TaxTMI 
TaxTMI 
2021 (11) TMI 1
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....assessment order without following the mandatory procedure prescribed in section 144C of the Income Tax Act, 1961 and in that view of the matter the impugned assessment order passed u/s 143(3) r.w.s. 144C dated 30.03.2021 be declared void ab initio. 2. For that on the facts and in the circumstances of the case and in law, the final assessment order passed by the Ld. AO being barred by limitation ought to be held as void-ab-initio and consequently the entire assessment be quashed. 3. At the time of hearing, the Ld. AR appearing on behalf of the assessee did not press these grounds and therefore the same stands dismissed. 4. Ground Nos. 3 to 7 of the appeal relate to the claim of deduction u/s 80IA of the Act, which read as under: 3. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the lower authorities grossly erred in making an adjustment of Rs. 13,71,40,567/- in respect of the transfer value of power by the captive power plant at Saharanpur. 4. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the lower authoritie....
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.... unit' engaged in the business of generation of power under Section 80-IA(4)(iv) of the Act. The assessee accordingly prepared stand-alone accounts of said eligible unit in terms of Section 80-IA(5)/(7) of the Act. Further, as the power generated by the assessee was captively consumed by the paper manufacturing unit, such transfer of power qualified as a reportable specified domestic transaction in terms of Section 80-IA(8) read with Section 92BA of the Act. The transfer pricing auditor duly reported this intra-unit transfer in Form 3CEB filed for AY 2016-17 and the said specified domestic transaction was benchmarked following the Comparable Uncontrolled Price Method [hereinafter referred to as CUP]. Perusal of the Transfer Pricing Study Report placed at Pages 31 to 67 of the paper-book, reveals that the non-eligible unit was taken as the 'tested party' as it was procuring power both from CPP as well as Paschimancla Vidyut Vitran Nigam Ltd i.e, State Electricity Board [hereinafter referred to as 'SEB']. The transfer price of power supplied by the CPP to the paper manufacturing unit was accordingly benchmarked at the annual average of the landed cost at which power was being purchas....
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....m's length sale value of the eligible unit was computed at Rs. 10,91,95,086/- [Rs. 3.73 per unit X 2,93,03,540 units] as opposed to Rs. 24,63,35,653/- [Rs. 8.41 per unit X 2,93,03,540 units] reported in Form 3CEB, resulting in downward adjustment of Rs. 13,71,40,567/-. 7. Pursuant to the above transfer pricing order dated 25.10.2019 passed u/s 92CA (3) of the Act, the AO issued draft assessment order u/s 144C of the Act dated 30.11.2019. Aggrieved by the said draft order, the assessee preferred an appeal before the Ld. DRP which dismissed by their order dated 27.02.2020. Being aggrieved by the same, the assessee is now in appeal before us. 8. In the course of hearing, the Ld. AR Shri Akkal Dudhewala FCA, appearing on behalf of the assessee contended that the lower authorities failed to appreciate that the eligible unit i.e. CPP did not supply power to any unrelated parties other than the non-eligible unit i.e. the paper manufacturing unit. On the other hand, the paper manufacturing unit was procuring power from both the CPP as well as unrelated third party i.e. the SEB. He therefore submitted that there was reliable internal CUP data available with the assessee to benchmark t....
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...., then the CPP ought to be taken as tested party since it was less complex that the paper manufacturing unit. 10. In his rejoinder, the Ld. AR of the assessee argued that, the assessee has not disputed that the impugned transaction which is covered u/s 80I-A(8) of the Act, is not subject to provisions of Chapter X of the Act or that it is not to be subjected to arm's length principles. He took us through the Form 3CEB wherein the assessee had determined the ALP of the power supplied by the CPP, by using the CUP Method. He also referred to the Transfer Pricing Study Report to show that even the auditor had performed the FAR Analysis & the Economic Analysis and thereafter determined the arm's length price of power transferred by the eligible unit to non-eligible unit in terms of Rule 10B of the Income-tax Rules, 1962. He further contended that the purported difference being carved out by the Revenue between the concept of 'open market value' and 'arm's length price' was without any basis. He invited our attention to the Guidance Note issued by the IRS of United States of America relied upon by the Ld. CIT, DR which stated that, ordinarily the fair market valuation standards produc....
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....e question for our consideration is what should be the most appropriate data and the price to be adopted for applying CUP Method. 12. Before we proceed further, it is worthwhile to quote here the relevant provisions of Rule 10B of Income Tax Rules 1962 [herein after referred to as the Rules]. Clause (a) of sub-rule (1) of Rule 10B defines CUP Method as follows: "Rule 10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) comparable uncontrolled price method, by which,-- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in....
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....o timing differences as well. In the circumstances, the transaction involving purchase of power by the non-eligible unit from the SEB, is found to fulfill the internal CUP parameters and thus the landed cost paid by the paper manufacturing unit to the SEB is held to represent internal comparable arm's length rate. We accordingly find sufficient merit in the benchmarking analysis undertaken by the assessee applying internal CUP Method. 15. Before us the Ld. TP CIT, DR had argued that, the choice of 'tested party' is irrelevant for the purposes of application of CUP Method. We agree that the key factor in application of CUP is 'product comparability' and choice of 'tested party' is of lesser significance. In the present case, we note that reliable comparable data is available for the same product purchased by non-eligible unit from eligible unit. Hence, as the significant criteria i.e. product comparability is found to be met, we do not see any infirmity in the manner in the assessee's application of CUP Method to ascertain the transfer price of power u/s 80-IA(8) of the Act. 16. In this regard, the Ld. CIT, DR had relied on some of the observations made by the Mumbai Bench of ....
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.... the facts involved in the assessee's case. One has to bear in mind that the ratio of any decision is rendered in the context of the facts which are before the Court. It is settled legal proposition that the observations of the any Court must be read in the context of the facts and the issues before the Court for consideration. The Hon'ble Supreme Court in the case of CIT Vs Sun Engineering Works (P) Ltd (198 ITR 297) has observed as follows: "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Court and not pick out words or sentences from the judgment, divorced from the context of th....
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...., which is evident from the tariff order itself. The fact that the rates at which SEB supplies power is regulated is of no consequence, as it is not a case that this rate has been fixed exclusively by the SEB for the assessee. Instead the SEB supplies power at the same tariff rate to all industrial consumers (similar to the assessee) in the same State, which thus represents the prevailing market rate. 20. As noted earlier, the application of CUP method requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the transactions take place. One should examine the market conditions in which the electricity is being sold. The tariff order relied upon by the TPO operates in an altogether different market, which is the Business to Business (commonly known as B2B) Model. This tariff rate is the rate at which electricity is purchased by distribution companies from generation companies. The conditions of this market are different and distinct from the consumer market. As noted earlier, no consumer of electricity can procure power in the market at the rate at which generation companies sell to distribution comp....
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.... missing in the CPP. It also observed that sale of electricity is regulated activity, thus, as per the law, CPP could have sold to a distribution licensee (through transmission utility). The benchmarking of sale of CPP at the rate at which non-eligible units brought electricity from the grid is thus incorrect. The ld.DRP under this misconception construed that the rate at which electricity supply-companies are purchasing the electricity should be applied for benchmarking the value of electricity sold by the CPP to its manufacturing units. In other words, the DRP was of the view that non-eligible units cannot be taken for the benchmarking for determining the value at which electricity was sold by the CPP. DRP has emphasized that manufacturing units could have different source of procurement of electricity; say - from CPP or from electricity boards. But as electricity producer, in a CPP, it could only be sold to distribution licensee holder. In this way, the ld.DRP observed that value of electricity cannot be benchmarked by adopting the rate at which manufacturing units of the assessee has been purchasing the electricity, rather, according to the DRP, the rate at which supplier compa....
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....s consumers at the same rate. This, therefore, was a market value of the electricity supplied by the CPP Unit to the general unit. The fact that this amount of Rs. 5.40 ps. comprises of a component of 8 paise, which was electricity duty, to our mind, would make no difference in so far as the market value is concerned. To a consumer, the price being paid remains 5.40 ps. per unit. The fact that the seller retains only Rs. 5.32 ps. out of the said collection and passes on 8 paise per unit to the Government in the form of electricity duty, to our mind, would make no difference. This question is, therefore, not required to be considered." 4. This was followed in case of CIT v. Shah Alloys Ltd. in Tax Appeal No. 2093/2010. This was reiterated in Tax Appeal No.1646/2010 in case of ACIT v. Pragati Glass Works (P.) Ltd. (order dated 30.1.2012), in which following observations were made : "7. To our mind, Tribunal has committed no error. Assessing Officer and CIT (Appeals) while adopting Rs. 4.51 per unit as the value of electricity generated by eligible unit of assessee and supplied through its non eligible unit only worked out cost of such electricity generation. In fact....
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....ssue. Hon'ble Court has considered section 80IA(8), therefore, it is not justifiable at the end of ld.DRP to ignore the judgment of Hon'ble jurisdictional High Court. 33. Respectfully following the authoritative pronouncements of the Hon'ble jurisdictional High Court, we allow these grounds of appeal. We direct the AO to grant deduction under section 80IA(4) on the value of electricity supplied by the CPP to its manufacturing units by adopting the average rate of electricity supplied to the assessee by MGVCL, DGVCL. 22. Useful reference in this regard may also be made to the decision of this Tribunal in the case of DCIT Vs Balrampur Chini Mills Ltd in ITA No. 1672/Kol/2019 for AY 2016-17 involving similar facts and circumstances as involved in the present case. In the decided case as well, identical benchmarking analysis was performed by the assessee to determine the ALP of power transferred by the CPP to the manufacturing unit for the purposes of Section 80-IA(8) of the Act. This benchmarking exercise was rejected by the TPO, who substituted it with the rate notified for sale of power by the power generating companies to distribution companies, in the tarif....
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....nt years, the Revenue had relied on the judgment of Calcutta High Court in the case of CIT Vs ITC Ltd. (supra) to contend that the deduction was required to be allowed taking into account the price at which distribution companies were purchasing electricity. After taking into account the provisions of the Electricity Act of 2003, and the regulatory provisions applicable in the State of West Bengal, the coordinate Bench accepted the assessee's contention that in view of the provisions of Electricity Act of 2003, which were applicable in the concerned AY 2011-12, the decision of Calcutta High Court in the case of CIT Vs ITC Ltd. (supra) was not applicable. .... 8.13. 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 o....
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....f power to a consumer in the open market and it should not be compared with the rate of power when it is sold to a supplier as this is not the rate for which a consumer or the Steel-Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market. 32. In our opinion, the AO committed an illegality in computing the market value by taking into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer. 33. It is admitted by the Department that in Chhattisgarh the power was supplied to the industrial consumers at the rate of Rs. 3.20/- per unit for the AY 2004-05 and Rs. 3.75/- per unit for the AYs 2005-06 and 2006-07. It was this rate that was to be considered while computing the market value of the power. 34. The CIT-A and the Tribunal had rightly computed the market value of the power after considering it with the rate of power available in the open market namely the price charged by the Board. There is no illegality in their orders. 35. In view of above, the question is decided against the Department and ....
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....e Infrastructure Ltd. (supra) was carried in appeal by the revenue before the High Court in Income Tax Appeal No.2180 of 2011, such appeal was dismissed making following observations:- "6. As far as question (d), namely, the claim relating to purchase price from Tata Power Company is concerned and that was for the deduction under Section 80IA, the ITAT in paragraph 21 onwards has noted the factual findings and also referred to the order of the Maharashtra Electricity Regulatory Authority (for short "MERC"). Paragraph 36 set outs as to how the claim arose. The claim has been considered in the light of Section 80IA and particularly proviso and explanation thereto. The Tribunal eventually held that till the Assessment Year 2005-2006, the Revenue considered the rate at which the power was purchased by the Assessee from Tata Power Company as market value. There is nothing brought on record as to how the rate determined by the MERC is the true market value. The Assessee gave explanation that the rates determined by the MERC do not reflect the correct market rate. The finding is that the mode of computation and deduction under Section 80IA requires no deviation from the past. The....
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....n Chapter X of the Act and therefore the ratio laid down in the above decisions (supra) indeed applies in the present case as well. 25. As far as the Revenue's reliance on the judgment of the Hon'ble Calcutta High Court in the case of ITC Ltd (supra) is concerned, we note that it is distinguishable on facts as well as in law and is thus not applicable to the assessee's case. In the decided case, the relevant year in question was Financial Year 2001-02 i.e. prior to the introduction of Electricity Act, 2003. Until then, the electricity generating companies could only sell or supply power to the State Power Utility or company engaged both in generation & distribution and that too at the tariffs rates prescribed by the Regulatory Commission. Therefore, in absence of any alternate rates, the High Court held that the price at which electricity generating company sold power to SEBs was the only available open market rate. However subsequent to the enactment of Electricity Act, 2003, the functioning of the power sector was liberalized as the business became de-regulated and it was legally permissible for the private CPPs to supply power to other consumers and the prices could be determ....
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....acturing undertaking which was the captive consumer of the CPP. We note that the A.O. proceeded on the premise that the CPP owned by the assessee was not allowed to sell its power to the final consumer but was allowed to sell the same only to grid of the SEB in case of excess production. Save and except such monopoly buyer, the CPP was not permitted to sell power to anyone else. According to the A.O., therefore, the market value which the assessee was likely to fetch by sale of excess power to monopoly buyer like SEB represented the market value. In the AO's opinion the rates at which the SEBs were selling power to the consumers were much higher than the price at which the power was purchased from the CPPs because in addition to profit margin of the SEB, such price also included the costs towards distribution, storage, transmission losses etc. 22. We note that the sole basis for AO's inference against the assessee was his belief that the CPP or independent power producer was not allowed to sell power to any person other than the SEBs or power distribution companies. According to the A.O., there was monopoly buyer who alone was permitted to purchase the power at the....
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.... 2003. The tariff policy issued by Government of India on 06.01.2006 also provided that the sole purpose of freely allowing captive generation was to enable industries to access reliable quality and cost effective power. As per the recommendation made, the SERCs were required to encourage the distribution licensees to procure power from CPPs through competitive bidding on a composite tariff basis. From a conjoint reading of the provisions of the Electricity Act 2003, KERCs 'open access' Regulation notified in 2004 and the order of the KERC dated 27.02.2007, it therefore, appears that there was no statutory bar on the CPPs to sell electricity to any third party and that too at the rate mutually agreed by and between the parties. We, therefore, find that the very foundation on which the A.O. held that the assessee had no option but to sell electricity to SEB alone was factually wrong and misplaced and therefore, legally untenable in the changed factual scenario as discussed above. 23. The learned AR drew our attention to the chart published by the Indian Energy Exchange (IEX) for the yearly power price prevailing on the IEX in different regions during the year2008-09....
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....neration and distribution and that the rate at which electricity could be sold by the captive power plant was the one fixed by the tariff regulatory commission. However, such position has undergone sea change inasmuch as during the relevant previous years it was open to the assessee to sell even to a consumer and the price for sale to a distribution company or to a consumer that could be mutually agreed upon notwithstanding the tariff fixed by the State Regulatory Commission. We find that during the previous year relevant to the Asst Year 2009-10, the assessee infact sold electricity at rates higher than that charged from it by the State Electricity Board. The assessee nevertheless made the computation for the purpose of section 80IA of the Act with reference to the price charged from it by the State Electricity Board. In such circumstances, we hold that, when it was permissible for the assessee to sell electricity to consumers and distribution licensees at rates higher than that paid by it to the State Electricity Board, the price charged by the State Electricity Board would be a very good indication of the market value of electricity and the assessee did not commit any error in a....
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.... is correctly given Amount Amount Amount Amount Amount Amount Income declared under the head Business 20,68,32,123 20,68,32,123 20,68,32,123 Add: Additions - Club Expenses - Downward Adjustment to ALP of power - 8,65,913 13,71,40,567 13,80,06,480 8,65,913 ______- 8,65,913 Business Income 20,68,32,123 34,48,38,603 20,78,89,350 Less: Brought forward loss (set off to the extent of income) 20,68,32,123 34,48,38,603 20,78,89,350 Gross Total Income NIL NIL NIL B. Deduction under Chapter VI - Deduction u/s 80-IA Less: TP adjustment Eligible Deduction after TP Adjustment (Restricted to the extent of GTI) 19,03,49,419 - __________ 19,03,49,419 NIL - - 19,03,49,419 13,71,40,567 5,32,08,852 NIL Assessed Income NIL NIL NIL 29. The Ld. DRP however did not agree with the above contention of the assessee and held that the transfer pricing adjustment made by ....
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....rned income, by making adjustment which is in excess of the deduction claimed under Chapter VI-A i.e. Section 80-IA of the Act. Such action is held to be unwarranted. 33. For the reasons set out above, Ground Nos. 1 to 7 of the appeal stands allowed. 34. Ground No. 8 of the appeal is as follows: 8. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the AO grossly erred on facts and in law in disallowing club expenses of Rs. 8,65,913/- even though the appellant had substantiated such expenditure. 35. Briefly stated, the AO noted that the tax auditor had reported sum of Rs. 8,65,913/-in the tax audit report being expenses incurred at clubs & associations. According to the AO, such expenses incurred by the company were personal in nature and he therefore disallowed it u/s 37(1) of the Act. On appeal, the Ld. DRP held that the club expenses were in the nature of pure business expense allowable u/s 37 of the Act. It further held that the membership fees of trade associations were also for business purposes. It however directed the AO to verify whether the membership was in the nature of company or the i....
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....also stands allowed. 40. Ground Nos. 9& 10 of the appeal are as follows: 9. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, although the AO ultimately held that that the entry tax of Rs. 62,90,188/- was actually paid to the UP State Government during the relevant year and was therefore allowable u/s 43B of the Act, but he failed to allow the deduction thereof while computing the final assessable income for the relevant AY 2016-17. 10. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the AO be directed to allow deduction for entry tax of Rs. 62,90,188/- paid during the year and accordingly re-compute the total income for the relevant year. 41. It is noted that, before the Ld. DRP, the assessee had raised an additional claim for deduction of entry tax paid under protest during the relevant year u/s 43B of the Act, which had not been claimed in the return of income. Upon examining the details furnished by the assessee and having regard to the provisions of Section 43B of the Act, the Ld. DRP admitted this new claim and direc....
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.... amounting to Rs. 33,80,641/- during the relevant year, which remained unpaid upto the return filing due date. The tax auditor reported the aforesaid amount to be disallowable u/s 43B of the Act. Accordingly the assessee had added back the same in the return of income filed for AY 2016-17. Before this Tribunal, the assessee has for the first time claimed that such mandi fees payable by it, was not in the nature of statutory liability by way of tax, duty or cess. Relying on the judgment of the Hon'ble Apex Court in the case of CIT Vs Mcdowell Co Ltd (180 Taxman 514), the assessee contended that such fees did not fall within the ambit of Section 43B of the Act and thus the same was required to be allowed on mercantile basis during the relevant year. Per contra, the Ld. CIT, DR appearing on behalf of the Revenue opposed the admission of this fresh claim by relying on the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT (284 ITR 323). He further submitted that the judgment relied upon by the assessee was not applicable in as much as there has been a change in law and the provisions of Section 43B(1)(a) had been amended from 01.04.1989 to include 'fees' w....