TaxTMI 
TaxTMI 
2022 (2) TMI 1285
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....Power Unit The Ld. AO/TPO erred on facts and in law in determining the arm's length price ("ALP") of the Assessee's Specified Domestic transactions pertaining to transfer of power units from eligible to non-eligible units at Rs. 5.2145/ unit as against Rs. 6.72/ unit and in doing so have grossly 2.1 erred in making addition of Rs. 6,95,84,383 on account of transfer of power units by taking power unit rate of Rs. 5.2145 (average of Rs. 6.93/ unit, tariff fixed by Punjab State Electricity Regulatory Commission for Biomass Gasifier Power Plants and Rs. 3.499/ unit, the average rate of power traded at Indian Energy Exchange), despite that fact that the assessee had Biomass Steam based Power plants and also the assessee could not have sold power units on Indian Energy Exchange due to statutory or regulatory restrictions and there was no evidence of actual delivery/supply of power traded at energy exchange by husk based power plant companies based in Punjab or anywhere in India. 2.2 erred in ignoring provisions of Income Tax Act and various ITAT/ High Court judgments regarding "Market Value" in relation to any goods or services being sold or supplied, which states that e....
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....city and power steam for heating, cooling, controlling the humidity and chemical reactions. The assessee had set up two electricity power plant of 6 MW each in Dera Bassi (Punjab) for fulfilling its captive needs. The said plants generating both electricity and steam aiding in the manufacturing process. The electricity produced by the said power plants was partly consumed for running the said plants and the remaining was distributed for carrying out the operation of the assessee company, i.e; manufacture of pharmaceutical products. A part of the steam generated during the process was also distributed for captive consumption as it acts as an inseparable part of the manufacturing process. The assesse worked out the rate per unit of electricity generated at Rs. 6.72 per unit on the basis of CUP (Comparable Uncontrolled Price Method) in the following manner : Details of Electricity units generated and distributed to Manufacturing process Month Total Generation of Electricity Units Auxiliary Consumption Units transferred to Manufacturing Processes Rate/Unit Revenue Apr-14 3,900,800 932,400 2,968,400 6.72 19,947,648 May-14 3,901,000 981,900 2,919,100 6.72 19,616,352 J....
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....f repetition the same is not reproduced herein. The TPO proposed the adjustment of Rs. 7,00,49,674/- by observing in para 7.12 to 7.22 of his order as under: 7.12 The assessee has submitted that they have computed the sale of power at the rates at which the Punjab State Electricity Board is supplying electricity to them/ others. The contention of assessee is not acceptable, there are prescribed methods under transfer pricing guidelines which has to be followed while benchmarking any of the transaction. The methods prescribed under the Income-tax Act, 1961 are as unden- 1. Comparable Uncontrolled Price Method 2. Transactional Net Margin Method 3. Resale Price Method 4. Cost Plus Method 5. Profit Split Method and 6. Any Other Method prescribed by the Board. 7.13 The assessee has submitted that they have applied CUP method for benchmarking the transaction. Now the issue arises is that whether the assessee has applied correct CUP or not. On verification of the facts it is found that the assessee has applied wrong CUP. The assessee has applied CUP taking base rates for purchase of power. The correct CUP in this case is taking rates for sale of power. It may be men....
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....wer to other independent party. Since the assessee has not sold power to any third party therefore, the sale rate caanot be arrived at. However, a notice u/s 133(6) was issued to Indian Energy Exchange, which is the largest exchange to trade power to ascertain average price of power traded at that exchange. In response to this the IEX has submitted day to day average rate is Rs.3.499 per unit. It can be seen that average rate of power traded at IEX during F.Y.-2014-15 was Rs.3.499 per unit. It may be mentioned that trading rates at registered Exchanges can be taken as basis to draw comparability. Therefore, these rates are taken as basis for taking comparable rates. The assessee has shown sale rate at Rs.6.72 per unit by applying wrong CUP. Therefore, proper CUP is applied and rate of sale of power is taken at Rs. 3.499. 7.18 Therefore, it is seen that the units which are not used for captive consumption are calculating their profit at actual rate i.e. purchase rate of different parties but where the power is used captively the sale rate is taken as sale rate of SEBs. Thus the assessee itself is applying two methods for calculating profits of its different units. 7.19 Asse....
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....5.2145 Per unit Difference between value shown by assessee and ALP Units consumed Notional value shown by assessee (in Rs.) Rate per unit (Notional) (in Rs.) Power plant 46529176 31,26,76,063 6.72 24,26,26,388 7,00,49,674 On the basis of above discussion, an adjustment of Rs. 7,00,49,674/- is hereby made to the purchase price of power by the non-eligible units front captive power plants. 5.2 During the year under consideration the assessee's power plant generated and transferred steam to generate electricity units and to manufacturing processes of various pharmaceutical and phyto-chemical products. The assessee submitted before the T.P.O as under: Month Total Steam Generated (MT) Steam used for Generation of Electricity Units (MT) Steam transferred to Manufacturing Processes (MT) Rate/MT Revenue Apr-14 38,366 12.404 25,962 2,160 56,077,920 May-14 38,377 12,410 25,967 2,160 56,088,720 Jun-14 46,502 14,444 32,058 2,160 69,245,280 Jul-14 41,185 12,235 28,950 2,160 62,532,000 Aug-14 44,018 13,752 30,266 2,160 65,374,560 Sep-14 42,793 13,371 29,422 2,160 63,551,520 Oct-14 39,511 9,698 29,813 2,160 64,396,080 Nov-14 ....
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....steam constitutes more than 76% of the total and sale of electricity is only 24% of the total. Since the primary activity of the power plant is captive generation of electricity, this is a scenario in which the residual by-product is being priced 3.2 times the cost of the main activity. Thus all in all, the assessee is claiming that residual heat from steam is more valuable to the assessee than the main function - i.e. electricity. 9.3 Considering the fact that the assessee is running a biomass based power plants which typically have a cost of Rs 3.5 - 4 per KwH of electricity (as per Ministry of New and Renewable Energy) and the steam turbines in these plants have an overall efficiency of around 80-90% - it is not possible for the value of steam to be 3.2 times that of electricity and for the profit margins of the plant to be 54,9%. 9.4 Further, as per the MNRE website FAQ's, it is mentioned that "The economic viability for the capacity below 6 MW is not sustainable." In the assessee's case the size of the power plant is 6MW, it is impossible that a size of plant just on the threshold of economic viability, in the initial years of its operation would have a return of 5....
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....losses and the heat utilized in Power generation has been subtracted. The remaining amount has simply been attributed as the heat transferred to the production process. This approach is not acceptable. Further losses after extraction of steam from the turbine to the point where it is actually a part of the production process has not been taken into account. Thus it is not possible to accurately determine the number of units of steam transferred to the production process. 9.10 Notwithstanding the above, the assessee has estimated the price per unit of steam on the basis of the price required to produce the same amount of calorific value. This formula will only work when the exact temperature and weight of steam transferred could be ascertained by the assessee. As has been established previously, the methodology used by the assessee is inadequate to quantify the same. 9.11 Since the data that the assessee has supplied cannot be relied upon, further it is seen that the entire costs of the power plant are being attributed to the primary activity i.e. generation of electricity. In this regard no definite cost of production can be attributed to the generation of steam. It is also p....
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....ilized part is only used for other purpose, as such entire cost is for power generation and being bye-product steam do not have any cost. 9.16 It may be mentioned that no where in the TP report the assessee has given CUP details of steam. Even during the TP audit the assessee submitted detail of steam pricing, but it was for power generation and not for entire steam. Therefore, the MAM applied by the assessee is rejected and Cost Plus Method is applied to benchmark the transaction. The assessee has submitted steam cost certificate and cost of steam segmental in its financial statements. The certificate issued by cost engineer on the basis of data provided by management only assumptions basis. However, on functional analysis of activity regarding production of steam it was found that the steam was produced as a result of burning of fuel in boiler. This steam is used for generation of electricity. Thus the cost of electricity absorbs entire cost of production of steam. Thus the resultant cost of excess steam is NIL. 9.17 It may be mentioned that steam is only a bye-product of the process of manufacturing power and It bears no cost. In case it was not utilized the same would have ....
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....e for industrial connection, filed at pages-174 to 197 of the paper book, is @ Rs. 7.15 per unit and therefore the assessee, for cost saving, setup power plants for producing power from bio-mass fuel and the assessee said power to its non-eligible units @ the rate Rs. 6.72 per unit. No doubt, assessee did save cost in this manner, if compared to the rate of PSERC, but with substantial cost of investment and in view of the fact that the assessee is claiming deduction u/s 80IA of the Act in respect of the profits for the units producing power, the cost of transfer of power to other non-eligible unit is liable to be benchmarked within the meaning of sub-section (8) of s. 80IA and s. 92F of the Act. Under the facts and circumstances of the case, application of external CUP, as done by the TPO, was the only method which could be considered for determining the ALP of the power transferred to non-eligible units. The TPO has observed that the units which are not used for captive consumption are calculating their profit at actual rate, i.e. purchase rate of different parties, but where the power is used captively the sale rate is taken as sale rate of SEBs, and that Punjab State Power Corpo....
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....ar facts was a subject matter of the assessee's appeal in ITA No. 567/Del/2019 for the A.Y. 2013-14 before the ITAT Delhi Bench "I-1", New Delhi wherein vide order dt. 13/09/2021 the issue has been decided in favour of the assessee and against the Department, copy of the said order was furnished which is placed on record. 8. The Ld. CIT DR in his rival submissions reiterated the observations made by the TPO, DRP and the A.O. in their respective orders and further submitted that the facts for the year under consideration are different from the earlier years. It was stated that the TPO liberally applied the rate for power transmission and that the State rates are not applicable when National Exchange Rates were available which are more reliable. Therefore the TPO rightly adopted the rate at Rs. 5.2145 per unit on the basis of comparable cost and calculated the difference at arms length price. He strongly supported the orders of the authorities below. 8.1 We have considered the submissions of both the parties and perused the material available on the record. In our opinion the facts of the issue under consideration are identical to the facts involved for the A.Y. 2013-14 in ITA No. ....
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....f Rs.6.72 per unit is definitely at Arm's Length. What is also required to be seen here is, whether in the open market what is the rate of power or electricity is available to the consumer. If in open market the power is available to a customer from State Electricity Board at the rate charged by it then it is to be reckoned as market rate. Before us, following judicial pronouncements have been cited wherein sale rate or purchase rate of State Electricity Board has been accepted on market rate. a. High Court of Chhattisgarh in the case of Commissioner of Income Tax Raipur v/s M/s Godawari Power & Ispat Ltd. Raipur [2014] 42 taxmann.com 551 (Chhattisgarh) vide para 31 of its order held as under: - "The market value of the power supplied to the SteelDivision should be computed considering the rate of 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." b. High Court of Calcutta in the case of Commissioner of....
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....own case are different from the facts involved in the year under consideration. It was further submitted that for the year under consideration no mark up was to be added since it was without any basis and that there was shifting of profit by the assessee to the another unit to claim the deduction under section 80IA of the Act. The Ld. CIT DR strongly supported the direction given by the Ld. DRP. 12. After considering the submissions of both the parties and the material available on the record, it is noticed that the issue relating to the adjustment on account of transfer of steam was a subject matter of the assessee's appeal before the ITAT "I-1" Bench, New Delhi in ITA No. 567/Del/2019 for the A.Y. 2013-14. In the said year also the ITAT has considered the transfer pricing rate of Rs. 2160 per MT at arms length, the said cost has been taken by the assessee for the year under consideration, therefore, we have no reason to deviate from the view taken by the Coordinate Bench in assessee's own case vide aforesaid referred to order dt. 13/09/2021 wherein the relevant findings have been given in para 21 to 23 of the said order which read as under: 21. In so far as adjustment in the t....