Nectar Lifesciences Ltd. Vs ACIT (ITAT Delhi)
Once there was a direct internal CUP, i.e., the assessee company had purchased electricity from Punjab State Power Corporation at Rs.7.57, then it represents the market rate on which any industry undertaking or consumer is getting the electricity. Thus, we do not find any reason as to why such market rate or CUP should be rejected. Nowhere, it has been brought by the TPO as to why the average trading rate in Indian Energy Exchange should be applied as external CUP. Accordingly, we hold that the sale of electricity @ 6.72 per unit is at Arms’ Length and no adjustment is required in this segment/unit.
FULL TEXT OF THE ORDER OF ITAT DELHI
The aforesaid appeal has been filed by the assessee against the assessment order dated 29.11.2018 passed u/s.143(3) r.w.s. 144C(1) for the Assessment Year 2014-15 in pursuance of the directions given by the ld. Dispute Resolution Panel vide order dated 20.09.2018. In the grounds of appeal, the assessee has challenged the addition On Transfer Pricing Adjustment at Rs.33,36,66,839/-. The grounds of appeal reads as under:
1.1 The assessment order passed by the Ld. AO in pursuance to the directions issued by the Hon’ble Dispute Resolution Panel (“DRP”) is a vitiated order as the Hon’ble DRP erred both on facts and in law in confirming additions made by the Ld. AO/Ld. Transfer Pricing Officer (“TPO”) to the Appellant’s income by issuing an order without appreciation of facts and law.
1.2 The Ld. AO erred on facts by considering power plants of the assessee as “Biomass Gasifier Power Plants” instead of “Biomass Steam Power Plants”. This has been clarified vide our letter dated 02.02.2017 and Chartered Engineer Certificate. The raw materials and operational working of both power plants are altogether different.
2. Power Unit
The Ld. AO/TPO erred on facts and in law in determining the arm’s length price (“ALP”) of the Assessee’s Specified Domestic transactions pertaining to transfer of power units from eligible to non-eligible units at Rs. 4.609545/ unit as against Rs. 6.72/ unit and in doing so have grossly
2.1 erred in taking unit rate of Rs. 4.609545 (average of Rs. 6.40/ unit, tariff fixed by Punjab State Electricity Regulatory Commission for Biomass Gasifier Power Plants and Rs. 2.81909/ unit, the average rate of power traded at Indian Energy Exchange), despite that fact that the assessee had Biomass Steam based Power plants and also the assessee could not have sold power units on Indian Energy Exchange due to statutory or regulatory restrictions and there was no evidence of actual delivery/supply of power traded at energy exchange by husk based power plant companies based in Punjab or anywhere in India.
2.2 erred in ignoring provisions of Income Tax Act and various ITAT/ High Court judgments regarding “Market Value” in relation to any goods or services being sold or supplied, which states that either sale price of electricity board or purchase price of electricity boards should be taken as a market value in the case of Captive Power Plants.
3. STEAM
The Ld. AO/TPO erred on facts and in law in determining the arm’s length price (“ALP”) of the Assessee’s Specified Domestic transactions pertaining to transfer of steam from eligible to non-eligible units at “Nil” as against Rs. 2160/ MT and in doing so have grossly
3.1 erred in treating assessee’s power plant as Biomass Gasifier Power Plant, in which no steam is generated, instead of Biomass Steam Power Plants and therefore failed to understand the operations of Husk based power plants in which total expenditure is incurred first on generation of steam and thereafter part of steam is used for generation of electricity units and majority of steam is transferred to manufacturing processes of Pharma units of the assessee.
3.2 erred in ignoring number of ITAT/ High Court/ Supreme Court judgments which have held that steam is a form of power eligible for deduction u/s 80-IA of the Income Tax Act 1961. Had the steam cost being NIL, there would have been no need of any judgment on this issue.
3.3 erred in ignoring audit certificates of Senior Chartered Engineer (approved by Income Tax Deptt.) (Page 164 to 166) , Cost Accountant (appointed by Central Govt, to conduct Cost audit of the company) (Page 167) and Chartered Accountant (appointed by Shareholders of the Company) (Page 168 – 171). All these authorities can’t be wrong in calculating actual cost of steam.
4. That the Ld. AO/TPO erred on facts and in law in making addition of adjustment of transfer pricing of Rs. 33,36,66,839/- and in doing so have grossly.
4.1. erred in not restricting the addition under chapter VI-A to Rs. 31,87,41,278/-.
4.2. erred in not considering revenue of Rs. 20,05,82,507/- (4,35,14,600 units @ Rs.4.609545) allowed by TPO in his order.”
3. The facts in brief are that the assessee-company is engaged in the business of manufacturing and delivery of high quality pharmaceutical products and research in health sector. The production of its pharmaceuticals products requires high volume of electricity and power steam for heating, cooling, controlling and humidity and chemical reactions. It has set up two electricity power plant OF 6 MW each in Dera Bassi (Punjab) for fulfilling the captive consumption needs of the assessee-company. The said plants generate both electricity and steam aiding in the manufacturing process. Since, the assessee has entered into specific domestic transaction within the meaning of Section 92BA with its associated enterprises; the Assessing Officer referred the matter to the TPO for determining the Arms’ Length Price. The TPO after examining the transfer pricing adjustment and after analyzing all the specific domestic transactions with the AE, has proceeded to benchmark the power from eligible unit to non eligible unit specifically supply of electricity and steam from eligible unit to non-eligible unit. As per the TP study report, the assessee had shown transfer of power from eligible unit to non eligible unit at Rs.17,66,97,024/-. The TPO noted that transfer of the electricity power from eligible unit to non eligible unit, the average sales price as per Indian Energy Exchange (IEX) by taking it as external CUP comes to Rs.2.81909 per unit, whereas assessee has shown Rs. 6.72 per unit. The TPO was of the view that benchmarking of the sale of electricity per unit cannot be done with the sale price fixed by State Electricity Board as benchmarked by the Assessee, because State Electricity Board purchases electricity on a much lesser price and sale price is much higher because of various fixed heads and expenses, therefore, it was not a right CUP.
4. TPO called upon information u/s. 133(6) from Indian Energy Exchange and after incorporating the day to day of energy rate of power trade by IEX, held that average rate of power traded by IEX for the Financial Year 2013-14 was Rs. 2.81909 per unit and whereas the assessee had shown sale rate at Rs. 6.72 per unit which is not correct. Accordingly, he made the adjustment of Rs.918,35,605/- after observing as under:
7.20 Assessees submission has been considered by the TPO, The assessee has compared sale of Punjab State Power Corporation with assessee’s sale rate. It may be mentioned that both have different functions and cannot be Compared. Punjab Stale Power Corporation is a trailer where as the assessee is a producer, therefore, functionally they are different. Sale price of Punjab Slate Power Corporation, Trader, cannot be compared with assessee, manufacturer.
7.21 As far as assessee’s contention that power generated by Rio Gasifier plants are not traded at IEX is concerned, it may be mentioned that IEX has not specified nature of power generator. It is rate of power and specifically based on fuel. Power was traded at IEX for Punjab region at Rs. 281909, therefore, it can be taken as a rate for determining average sale rate.
7.22 The assessee submitted that Punjab State Electricity Regulatory Commission has fixed tariff of Rs.6,52 per unit; for Biogas Gasifier Power Projects. Contention of assessee is considered , il was found that Net Applicable Tariff Rote upon adjusting for Accelerated Depreciation benefit rate fixed by PSERC was Rs.6.40 per unit, it is further seen that this was generic tariff for RE technologies for F.Y .2013-14. There are various other variable factors which have to be considered while deciding final tariff, these factors are- Plant Load Factor and number of operating days for Non-fossil fuel based Cogeneration: fuel cost and return on equity. Since PSERC hits not fixed tariff for assessee’s unit, therefore, it cannot be presumed that these factors have boon considered while deciding tariff of Rs.6.40 per unit. Under these circumstances solely Generic Tariff cannot be taken as base for determining CUP. However it can be taken as a base to some extent. Therefore, the rates of power traded at TEX and generic rates decided by PSERC cart be taken as base for comparability under CUP. With above discussion average of generic tariff mid power traded at IEX is taken as comparable price. Thus Rs. 4.609545 per unit is taken as comparable price for calculating ALP under CUP.
7.23 With this remark, external CLP is applied in this case taking assessee as the tested party and arm’s Length Rate is applied at Rs.4.609545 per Kwh. Adjustment as per ALP:-
