascertain the legal status of further appeal by the revenue and in case the matter has attained finality and the decision of this tribunal has been accepted by the revenue, the adjustments/additions shall be deleted if not then adjustment/addition is upheld until such finality is attained. However as submitted by the ld. Counsel for the assessee, the revenue's appeal against the decision of the Tribunal for Ay 2016-17 is still pending and that the Hon'ble High Court is yet to decide the said issue and until such time the order of this tribunal in the assessee's own case for the assessment year 2016-17, shall be binding. We, therefore, respectfully following the decision of the tribunal in the assessee's own case for the assessment year 2016-17, set aside the order of the lower authority, uphold the benchmark analysis undertaken by the assessee and delete the alleged downward transfer pricing adjustment and allow the effective grounds raised by the assessee.
9. In the result, appeal of the assessee is allowed.
Order pronounced in the Court on 10th July, 2023 at Kolkata. X X X X Extracts X X X X X X X X Extracts X X X X
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