Transfer pricing and section 80-IA: fixed loan interest benchmark accepted, captive power pricing adjusted, deduction computation restricted.

ITAT Mumbai considered transfer pricing and section 80-IA computation issues. On intra-group loan interest, it accepted a fixed 6.5% benchmark with credit for interest already offered, treating a LIBOR-based floating rate as unsuitable on the facts. On section 80-IA, it held that losses of other eligible units had to be set off against the profits of the profitable unit for deduction computation, so the assessee's unit-wise claim failed. On captive power sales to associated enterprises, it accepted the distribution company's selling rate as a valid comparable for arm's length price, deleting the transfer pricing adjustment.

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Issues: (i) whether the arm's length interest on the loan advanced to the associated enterprise was to be benchmarked at a fixed rate of 6.5% with credit for interest already offered; (ii) whether deduction under section 80-IA could be curtailed by setting off losses of other eligible units against profits of the profitable unit; and (iii) whether the arm's length price of captive power supplied to associated enterprises had to be determined with reference to the selling rate of the distribution company.

Issue (i): whether the arm's length interest on the loan advanced to the associated enterprise was to be benchmarked at a fixed rate of 6.5% with credit for interest already offered

Analysis: The transaction involved a long-standing intra-group loan where the contractual terms were repeatedly amended and interest had remained unpaid for a prolonged period. The Tribunal followed its earlier orders in the assessee's own case and applied the safe harbour framework as a guiding benchmark, holding that a floating LIBOR-based rate was not workable on the facts. The fixed rate of 6.5% was treated as a reasonable approximation of arm's length interest, with credit to be given for interest already offered in return of income.

Conclusion: The issue was decided in favour of the assessee and the Revenue's adjustment on this count was set aside.

Issue (ii): whether deduction under section 80-IA could be curtailed by setting off losses of other eligible units against profits of the profitable unit

Analysis: The Tribunal noted that the assessee's claim was to compute deduction on a unit-wise basis, whereas the Revenue required losses from other eligible units to be adjusted against the profits of the eligible unit before allowing deduction. Relying on its earlier decision in the assessee's own case and the interpretation of section 80-IA(5), the Tribunal held that the eligible business had to be computed by treating it as the only source of income for the purpose of determining the quantum of deduction, and the contrary plea could not be accepted on the facts of the case.

Conclusion: The issue was decided against the assessee and the disallowance of deduction under section 80-IA was upheld.

Issue (iii): whether the arm's length price of captive power supplied to associated enterprises had to be determined with reference to the selling rate of the distribution company

Analysis: The additional ground concerned sale of power to associated enterprises for captive consumption under long-term power purchase arrangements, where the assessee benchmarked the price using the tariff mechanism under the CERC regulations and alternatively by reference to the rate charged by the State electricity board. The Tribunal held that the issue was covered by its own earlier orders and by the Third Member view, under which the selling rate of the distribution company could be taken as the valid comparable for determining the arm's length price of power supplied by the captive power plant.

Conclusion: The issue was decided in favour of the assessee and the transfer pricing adjustment on captive power sales was deleted.

Final Conclusion: The appeal succeeded on the transfer pricing interest issue and the power-sale pricing issue, but failed on the section 80-IA deduction issue, resulting in a partly favourable outcome for the assessee.

Ratio Decidendi: Where the material facts remain unchanged, earlier appellate findings on transfer pricing can be followed for subsequent years; however, for section 80-IA the eligible business is to be computed as the only source of income for determining the deduction, and captive power pricing may be benchmarked by the distribution company's selling rate where that represents the appropriate market value.

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