TaxTMI 
TaxTMI 
2023 (7) TMI 1557
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.... to the transfer value of power by the captive power plant at Saharanpur. 2. For that on the facts and in the circumstances of the case and in law, the methodology followed by the assessee to benchmark the arm's length value of the power transferred by the eligible unit to the non-eligible unit with the average landed cost at which power was purchased by the non-eligible unit from the SEB, fulfilled the internal CUP parameters and in that view of the matter no transfer pricing adjustment was permissible on the given facts and in law. 3. For that on the facts and in the circumstances of the case and in law, the methodology proposed by AO/TPO to benchmark the arm's length value of the power generated by the eligible unit was wholly fallacious and suffered from serious infirmities and in that view of the matter the downward adjustment of Rs. 16,18,75,076/- deserves to be deleted. 4. For that on the facts and in the circumstances of the case and in law, the AO be directed to re-compute the set-off of losses upon giving effect to this order and also pass a speaking order quantifying and allowing the carry forward of losses as per law. 5. For that the appellant craves lea....
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....However as the Gross Total Income, after setting off brought forward losses was NIL, the assessee did not claim any deduction u/s 80-IA in the return of income filed for AY 2016-17. During the course of assessment proceedings, the ld. Assessing Officer referred the matter of computation of arm's length price of power units transferred from CPP to the ld. TPO. The ld. TPO vide order dt. 31/07/2021, framed u/s 92CA(3) of the Act computed the ALP of the power transfer from CPP at Rs. 3.84 per unit as against transfer rate of Rs. 9.08 per unit applied by the assessee and the same being reflected in the 3CEB report. The ld. TPO accordingly proposed the downward adjustment at Rs. 16,18,75,076/-. Subsequently, the ld. Assessing Officer made the said adjustment in the draft assessment order against which the assessee moved an appeal before the ld. DRP. Ld. DRP observed that since the issue and objections are identical to Assessment Year 2016-17, the Assessing Officer is directed to ascertain the legal status of further appeal by the revenue. The ld. DRP further observed that in case the matter has attained finality and the decision of the Hon'ble ITAT have been accepted by the revenue, th....
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....valued at Rs. 3.84 per unit as against Rs. 9.08 per unit adopted by the assessee. Relevant extract of the show cause notice dt. 23/07/2021, is reproduced below:- "In this regard the appropriate CUP for benchmarking the said AE transaction is the average rate at which Distribution Company in the state purchased power from generation companies during F.Y. 2017-18 which may be relied upon for the purpose of determination of arm's length price for transfer of electricity. Hence, the undersigned propose to adopt the average rate of the sale of power generated independent CPP/IPPS as determined through multi-year tariff order of UPERC effective for the F.Y. 2017-18 issued by Uttar Pradesh Electricity Regulatory Commission as under: SI No. Average cost of power from generating source Rate per unit 1 Thermal power 3.88 2 Inter Sytem exchange (Bilateral & PXIL, IEX)/UI 3.80 Average 3.84 Based on the above rate, the Transfer Pricing adjustment for the transaction of transfer of power is determined as follows:- Tranfer Rate Arm's length price Units transferred TP adjustment Transfer of power for captive consumption 9.08 3.84 3,08,92,190 16,18,75,076 You ....
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....dance with the provisions of Section 801A and hence the downward adjustment of Rs. 16, 18,75,076/- computed by the TPO was unjustified on facts and in law. For that on the facts and in the circumstances of the case, the methodology proposed by Ld AO/TPO to benchmark the "market value or transfer price" of the power generated is wholly fallacious and suffered from serious infirmities and in that view of the matter the downward adjustment of Rs. 16,18,75,076/- made by the TPO deserves to be deleted in full." In this regard, the observation of Ld. DRP is given below - "2.1 Identical objections were raised by the assessee in AY 2016-17 which were examined in DRP directions dated 27.02.2020. During the hearing for this AY, it was brought to the notice of the Panel by the authorized representative that vide order dated 26.10.2021, Hon'ble ITAT had allowed relief to the assessee on this issue of determination of transfer value of power from the assessee's captive power plant to its manufacturing unit. 2.2 In view of the same, as the issue and objections are identical to AY 2016-17, the AO is directed to ascertain the legal status of further appeal by Revenue. In case the m....
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....ransfer value of power from the assessee's captive power plant to tis manufacturing unit. In view of the same, as the issue and objection are identical to AY 2016-17, the AO is directed to ascertain the legal status of further appeal by Revenue, In case the matter has attained finality and the decision of the Hon'ble ITAT have been accepted by Revenue, the adjustment/ addition shall be deleted. If not, the adjustment / addition is upheld, until such finality is attained. As verified from the assessee's case record available with this office, Revenue has not accepted the decision of the Hon'ble ITAT, Kolkata on the issue of determination of transfer value of power from the assessee's captive power plant to its manufacturing unit in assessee case of the AY. 2016-17 and further appeal before the Hon'ble High Court has been preferred by this office which is still pending for final adjudication by the Hon'ble Court. the Ld. DRP for the current year In the circumstance, following the above direction under consideration, the TP adjustment made vide order u/s92CA(3) of the Income Tax Act, dt 30.07.2021, in the instant case for the year under consideration ....
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....that it's internal CUP i.e. the rate at which the non-eligible unit procured power in an uncontrolled transaction from an unrelated entity viz. SEB, was the right basis for determination of ALP. Hence, the 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 th....
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....al location. From the data provided by the assessee, it is noted that both the CPP and SEB have supplied power in all the months of the year and therefore there are no 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 asce....
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....ce. Product Comparability is the main 'key factor'." 17. It is thus noted that the facts involved in the above case were materially different from 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 ascer....
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....the TPO is heavily regulated and is ascertained by the State Electricity Commission after taking into account several socio-political considerations, 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 marke....
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....in laying in transmission and distribution infrastructure. These investments and related transmission and distribution function are totally 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 wh....
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....5.40 ps. per unit is concerned, we find no error. Undisputedly, GEB supplied the electricity to its 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 throu....
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....; This judgment of Hon'ble High Court is directly on the issue. 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 gene....
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....pect of appeals relating to abated assessment 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....
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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 in favour of the Assessee. T....
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....e 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 findings of fact and to be found in paragraphs 42 to 50 also reflect that the....
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....ll. 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 determined through competitive bidding process or any other mutually agreed terms. Hence, the decision of Calcutta High Court (supra) i....
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....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 price determined in the sole discretion of the SEBs and therefore, the price at which the SEBs were purchasing power alone represented the mark....
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....as 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. The said chart we note gave break up of power price at which the was purchased and sold by power producers, distribution companies etc in different r....
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....er, 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 adopting such price for working out the amount eligible for deduction u/s 80IA of the Act. ...... 30. Following the judgment of the Hon'ble Gujarat High Court ....