OPG Energy (P.) Ltd.
Deputy Commissioner of Income-tax
N. S. Saini, Accountant Member –
This is an appeal filed by the Assessee against the order of Commissioner of Income Tax(Appeals)-V, Chennai dated 28.09.2011 for Assessment Year 2008-09 by taking the following grounds:-
“1. The learned Commissioner of Income Tax(Appeals) erred in confirming the Assessing Officer’s finding that the appellant had charged higher rates to related parties.
2. The learned Commissioner of Income Tax(Appeals) failed to appreciate that the sale of power to related parties was not higher than market price.
3. The learned Commissioner of Income Tax(Appeals) erred in sustaining partially disallowing deduction under Section 80 IA on sale of power to related parties.
4. The learned Commissioner of Income Tax(Appeals) ought to have appreciated that the prices paid by the related parties were lower than the prices charged by the Tamil Nadu Electricity Board.
5. The learned Commissioner of Income Tax(Appeals) ought to have appreciated that the prices paid by the related parties were comparable with those paid by unrelated parties such as Ennore Foundries, Schasayee Paper etc.
6. The learned Commissioner of Income Tax(Appeals) ought to have appreciated that even the average prices paid by the non-related parties was lower on account of a lower tariff paid by one party Meridian Industries Ltd on account of difference in the nature of the price which was fixed with reference to the price of gas.
7. In any case, deduction under Section 80-IA can be denied only if there is a deliberate attempt to inflate profits whereas the prices charged by the appellant are lower than prices charged by the Tamil Nadu Electricity Board.
8. For these and other grounds that may be adduced at the time of hearing, it is prayed that exemption claimed under Section 80IA may be granted in full and the returned income accepted and justice rendered.”
2. The sole issue in the above grounds of appeal of assessee is that Commissioner of Income Tax(A) erred in confirming the partial denial of deduction under Section 80-IA for the reason that the assessee had sold power to its group concern and non-group concerns at different rates. The Commissioner of Income Tax(A) has decided the issue as under:-
“8.3. The second issue, as per the ground No.8, is with regard to partial denial of deduction under Section 80-IA for the reason that the appellant has sold power to its group concern and non group concerns at different rates. According to the working given by the Assessing Officer in the assessment order the appellant has sold power to its related parties at the rate of Rs. 3.364 per unit whereas the other parties which it had been charged at the rate of Rs.3.266 per unit. The difference of Rs. 0.098(3.364-3.266) was applied to 1185056.17 units sold to the related parties and excess receipts from the related parties. Were worked out at Rs. 1,16,13,550/- and the claim of deduction under section 80-IA was not allowed on the excessive receipts from the related parties. However, since the entire profit attributable to sale of power to M/s. OPG Metals was already disallowed by the Assessing Officer, this disallowance was not made again.
It is submitted by the appellant that the Hon’ble ITAT has held in ITA No.1014/Mds./10(supra) that and average sale price of Rs. 3.45 per unit was reasonable and not excessive and hence deduction under section 80-IA could not be denied and that the average sale price to group companies of Rs. 3.364 was not excessive especially when the tariff of the Electricity Board was Rs. 3.50 plus peak hour charges plus maximum demand charges etc.
It is further submitted by the appellant that a quick look at the table prepared by the Assessing Officer shows that the sale to group companies at an average rate of Rs. 3.364 is actually lower than the price of Rs. 3.40 at which it has been sold to large public companies such as Ennore Foundries, Adyar Gate Hotels, Schasayee Paper etc. to whom power has been sold at Rs. 3.40. It is submitted by the appellant that if the sale price to Meridian Industries (out of non-group companies) is ignored, then the average price to group companies is actually lower and the reason for charging lower rate from Meridian industries has been given that with this concern alone the rate was fixed on the basis of the natural gas price and it varies with the gas price.
I have considered the submissions of the appellant but the same cannot be accepted. Firstly, the claim of the appellant that the ITAT have held the sale price of power 3.40 per unit as reasonable and not excessive is not correct as the ITAT have considered the sale price to OPG Metals Pvt. Ltd, a group concern vis a vis the price per unit as per agreement with TNEB. Since the agreement with the TNEB was to sell only surplus power after supplies have been made to such concerns, it was observed that the argument of the assessee that it was only a standby arrangement, and such rate agreed there in could not be taken for comparison purposes, could not be brushed aide. The ITAT, therefore, held that the power purchase agreement with TNEB, which was a standby arrangement, could not be made basis for arriving at the market rate of power disregarding the energy rate at which TNEB Grid to its customers. Therefore, the reliance by the appellant on this decision of the ITAT in appellant’s own case for Assessment Year 2006-07, is misplaced.
Further the submissions of the appellant that the sale price to Meridian Industries may be ignored, cannot be considered as the maximum sale amongst unrelated parties are to this concern alone. Ignoring the same would give a distorted picture and if this argument of the appellant is accepted than on the same analogy the sale price to M/s. OPG Metals can also be excluded and the sale price per unit to the group concerns works out to Rs. 3.58 per unit and the disallowance on this account would work out to a figure little above the working of the above. Also about from making the submissions with regard to the transaction with Meridian Industries, no documentary evidence has been furnished. In any case, there may be various reasons for contracting different sale rates with different customers but the onus is on the appellant to evidence the same when deduction is claimed on higher receipts from related parties as compared to unrelated parties. In the instant case, the appellant has failed to justify the same with any evidence.
In view of the above action of the Assessing Officer in not allowing the deduction u/s 80-IA on the excessive rates charged from the group concern/related parties is confirmed and this ground (No.8) is dismissed.”
3. The Authorised Representative of the assessee reiterated the submissions made before the Commissioner of Income Tax(Appeals) and the Departmental Representative supported the order of the Assessing Officer.
4. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. In the instant case, the undisputed facts of the case are that the assessee is engaged in the business of generation and distribution of power. The assessee is eligible for deduction under Section 80-IA in respect of profits derived from the said undertaking in accordance with the provisions of that section. The Assessing Officer observed that the average price at which the assessee sold power to sister concerns works out to Rs. 3.364 per unit, when the average rate in respect of non-related parties works out to Rs. 3.266 per unit. The average sale price to sister concerns is more by 0.098 per unit. The total number of units sold to sister concerns was 11,85,05,617 units. Therefore, the Assessing Officer worked out that the assessee derived more profits of Rs. 1.16,13,550/- under Section 80-IA of the Act.
5. On appeal, the Commissioner of Income Tax(Appeals) confirmed the action of the Assessing Officer.
6. The dispute before us relates to the interpretation of provisions of sub-section(10) of Section 80-IA of the Act. The said sub section reads as under:-
A reading of the above provisions shows that when business transaction is so arranged produces to the assessee more than the ordinary profits, which might be accepted to arise in such eligible business, then the AO is empowered to restrict the allowance of deduction under Section 80-IA to the amount of profit, which might reasonably be deemed to have been derived from the normal business transactions.
7. We find that in the instant case, the lower authorities have restricted the allowance of deduction under Section.80-IA by determining the difference between the average price at which power was sold to sister concerns of the assessee and to other unrelated parties. We find that the provisions of Sec.80-IA(10) does not empower the Revenue to do so. The basic condition, which is to be satisfied for invoking the provisions of Section 80-IA(10) is that the business transactions are so arranged so as to produce to the assessee more than the ordinary profits, which might be expected to arise in such eligible business. The Section does not provide that if the assessee earns more profit from related parties in compare to unrelated parties, then the allowance of deduction under Section 80-IA is to be restricted to the same proportion at which the profit was derived from unrelated parties, even in the circumstances where such profits derived from related parties were such that it could be expected to arise to such eligible business as ordinary profit. In the instant case, submission of the assessee is that the average rate of per unit of power charged from sister concerns was less than the rate at which power was sold by the TNEB, which is an undertaking owned by the State Government. Thus, profit realized by charging rates which are lower than the rate, which is charged by an undertaking belonging to the Government by no strategy of imagination can be held as more than the ordinary profit which reasonably be expected to arise in such business. We find force in the above argument of the assessee.
8. However, we find that the assessee has not furnished before us the party-wise break up of the rate charged by it in respect of its sister concerns. In our considered opinion, the working for the provisions of Section 80-IA(10) has to be made on individual basis and the same cannot be made on an average basis. In absence of rates charged from individual parties having close connection with the assessee before us, we are not in a position to adjudicate the issue completely. In our considered opinion, it has to be verified on individual party basis the rates, which have been charged for power sold by the assessee and when it is found that the rates are higher than the rates, which might be expected to realize by its power generating unit, then in such circumstances, the profit based on rates, which may be expected to be realized by the assessee’s power generating unit can only be allowed deduction to the assessee in view of the provisions of Sec.80-IA(10) of the Act. We ,therefore, set aside the orders of the lower authorities and restore the issue back to the file of the Assessing Officer for adjudicating afresh in light of the observations made herein above after proper verification and after allowing proper opportunity of hearing to the assessee. Thus, the grounds of appeal of assessee are allowed for statistical purposes.
9. In the result, the appeal of assessee is allowed for statistical purposes.