Section 92BA applies regardless of whether assessee claims section 80IA deduction for transfer pricing analysis

ITAT Hyderabad held that section 92BA applies even when the assessee has not claimed deduction under section 80IA. The tribunal ruled that eligibility for section 80IA deduction does not depend on actually claiming it, as the assessee can exercise this option for any 10 consecutive years out of 15. For transfer pricing, the tribunal upheld using internal comparables (electricity supply to 14 consumers at average Rs. 2.97/unit) over state utility tariff (Rs. 7.85/unit) for benchmarking related party transactions, as the assessee operates as a power generator requiring comparison with similar entities rather than distribution companies.

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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.

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