Tata Chemicals Ltd Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that once only comparable as chosen by DRP fails, then same loses the comparability for determining the ALP. Accordingly, the price on which eligible unit is selling the power, 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.
Facts-
The present appeal has been filed by the assessee against final assessment order 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.
The 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.
The Transfer Pricing Officer (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.
TPO held that where the claim of deduction u/s. 80IA is made, the ALP for the purpose of specified domestic transactions is the price which would be applicable in the transactions between two persons other than the associated enterprises in uncontrolled conditions. The comparability of the specified domestic transaction has to be established in terms of the parameters contained in Rule 10B (2).
Conclusion-
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.
Held that once only comparable as chosen by the ld. DRP fails, then same loses the comparability for determining the ALP. Accordingly, held 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 CIT (A) is deleted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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.
2. 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.
5. 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”.
6. Levy of interest u/s 234B
The learned AO erred in levying interest u/s 2348 amounting to Rs. 0.52 Cr.
3. 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).
4. 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.
5. However, TPO held that, the assessee has transferred / sold the power from its captive eligible unit to it’s another non-eligible unit and there is absolutely no distribution cost involved in its pricing. Whereas the comparable (GEB) is not only purchasing the power but also being a distribution company incurs huge distribution cost and transmission losses which are factored in the sales price set by them. This material difference of distribution cost makes the difference in price and therefore, the price at which GEB is selling to the customers cannot be accepted. After referring to the provisions of Section 92BA, 92F and Rule 10B (2), TPO held that where the claim of deduction u/s.80IA is made, the ALP for the purpose of specified domestic transactions is the price which would be applicable in the transactions between two persons other than the associated enterprises in uncontrolled conditions. The comparability of the specified domestic transaction has to be established in terms of the parameters contained in Rule 10B (2). Thereafter he analyzed the functions and assets of the distribution company and the company which are manufacturing electricity and after detail FAR analysis; he held that performance of distribution function is entirely different. In sum and substance, he held that the contention of the assessee cannot be accepted, because of difference in FAR between the power distribution entities and power generating units. He observed that, the power generating units, power transmitting units and power distribution entities can be segregated on the basis of functions that the entity does and therefore, assessee’s attempt to use the price charged by a distribution entity as a benchmark is not a valid comparison as it fails the comparability test and FAR. He further held that the power purchase cost for the distributor includes the energy cost, the transmission cost and the sate load dispatch centre cost and this energy cost has various bifurcations of price and cost which are different from the unit which are simply generating electricity. He has dealt this issue in detail as to how the FAR of a distribution entity is entirely different and what are the cost factors and pricing mechanism of a distribution company as assessee has not submitted any FAR analysis in support of its contention. TPO has given his detailed analysis from pages 10-39 of his order.
6. One of the point raised by the TPO is that, u/s. 80IA, what is required to be seen is the quantum of deduction of the profits and gains by an undertaking or an enterprise from business referred to in Sub-Section (4) and therefore, object of the Section is to quantify the profits and gains derived by the undertaking which is engaged in the eligible activity of power generation. The SDT for which ALP is required to be determined is the supply of eligible power generation unit. Therefore, the choice of the tested party should be such, so as to arrive at the true profits of such eligible power generation unit ascertain the ALP of sale price to another unit. Hence, in such cases, power generating entity alone should be considered as tested party, as the FAR of the power generating unit has a direct impact in the quantum of SDT which should be given precedent over the FAR of the other party.
7. Further, TPO has referred to the Explanation to Section 80IA(8) which defines “market value” used in this sub-section in two manner; firstly, the price that such goods and services would ordinarily fetch in the open market; and secondly, the ALP as defined in clause (ii) of section 92F if transfer of such goods is SDT under section 92BA. He held that, in so far as the price that such goods and services would ordinarily fetch in the open market means that the electricity generated by the eligible unit would ordinarily fetch in the open market if sold and not the rate in which non-eligible unit could procure the electricity in the open market and therefore, eligible unit alone has to be taken as tested party. He further held that the object of extending the application transfer pricing regulations to specified domestic transaction was to ensure that assessee do not inflate the profits to such transaction of the eligible units and the correct profits should be determined and therefore, the ALP has to be determined in terms of Clause (ii) to Explanation to Section 80-IA (8). TPO also referred to the „Safe Harbour Rules‟ notified by CBDT wherein it provides that the company engaged in the business of generation of power, the rates for the supply of electricity would be as per the tariff decided by the appropriate commission in accordance with the provisions of Electricity Act, 2003. He also referred to the contentions of the assessee that the difference in the trade level of the comparables are very important to determine the comparability and in the comparable transactions proposed by the department, the sale of power is not end consumer whereas the assessee has made sale to the end consumer and therefore, price on which end consumer gets the electricity is important. The rebuttal of the ld. TPO was that the retail price at which the power is sold to end customer includes profits on account of distribution function and therefore, cannot be considered for the purpose of determining the profit which power generating company not performing any distribution function. The main important thing which is to be seen is the supplier of the power in the transaction cannot be a distributor. He further reiterated that after the incorporation of the TP provisions, it is incumbent to determine the price as per the methods adopted for determination of ALP and not simply looking at the market value as provided in Sub-clause (i) of Explanation to Section 80IA (8). After detailed discussion and referring to the various case laws and distinguishing the case laws relied upon by the assessee, the ld. TPO proposed an adjustment of Rs. 15,49,32,320/- in the following manner:-
The power procurement rate for GEB is Rs.3 94/unit which is higher than the power exchange rates as discussed in above paras. It is also higher as compared to the power purchase cost to the MSEDCL of Rs.3.79 per unit in the state of Maharashtra. The assessee submitted its cost of production to be at Rs.3.03 per unit being Rs.2.83 towards production cost and 20 paise towards coal cost and depreciation and other expenses. Further even after considering the adjustment for return on capital pre tax of 24.05%, the cost works out to Rs.3.76 per unit where as procurement rate for GEB is Rs.3.94/unit which s being compared in this case. It may be noted that since the aforesaid price is the average price of procurement of electricity and since the source of procurement is hydel, thermal, solar as well as wind, the correct picture is not reflected. According to the assessee, if the hydel power rate only is considered, the average rate would be Rs.3.94/unit. However, considering the details as discussed above regarding the cost of production of the assessee, power purchase cost to the MSEDCL, return on capital pre tax of 24.05%, the profit element of the assessee company etc, the ALP of the power sold to the eligible units is treated to be at Rs.3.94/unit and adjustment is worked out as tabulated below
