2025 (1) TMI 1533 - AT - Income Tax

Electricity supply transfer pricing adjustments deleted under section 92CA(3) due to regulated pricing and SERC approval requirements

M/s. Mangalam Cement Limited Versus DCIT, Central, Circle-2, Kota

ITAT Jaipur allowed the assessee's appeal on all three grounds. The tribunal deleted transfer pricing adjustments under section 92CA(3) for electricity ... Adjustment u/s 92CA(3) on account of deduction u/s 80-IA - HELD THAT:- As the Appellant has neither claimed deduction under section 80-IA due to losses or AO made any addition wiping off the losses and assessing the income, addition made on account of transfer pricing adjustment on account of supply of electricity was deleted by the coordinate bench. As there is no order by any higher appellate authority, i.e. the Hon’ble High Court or Supreme Court in favour of the Revenue and also the Revenue is not able to make out the case, distinguishing the earlier ratio laid down by the coordinate bench, we are in agreement with the order of the coordinate bench and respectfully following the same, Ground No. 1 raised by the assessee is allowed. Adjustment proposed by TPO u/s. 92CA (3) - Determination of price of electricity is a regulated activity and therefore the price at which power is supplied by generation company to transmission or distribution company cannot be said to be under ‘uncontrolled condition’ to be considered for benchmarking purpose - Evaluating this in light of the meaning of arm’s length price i.e. a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions, it is evident that the transaction of purchase of electricity by State Electricity Boards from independent power producers is a regulated activity, being subject to approval of SERC, and therefore is not a transaction undertaken in uncontrolled conditions. Thus, the transaction between power producers and state electricity board is not fit to be considered comparable to the tested transaction of sale of electricity by eligible unit to non-eligible unit. Thus, the average rate of Rs 4.57 per unit, being the price for transfer of electricity by power producers to third party customers cannot be treated as arm’s length price as it is a price under controlled conditions. We are of the considered opinion that the transfer price of electricity considered by the Appellant is ALP and therefore the additions proposed by the TPO and further confirmed by the Ld. DRP not sustainable in law. Hence directed to be deleted, in the result Ground No. 2 raised by the assessee is allowed. Not considering the modified return of income filed u/s 119(2) (b) pursuant to receipt of approval from the assessing officer inspite of its cognizance in the final assessment order and therefore has incorrectly computed the total taxable income, tax liability, MAT credit and carried forward losses - FAO failed to consider the modified ROI and computed the total income as per the original ROI filed on 12 February 2021 considering income under the head PGBP at Rs. 70,41,06,729/- as against Rs. 47,94,60,093/- reported in the modified ROI under the normal provisions of the Act. Similarly, income under section 115JB of the Act was considered at Rs. 109, 85, 36,739/- basis the original ROI dated 12 February 2021 as against Rs. 82, 22, 48,000/- reported in the modified ROI. It is also placed on record that the appellant has filed a rectification application with the jurisdictional assessing officer (PB 55-56) requesting the jurisdictional assessing officer to rectify the mistake apparent from record. We have taken note of the above activities and submissions of the assessee and found the same to be correct. In the light of above facts and documents placed before us, we direct the JAO to dispose the application of the assessee filed u/s. 154 of the Act as per law considering the facts discussed by this bench. In view of the above, Ground No. 3 raised by the assessee is allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the adjustment of Rs. 46,16,39,395/- under section 92CA(3) of the Income Tax Act, 1961, on account of deduction under section 80-IA, was justified given that the assessee did not claim any deduction due to set-off of brought forward losses.Whether the computation of Arm's Length Price (ALP) for power transferred by the captive power plant (CPP) to the cement plant and by the wind power plant (WPP) to Jaipur Vidyut Vitran Nigam Ltd. (JVVNL) was correct.Whether the modified return of income filed under section 119(2)(b) was correctly considered in the computation of total taxable income, tax liability, MAT credit, and carried forward losses.ISSUE-WISE DETAILED ANALYSIS1. Adjustment under Section 92CA(3) and Deduction under Section 80-IARelevant legal framework and precedents: The adjustment pertains to the computation of deduction under section 80-IA, which allows for deductions on profits derived from certain industrial undertakings. The Tribunal referred to its own decision in the assessee's case for A.Y. 2018-19, where it had held that adjustments could only be made if the assessee had claimed a deduction or if the addition resulted in positive income eligible for deduction.Court's interpretation and reasoning: The Tribunal noted that since the assessee did not claim any deduction under section 80-IA due to losses, and no addition was made that would result in positive income, the adjustment was not justified.Conclusions: The Tribunal allowed the ground of appeal, agreeing with the assessee that the adjustment was unwarranted.2. Computation of Arm's Length Price (ALP)Relevant legal framework and precedents: The determination of ALP is guided by section 92F(ii) of the Act, which defines it as a price applied in transactions between unrelated parties in uncontrolled conditions. The Supreme Court's decision in CIT vs. Jindal Steel & Power Limited was pivotal, establishing that the market value of power supplied by State Electricity Boards to consumers should be considered the ALP.Court's interpretation and reasoning: The Tribunal concluded that the rates at which JVVNL supplied electricity to the assessee should be considered the market value, as these transactions reflected uncontrolled conditions. The Tribunal rejected the TPO's lower ALP determination, which was based on controlled conditions between power producers and the state electricity board.Conclusions: The Tribunal found the ALP determined by the assessee to be appropriate and directed the deletion of the additions proposed by the TPO.3. Consideration of Modified Return of IncomeRelevant legal framework and precedents: Section 119(2)(b) allows for the filing of a modified return of income following approval from the assessing officer. The Tribunal examined whether the modified return was duly considered in the final assessment.Court's interpretation and reasoning: The Tribunal observed that despite the assessing officer acknowledging the modified return, it was not considered in the final assessment, leading to incorrect computation of income and tax liability.Conclusions: The Tribunal directed the jurisdictional assessing officer to rectify the error and consider the modified return, allowing the ground for statistical purposes.SIGNIFICANT HOLDINGSThe Tribunal reiterated the principle that adjustments under section 92CA(3) are unwarranted if no deduction under section 80-IA is claimed due to losses.It affirmed that the market value of electricity supplied by State Electricity Boards to consumers should be considered the ALP, aligning with the Supreme Court's decision in CIT vs. Jindal Steel & Power Limited.The Tribunal emphasized the importance of considering a modified return of income in the final assessment, directing rectification of errors in computation.Final determinations on each issue:The Tribunal allowed the appeal concerning the adjustment under section 92CA(3), finding it unjustified.The appeal regarding the computation of ALP was allowed, with the Tribunal directing the deletion of the TPO's proposed additions.The appeal concerning the consideration of the modified return of income was allowed for statistical purposes, with directions for rectification.