Rayalaseema Hi Strength Hypo Limited Vs DCIT (ITAT Hyderabad)
The Hyderabad Bench of the Income Tax Appellate Tribunal disposed of two appeals filed by Sree Rayalaseema Hi Strength Hypo Limited for Assessment Years 2017-18 and 2018-19 against assessment orders passed by the National Faceless Assessment Centre and the Assistant Commissioner of Income Tax, Circle-1, Kurnool, respectively. Since the facts and grounds in both appeals were identical, the Tribunal disposed of them through a common order with reference to the facts of Assessment Year 2017-18.
The assessee was engaged in manufacturing and sale of industrial chemicals, trading in coal and generation of power. It operated a captive thermal power plant of 10 MW capacity with an 11 KV distribution system and claimed deduction under section 80-IA of the Income-tax Act, 1961.
For AY 2017-18, the assessee had entered into specified domestic transactions with its Associated Enterprises in respect of sale of power. It benchmarked the transfer of electricity at Rs. 8.74 per unit by comparing it with rates charged by the State Electricity Board/APSPDCL to comparable consumers. The comparables reflected rates of Rs. 8.82, Rs. 8.98 and Rs. 10.71 per unit. The assessee contended before the DRP that its internal Comparable Uncontrolled Price, namely the rate at which electricity was procured by the non-eligible unit and other AEs from an unrelated entity, APSPDCL, constituted the appropriate basis for determining the Arm’s Length Price.
The Transfer Pricing Officer, however, considered that the Rs. 8.74 per unit rate included demand charges, energy charges, fuel charges, peak-hour charges, night-unit charges and electricity duty. According to the TPO, those components were not incurred by the captive power plant and therefore should be excluded. The TPO consequently proposed an average energy charge of Rs. 7.39 per unit as the Comparable Uncontrolled Price. The DRP considered demand charges at Rs. 7.40 per unit and held that other charges and duties arose from circumstances such as collections made on behalf of the Government and investments in distribution and transmission assets which were not incurred by the assessee’s captive power plant. The DRP therefore accepted the TPO’s determination of Rs. 7.39 per unit.
The assessee challenged this approach before the Tribunal, contending that charges such as time-of-day charges, demand and penal charges, customer charges and electricity duty formed part of the tariff and should not have been excluded when determining the ALP. The assessee relied, among other authorities, upon Nectar Lifesciences Ltd. Vs ACIT (2022) 138 Taxmann.com 557 and several decisions concerning valuation of electricity generated by captive power plants for purposes of Section 80-IA.
The Revenue supported the orders of the lower authorities. It contended that charges imposed by the State Electricity Board arose for reasons such as fuel surcharge, electricity duty and investment in distribution and transmission infrastructure, whereas the assessee did not incur those costs. The Revenue also relied upon the fact that the assessee had supplied power to APSPDCL at Rs. 5.45 per unit for two months during the relevant financial year and argued that the TPO’s adoption of Rs. 7.39 per unit was justified.
The Tribunal examined the record and noted that the Rs. 5.45 per unit rate related to surplus power supplied pursuant to a short-term tender invitation by APSPDCL, with the rate having been fixed in financial year 2015-16. APSPDCL was stated to be the sole monopoly in generation, procurement and distribution of power in the area, leaving the assessee with no option but to supply surplus power at the prescribed price. The Tribunal further noted that the TPO himself had accepted that the Rs. 5.45 rate could not constitute a controlled transaction.
In contrast, the rates charged by APSPDCL to TGV Projects and Investments Private Limited, Gauri Gopal Hospital and SRHHL were Rs. 8.98, Rs. 8.82 and Rs. 10.71 per unit respectively. The Tribunal observed that the TPO did not dispute these rates. It also noted that the chemical division of the assessee procured power from the assessee’s thermal division at Rs. 8.74 per unit while the same chemical division procured power from APSPDCL at Rs. 10.71 per unit.
The Tribunal considered the judicial precedents relied upon by the assessee, including decisions concerning captive power generation and Section 80-IA. It recorded that the consistent judicial view reflected in those decisions was that where an assessee establishes a captive power generation plant, supplies electricity to its AEs and claims deduction under Section 80-IA on the resulting profits, the valuation of electricity supplied to the AEs should be based on the rate at which the State Electricity Board charges industrial consumers.
Following the decisions of the High Courts in Reliance Industries Limited, Godavari Power and Ispat Ltd., Gujarat Alkalis and Chemicals Ltd. and Kanoria Chemicals and Industries Ltd., the Tribunal held that the assessee was justified in adopting Rs. 8.74 per unit as the ALP for electricity supplied by its captive power generation plant to its AEs. The Revenue was held to be unjustified in excluding the disputed heads of charges from that rate. The grounds on this aspect were accordingly allowed.
The Tribunal further held that, in view of its finding on the ALP of electricity, the issues concerning quantification of MAT credit and interest under sections 234B and 234C of the Act were academic and therefore did not require adjudication.
For AY 2018-19, the Tribunal found the facts to be identical to those in AY 2017-18 and held that its findings would apply mutatis mutandis. Accordingly, that appeal was also allowed. In the result, both appeals filed by the assessee were allowed.
Cases Discussed
- Nectar Lifesciences Ltd. Vs ACIT, (2022) 138 Taxmann.com 557 — considered in relation to the use of an internal Comparable Uncontrolled Price for valuation of electricity.
- Star Paper Mills Ltd. Vs DCIT, (2022) 134 Taxmann.com 177 — referred to in relation to valuation and benchmarking of power supplied by a captive power unit to another unit.
- DCIT Vs Vishal Fabrics Ltd., (2022) 139 Taxmann.com 30 — referred to in relation to valuation of electricity and the use of comparable market rates.
- CIT-LTU Vs M/s Reliance Industries Ltd., (2019) 12 Taxmann.com 372 (Bombay High Court) — followed on valuation of electricity supplied by a captive power generating plant to another unit with reference to the rate charged by electricity distribution companies to consumers.
- CIT Vs Godavari Power and Ispat Ltd., (2014) 42 Taxmann.com 551 (Chhattisgarh High Court) — followed as part of the judicial line concerning valuation of captive power for Section 80-IA purposes.
- PCIT Vs Gujarat Alkalis and Chemicals Ltd., (2017) 80 Taxmann.com 722 (Gujarat High Court) — followed in relation to valuation of electricity generated by a captive power plant with reference to market rates charged to industrial consumers.
- CIT Vs Kanoria Chemicals and Industries Ltd., (2013) 35 Taxmann.com 566 (Calcutta High Court) — followed as part of the consistent judicial view concerning valuation of captive-generated electricity.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Aggrieved by the order(s) dated 21/02/2022 & 17/06/2022, passed by the National Faceless Assessment Centre (NFAC), Delhi (for the AY.2017-18) & Learned Assistant Commissioner of Income Tax, Circle-1, Kurnool (for the AY.2018-19) (“Ld. AO”) in the case of Sree Rayalaseema Hi Strength Hypo Limited (“the assessee”) for the assessment years 2017-18 & 2018-19, under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for short “the Act”), consequent to the directions of Hon’ble Dispute Resolution Panel, Bengaluru (“DRP”), assessee filed these appeals. Since the facts involved in these two appeals, so also the grounds, are identical we deem it just and proper to dispose of these two appeals by way of a common order, with reference to the facts in the lead case for the assessment year 2017-18.
2. Brief facts of the case are that the main business of the assessee is manufacturing and sale of industrial chemical, trading in coal and generation of power. They have a captive thermal power plant of 10 MW capacity with the distribution system of 11 KV capacity and in respect of this unit the assessee claimed deduction under section 80-IA of the Act.For the assessment year 2017-18, return of income was filed on 28/11/2017 declaring an income of Rs. 16,14,94,790/-. 3CEB report for this year revealed that the assessee entered into specified domestic transaction with their Associated Enterprises (“AEs”), namely, Sree Rayalaseema Hi Strength Hypo Limited, Sree Rayalaseema Galaxy Projects Private Limited (SRGPPL) and TGV Projects and Investment Private Limited (TGVPIPL) in respect of sale of power, and Sree Rayalaseema Hi Strength Hypo in respect of sale of steel at Rs. 8.74 per unit. Assessee compared the transaction of sale of power with similar 11 KV connections of TGVPIPL, Gouri Gopal Hospital and Service No. 83 of SRHHL Power Plant to state that rate per unit of the comparables was in the range of Rs. 8.82 to Rs. 10.71 per unit as compared to Rs. 8.74 per unit at which the captive power plant of the assessee transferred power to the AEs.
3. Learned Transfer Pricing Officer (“learned TPO”), however, was of the opinion that the rate adopted by the assessee at Rs. 8.74 per unit includes demand charges, energy charges, fuel charge, peak hour charges, night unit charges and electricity duty and such charges have to be excluded from consideration. He accordingly proposed the average energy charges at Rs. 7.39 per unit as Comparable Uncontrolled Price (CUP).
4. Assessee filed objections before the learned DRP and contended that its internal CUP i.e., the rate at which the non-eligible unit and other AEs procured power in an uncontrolled transaction from an unrelated entity viz. APSPDCL, was the right basis for determination of Arms Length Price (ALP).
5. Learned DRP considered the demand charges, calculating the same on the basis of slab rate as per the tariff at Rs. 7.40 per unit and holding that the other charges and duties arise due to various reasons, namely, some are collections on behalf of the Government by DISCOMS (fuel surcharge and electricity duty), some arise due to large investment made in distribution and transmission assets put by the DISCOM for multiple industrial customers (for example demand charges arising out of providing firm commitment of sanctioned power to industrial power units by the distributing company) etc. Inasmuch as the captive power plant of the assessee does not incur these expenditure and commitments, Rs. 7.39 per unit adopted by the learned TPO against Rs. 8.74 per unit adopted by the assessee, is proper.
6. Pursuant to the directions given by the Ld. DRP, the learned Assessing Officer of the National Faceless Assessment Centre (“NFAC”) passed the final assessment order on 21/2/2022 in accordance with the directions given by the Ld. DRP, but the grievance of the assessee is that while giving effect to the directions of the Ld. DRP, the learned Assessing Officer of NFAC failed to give credit to the MAT while determining the final tax liability.
7. Hence, the assessee is in appeal before the Tribunal contending that the assessee did not claim any excess benefit under section 80IA of the Act, and while determining the ALP in respect of the price for supply of power per unit, various charges like time of the day charges, demand and penal charges, customer charges, electricity duty should have been taken into consideration to form part of the basic tariff itself but the authorities erroneously excluded the same while determining the ALP. In support of their contention that if the supply of electricity by one it to other unit of the entity was made at the rate at which the Electricity Board is supplying power, then it meets the ALP requirement, reliance is placed on the decisions reported in net of life sciences Ltd vs. ACIT(2022) 138 Taxmann.com 557, Star paper Mills Ltd vs. DCIT (2022) 134 taxmann.com 177, DCIT vs. Vishal fabrics Ltd (2022) 139 taxmann.com 30, West Coast paper Mills Ltd vs. additional CIT (2014) 52 taxmann.com 268 (Mumbai ITAT), CIT vs. reliance industries limited (2019) 12 Taxmann.com 372 (Bombay HC), CIT vs. Godavari power and Ispat Ltd (2014) 42 Taxmann.com 551 (Chattisgarh HC), PCIT vs. Gujarat alkylation chemicals Ltd (2017) 80 Taxmann.com 722 (Gujarat HC), and CIT vs. Kanoria chemicals and industries Ltd (2013) 35 Taxmann.com 566 (Calcutta HC).
8. Per contra, Revenue relied upon the orders of the authorities below and it is strenuously argued by the Ld. DR that the cost of production of electricity is to be compared with the cost of production of electricity by the state Electricity Boards and inasmuch as the other charges and duties levied by the State Electricity Board arise due to various reasons like the collections on behalf of the Government by this comes, fuel charge and electricity duty, large investments made in distribution and transmission assets incurred by this comes for multiple industrial customers to meet the demand charges arising out of providing firm commitment of sanctioned power to the industrial power units by the distributing company etc., which the assessee is not likely to incur, and, therefore, the authorities below are justified in excluding such charges which are incurred by the State Electricity Board but not by the assessee. It is the further argument of the Ld. DR that the assessee supplied power to APSPDCL at Rs. 5.45 per unit for a period of two months during the relevant financial year and therefore, Ld. TPO benchmarking the price per unit at Rs. 7.39 is quite justified.
9. We have gone through the record in the light of the submissions made on either side. It is an admitted fact that the assessee has been dealing in manufacturing and sale of industrial chemicals, trading in: generation and distribution of power and chemicals to the domestic as well as international markets. The assessee also has a captive thermal power plant of 10 MW capacity at Kurnool, in respect of which the deduction under section 80-IA of the Act has been claimed by the assessee with the distribution system of 11 KV capacity. It is also not in dispute that the assessee entered into specific domestic transaction with its AEs, namely, Sh. Rama Seema High-strength Hypo Ltd, Sh. SMR Galaxy Projects Pvt. Ltd and ATV Projects and Investments Private Ltd in respect of sale of power.
10. Dispute in this appeal revolves around the deduction of Rs. 3,75,68,330/-claimed by the assessee under section 80-IA of the Act in respect of the power generation through thermal sources by adopting Rs. 8.74 per unit as ALP for supply of power to its chemical division and other AEs. It is not in dispute that the state power distribution company charged Rs. 8.98 per unit from TGV Project and Investment Private Limited, Rs. 8.82 per unit from Gauri Gopal Hospital and Rs. 10.71 per unit for service No. 583 of SRHHL plant unit.
11. Insofar as the assessee supplying power at Rs. 5.45 per unit for a period of two months till 25/06/2016 is concerned, it remains undisputed that such price was fixed in the financial year 2015-16 and in respect of the surplus power generated, based on a short-term tender invitation by the APSPDCL, under the circumstances that APSPDCL is the sole monopoly in generation, procurement and distribution of power in the area and the assessee being a private enterprise had to supply surplus power to the State Electricity Board and therefore, there was no option available to the assessee but to sell the same at the price prescribed by the APSPDCL. As a matter of fact, Ld. TPO on a consideration of the submissions made by the assessee, agreed with the assessee and recorded that the rate of Rs. 5.45 cannot be controlled transaction.
12. Now coming to the transaction it is submitted by the assessee in respect of TGV Projects and Investments Pvt. Ltd, Gauri Gopal Hospital and SRHHL, as comparable transactions, rate per unit charged by APSPDCL in respect of TGVPIPL is Rs. 8.98, in respect of Gauri Gopal Hospital it is Rs. 8.82 and in respect of SRHHL it is Rs.
10.71. Basing on these 3 transactions the assessee concluded that the rate per unit is about Rs. 8.82 to Rs. 10.71 and, therefore, the average at Rs. 8.74 per unit is taken to benchmark the transaction. Insofar as these rates are concerned, Ld. TPO does not dispute the same. According to the Ld. TPO, assessee is not entitled to claim the inclusion of the TOD charges, demand charges, penal demand charges, electrical duty, customer charges and late payment charges which the state electricity board collects from the consumer, since the assessee does not incur any expenditure relevant to such charges being a captive power plant.
13. It is relevant to note here that the assessee does not claim late payment charges. According to the assessee while adopting CUP method, the price at which the state Electricity Board adopted while supplying power to the assessee has to be considered instead of excluding so many charges levelled by the State Electricity Board to its consumers, more particularly to the assessee. Even in respect of the chemical division of the assessee in question, it procured power from the thermal division at Rs. 8.74 while the same chemical division procured power from the APSPDCL at Rs. 10.71 per unit. Insofar as this fact is concerned, neither the Ld. TPO nor the Ld. DRP dispute the same.
14. Coming to the case law relied on by the assessee, in the cases of Star paper mills Ltd (supra), Vishal fabrics Ltd (supra), Reliance Industries Limited (supra),,, Godavari Power and Ispat Ltd (supra), Gujrat Alkalis and Chemicals Ltd (supra) and Kanoria Chemicals and Industries Ltd (supra) are concerned with the supply of power generated by the captive power plants. In all these cases, and more particularly in the Nector Lifesciences Ltd (supra), Star paper Mills Ltd (supra), West Coast paper Mills Ltd (supra), Godavari Power (supra), Gujrat Alkalis (supra) and Kanodia Chemicals it is specifically held that when an assessee setsup a captive power generation plant and provided electricity to its AEs and claimed deduction under section 80-IA of the Act, in respect of the profits arising out of such activity, the valuation of the electricity provided to the AEs should be at rate at which the State Electricity Board charges for supply of electricity to the industrial consumers.
15. On the face of the admitted fact that the Ld. TPO himself conceded that the rate at which the assessee supplied the power to the APSPDCL during the financial year 2015-16 at Rs. 5.45 cannot be an uncontrolled transaction, the Ld. TPO cannot ignore the transaction as submitted by the assessee between TGV Projects, Gauri Gopal Hospital and SRHHL with the APSPDCL at Rs. 8.98, Rs. 8.82 and Rs. 10.71 per unit cannot be ignored. At the same time the consistent view taken by the higher judicial fora and also the Tribunal in the cases referred to by the assessee is to the effect that when the assessee had set up a captive power generating unit and provided electricity to its AEs and claimed deduction under section 80-IA of the Act in respect of profits arising out of such activity, for the purpose of such deduction the market value of power supplied by the assessee to its AEs should be computed considering the rate of power charged by the State Electricity Board for supply of electricity to industrial consumers.
16. We, therefore, respectfully following the decisions of various Hon’ble High Courts in the case of Reliance Industries Limited (supra), Godavari Power and Ispat Ltd (supra), Gujrat Alkalis and Chemicals Ltd (supra) and Kanoria Chemicals and Industries Ltd (supra) are of the considered opinion that the assessee is justified in adopting the ALP of the electricity supply bites captive power generation plant to its AEs at Rs. 8.74 and the Revenue is not justified in excluding certain heads of charges from out of it. With this view of the matter, we allow the grounds of appeal on this aspect.
17. In view of our finding in the preceding paragraphs, issues relating to the quantification of the MAT credit and interest under section 234B and 234C of the Act are academic in nature and need not be adjudicated.
18. Since the facts of ITA TP No. 351/Hyd/2022 for the assessment year 2018-19 are identical to one as decided by us in ITA TP No. 123/Hyd/2022 (supra) for the assessment year 2017-18 and, therefore, our findings in the said appeal, mutatis mutandis, would apply to this appeal as well. Hence, this appeal of assessee is also allowed.
19. In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on this the 26th day of October, 2022
