ACIT Vs ACB India Ltd (ITAT Delhi)
Summary: The Revenue’s appeal in ITA No. 5469/Del/2019 and the assessee’s Cross Objections for Assessment Year 2014-15 arose from the order of the CIT(A)-44, New Delhi dated 28.02.2019 concerning the assessment framed under section 143(3) of the Income-tax Act, 1961.
The principal issue before the ITAT Delhi concerned determination of the transfer price for electricity supplied by the assessee’s thermal power plant to its Washeries division. The assessee was engaged in coal beneficiation, coal trading and power generation and sale. It had two eligible units for purposes of deduction under section 80-IA, namely a 15 MW windmill unit and a 30 MW thermal power plant. Since the thermal power plant had suffered losses, the assessee claimed deduction under section 80-IA only in respect of the windmill unit.
During the relevant year, electricity generated by the thermal unit was transferred to the Washeries division at Rs 4 per unit. The assessee relied upon the rate published by the Chhattisgarh State Electricity Board for the mines and cement industry, which was Rs 4.05 per unit, and contended that the transfer price of Rs 4 per unit represented the Arm’s Length Price.
The Transfer Pricing Officer did not accept the assessee’s benchmarking. The TPO averaged the CSEB rate, after adjustment for transmission and distribution cost but without adjustment for transmission and distribution losses, with the rate of trade as per IEX without adjustment for transmission/distribution loss or charges. The resulting ALP was determined at Rs 2.868 per unit, resulting in a differential adjustment of Rs 2,74,40,110/-. The Assessing Officer incorporated the adjustment in the assessment.
The CIT(A), relying upon the order in the case of BALCO for AY 2013-14, adopted the landed rate of BALCO for benchmarking the transaction after making adjustments in the average IEX rate for the Chhattisgarh region. The resultant transfer price was determined at Rs 4.57 per unit. Since the assessee had actually transferred electricity at Rs 4 per unit, the transaction was accepted as being at ALP. The Revenue challenged this relief before the Tribunal, while the assessee’s Cross Objections contended that Rs 4 per unit itself should be regarded as the ALP.
The Tribunal noted that there was no dispute that the assessee transferred electricity from its thermal power plant to its Washeries division at Rs 4 per unit and that the CSEB rate charged to industry was Rs 4.05 per unit. The Tribunal considered the Supreme Court decision in CIT Vs Jindal Steel & Power Limited, reported in 157 taxmann.com 207 (SC), concerning the market value of electricity supplied by a captive power plant to an industrial unit.
The Tribunal applied the principle from that decision to the transfer pricing issue before it. The Supreme Court had held, in the context of section 80-IA, that market value of electricity supplied by a captive power plant to an industrial consumer should be determined with reference to the rate at which the State Electricity Board supplied electricity to industrial consumers in the open market, rather than the rate at which surplus power was supplied to the State Electricity Board.
Applying that principle, the Tribunal held that Rs 4.05 per unit, being the rate charged by CSEB to industrial consumers, represented the market value of electricity in the present case. Since the assessee had transferred electricity at Rs 4 per unit, the transfer price was below the prevailing market rate and was therefore at ALP. The Tribunal accordingly held that no transfer pricing adjustment was warranted.
The Tribunal also noted that although the CIT(A) had granted further relief by adopting Rs 4.57 per unit, the assessee had fairly preferred Cross Objections seeking acceptance of Rs 4 per unit itself as the ALP. The Revenue’s grounds on the transfer pricing adjustment were dismissed, while Ground Nos. 3 to 7 of the assessee’s Cross Objections were allowed.
The assessee’s Ground Nos. 1 and 2 were stated by the learned AR to be not pressed at the time of hearing. The Tribunal treated the statement as one made from the Bar and dismissed those grounds as not pressed.
Ground Nos. 8 and 9 concerned additions of Rs 8,58,549/- towards employees’ contribution to PF and Rs 5,87,397/- towards disallowance of depreciation. The assessee contended that the figures did not pertain to it and requested restoration of the issue to the Assessing Officer for fresh adjudication after considering the correct figures and facts. The Tribunal accepted the request and allowed these grounds for statistical purposes, directing the Assessing Officer to undertake denovo adjudication in accordance with law and make an addition if warranted.
Ground No. 10 was general in nature and required no specific adjudication.
Accordingly, the Revenue’s appeal was dismissed and the assessee’s Cross Objections were partly allowed for statistical purposes.
Cases Discussed
- CIT Vs Jindal Steel & Power Limited, 157 taxmann.com 207 (SC) — considered on the determination of market value of electricity supplied by a captive power plant to an industrial consumer, with the Tribunal applying the principle that the State Electricity Board’s consumer rate represents the relevant market value.
- CIT Vs. ITC Ltd. — discussed in the Supreme Court decision quoted in the order, where the Supreme Court distinguished the facts of that case from the captive-power circumstances before it.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No.5469/Del/2019 filed by the revenue and CI No. 133/Del/2019 filed by the assessee for AY 2014-15, arise out of the order of the Commissioner of Income Tax (Appeals)-44, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 141/2018-19/CIT(A)-44 dated 28.02.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 27.02.2018 by the Assessing Officer, ACIT, Central Circle-17, New Delhi (hereinafter referred to as ‘ld. AO’).
2. The only effective issue to be decided in the appeal of the revenue is with regard to determination of transfer price for supply of electricity from thermal unit to washeries division of the assessee during the year.
3. We have heard the rival submissions and perused the materials available on record. The return of income for the assessment year 2014-15 was filed by the assessee company on 27-11-2014 declaring total income of Rs 93,73,17,398/-. The assessee company is engaged in the business of activity of coal beneficiation, coal trading and power generation and sale as core business activities. A reference under section 92CA(1) of the Act was made by the Learned AO to the Learned Transfer Pricing Officer (TPO) for benchmarking the international transactions and domestic transactions of the assessee carried out with its associated enterprises. The Learned TPO passed an order under section 92CA(3) of the Act dated 17-08-2017 wherein a sum of Rs 2,74,40,110/- was made as transfer pricing adjustment with regard to transfer price of electricity from thermal unit to washeries division of the assessee.
4. The assessee has two different eligible units for claiming deduction under section 80 IA of the Act. These included a 15MW Windmill unit and a 30MW thermal power plant. The assessee claimed deduction of Rs 8,98,46,843/- under section 80IA(4) of the Act only for the Windmill unit as it had suffered losses in the thermal power plant. Accordingly, thus no deduction under section 80 IA of the Act was claimed by the assessee for thermal power plant during the year under consideration. The assessee has had transferred electricity at the rate of Rs 4 per unit to its Washeries division. As per the rates published by Chhattisgarh State Electricity Board
(CSEB) for the ‘mines and cement industry’, the published rate was Rs 4.05 per unit. Accordingly, the assessee claimed that the transfer of electricity from thermal unit to washeries division at Rs 4 per unit was at Arm’s Length Price (ALP) thereby satisfying the TP regulations.
5. The Learned TPO did not accept the contention of the assessee. The Learned TPO applied an average of the rate published by CSEB (as adjusted by transmission and distribution cost but not adjusted for transmission and distribution losses) and the rate of trade as per IEX (without adjusting for any transmission / distribution loss or charges) and arrived at the rate of Rs 2.868 per unit to be the ALP. The Learned TPO accordingly determined the ALP of transfer of electricity at Rs 2.868 per unit. Accordingly the differential price of Rs 1.132 per unit was sought to be added in the hands of the assessee which resulted in a transfer pricing adjustment of Rs 2,74,40,110/- in the hands of the assessee. The Learned AO incorporated the transfer pricing adjustment in the assessment of the assessee, against which the assessee preferred an appeal before the Learned CITA. The Learned CITA by placing reliance on the order passed in the case of BALCO for assessment year 2013-14 in Appeal No. 109 / 2018-19 dated 31-12-2018 considered the landed rate of BALCO for benchmarking the above mentioned transaction after making adjustments in the average IEX rate for the Chhattisgarh region. The Learned CITA also held that would be the best method of benchmarking the transaction. Accordingly, the Learned TPO / AO arrived at the transfer price for transfer of electricity from thermal power plant to washeries division at Rs 4.57 per unit. Since assessee had transferred at Rs 4 per unit, the same was accepted to be at ALP. Aggrieved by this, the revenue is in appeal before us. The assessee has also preferred cross objections vide Ground Nos. 3 to 6 stating that the transfer price should have been considered only at Rs 4 per unit to be at arm’s length price and not Rs 2.868 per unit or Rs 4.57 per unit adopted by the Learned CITA. Hence the cross objections of the assessee vide Ground Nos. 3 to 7 and the appeal of the revenue in this regard are with regard to the solitary issue of transfer pricing adjustment and hence they are taken up together.
6. There is no dispute that assessee had transferred electricity from its thermal power plant to its washeries division at Rs 4 per unit. It is not in dispute that the rate charged by CSEB on the industry is Rs 4.05 per unit. Hence, the fair market value for the transfer rate of power or the selling rate of power in the industry by CSEB is Rs 4.05 per unit. Whether the said rate of Rs 4.05 per unit being the prevailing market rate could be used for transfer of electricity between two units of the same Assessee for captive consumption was subject matter of consideration by the Hon’ble Supreme Court in the case of CIT vs Jindal Steel & Power Ltd reported in 157 taxmann.com 207 (SC), wherein it was held as under:-
“22. Reverting back to sub-section (8) of Section 80-IA, it is seen that if the assessing officer disputes the consideration for supply of any goods by the assessee as recorded in the accounts of the eligible business on the ground that it does not correspond to the market value of such goods as on the date of the transfer, then for the purpose of deduction under section 80-IA, the profits and gains of such eligible business shall be computed by adopting arm’s length pricing. In other words, if the assessing officer rejects the price as not corresponding to the market value of such good, then he has to compute the sale price of the good at the market value as per his determination. The explanation below the proviso defines market value in relation to any goods to mean the price that such goods would ordinarily fetch on sale in the open market. Thus, as per this definition, the market value of any goods would mean the price that such goods would ordinarily fetch on sale in the open market.
23. This brings to the fore as to what do we mean by the expression “open market” which is not a defined expression.
24. Black’s Law Dictionary, 10th Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. P. Ramanatha Aiyer’s
Advanced Law Lexicon has also defined the expression “open market” to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.
25. Therefore, the expression “market value” in relation to any goods as defined by the explanation below the proviso to sub-section (8) of Section 80-IA would mean the price of such goods determined in an environment of free trade or competition. “Market value” is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or regulation; rather, it is determined by the economics of demand and supply.
26. Under the electricity regime in force, an industrial consumer could purchase electricity from the State Electricity Board or avail electricity produced by its own captive power generating unit. No other entity could supply electricity to any consumer. A private person could set up a power generating unit having restrictions on the use of power generated and at the same time, the tariff at which the said power plant could supply surplus power to the State Electricity Board was also liable to be determined in accordance with the statutory requirements. In the present case, as the electricity from the State Electricity Board was inadequate to meet power requirements of the industrial units of the assessee, it set up captive power plants to supply electricity to its industrial units. However, the captive power plants of the assessee could sell or supply the surplus electricity (after supplying electricity to its industrial units) to the State Electricity Board only and not to any other authority or person. Therefore, the surplus electricity had to be compulsorily supplied by the assessee to the State Electricity Board and in terms of Sections 43 and 43A of the 1948 Act, a contract was entered into between the assessee and the State Electricity Board for supply of the surplus electricity by the former to the latter. The price for supply of such electricity by the assessee to the State Electricity Board was fixed at Rs. 2.32 per unit as per the contract. This price is, therefore, a contracted price. Further, there was no room or any elbow space for negotiation on the part of the assessee. Under the statutory regime in place, the assessee had no other alternative but to sell or supply the surplus electricity to the State Electricity Board. Being in a dominant position, the State Electricity Board could fix the price to which the assessee really had little or no scope to either oppose or negotiate. Therefore, it is evident that determination of tariff between the assessee and the State Electricity Board cannot be said to be an exercise between a buyer and a seller in a competitive environment or in the ordinary course of trade and business i.e., in the open market. Such a price cannot be said to be the price which is determined in the normal course of trade and competition.
27. Another way of looking at the issue is, if the industrial units of the assessee did not have the option of obtaining power from the captive power plants of the assessee, then in that case it would have had to purchase electricity from the State Electricity Board. In such a scenario, the industrial units of the assessee would have had to purchase power from the State Electricity Board at the same rate at which the State Electricity Board supplied to the industrial consumers i.e., Rs. 3.72 per unit.
28. Thus, market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under section 80-IA of the Act.
29. Section 43A of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under section 80-IA of the Act.
30. Thus on a careful consideration, we are of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board’s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under section 80-IA of the Act.
31. That being the position, we hold that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.
32. Revenue has relied upon the decision of the Calcutta High Court in ITC Ltd. (supra). In that case, the High Court rejected the first contention of the revenue that the assessee therein was not entitled to the benefit under section 80-IA of the Act because the power generated was consumed at home or by other business of the assessee. After holding so, the High Court however, answered the question on the point of computation of profits and gains of the eligible business against the assessee. On going through the judgment, we find that facts of that case are clearly distinguishable from the facts of the present batch of appeals. It is noticeable that though an opportunity was granted by the assessing officer to the assessee to adduce evidence to justify the price of electricity sold by it to its paper unit, the same could not be availed of by the assessee. The electricity generated was sold by the assessee entirely to its paper unit. There was no surplus electricity to be supplied to the State Electricity Board and consequently, there was no contract between the assessee and the State Electricity Board determining the rate of tariff for the electricity supplied by the assessee to the State Electricity Board. On the other hand, it was noticed that the Electricity Act, 2003 had come into force whereby and whereunder, the rate at which electricity could be supplied is determined, notably by Sections 21 and 22 thereof. That apart, there is the tariff regulatory commission which has the mandate for fixing the rates for sale and purchase of electricity by the distribution licensee. Thus it was noted that there is an inbuilt mechanism to ensure permissible profit both to the generating companies and to the distribution licensees. Therefore, it was held by the High Court that the assessee’s generating unit could not claim any benefit under section 80-IA of the Act computing the profits and gains on the basis of the rate chargeable by the distribution licensee from the consumer and that the benefit could only be claimed on the basis of the rates fixed by the tariff regulatory commission for sale of electricity by the generating company. Facts being clearly distinguishable, this decision can be of no assistance to the revenue.
33. Before parting with this issue, we may mention that reliance placed by Mr. Rupesh Kumar, learned counsel for the revenue on the definition of the expression “market value” as defined in the explanation below sub-section (6) of section 80 A of the Act is totally misplaced inasmuch as sub-section (6) was inserted in the statute with effect from 1-4-2009 whereas in the present case we are dealing with the assessment year 2001-2002 when this provision was note even borne.
34. That being the position, we have no hesitation in answering this issue in favour of the assessee and against the revenue.”
(emphasis supplied by us)
7. Though this decision was rendered in the context of claim of deduction under section 80IA of the Act, but the principle laid down thereon as to what would be the market value is to be applied to the facts of the instant case before us. In the present case before us, the market value is Rs 4.05 per unit being the rate charged by CSEB on the industrial consumers, whereas the transfer price between two units of the assessee was Rs 4 per unit. The same is well within the market rate of Rs 4.05 per unit and hence the price of Rs 4 per unit is to be construed to be at ALP. Accordingly, no transfer pricing adjustment is warranted. Though the Learned CITA had given more relief to the assessee by adopting Rs 4.57 per unit, the assessee before us has been very fair to prefer Cross Objections in the larger interest of justice and fairplay. Accordingly, the grounds raised by the revenue are dismissed and Ground Nos. 3 to 7 raised by the assessee in its Cross Objections are allowed.
8. The Ground Nos. 1 and 2 raised by the assessee in its Cross Objections were stated to be not pressed by the Learned AR at the time of hearing. The same is reckoned as a statement made from the Bar and accordingly dismissed as not pressed.
9. The Ground Nos. 8 and 9 raised by the assessee in its Cross Objections are challenging the confirmation of addition made in the sum of Rs 8,58,549/- towards Employees contribution to PF and Rs 5,87,397/- towards disallowance of depreciation on the ground that the said figures does not even pertain to the assessee before us. Hence the Learned AR was very fair in stating that the said issue may be restored to the file of Learned AO for denovo adjudication for adopting the correct figures in accordance with law after considering the facts and figures pertaining to the assessee and make an addition if warranted. Accordingly, the Ground Nos 8 & 9 raised by the assessee in its Cross Objections are allowed for statistical purposes.
10. The Ground No. 10 raised by the assessee in its Cross Objections is general in nature and does not require any specific adjudication.
11. In the result, the appeal of the revenue is dismissed and Cross Objections of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 31/12/2024.
