TaxTMI 
TaxTMI 
2023 (7) TMI 1557
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....e transfer pricing adjustment of Rs. 16,18,75,076/- 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 ca....
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....essee at Rs. 27,95,74,321/- which was eligible for deduction u/s 80-IA of the Act. 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 attaine....
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....assessee that why not the value of units transferred from CPP to power manufacturing unit be 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 l....
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....aranpur. For that the AO/TPO failed to appreciate that the "market value or transfer price" of the power generated by the captive power plant adopted by the Assessee for computation of deduction u/s 801A was in accordance 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 f....
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....rt of the same is preproduced verbatim as below: it was brought to the notice of the panel by the During the hearing for this AY, authorized representative that vide order dated 26.10.2021, Hon'ble ITAT, Kolkata had allowed relief to the assessee on this issue of determination of transfer 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 ....
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....The dispute is regarding the manner of benchmarking the transfer price of power under the CUP Method. According to the TPO/Revenue, the average rate at which the power generating stations sold power to the Grid, in terms of the notified tariff order, constituted the representative arm's length price. Per contra, it is the assessee's contention 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....
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....er throughout the year both from the CPP as well as unrelated external party i.e. the SEB. Undeniably, the product purchased by the AE from its related party as well as unrelated party is the identical i.e. power/electricity. The rate at which power has been supplied by the SEB to the assessee is the prevailing market rate at which SEB supplies power to other factories/units located in the same geographical 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 applic....
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....ers high degree of comparability and requires least amount of adjustment. It should be, most often the one that has least complex functional analysis. Under CUP method, what is required to be seen is the price at which a controlled transaction is carried out as compared to the price obtained in a comparable uncontrolled transaction under similar conditions. Thus, it is a direct method for determination of Arm's length price. 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 quest....
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....is procuring power from SEB is used as the comparable rate under the arm's length standards. 19. According to the Ld. CIT, DR however this landed rate at which the non- eligible unit purchases power from the SEB is regulated and therefore cannot be said to represent an uncontrolled transaction. This argument does not hold good in the given facts of the present case, for the reason that even the notified tariff order of the UPERC relied upon by 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 ....
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....le units. According to the TPO captive power plant and electricity distributing companies are to be pitted at different pedestal. According to the DRP, there is a material difference between captive power plant as a seller and distribution/transmission entity. Thus, differences are both in terms of functions performed as well as asset used. In the case of distribution and transmission entities, apart from assets used for generation of electricity huge investments have gone 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 vie....
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....the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture. 7. We may notice that the Tribunal did not accept the contention of the assessee that the electricity is neither goods nor services and that, transfer of electricity, therefore, would not be covered under sub Section (8) of Section 80IA of the Act. However, in so far as the Tribunal's reasoning to adopt the market value of the goods at Rs. 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. ....
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.... Tribunal reduced the said figure by the nature of excise duty and came to the figure of Rs. 4.90 to ascertain the market value of electricity generated by the eligible unit and supplied to non eligible business of the assessee. No error was committed by the Tribunal. No question of law therefore, arises. Tax Appeal is dismissed." ...... 6. Issues are thus considered on number of occasions by the Court and held against the Revenue. Questions are answered against the Revenue. Both the tax appeals are therefore, dismissed.' 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 ....
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....ince the appellant has sufficiently demonstrated that not only is it is permitted to supply power independently to unrelated parties but it has actually supplied substantial quantities of power to unrelated parties. Instead I find that the issue of allowability of deduction under Section 80IA in respect of profits derived by CPP came up for consideration before another coordinate Bench of the Hon'ble Jurisdictional ITAT in the case of M/s Electrosteel Castings Ltd in I.T. (SS) No. 47 to 60/Kol/2014, 313 and 256/Kol/2015, 66 and 124/Kol/2016 dated 25th November 2016. In respect 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, th....
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....e to the following decisions of the Hon'ble High Courts. (A) CIT Vs Godavari Power & Ispat Ltd (223 Taxman 234) (Chattisgarh HC) "30. The Steel-Division of the Assessee is a consumer. The CPP of the Assessee supplies electricity to the Steel-Division. Had the Steel Division not taken power from the CPP then it had to purchase power from the Board. The CPP has charged the same rate from the Steel Division that the Steel-Division had to pay to the Board if the power was purchased from the Board. 31. The market value of the power supplied to the Steel-Division 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. 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.....
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....n. The Tribunal by detailed judgment had held and observed as under:- "44. In the given facts and circumstances of the case, we are of the view that the profits of the business of generation of power worked out by the Assessee on the basis of the price that it paid to TPC for purchase of power continues to be the best basis even after the order of MERC and therefore the same has to be accepted as was done in the past and as approved by the ITAT in Assessee's case. We therefore dismiss ground No. 4 of the revenue." 7. Counsel for the assessee pointed out that the judgment of the Tribunal in case of Reliance 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....
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.... of 'open market value' and not 'arm's length price' is found to be misplaced. We agree with the Ld. AR of the assessee that, the 'open market value' standards and 'arm's length price' standards would ordinarily yield the same results, unless the considerations and rules involved are different. On this particular issue of determination of the transfer price of power u/s 80-IA(8) of the Act, we note that the considerations taken into account under the open market valuation standards by the High Courts in the above decided cases (supra) are consistent with the considerations and guidelines under the arm's length standards set out in 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 co....
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....wever, on perusal of the working of the profitability, the A.O. found that the transfer price for power was considered by the assessee equal to the price at which the electricity was procured by the manufacturing undertakings from the respective SEBs. Referring to explanation to section 80IA, the A.O. held that for the purposes of section 80IA,the term 'market value' means the price that such goods or services would ordinarily fetch in the open market. According to the A.O., such market value was to be ascertained from the view point of the power generating undertakings claiming the deduction and not from the perspective of the manufacturing 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....
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....Policy issued by the Government of India on 12.02.2005 with regard to captive generation. The said order explains that the Electricity Act 2003, put in place highly liberal frame work for power generation wherein there is no requirement of licensing for generation of power. The requirement of techno-economic clearance of CEA for thermal generation was no longer there. Captive generation has been freed from all controls. The said policy further clarified that the captive generating plants were permitted to sell electricity to licensees and consumers when they were allowed 'open access' by SERCs under section 42 of the Electricity Act, 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 KE....
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.... Ltd for Asst Year 2002- 03 was rendered by taking into account the relevant provisions of Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948. These Acts were repealed and a new Electricity Act 2003 was introduced with effect from 10.6.2003. Hence for the Asst Years 2008-09 and 2009-10 (i.e the years under appeal before us) , the assessee would be governed by the provisions of Electricity Act, 2003. 5.6.1. We have already seen that the ITC's case in Hon'ble Calcutta High Court, proceeded on the basis that the open market for the captive power plant was only a distribution company or a company engaged both in generation 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....