ITAT rejects transfer pricing adjustment on captive power plant electricity using WBSEB rates, restricts section 14A disallowance

ITAT Kolkata ruled on transfer pricing of captive power plant electricity and section 14A disallowance. The TPO's arms length price determination using comparable units pricing electricity at Rs. 3.23 per unit was rejected as WBSEB rates cannot apply since it's not a tested party. Following SC precedent in Jindal Steel Power Ltd, the tribunal upheld CIT(A)'s deletion of transfer pricing adjustment for inter-unit power supply transactions. For section 14A disallowance, the tribunal restricted addition to Rs. 3,131 instead of Rs. 1,48,085, considering only dividend-yielding investments worth Rs. 25,000 rather than total investments of Rs. 296.17 lakh.

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Issues Involved:
1. Deduction under Section 80IA of the Income Tax Act.
2. Addition under Section 14A and Rule 8D.
3. Education Cess as an allowable expenditure.
4. Procedural delay in filing the appeal.

Summary:

1. Deduction under Section 80IA of the Act:
The primary issue was whether the Ld. CIT(A) erred in allowing the deduction under Section 80IA as claimed by the assessee. The assessee, engaged in diverse businesses including power generation for captive consumption, had set up a Captive Power Plant (CPP). The Transfer Pricing Officer (TPO) had reduced the transfer price of power generated by the CPP, leading to a reduced deduction claim under Section 80IA. The Ld. CIT(A) held that the rate adopted by the appellant at Rs. 8.48 per unit was justified, following the internal Comparable Uncontrolled Price (CUP) method, and directed the deletion of the transfer pricing adjustment. This decision was upheld by the tribunal, referencing consistent views from previous cases and the Supreme Court's ruling in CIT vs. Jindal Steel & Power Ltd., which supported the use of the State Electricity Board's rate as the market value for computing deductions under Section 80IA.

2. Addition under Section 14A and Rule 8D:
The second issue was whether the Ld. CIT(A) erred in deleting the addition made by the AO under Section 14A read with Rule 8D. The AO had added Rs. 1,48,085/- to the total income of the assessee, calculated as 0.5% of the average investment. The tribunal found that the disallowance should be limited to the dividend-yielding investments only, which amounted to Rs. 4.72 lakh, resulting in a reduced disallowance of Rs. 3,131/-. Consequently, the addition of Rs. 25,000/- was deleted, and the disallowance was restricted to Rs. 3,131/-.

3. Education Cess as an Allowable Expenditure:
The third issue was whether the Ld. CIT(A) erred in holding that the Education Cess paid on Income Tax is an allowable expenditure under the head "Business & Profession." This issue was not pressed by any of the parties during the hearing.

4. Procedural Delay in Filing the Appeal:
The appeal was filed with a delay of two days. The assessee provided reasons for the delay, which were accepted by the bench, and the delay was condoned.

Conclusion:
The tribunal dismissed the revenue's appeal on the grounds related to the deduction under Section 80IA and the addition under Section 14A, while partly allowing the appeal to the extent of restricting the disallowance under Section 14A. The appeal for the subsequent assessment year 2014-15 was dismissed, following the same reasoning as for the assessment year 2013-14.

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