Comparability for figuring out ALP lost because DRP only selected one comparable fails
Fact and issue of the case
The aforesaid appeal has been filed by the assessee against final assessment order dated 28/01/2022 passed u/s. 143 (3) r.w.s. 144C (13) for the A.Y. 2017-18, in pursuance of direction given by the DRP vide order dated 28/12/2021.
In ground Nos. 1-4 assessee has challenged transfer pricing adjustment of Rs.15,23,15,220/- in respect of specified domestic transaction of inter-unit transfer of power from the eligible undertaking u/s.80-IA of the Act to other manufacturing undertaking of the assessee which are non-eligible units. Besides this assessee has raised following two grounds also.
Unwarranted addition of Rs. 21.02 Cr. under the head “income from Business and Profession” “The learned Assessing Officer at National e-assessment Centre, New Delhi (“AO”) erred in taxing income under the head “income from Business and Profession” at Rs. 853.74 Cr, instead of Rs. 832.72. Cr., thereby levying additional tax on Rs. 21.02 Cr. In the “Computation Sheet” even when there are no such additions in the assessment order”.
Levy of interest u/s 234B
The learned AO erred in levying interest u/s 2348 amounting to Rs. 0.52 Cr.
The brief facts qua the issue of adjustment on account of specified domestic transactions are that, the assessee company is engaged in the business of manufacturing and sale of inorganic chemicals, fertilizers and bio fuels. It operates inorganic chemical complex at Mithapur in Gujarat and a fertilizer complex at Babrala in Uttar Pradesh and Phosphatic fertilizers complex at Haldia in West Bengal. Assessee has reported Specified Domestic Transaction (SDT) with respect to sale of electricity from unit called Power Plant-TT-12) which has supplied 5,23,42,000 KWH units of electricity to the manufacturing unit of TCL at Mithapur at a transaction price of Rs.36,09,44,480/-. In TP study report assessee justified the arm’s length price by using CUP as the most appropriate method whereby the assessee stated that the price charged by the eligible unit has been compared with the prices charged by Gujarat Electricity Board (GEB) to TCL at Mithapur for supply of electricity under similar comparable circumstances. It was stated that electricity generated by TT-12 power plant unit which is an eligible unit u/s.80-IA of TCL has been transferred to manufacturing unit of TCL at Mithapur at the same average rate of Rs.6.90/- per unit. The average rate charged by GEB in similar transaction of sale of electricity to consumers and also to Mithapur unit was Rs.6.90 per unit, therefore, it was reported that price charged by eligible unit was at arm’s length price (ALP).
The ld. TPO held that comparison to sale price charged by eligible unit of the assessee with that of GEB is erroneous considering the functions performed, assets employed and the risks assumed by the GEB which is totally different from eligible unit. In the case of GEB huge distribution costs are involved whereas in assessee’s case no such substantial costs are involved as it is only an inter unit transfer of power. The assessee has not considered any such costs for adjustment to bringing its comparability to the level of cost of production of the GEB and thus the CUP data and method used by assessee suffers from factual defects. In his show-cause notice he asked the assessee why the net tariff determined by Gujarat Electricity Regulatory Commission (GERC) being the power purchase cost to Gujarat Electricity Board as notified for F.Y.2016-17 for Rs.3.94 per KWH as available in the public domain should not be applied and why the same should not be taken as comparable CUP and determine ALP. In response, it was submitted by the assessee that the Revenue from sale of electricity was recorded based on regulatory approved tariff rates. Such tariff rate is utilized by GEB for charging its end customers for consumption of electricity and therefore, it represents the „fair market value‟ of electricity supply to the end customers. The assessee also filed various documentary evidences and also made detailed submissions regarding the value of power generated and captively consumed by the assessee will be that value that should have been paid by the assessee if the power was bought from open market. Assessee also relied upon various judgments which have been quoted in the ld. TPO‟s order. Reliance was also placed on the decision of ITAT Ahmedabad Bench in the case of Gujarat Fluorochemicals Ltd. vs. DCIT (2018) 97 taxmann.com 10 which is also from the same jurisdiction. The Tribunal has held that for the purpose of determining the ALP of SDT of supply of electricity from eligible unit to non-eligible unit would be at the rate at which manufacturing unit of the assessee has been purchasing the electricity from State Electricity Board. Reliance was also placed on the decision of Hon’ble Bombay High Court in the case of CIT vs. Reliance Industries Ltd., reported in (2020) 421 ITR 686, wherein Hon’ble High Court on similar issue and on similar lines held that valuation of electricity provided to another unit should be at the rate at which electricity distribution companies are allowed to supply electricity to the consumers.
Observation of the court
Here in this case what is required to be seen is, whether the market value in the price charged by the eligible unit for the sale of electricity to another unit can be benchmarked with the price on which GEB is supplying to the customers. From the records, it is seen that the manufacturing unit of the assessee also buys electricity from GEB at the same price of Rs.6.90/- per unit and the same price is being paid to the eligible unit also. The case of the department is that since assessee is generating electricity and supplying it to the manufacturing unit, therefore, functionally it is similar to entities which are generating electricity and not which are into distribution of electricity. What is required to be seen u/s. 80IA (8) is that, where any goods or services provided by the eligible business or transfer to any other business carried on by the assessee, the same should correspond to market value of such goods and services. The market value has to be seen qua the price in which such goods or services would ordinarily be fetched in the open market, i.e., whether in the open market the price of such goods and services are available or not? Here assessee is a captive service provider for generating electricity and to supply and distribute to the manufacturing unit which otherwise would have bought from the open market. The price has to be seen what the manufacturing unit is paying in the open market. This precisely has been dealt by the Hon‘ble Gujarat High Court in the case of PCIT vs. Gujarat Fluorochemicals Ltd., and also by the Hon‘ble Jurisdictional High Court in the case of CIT vs. Reliance Industries Ltd., wherein the Courts had held that if the assessee had set up a captive power generating unit and provided electricity to its another unit and claimed deduction under section 80-IA in respect of profits arising out of such activity, then violation of electricity provided to another unit should be at the rate at which electricity distribution companies were allowed to supply electricity to the consumers. This judgment has been distinguished by ld. TPO / ld. DRP holding that these judgments relate to assessment years where SDT provisions were not applicable. We are not inclined to agree to such a view that these judgments have become redundant and Explanation (i) is no more applicable after the introduction of Clause (ii) w.e.f. 01/04/2013, because, the statute has not omitted clause (i). Thus, in our opinion these judgments still holds the field and once the market value of such price on which electricity is sold to another unit of the assessee, the same can be compared with the electricity distribution entities for supplying to the customers in the open market. Accordingly, there is no infirmity in the contention of the assessee that per unit electricity sold to the non-eligible unit at Rs.6.90 per unit is the market value.
The ld. DRP has taken M/s. Torrent Power Ltd. (TPL) which is the electricity generation entity supplying electricity to GEB. In that case Gujarat Electricity Regulatory Commission (GERC) has fixed tariff of Rs.3.99 per unit for supplying it to the GEB for F.Y.2016-17. First of all nothing has been brought on record whether, M/s. Torrent Power Ltd. (TPL) was supplying to other entities or industry or it was purely supplying to GEB. What is culled out is that, these power generating entities were manufacturing and supplying 100% to the GEB and the price is influenced by GEB, although fixed by GERC, but if there is only one party to whom sale is made and the prices and other conditions are purely influenced by that entity, then it becomes a tainted transaction. The reason being, Section 92A dealing with the meaning of the associated enterprises stipulates that two enterprises shall be deemed to be associated enterprises if any time during the previous year, the goods or articles manufactured or processed of one enterprise are sold to other enterprise which is specified by the other enterprises and the prices and the conditions are influenced by the other enterprise. This has been specifically provided in 92A (2)(i) which reads as under:- (i) The goods or articles manufactured or processed by one enterprise are sold to the other enterprise or to the persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise.
If M/s. Torrent Power Ltd. (TPL) is purely supplying to GEB and GEB is controlling the prices and other conditions, although determined by regulatory authority, then it falls in the category of aforesaid clause and any such price under the condition, where one entity, i.e. GEB is influencing the price, then it becomes an controlled transaction between two associated enterprises. In that scenario, the prices on which GEB purchased the electricity from M/s. Torrent Power Ltd. (TPL) cannot be considered as comparative price. Thus, the price fixed for purchasing the electricity by GEB from M/s. Torrent Power Ltd. (TPL) cannot be compared with the prices on which eligible unit of the assessee is selling it to the other. Thus, once only comparable as chosen by the ld. DRP fails, then same loses the comparability for determining the ALP. In view of aforesaid discussion, we hold that the price on which eligible unit is selling the power, i.e., at Rs.6.90 per unit which is the price available in the open market and also the same manufacturing unit is purchasing it from GEB at the same price, then it can be said to be the market value of the price. Accordingly, addition / disallowance of deduction made by the ld. CIT (A) is deleted and the ground Nos. 1-4 raised by the assessee are allowed.
In ground No.5, assessee has challenged that Assessing Officer at National e-assessment Centre had erred in taxing income under the head „income from business and profession‟ at Rs.853.74 Crores instead of Rs.832.72 Crores thereby levying additional tax of Rs.21.02 Crores in the computation sheet when there is no such additions in the assessment order. Before us the ld. Counsel has submitted a chart pointing out the discrepancy in the computation sheet of the ld. AO. Accordingly, we direct the ld. AO to verify the facts and if there is such error, same should be rectified and relief should be given. Accordingly, this ground is allowed for statistical purposes.
Lastly, with regard to levy of interest u/s.234B, the ld. Counsel submitted that there is no short fall and in fact assessee has paid extra tax more than assessed income. On this issue also we direct the ld. AO to verify the payment of tax and to grant consequential relief in the computation of interest u/s.234B. Accordingly, appeal of the assessee is partly allowed for statistical purposes.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 10th October, 2023.
Read the full order from hereTata-Chemicals-Ltd-Vs-DCIT-ITAT-Mumbai-2