2021 (5) TMI 254 - AT - Income Tax

Tribunal Confirms CIT(A) Ruling: Deduction u/s 80IA Valid Using State Electricity Board Rate for Internal Transfers.

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's deduction under Section 80IA based on an internal transfer price of Rs. 8.30 per Kwh ... Determining the ALP under transfer pricing provisions - Determination of market value of of electricity - Determination of the quantum of profit claimed as deduction u/s 80IA - determine the price at which the electricity is transferred by the Captive Power Plant of the assessee company to the manufacturing unit of the assessee company - HELD THAT:- The Hon’ble Gujarat High Court in the case of Pr. CIT vs. Gujarat Alkalies and Chemicals Ltd.[2016 (10) TMI 1111 - GUJARAT HIGH COURT] has held the market value of per unit of electricity sold by the assessee in the open market, is the price charged by the Gujarat Electricity Board to its customers. Courts have determined that the market value should be the rate at which electricity is supplied by the State Electricity Boards to its industrial customers. As already stated the Explanation to Section 80IA(8) inserted by the Finance Act, 2012 w.e.f. 01.04.2013 gives an option for determination of “Market Value” as the ALP under the transfer pricing provisions OR as the price of such goods and services as, that it would fetch in the open market. If it is taken that ALP is the market value, then we find there is no dispute that the MAM is CUP. The contention of the ld. D/R that when MAM is taken as CUP, we need not determine a tested party is erroneous. The ICAI in Guidance note u/s 94B of the Act has laid down that the tested party has to be identified even when MAM is CUP. In this case the assessee has taken that the tested party as the non-eligible unit and whereas the TPO has taken the tested party as the CPP i.e. the eligible unit. In our view the profit of the non-eligible unit also has to be properly determined. The only purpose for which the manufacturing unit is taken as the tested party was to determine the market value at which the manufacturing unit purchases power from unrelated third parties. No other function etc. are in question. In our view taking the manufacturing unit as tested party for the purpose of determination of ALP with MAM being CUP, cannot be found fault with. The TPO has chosen to take the price specified in the PPAs for purchase of power as the market value. The PPA is a 20 year agreement. The assessee required to take statutory clearances and approvals. The price is regulated. The sale of power under the terms and conditions of PPA cannot be considered as the market value of the sale of electricity. Such sales cannot be considered as made in “uncontrolled conditions”. The ld. D/R submitted that the power generating 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. 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. As consistent with the view taken in the case of M/s. Electrosteel Casting Limited [2019 (3) TMI 687 - ITAT KOLKATA] and applying the propositions of law laid down by the jurisdictional High Court in the case of Graphite India Ltd. [2016 (8) TMI 1353 - ITAT KOLKATA], M/s. Kanoria Chemicals & Industries Ltd.[2018 (2) TMI 1724 - ITAT KOLKATA] and Gujarat Alkalies and Chemicals Ltd. (supra) as well as the judgement of the Hon’ble Chhattisgarh High Court in the case of Godawari Power & Ispat Ltd. [2013 (10) TMI 5 - CHHATTISGARH HIGH COURT] we uphold the finding of the ld. CIT(A) and dismiss this appeal of the Revenue. Issues Involved:1. Determination of the quantum of profit eligible for deduction under Section 80IA of the Income Tax Act, 1961.2. Determination of the appropriate rate for transferring electricity from the Captive Power Plant (CPP) to the manufacturing unit.3. Application of the Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP).4. Distinction between market value and ALP.Detailed Analysis:1. Determination of the Quantum of Profit Eligible for Deduction under Section 80IA:The core issue in this case is the determination of the quantum of profit which could be claimed as a deduction under Section 80IA of the Income Tax Act, 1961. The assessee company claimed a deduction amounting to Rs. 2,43,24,28,803/- for the generation and distribution of power. The Assessing Officer (AO) reduced this deduction to Rs. 2,02,41,83,489/- by adjusting the rate at which electricity was transferred internally within the company.2. Determination of the Appropriate Rate for Transferring Electricity:The assessee company used a rate of Rs. 8.30 per Kwh for transferring electricity from its Captive Power Plant (CPP) to its manufacturing units, based on tariff orders issued by the Uttar Pradesh Electricity Regulatory Commission. The Transfer Pricing Officer (TPO), however, considered a rate of Rs. 4.90 per Kwh, which was the average rate at which the generating companies could sell electricity to distribution licensees.3. Application of the Comparable Uncontrolled Price (CUP) Method:The TPO adopted the CUP method to determine the ALP for the transfer of electricity. The TPO relied on the judgment of the Hon’ble Calcutta High Court in CIT Vs ITC Limited, which suggested using the rate at which electricity is sold under Power Purchase Agreements (PPA) as the ALP. The AO and TPO argued that the rate used by the assessee was excessive and did not represent the fair market value or ALP of the power supplied by the CPP.4. Distinction Between Market Value and ALP:The CIT(A) and the Tribunal highlighted the distinction between market value and ALP. The Explanation to Section 80IA(8) allows for the determination of market value either as the price that goods or services would ordinarily fetch in the open market or the ALP as defined in Section 92F(ii). The CIT(A) and the Tribunal agreed with the assessee's contention that the rate of Rs. 8.30 per Kwh, based on the tariff order issued by the SEB, was a fair and reasonable market value.Judgment Analysis:- The CIT(A) held that the rate of Rs. 8.30 per Kwh adopted by the assessee was justified and based on the tariff order issued by the SEB for similar transactions under uncontrolled conditions.- The Tribunal upheld the CIT(A)'s decision, stating that the internal CUP method used by the assessee, which considered the rate at which the non-eligible units procured power from the SEB, was appropriate and reasonable.- The Tribunal distinguished the case from the ITC Ltd. judgment, noting that the assessee in this case had the right to sell power in the open market, unlike ITC Ltd.- The Tribunal also referenced several other judgments, including those from the Hon’ble Gujarat High Court and Hon’ble Chhattisgarh High Court, which supported the use of the SEB rate as the market value for the purposes of Section 80IA.Conclusion:The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision, allowing the assessee's claimed deduction under Section 80IA based on the transfer price of Rs. 8.30 per Kwh. The judgment emphasized the appropriateness of using the SEB rate as a fair indicator of market value for internal transfers of electricity within the company.