‘Market rate’ for the purpose of inter divisional notional transfer price cannot be based on the rate determined by the Regulator
• Taxpayer is a company engaged in the business of generation and distribution of electricity.
• Originally the taxpayer was only in the business of distribution of electricity. Subsequently, in the assessment year 1996-97, the taxpayer had put up a plant for generation of electricity at Dahanu.
• The taxpayer had claimed deduction under section 80-IA of the Income Tax Act,1961 (the Act) in respect of income from generation and distribution of electricity at Dahanu by taking the average price it realized from consumers from assessment year 2000-01.
• The Assessing Officer (‘the AO’) held that taxpayer was entitled to deduction only in respect of generation of electricity under section 80-IA of the Act and not in respect of the distribution of power.
• For the purpose of determining the profits earned by the said unit, the AO sought to apply the provisions of section 80-IA(8) wherein the goods transferred from one business to another business of the same taxpayer should be at the market value.
• Accordingly, till assessment year 2005-06 the AO had computed the deduction under section 80-IA (8) considering the rate of purchase of power from independent power supplier as appropriate market price for the power generated and transferred by the generation division to the distribution division. This method of working was accepted by the Commissioner of Income Tax (Appeals) (CIT(A)) and the Income Tax Appellate Tribunal (Tribunal) till assessment year 2005-06.
• In the assessment proceedings for the assessment year 2006-07, the AO observed that the aforesaid method of working was no longer relevant because of the tariff fixed by the Regulator. Under the regulations, it was mandatory for all power generation and distribution entities to apply for fixation of tariff ultimately to be charged to various customers.
• Accordingly the AO proceeded to assess the deduction available under section 80-IA based on the tariff fixed by the Regulator and not as per the previous assessments.
• On an appeal by the taxpayer, the CIT(A) decided the issue in favor of the taxpayer.
• Aggrieved by the order of CIT(A), the tax authorities filed an appeal before the Tribunal .
Issue before the Tribunal
• Whether in computing the deduction under section 80-IA(8), for the purpose of determining the inter divisional notional transfer price, the market price of the power generated should be taken as the price of power purchased from independent power supplier or the price fixed by the Regulator?
Observations and Ruling of the Tribunal
• The tariffs fixed by Regulator (based on ‘clear profit method’ and ‘reasonable method’) is inclusive of both the activities of distribution and generation of power. This rate may not reflect the true rates with regard to the activity of only generation of power, which has not been rebutted by the tax authorities.
• The expression ‘clear profit’ and ‘reasonable return’ and the method of its computation would not be relevant for the purpose of the computing income under the Act.
• Till assessment year 2005-06, the tax authorities considered the rates at which power was purchased by the taxpayer from independent power supplier as the market value
• It was not determined as to whether the rates, based on the determination of power tariffs by Regulator, represent the correct market value for this purpose.
• In view of the fact that the tax payer had paid a particular rate to an independent power supplier, there was no difficulty of determining the market price. On the other hand, the rates fixed by the Regulator are for different types of producers and consumers.
• Hence, the AO’s determination of notional inter divisional transfer price fixed by the Regulator was not relevant to the facts of the case.
Conclusion: The above decision stipulates that if transactions between unrelated parties are at arm’s length, the same can be used as yardstick. Such price cannot be based on the tariffs determined by the Regulator for some other purposes.
Source: Reliance Infrastructure Limited. Vs ACIT, Mumbai.(ITA No. 4838/Mum/2009)