RKM POWERGEN PRIVATE LIMITED,CHENNAI vs. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 1(1), CHENNAI

आदेश / O R D E R

PER MANJUNATHA. G, AM: This appeal filed by the assessee is directed against the order

passed by the learned Commissioner of Income Tax (Appeals)-18,

Chennai, dated 20.03.2023, and pertains to assessment year 2013-14.

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engaged in the business of construction and operation of power plants.

The assessee is a joint venture company promoted by M/s. R K Powergen

Pvt. Ltd., (in short “M/s.RKPPL“) & M/s. Mudayaja Corporation, Berhad,

Malaysia, (in short “M/s.MJC“) with the objectives of setting up of 4 x 360

MW coal based Thermal Power Project at Jangir, Champa District,

Chhattisgarh. M/s.MJC was incorporated under the Malaysian Companies

Act, 1965, as a Public Limited Company. M/s.MIPP International Ltd. (in

short “M/s.MIPPIL“) was incorporated in the republican of Mauritius as a

Private Limited Company and the company is a subsidiary of M/s.MJC.

M/s.MIPPIL was granted a Global License Category-2 u/s. 20(5) of the

Financial Services Development Act, 2001, and it is kept valid with annual

certification. The principle activity of M/s.MIPPIL is supply of power

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equipments for the Indian market. The assessee company entered into an

agreement dated 18.07.2017 with M/s MIPPIL for supply of mechanical

and electrical plant & machinery for setting up of 360 MW coal based

Power Plant for Phase-I and also entered into agreement for supply of

mechanical and electrical plant & machinery for setting up of 3 x 360MW

coal based Power Plant for Phase-II. The mechanical equipment procured

from M/s.MIPPIL includes boilers, steel turbines, generators, coal handling

system, cooling water system, etc. During the FY 2012-13, relevant to

assessment year 2013-14, the assessee has imported capital equipments

from its AEs, M/s.MIPPIL amounting to Rs.1471,30,09,946/- pursuant to

supply contract agreements entered into with above company. The

equipments were supplied on FOB basis by M/s.MIPPIL.

on 27.11.2013 admitting a total income of Rs.NIL under normal provisions

of the Act and book loss of Rs.12,41,817/- u/s.115JB of the Income Tax

Act, 1961 (in short “the Act“). The assessee had also filed a Transfer

Pricing Report and also reported international transactions with its AEs in

Form No.3CEB in respect of import of plant & machinery from M/s.MIPPIL,

at a cost of Rs.1471,30,09,946/-. The assessee has selected ‘other

method’ as per Rule 10AB of the Income Tax Rules, 1962 and has claimed

that its transactions with its AEs are at arm’s Length Price and for this

purpose, it has relied upon the comparable information from M/s. Power

Finance Corporation Information Memorandum in respect of Thermal

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Power Project, Suratgarh, which has been chosen as a comparable

project. The assessee had obtained a Valuation Report from Chartered

Engineer dated 11.11.2013 and as per the report of Chartered Engineer,

per MW cost incurred by the assessee for setting up of power project is

lesser than per MW cost incurred by the Thermal Power Projects at

Suratgarh.

assessment proceedings; a reference was made to the TPO for

determining ALP of international transactions of the assessee company

with its AEs, M/s.MIPPIL, in respect of import of mechanical and electrical

plant & machinery for setting up of Coal Based Power Plant at

Chhattisgarh. During the proceedings before the TPO, the assessee

furnished information and documents called for. The assessee submitted

that there was a standard per MW cost for large Coal Based Power Plants

that was well-known and served as a benchmark and that its original

project cost was well within the benchmark. The assessee also submitted

that its project had been apprised and funded by two leading Specialized

Power Finance Corporations, that had a deep knowledge of power sector

and that the appraisal of the project cost itself established that the

imported cost of plant & machinery was reasonable and at arm’s length

price. The assessee also pointed out that imports were made pursuant to

a procurement contract entered into with M/s.MIPPIL and that imports

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made in the earlier Financial Years pursuant to the same contract had

been accepted in earlier years in TP proceedings.

also taken note of various facts including financial statement of AEs,

M/s.MIPPIL obtained under exchange of information observed that, the

margin earned by the AE @ 33.5% was high considering the role of the

AEs as per FAR analysis. The TPO has analyzed the transactions in light

of TP report submitted by the assessee by adopting ‘other method’ as per

Rule 10AB of the Income Tax Rules, 1962, in light relevant information,

including agreement between the parties for purchase of Plant &

Machinery. The TPO observed that based on functions performed by AE, it

can be treated as a trader and thus, margin earned by the AE on total

transactions with the assessee company in respect of import of Plant &

Machinery is considerably high. Therefore, rejected TP report submitted

by the assessee and has carried out independent TP study and has

applied TNMM as most appropriate method in the given facts and

circumstances of the case. The TPO had also selected M/s.Shicagen India

Ltd., as a comparable company, which is in the business of trading in

construction materials. The TPO had also computed PLI (OP/OC) of

M/s.Shicagen India Ltd., (trading segment) at 2.74% and made certain

economic adjustment to arrive at PLI of 8.74%. The TPO had also

computed PLI of M/s.MIPPIL at 50.36% based on its financial statement

obtained under Exchange of Information Scheme and then, made

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downward adjustment of Rs.407,25,95,597/- to the value of imports of

Plant & Machinery from AE.

r.w.s.92CA of the Act dated 31.03.2017 and made TP adjustment of

Rs.407,25,95,597/- towards downward adjustment suggested by the TPO

in respect of import of Plant & Machinery and reduced from value of fixed

assets/capital work-in-progress, since, the business of the assessee is not

commenced. The AO further stated that when the business of the

assessee is commenced, the depreciation to the extent of downward

adjustment to be disallowed. The AO had also made addition of

Rs.25,93,58,803/- towards interest income earned from fixed deposit with

banks on the ground that any income earned like interest income,

dividend, etc., should be assessed under the head ‘income from other

sources’ irrespective of source of fund. The AO had also made additions

of Rs.1,70,83,176/- u/s.14A r.w.r.8D of the Income Tax Rules, 1962,

towards expenses relatable to exempt income and disallowed interest on

borrowings u/r.8D(ii) and other expenses u/r.8D(iii) of the Income Tax

Rules, 1962.

an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has

filed detailed written submissions on the issue which has been reproduced

at Para No.6 on pages 11 to 48 of the Ld.CIT(A)’s order. The assessee

has challenged downward adjustment made by the TPO towards import of

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capital goods from AE, M/s.MIPPIL and also challenged additions made by

the AO towards disallowance u/s.14A r.w.r.8D of the Income Tax Rules,

1962, and also assessment of interest income under the head ‘income

from other sources’ as against reduction of interest income from capital

work-in-progress account.

assessee and also taken note of various reasons given by the AO

sustained additions made by the AO towards downward adjustment

proposed by the TPO in respect of import of capital goods from AE.

Further, the Ld.CIT(A) has enhanced the assessment and directed the AO

to make further adjustment in respect of import of capital goods from AE

amounting to Rs.378,10,39,958/- by holding that the AE is a low risk

trader and accordingly, by considering Safe Harbor Rules applied 5%

margin on overhead cost incurred by the AE to arrive at total ALP of

capital goods imported by the assessee company from its AE, and thus,

computed downward adjustment of Rs.744,03,40,395/-. Since, the AO

has already been made downward adjustment in TP order dated

01.02.2017 amounting to Rs.407,25,06,299/-, the balance short

adjustment of Rs.336,78,34,096/- has been enhanced and directed the

AO to reduce from capital work-in-progress. The Ld.CIT(A) while doing

so, has rejected TP study conducted by the assessee company and

adoption of any ‘other method’ as per Rule 10AB of the Income Tax Rules,

1962 and also rejected selection of most appropriate method by the AO

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and selection of comparable M/s.Shicagen India Ltd., on the ground that

in the given facts and circumstances of the case, the most appropriate

method can be considered is any ‘other method’ as provided u/r.10AB of

the Income Tax Rules, 1962, but not TNMM as considered by the TPO.

The Ld.CIT(A) has also categorized the AE, M/s.MIPPIL as low profile

trader with very low risk and accordingly, applied 5% margin on overhead

cost and suggested downward adjustment in respect of import of capital

goods. The Ld.CIT(A) had also upheld additions made by the AO towards

disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962 and also

assessment of interest income earned from fixed deposits kept with banks

under the head ‘income from other sources’. The Ld.CIT(A) had also

enhanced assessment and direct the AO to disallow interest of

Rs.108,03,37,425/- u/s.36(1)(iii) of the Act, for diversion of interest

bearing funds for non-business purpose in respect of amount paid to AEs

for import of capital goods on the ground that downward adjustment

suggested towards import of capital goods is nothing but payment of

amount to AEs, which is nothing but diversion of interest bearing funds.

The Ld.CIT(A) had also directed the AO to reduce interest disallowances

from the capital work-in-progress for AY 2014-15. Thus, the Ld.CIT(A)

dismissed the appeal filed by the assessee with enhancement. Aggrieved

by the order of the Ld.CIT(A), the assessee is in appeal before us.

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of the assessee appeal is disallowance of expenditure relatable to exempt

income u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962. The

facts with regard to impugned dispute are that the assessee has earned

exempt dividend income of Rs.5,31,21,556/-. The assessee has

disallowed an amount of Rs.8,79,013/- u/s.14A of the Act. The AO has

determined total disallowance of Rs.1,70,83,176/- u/s.14A of the Act, by

invoking Rule 8D of the Income Tax Rules, 1962, which includes interest

on borrowings, disallowance u/r.8D(ii) of the Income Tax Rules, 1962, of

Rs.82,93,040/-, and disallowance of other expenses @ 0.5% of average

value of investment u/r.8D(iii) of the Income Tax Rules, 1962, for

Rs.87,90,136/-. The AO had also made re-computation of book profit

u/s.115JB of the Act, by making additions towards disallowance u/s.14A

of the Act r.w.r.8D of the Income Tax Rules, 1962. On appeal, the

Ld.CIT(A) sustained the additions made by the AO towards disallowance

of expenditure relatable to exempt income u/s.14A of the Act r.w.r.8D of

the Income Tax Rules, 1962, and also re-computation of book profit

u/s.115JB of the Act, by making additions towards disallowance u/s.14A

of the Act. Aggrieved by the order of the Ld.CIT(A), the assessee is in

appeal before us.

submitted that the AO has disallowed Rs.1,70,83,176/- which is

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comprising of Rs.87,90,136/- u/r.8D(iii) of the Income Tax Rules, 1962,

and Rs.82,93,040/- u/r.8D(ii) of the Income Tax Rules, 1962. The

assessee has not challenged the disallowance of other expenses

u/r.8D(iii) of the Income Tax Rules, 1962. In respect of disallowance of

interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, the

assessee company is having sufficient funds comprising of share capital,

reserves and surplus, which is more than the amount of investment in

shares and securities, mutual funds which yielded exempt income.

Therefore, when own funds including mixed funds is in excess of

investments, the question of disallowance of interest expenditure does

not arise. In this regard, he relied upon the decision of the Hon’ble

Supreme Court in the case of South Indian Bank Ltd. v. CIT reported in

[2021] 130 taxmann.com 178 (SC). The Ld.Counsel for the assessee

further submitted that disallowance of expenditure u/s.14A of the Act

r.w.r.8D of the Income Tax Rules, 1962, cannot be added back to book

profit computed u/s.115JB of the Act, and in this regard, he relied upon

the decision of ITAT Special Bench in the case of ACIT v. Vireet

Investment (P.) Ltd., reported in [2017] 82 taxmann.com 415 (Delhi –

Trib.) (SB).

the order of the Ld.CIT(A) submitted that although, the assessee claims

to have sufficient own funds in excess of investments made in shares and

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securities which yielded exempt income, but no details has been filed,

including cash flow statement to establish availability of own funds.

Therefore, Ld.CIT(A) has rightly sustained additions made by the AO

u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962, and their

orders should be upheld. He further submitted that disallowance

contemplated u/s.14A of the Act, should be added back to the book profit

computed u/s.115JB of the Act. As per Clause (f) of Explanation-1 to

Sec.115JB of the Act, any amount of expenditure relatable to any income

referred to in Sections 10, 11 or 12 should be added back. Therefore,

there is no error in the reasons given by the AO to make additions, and

thus, the order of the Ld.CIT(A) should be upheld.

record and gone through orders of the authorities below. The assessee

has not challenged the disallowance of other expenses @ 0.5% on

average value of investment u/r.8D(iii) of the Income Tax Rules, 1962,

amounting to Rs.87,90,136/-, and thus, we are inclined to upheld the

findings of the Ld.CIT(A). In so far as disallowance of interest on

borrowings u/r.8D(ii) of the Income Tax Rules, 1962, the assessee has

filed necessary details to prove availability of sufficient own funds in

excess of investments made in shares and securities and mutual funds

which yielded exempt income. From the details filed by the assessee, we

find that the assessee own funds at Rs.10585.28 Crs., whereas the

average value of the investments made in shares and securities and also

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mutual funds was at Rs.175.80 Crs. From the above, it is undisputedly

clear that the assessee is having sufficient own funds in excess of

investments made in shares and securities, and thus, in our considered

view, the case of the assessee is squarely covered by the decision of the

Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT

(supra), wherein, the Hon’ble Supreme Court clearly held that if

investments in securities is made out of common funds and the assessee

has available non-interest bearing funds larger than the investment made

in tax free securities, in such cases, disallowance u/s.14A of the Act,

cannot be made. The relevant findings of the Hon’ble Supreme Court are

as under:

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20, Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A of the Act. in other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made.

of the Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT

(supra), we are of the considered view that the AO is erred in disallowing

interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, and

thus, we reversed the findings of the Ld.CIT(A) on this issue and direct

the AO to delete the additions made towards disallowance of expenditure

u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962 on interest

expenditure.

by making additions towards disallowance u/s.14A of the Act, r.w.r.8D of

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the Income Tax Rules, 1962. We find that this issue is also squarely

covered in favour of the assessee by the decision of the ITAT Special

Bench in the case of ACIT v. Vireet Investment (P.) Ltd., (supra),

wherein, the ITAT Special Bench held that computation under Clause (f)

to Section 115JB of the Act, is to be made without resorting to the

computation as contemplated u/s.14A of the Act r.w.r.8D of the Income

Tax Rules, 1962. Therefore, we are of the considered view that the

Ld.CIT(A) is erred in upholding the reasons given by the AO to re-

compute book profit u/s.115JB of the Act, by making additions towards

disallowance of expenditure relatable to exempt income u/s.14A of the

Act, r.w.r.8D of the Income Tax Rules, 1962. Thus, we reverse the

findings of the Ld.CIT(A) on this issue and direct the AO to delete

additions made towards disallowance u/s.14A of the Act r.w.r.8D of the

Income Tax Rules, 1962, to book profit computed u/s.115JB of the Act.

No.2 of the assessee appeal is assessment of interest income during pre-

commencement period under the head ‘income from other sources’

amounting to Rs.25,93,58,803/-. The facts with regard to impugned

dispute are that during the FY 2012-13 relevant to AY 2013-14, the

assessee has earned interest on Short Term Fixed Deposits with bank

amounting to Rs.25,93,58,803/-. The assessee has reduced interest

income from capital work-in-progress on the ground that interest earned

on Fixed Deposits with banks is inextricably linked to project, and thus,

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during pre-commencement period any income, including interest income

earned by the assessee should be reduced from capital work-in-progress.

The AO assessed interest income earned on Short Term Fixed Deposits

under the head ‘income from other sources’ by following the decision of

the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172 (SC). On appeal,

the Ld.CIT(A) sustained assessment of interest income under the head

‘income from other sources’. Aggrieved by the order of the Ld.CIT(A), the

assessee is in appeal before us.

Fixed Deposits were made for the purpose of setting up of power plant

and as such; interest earned on Short Term Fixed Deposits ought to be

reduced from capital work-in-progress. The Ld.Counsel for the assessee

further submitted that the assessee company has imported power plant

equipment and to secure the custom duty concession has kept Short

Term Fixed Deposit with bank and earned interest income. Since, the

deposits are inextricably linked with the project; interest earned on said

deposits would go to reduce the capital work-in-progress. The Ld.Counsel

for the assessee further submitted that although, the assessee has rightly

reduced interest income from capital work-in-progress, but the ITAT in

the assessee own case for AYs 2011-12, 2012-13 & 2014-15 has held

that interest income is taxable under the head ‘income from other

sources’. But, if you go through the findings of the Tribunal, it went on

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the premise that the assessee business has been set up for the relevant

assessment year and once business has been set up, the assessee would

be eligible to claim business expenditure as Revenue expenditure and on

the very same reasoning, any income earned after setting up of the

business would be Revenue in nature and assessable to tax. But, for the

impugned assessment year, it was categorical admission of the AO that

the business of the assessee not commenced and the power plant is at

pre-operative stage. Therefore, the decision of ITAT should not be

followed and interest income earned from Short Term Fixed Deposits

should be reduced from capital work-in-progress. The AO and the

Ld.CIT(A) are erred in assessing said interest income under the head

‘income from other sources’. In this regard, he relied upon the decision of

the Hon’ble Supreme Court in the case of CIT v. Bokaro Steels Ltd.,

reported in [1999] 236 ITR 315 (SC) and CIT v. Karnal Co-operative

Sugar Mills Ltd., reported in [2000] 243 ITR 2 (SC). The Ld.Counsel for

the assessee further submitted that alternatively, interest income is

assessed under the head ‘income from other sources’ then, expenses

incurred in relation to earning such income being interest paid on

borrowed capital, should be allowed as deduction. In this regard, he

relied upon the decision of the Hon’ble Madras High Court in the case of

CIT v. VGR Foundation reported in [2008] 298 ITR 132.

submitted that interest income is taxable under the head ‘income from

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other sources’, whether such interest income is earned out of funds

earmarked for specific purpose or surplus funds available with the

assessee. This position has been reiterated by the Hon’ble Supreme Court

in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra).

The Ld.CIT(A) after considering relevant facts has rightly upheld

assessment of interest income under the head ‘income from other

sources’. The ITAT Chennai Bench also in assessee own case in ITA

Nos.577 to 579/Chny/2022 order dated 14.07.2023, has held that once

business is set-up income arising after would be Revenue in nature and

assessable to tax. Thus, the order of the AO should be upheld.

record and gone through orders of the authorities below. There is no

dispute with regard to fact that the assessee has earned interest on Short

Term Fixed Deposits kept with banks. It is also not in dispute that the

assessee is in the process of establishing of power project and the project

is under construction stage for the impugned assessment year. The

assessee has imported capital goods for setting up of power project and

for this purpose kept Short Term Fixed Deposits in bank to secure custom

duty benefit. From the above, it is undisputedly clear that deposits with

banks are inextricably linked with the project and thus, in our considered

view, interest earned would go to reduce capital work-in-progress, in

case, the project is under pre-implementation stage or pre-operative

stage. This legal principle is supported by the decision of the Hon’ble

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Supreme Court in the case of CIT v. Bokaro Steels Ltd. (supra), where, it

has been clearly held that if source for various Short Term Deposits is out

of earmarked funds for any project, then, interest earned from said

deposits is goes to reduce the capital work-in-progress. A similar view has

been taken by the Hon’ble Supreme Court in the case of CIT v. Karnal Co-

operative Sugar Mills Ltd. (supra), wherein, the Hon’ble Supreme Court

after considering its earlier decision in the case of Tuticorin Alkali

Chemicals and Fertilizers Ltd. v. CIT (supra) held that if funds are

inextricably linked to project, then, any interest earned from said funds,

including interest earned on Short Term Fixed Deposits, is goes to reduce

the capital work-in-progress. Therefore, we are of the considered view

that the AO and the Ld.CIT(A) are erred in assessment of interest income

under the head ‘income from other sources’, even though, interest income

earned by the assessee from Short Term Fixed Deposits is inextricably

linked with the project.

own case for AYs 2011-12, 2012-13 and 2014-15. The coordinate Bench

of ITAT Chennai had considered an identical issue and held that once

business is set-up, any income arising after setting up of the business

would be Revenue in nature and assessable to tax. There is no dispute

with regard to ratio laid down by the Tribunal on the issue of assessment

of income after setting up of business, but fact remains to be considered

is whether the business of the assessee has been set up or not. In the

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present case, admittedly, the AO has recorded categorical findings that

the business of the assessee has not been set up and it is in pre-operative

stage. Further, in our considered view when business can be said to have

set up or commenced its business is important to decide the controversy.

There is a distinction between setting up and commencement of business.

When a business is established and it is ready to commence the business,

it can be said that the business is set-up. The stage of set up of business

is different in different cases. In case of manufacturing entity, the

business can be said to have set up, in case, the installation of plant and

machinery is complete and is ready for trial run or commercial production.

In the present case, admittedly, the assessee is into setting up of power

plant which is under construction for the impugned assessment year.

When the plant was under construction, it cannot be said that the

business of the assessee is set-up and is ready for commencement. If

business is not set up and it is in pre-operative stage, then, as held by

the coordinate Bench in the assessee own case and also as per the ratio

laid down by the Hon’ble Supreme Court in the case of CIT v. Karnal Co-

operative Sugar Mills Ltd., any income including interest income is goes to

reduce the cost of capital work-in-progress. Since, the assessee business

was not set up and it is under construction stage, in our considered view,

the assessee has rightly reduced interest income from capital work-in-

progress. Therefore, we are of the considered view that findings of the

Tribunal in the assessee own case for the AY 2014-15 is not applicable for

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the present assessment year, because, it is not a case of the AO that the

business of the assessee is set-up and ready for commencement.

circumstances of the case and by following the decision of the Hon’ble

Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd.,

we are of the considered view that the assessee has rightly reduced

interest income from capital work-in-progress. The Ld.CIT(A) without

appreciating the relevant facts has upheld assessment of interest income

under the head ‘income from other sources’. Thus, we set aside the order

of the ld. CIT(A) on this issue, and also direct the Assessing Officer to

accept the method followed by the assessee for treatment of interest

income in its books of accounts.

Nos.3-8 of the assessee appeal is downward adjustment towards

international transactions with its AE in respect of import of capital goods

and enhancement by the Ld.CIT(A) towards downward adjustment in

respect of import of capital goods from AE. The Ld.Counsel for the

assessee submitted that the TPO had made downward adjustment of

Rs.407.25 Crs. on the cost of power project equipment imported by the

assessee company from its AE, M/s.MIPPIL by adopting TNMM as most

appropriate method as against ‘other method’ adopted by the assessee as

specified u/r.10C & 10AB of the Income Tax Rules, 1962, even though,

the Department has accepted very same international transactions with

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its AE towards import of capital goods for the purpose of setting up of

power project for AYs 2011-12 & 2012-13. The Ld.Counsel for the

assessee referring to TP study of the assessee submitted that, the

assessee has conducted a TP study and after considering the given facts

and circumstances of the case, has adopted ‘other method’ as most

appropriate method for bench marking international transactions with its

AE for import of capital goods, because, the import of capital goods is an

entity specific without there being any comparable of similar nature.

Further, the assessee company has justified its transactions with its AE

under ‘other method’ as per rule 10AB of the Income Tax Rules, 1962, by

comparing per MW cost of similar power project implemented by other

companies, where per MW cost incurred by the assessee company is less

than the per MW cost incurred by other costs. The Ld.Counsel for the

assessee further referring to TP order passed by the TPO submitted that

the TPO has rejected TP study without assigning proper reasons and also

selected TNMM as most appropriate method by considering M/s.Sicagen

India Ltd., which is engaged in the business of trading in construction

materials as comparable, even though, the assessee has strongly raised

its objection for selecting TNMM as most appropriate method and

selection of M/s.Sicagen India Ltd., as comparable company. The

Ld.Counsel for the assessee further submitted that M/s.Sicagen India

Ltd., is engaged in various lines of business such as building materials,

vehicle sales and services and governor services, chemicals, boat

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building, etc., whereas the assessee company is engaged in the business

of setting up of Coal Based Thermal Plant which is unique in nature and

entity specific. Therefore, selection of TNMM as comparable is totally

against the functions performed by the assessee asset employed and risk

assumed. The Ld.Counsel for the assessee further submitted that the TPO

has obtained unaudited finance of AE, M/s.MIPPIL under Exchange Of

Information Scheme and computed operating margin of 50.36% without

appreciating the fact that the foreign AE cannot be considered as tested

party and further, as per Rule 10TF in respect of eligible international

transactions entered into with its AEs located in any country or territory

referred u/s.94A of the Act or no tax or low tax country or territory,

cannot be considered. The AE is situated in a low tax or no tax country,

and thus, margin earned by AE cannot be considered for the purpose of

comparing transactions of the assessee. The Ld.Counsel for the assessee

further submitted that the assessee has rightly adopted ‘other method’ as

per Rule 10AB of the Income Tax Rules, 1962, and also obtained

Valuation Report from a Chartered Engineer, where, he has estimated per

MW cost of a power project and then, compared with per MW cost

incurred by other power projects. Further, the assessee company is

substantially financed by two major Power Finance Companies in India

and they have thoroughly appraised the cost of project before approving

the project for finance. From the above, it is undisputedly clear that the

cost incurred by the assessee for setting up of power project is

IT (TP) A No.44/Chny/2023 :: 23 ::

comparable with other power projects in India and thus, TPO is erred in

adopting TNMM as most appropriate method.

Ld.CIT(A) submitted that although, the Ld.CIT(A) has rejected TNMM

method adopted by the TPO as incorrect, but proceeded to classify the AE

as low risk trader to adopt Safe Harbor Rules and margin provided therein

without appreciating the fact that the Safe Harbor Rules notified by the

CBDT is not applicable for the impugned assessment year and further,

said rules is for the assessee, but not for the TPO. The Ld.Counsel for the

assessee further submitted that the Ld.CIT(A) has categorized the AE as

low risk trader on the basis of survey conducted by the Department in the

case of the assessee for the subsequent period which is not applicable for

the impugned assessment year and further, said report has been used

against the assessee without providing copy of Survey Report to the

assessee in contravention of principles of natural justice. The Ld.Counsel

for the assessee further submitted that although, the Ld.CIT(A) has relied

upon the findings of the Survey Report to take an adverse inference

against the assessee to classify the AE as low risk trader based on the

involvement of the assessee company and their staff in the process of

import of capital goods, but, fact remains that said findings alone cannot

be a reason to make a downward adjustment of import of capital goods

that too, to the extent of more that 50% of cost of equipment imported

by the assessee. Therefore, he submitted that the TPO and the Ld.CIT(A)

IT (TP) A No.44/Chny/2023 :: 24 ::

are completely erred in making downward adjustment to cost of capital

goods imported by the assessee company from its AE.

TPO and the Ld.CIT(A) submitted that there was a survey u/s.133A of the

Act, in the case of the assessee and during the course of survey, various

information gathered by the Department suggest that most of the work

has been executed by the assessee company for import of capital goods,

including identification of supplier, location of plant & machinery, etc. The

AE is only a pass through entity located in low tax or no tax country with

high margin. Further, the global tender for supply of plant & machinery

was given almost one year later than the agreement between the

assessee company and the AE for supply of capital equipments. From the

above, it is undisputedly clear that the AE is a pass through entity without

there being any functions performed, asset employed and risk assumed.

Therefore, the Ld.CIT(A) has rightly classified the AE as low risk trader

and thus, adopted margin provided in Safe Harbor Rules for low risk

traders to compare international transactions of the assessee company.

The Ld.DR further submitted that the assessee has not provided

comparables to bench mark import of capital goods. Further, the method

followed by the assessee to take project cost as basis for bench mark

import of capital goods is not correct. Further, Central Electricity

Regulation Commission’s order cannot be basis for bench marking

transactions with its AE. The Ld.CIT(A) after considering relevant facts

IT (TP) A No.44/Chny/2023 :: 25 ::

has rightly rejected TP study conducted by the assessee and has adopted

‘other method’ as per Rule 10AB of the Income Tax Rules, 1962. The

Ld.CIT(A) has also rightly classified the AE as low risk trader and

considered margin as per Safe Harbor Rules to bench mark import of

capital goods, and thus, their orders should be upheld.

record and gone through orders of the authorities below. The facts with

regard to impugned dispute are that, the Appellant, a private Limited

Company, was engaged during this assessment year 2013-14, in the

setting up a 1440 MW coal based thermal mega power plant comprising 4

Units of 360 MW each at Chhattisgarh State ("Project"). Subsequently the

Project has been commissioned and is now in operation. The Project is

funded by a consortium of lenders with more than 75% of the loans

coming from Power Finance Corporation Limited and Rural Electrification

Corporation Limited and the balance loan from nationalised banks and

financial institutions. The appellant company is a joint venture between

M/s RK Powergen Pvt. Ltd. (RKPPL) with 74% share capital and M/s

Mudajaya Corporation Berhad, Malasiya. ("MJC" or "Mudajaya"), a listed

Malaysian company holding 26% of the share capital of the Appellant

during this year. The Appellant sourced the majority of the plant and

equipment for the Project from M/s MIPP International Limited ("MIPP" or

"AE"), a subsidiary of Mudajaya Corporation Berhad. The imports were

made pursuant to two Equipment Purchase Agreements dated 18.07.2007

IT (TP) A No.44/Chny/2023 :: 26 ::

and 20.02.2009. The appellant has conducted TP study and has adopted

“Other Method” as per Rule 10AB of The Income tax Rules, 1962 as most

appropriate method. The appellant claimed that transactions with its AE

are at Arm’s length price. For this, purpose, the appellant has obtained

independent valuation report from Chartered Engineer, where he has

worked out per MW cost of coal based power project and then compared

with similar power projects in India and as per valuation report, the per

MW cost of the appellant Company is lesser than per MW cost of similar

other power projects in India.

cost of power project equipment imported from M/s MIPP ("AE") as

against the actual price paid of Rs. 1,471.30 crores. The TPO has rejected

TP report submitted by the assessee and has conducted fresh TP study.

The TPO has adopted TNMM as most appropriate method for

benchmarking international transactions of the assessee with its AE. The

TPO had also obtained financial statements of the AE, M/s MIPP

International Limited under exchange of information and computed PLI

(OP/OC) at 50.36%. The TPO has selected M/s Sicagen India Limited, an

Indian Company engaged in trading building materials as comparable to

appellant Company. The TPO computed PLI (OP/OC) of M/s Sicagen India

Limited at 8.74% for trading segment. Since, the margin of AE is more

when compared to M/s Sicagen India Limited, the TPO has made

downward adjustment of Rs. 407.26 crores to the value of imports from

IT (TP) A No.44/Chny/2023 :: 27 ::

AE. At this stage, it is relevant to note that, the TPO passed orders for

Assessment Years 2011-12 and 2012-13, accepting the contract price to

be the arm's length price ("ALP") on the basis that the per megawatt cost

of the equipment was on par with other companies and norms which

constitutes "Other Method" as specified in Rule 10C and 10AB of The

Income Tax Rules, 1962.

that there was no possibility of adopting TNMM method for the reasons

given in page 72 of the impugned order and that he was adopting 'Other

Method" under Rule 10AB. From the observations of the ld. CIT(A), it is

undoubtedly proved that ‘Other method’ selected by the appellant has

been approved by the CIT(A), but with certain modifications. The

appellant has not preferred any appeal against the order of the learned

CIT(A) nor filed cross objections. As such the appellant has accepted

adoption of "Other Method" is appropriate and in accordance with TP

regulations. Further, the learned CIT Appeals -relied on a survey report

prepared after the TPO order and the assessment order and held that the

functions performed, and the risks undertaken by the AE were

insignificant and that only invoicing was done by the AE. The CIT(A)

characterized the AE as a low-level service provider and the arm's length

margin was 5% based on the safe harbor provisions. The CIT(A) also

applied this margin only on the overhead expenses of the AE (not on the

cost of goods sold). By this process, the downward adjustment was

IT (TP) A No.44/Chny/2023 :: 28 ::

enhanced to Rs 744.03 crores. It may be noted that the percentage of

downward adjustment thus amounts to 50.5% when even according to

the TPO the profit margin of the AE was around 30%.

reason given by the ld. TPO and ld. CIT(A) to make downward adjustment

to the value of import of cost of capital equipments from AE and we, find

that the TPO and CIT(A) breached the rule of consistency. Admittedly, the

appellant entered into equipment supply contract with AE, M/s MIPP

International Limited dated 18-07-2007 and 20-02-2009. The contract for

supply of capital equipment is spread over the period of more than one

year. The appellant had also imported similar capital goods from AE for

Asst. years 2011-12 and 2012-13. The TPO has accepted ‘Other method’

adopted by the assessee in their TP report for benchmarking import of

capital goods from AE in light of valuation report obtained from Chartered

Engineer, where he has compared per MV cost of power project of the

appellant with similar other power projects in India. The appellant has

furnished copies of TPO orders for Asst. year 2011-12 dated 21-01-2015

and Asst. year 2012-13 dated 08-09-2015 which are available on record.

The TPO has discussed import of capital goods for both assessment years

and has accepted value of imports without there being any adjustment to

the value of imports. Therefore, in our considered view, when there are a

series of transactions extending over several assessment years it is not

open or the TPO to depart from the method adopted in the earlier years.

IT (TP) A No.44/Chny/2023 :: 29 ::

Further, the supplies during the year were based on a Contract that was

spread over several assessment years. When the contract price had been

held to be at ALP in the earlier two assessment years 2011-12 and 2012-

13 and during the subsequent assessment year further supplies is made

under the same contract, it was not open to the TPO to adopt a different

method. Although, res-judicata is not strictly applicable to income tax

proceedings, but rule of consistency should be followed as held by the

Hon’ble Supreme Court in case of Radhasoami Satsang vs. CIT (1992)

193 ITR 321(SC). The Hon’ble Supreme Court while deciding the appeal

held that strictly speaking res-judicata does not apply to income-tax

proceedings. Again, each assessment year being a unit, what is decided in

one year may not apply in the following year, but where a fundamental

aspect permeating through the different assessment years has been

found as a fact one way or the other and parties have followed that

position to be sustained by not challenging the order, it would not be at

all appropriate to allow the position to be changed in a subsequent year.

From the ratio of the Hon’ble Supreme Court, it is undisputedly proved

that, unless there is change in facts in subsequent year, settled position

or accepted position cannot be changed. In the present case, the revenue

having accepted ‘other method’ followed by the assessee for

benchmarking import of capital equipments from AE and further, accepted

price paid by the assessee to be at ALP for Asst. years 2011-12 and 2012-

13, cannot dispute imports of capital equipment from AE and price paid

IT (TP) A No.44/Chny/2023 :: 30 ::

by the assessee to AE under very same equipment supply agreement

between the parties for the impugned assessment year. Therefore, we are

of the considered view that, on this ground itself downward adjustment

made by the ld. TPO and enhancement made by the ld. CIT(A) cannot be

sustained.

requires looking at the cost to the Appellant or costs or profits of AE. In

this regard, it is necessary to read Rule 10AB of The Income Tax Rules,

1962 which reads as follows:-

10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. The wording of ‘Other method’ is akin to that of the CUP method. In

other words, the methods applying margins of profits are ruled out and

the cost that would have been paid to a Non AE become significant. The

TPO does not seriously dispute the Appellant's contention that the cost of

equipment is on par with other power plants. The TPO case is that the AE

has made excessive profits. This is not the correct approach to determine

the ALP, since Rule 10AB would require the determination of the cost that

the Appellant would have incurred., if the purchase had been made from

an unrelated enterprise and whether in relation to that the price paid to

the AE was excessive, which as can be seen from the cost incurred by

IT (TP) A No.44/Chny/2023 :: 31 ::

other projects is not the case. It is a settled principle that what an

independent party would have paid under the same or identical

circumstances would be the ALP. What an assessee would have earned in

case he would have entered into or gone ahead with a different

transaction say with a party in India is not the criterion This position is

upheld by Co-ordinate Bench of ITAT Delhi in case CIT vs. Cotton

Naturals India Private Limited (2015) 231 Taxmann 401 (Delhi)).

Therefore, in our considered view the method followed by the ld. TPO and

ld. CIT(A) is completely opposed to scheme of TP regulations and thus,

we reject method followed lower authorities.

erroneous, since the least complex party ought to be chosen as the tested

party. It is a fundamental tenet of Transfer Pricing that the party

performing less complex functions should be treated as the tested party.

In this case, the Appellant was a project company and was awaiting the

supply of equipment. The AE, on the other hand, was undertaking the

complex task of ordering equipment from dozens of manufacturers in

China, doing the inspection, monitoring progress, testing equipment

before shipping etc. In this situation, treating the foreign AE as the tested

party was erroneous. Further, reliable data is an important factor in

considering tested party. Therefore, reliable data should be available in

the case of the tested party. Further, adoption of the Foreign AE as a

tested party is permissible only when reliable data is available. The

IT (TP) A No.44/Chny/2023 :: 32 ::

reliance on a single page of unaudited statements of the AE was

erroneous particularly when a copy was not even furnished to the

Appellant. The financial statements of the AE are said to have been

obtained under the Exchange of Information and have been reproduced in

the Show Cause Notice dated 05.01.2017 (Page 46 of the paperbook).

The appellant claims that in the course of the hearing, these were shown

to the AR and it was observed that the financial statements were one

page with no notes or schedules and were unaudited. Therefore, in our

considered view the use of such unauthenticated financial statements is

contrary to the principles of evidence and not furnishing copies to the

Appellant contravenes principles of natural justice. The data contained in

these statements cannot be said to be reliable on the face of it. Moreover,

the profits disclosed by a company which is in a tax haven cannot be

relied upon, particularly when it is violently opposed to external

comparables as explained later. It is also to be appreciated that the AE is

a subsidiary of Mudajaya Corporation Malaysia, and it is possible that

most of the expenses were booked by the holding company. The financial

statements extracted in the SCN do not show any line item for foreign

exchange fluctuation, inspection charges, foreign travel, etc. The

undesirability of using the values in such cases is codified in Rule 10TF

and as per said rules Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule

10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A or in a no tax or low tax country or territory. Therefore, in our considered view, the

IT (TP) A No.44/Chny/2023 :: 33 ::

ld. TPO and ld. CIT(A) are completely erred in considering foreign AE as

tested party and further, relied upon un -udited financial statements of AE

obtained under information exchange, that too without providing copies to

the appellant.

completely rested his findings on the basis of survey report which was

carried out subsequent to the assessment order passed by the AO and

thus, any adverse findings on the basis of such report cannot be valid and

to be rejected. In our considered view, the reliance on a copy of a survey

report was erroneous particularly when a copy was not even furnished to

the Appellant. The learned CIT Appeals relies on a Survey Report (Page

number 88 of CIT(A) order) a copy of which was never furnished to the

Appellant which is contrary to the principles of natural justice. It is settled

law that all material that are used by the authorities are to be furnished

to the assessee. It is also settled law that even statements recorded

during a survey are not admissible as evidence. The survey report is not a

statutory report nor is it capable of being challenged by the assessee. The

only proper manner in which the report can be used, if at all, is by

confronting the assessee with all the materials used to come to the

conclusion in the report and giving an opportunity for rebuttal. Therefore

the findings of the ld. CIT(A) to reclassify the AE as low risk trader and

adopting 5% margin on overhead cost on the basis of safe harbour rules

is incorrect and overruled.

IT (TP) A No.44/Chny/2023 :: 34 ::

accepted by the ld. CIT(A), subject to certain modifications. The appellant

has bench marked cost per megawatt of power project taking note of the

Electricity Regulatory Commissions report or order, which are statutory

and specialized bodies manned by experts. The cost per megawatt of

power projects is adequately benchmarked. Moreover, the hard cost of

plant and equipment for power projects has been benchmarked by the

statutory body called the Central Electricity Regulatory Commission

(hereinafter"CERC") which is constituted under the Electricity Act 2003.

Power sector is a regulated Industry in India. CERC, a statutory body

functioning as a quasi-judicial status under section 76 of the Electricity

Act, 2003 is the key regulator of the power sector in India. As per section

3 of the Electricity Act, the Central Government is empowered to prepare

the National Electricity Policy and Tariff Policy. The Central Government in

exercise of its power under section 3, notified the Tariff Policy on 6

January 2006. The Tariff Policy provides that "while allowing the total

capital cost of the project, the Appropriate Commission would ensure that

these are reasonable and to achieve this objective, requisite benchmarks

on capital costs should be evolved by the Regulatory Commission".

Further, the first proviso to clause (2) of Regulation 7 of the 2009 Tariff

Policy provides that "in case of the thermal generating station and the

transmission system, prudence check of capital cost may be carried out

based on the benchmarks norms to be specified by the Commission from

IT (TP) A No.44/Chny/2023 :: 35 ::

time to time". From the CERC regulations, it is very clear that there is a

check and balance for capital cost of power project and further, the CERC

would undertake such exercise. The CERC vide order dated 4 June 2012

has fixed the benchmark hard cost for thermal power stations of

capacities 500 megawatts and above. The Regulatory Commission has

fixed the benchmark cost for a 500 MW unit as between Rs. 4.34 crores

and 5.08 crores per MW (page 116 of paper book). This benchmark has to

be scaled up for inflation index since 2011 and for the Company's unit

capacity which is 360 MW. However even without such adjustments the

hard cost incurred by the Company is in line with the benchmark fixed by

the CERC. In the present case, the Project cost of the Appellant has been

approved by the Chhattisgarh State Electricity Regulatory Commission

('CSERC') vide its order dated 26 December 2007. This order assumes

importance since the tariff paid by the Chhattisgarh State Electricity

Board is determined by the Project cost and the justification of the Project

cost was necessary in public interest. The CSERC order in Para 8, after

comparing the Project cost of all the other projects concluded that the

Project cost of the Company is reasonable. The TPO takes the view that

what has to be determined is not the total project cost which includes

other components but only the international transactions with the AE. As

pointed out earlier, the majority of the cost of the project is the

equipment cost. Therefore if the project meets the project cost

benchmarks, it follows that the equipment cost also meets the

IT (TP) A No.44/Chny/2023 :: 36 ::

benchmark. The TPO also points out that the actual project cost turned

out to be higher without realising that this supports the Appellant's case

since when all the other costs ballooned the procurement price from M/s

MIPP International Limited, AE did not escalate. In our considered view, if

the TPO did not want to rely on the project cost but wanted to look at the

hard cost of equipment, he ought to have done so rather than use this as

a pretext to reject the methodology. If the TPO had undertaken such an

exercise it would have been revealed that the equipment cost per MW of

the Appellant was lower than that of other companies. It can be seen

from the Chartered Accountant's Certificate dated 15.02.2019 that the

actual cost of all equipment of the Appellant was Rs. 3.44 crores per MW,

whereas those of two other power plants (Mettur Thermal Power

Corporation of the Tamil Nadu Government and Paguthan Power Plant of

CLP India Private Limited) were much higher based on the order of the

Tamil Nadu Electricity Regulatory Commission. Therefore, in our

considered view, the most reliable source of information is the order of

the Central Electricity Regulatory Commission which is an expert quasi-

judicial body and passed the order dated 04.06.2012 determining the

benchmark hard cost of thermal power plants after extensive consultation

with industry bodies, experts and other stakeholders. This finding must be

read along with the hard cost per MW of the Appellant which can be

readily seen from the CA certificate dated 15.02.2019. The most

important criterion for using any method to fix the ALP is availability of

IT (TP) A No.44/Chny/2023 :: 37 ::

reliable comparable data. The most reliable comparable data is that fixed

by a statutory body. By an order in the public domain, CERC has fixed the

price of hard cost at Rs. 4.34 crores per megawatt (page 116 of the paper

book). The cost after completion of the power project was Rs. 3.44 crores

per megawatt in the case of the Appellant (Page 345 of the paper book).

Therefore, we are of the considered view that the method followed by the

appellant to bench mark hard cost of equipment imported from AE is in

accordance with Rule 10AB and as per said rule, for the purposes of

clause (f) of sub-section (1) of section 92C, the other method for

determination of the arm's length price in relation to an international

transaction or a specified domestic transaction shall be any method which

takes into account the price which has been charged or paid, or would

have been charged or paid, for the same or similar uncontrolled

transaction, with or between non- associated enterprises, under similar

circumstances, considering all the relevant facts. Therefore, we are of the

considered view that the TPO and CIT(A) are completely erred in rejecting

method selected by the assessee. Further, there is no basis for the TPO

and CIT(A) to shift focus to comparison of margin even though ‘Other

Method’ clearly advocates comparison of cost alone.

harbor provisions by the learned CIT (Appeals) to determine the ALP is

unjustified since the Associated Enterprises was rendering complex

services and the Appellant had not opted for the safe harbor provisions.

IT (TP) A No.44/Chny/2023 :: 38 ::

The learned CIT Appeals went beyond the findings of the TPO and held

that the AE performed low value services without appreciating that the AE

had supplied equipment over a period of several years which have been

commissioned and running successfully. It can be seen from the technical

due diligence report of NTPC (Pages 125 to 232 of the paperbook) that

the equipment supplied was of good quality as certified by NTPC. Such a

supply of equipment over a period of several years by the AE

manufactured in multiple factories in China, subject to multiple

inspections and transported by dozens of ships for the creation of an

important infrastructure project has been trivialized as a low value service

addition. The conclusion from the survey report that the AE was a low end

service provider is contrary to the facts on the grounds. When several

power plants are stranded and incomplete, the Appellant's power plant is

functioning and generating power based on the equipment supplied by the

AE. The learned CIT(A) trivialises the functions of the AE even beyond

what was done by the TPO. The TPO compared the AE to a retailer who

sells mass produced goods. The CIT (A) goes further and states that the

AE was a low level service provider who essentially did the billing and

nothing more. The only fact that gives rise to this wild conclusion is that

the technical head of the Appellant visited China multiple times. It is

inconceivable that the Appellant would make advances for purchase of

equipment of several crores without making periodic visits of inspection.

This is analogous to a house owner visiting the construction site. If he

IT (TP) A No.44/Chny/2023 :: 39 ::

were to visit every day would the architect, civil contractor and the

interior decorator and the structural engineers be termed low level service

providers. Therefore, the reasons given by the ld. CIT(A) to classify M/s

MIPP, an AE as low value service provider and to be classified as low risk

trader and margin of 5% on overhead cost is alone to considered for

bench marking imports of capital goods from AE is totally devoid of merits

and thus, rejected.

total equipment cost would be reduced to a level at which no power plant

has been built in India during this period. As submitted earlier the

benchmark power plant cost has been statutorily fixed by the Central

Electricity Regulatory Commission and if the result of these downward

adjustments would be to reduce the cost of power plant below these

norms by 50%, which is absurd and impossible. It must be noted that the

power plant is functioning and generating power at full load and that its

technical excellence has been vouchsafed by NTPC. Further, the contract

had been duly appraised by the project lenders who were well versed with

the power sector. The Appellant's Project was funded by a consortium of

lenders for the Project led by Power Finance Corporation ('PFC')

conducted detailed feasibility analyses to determine the technical and

financial feasibility of the Project. After having found the Project to be

feasible, the consortium decided to fund the Project. The Information

Memorandum prepared by PFC for Phase I in June 2007 and Phase II in

IT (TP) A No.44/Chny/2023 :: 40 ::

September 2008 clearly records this fact. After analysis of the project cost

of the Company on similar projects, PFC recorded a finding that the cost

of project was comparative with other power projects which are coal

based and of similar size. Further, PFC concluded that the Company had

managed to maintain the cost of the project comparable with older

projects through strong contractual management. It is significant to note

that despite project delays, M/s MIPPIL supplied the plant and equipment

at the contracted cost without claiming any additional amounts as

escalation. The 2nd largest lender to the company is Rural Electrification

Corporation Ltd. ('REC') that is also a specialist in financing power

projects. The lenders have also appointed their own representative in the

form of a Lenders Engineer Tractable Engineering to monitor both

equipment quality as well as construction. It may be noted that PFC and

REC are the biggest term-lending institutions for the power industry and

as such have expert knowledge of the cost of power equipment. Such

Government bodies will not approve the purchase of the equipment from

suppliers who do not have experience or reputation. It is pertinent to note

that the Appellant's relationship with MJC Group /MIPP had been fully

disclosed to the lenders, who evaluated this closely and inter alia

approved it, having found it to be at arm's length. Therefore, in our

considered view adverse inference drawn by the ld. CIT(A) on the basis of

survey findings that all work has been executed by the appellant and AE

is only pass through entity without any risk is incorrect and purely on

IT (TP) A No.44/Chny/2023 :: 41 ::

assumptions and thus, we reject ld. CIT(A) approach of looking at the

issue and consequent downward adjustment to the cost of equipment

imported from AE.

relevant materials placed before us, we of the considered view that the

Ld.TPO is totally erred in rejecting ‘other method’ as prescribed u/r.10AB

of the IT Rules, 1962, by assigning improper and incorrect reasons. The

Ld.TPO also erred in adopting TNMM as most appropriate method, which

is further fortified by the observation of the Ld.CIT(A), where the

Ld.CIT(A) rightly rejected TNMM as most appropriate method for the

detailed reasons given in their order and said findings of the Ld.CIT(A) is

final and not challenged by the Revenue. Further, once it is accepted

position in the given facts and circumstances of the case that only ‘other

method‘ is suitable to bench mark import of capital goods from the AE,

then the method followed by the assessee to compare per MW cost of

power project with similar other power projects in India along with the

valuation report from Chartered Engineer< order of Central Electricity

Regulation Commission and project appraisal report of project financiers,

M/s Power Finance Corporation Limited and M/s Rural Electrification

Corporation Limited and the balance loan from nationalised banks and

financial institutions to be accepted as it is. If you go by logic adopted by

the Ld.TPO and Ld.CIT(A) that the assessee has almost paid more than

IT (TP) A No.44/Chny/2023 :: 42 ::

50% excess consideration for import of capital equipment from AE, it

appears that the project approved by the CERC and financed by various

state Financial Institutions under power sector and their appraisal of

project is flawed appears to be totally incorrect, absurd and illogical.

Further, although the CIT(A) has approved ‘other method‘ for bench

marking transactions, but completely erred in deviating from the method

adopted by the assessee and has choosing Safe Harbour Rules and

percentage of margin provided therein for low risk traders. In our

considered view, the reasons given by the Ld.CIT(A) to treat M/s.MIPPIL,

an AE, as a low risk trader, is purely on hypothetical basis and further on

the basis of survey report which is not at all applicable for the impugned

assessment year and further cannot be relied upon. As we have already

stated in earlier part of this order, the TPO and Ld.CIT(A) are not

technical experts to analyze and appraise the power projects. Further,

the project executed by the assessee is a unique and industry specific,

which is very clear from equipment supply contract between the assessee

and the AE where going by the terms of contract, it is undisputedly

proved that the AE sourced various plant & machinery required for setting

up of power project from China from different manufacturers. From the

above, it is very clear that capital goods imported by the assessee are not

general in nature and there is no comparables available in the public

domain. Therefore, we are of the considered view that the method

followed by the assessee to bench mark import of capital goods from AE

IT (TP) A No.44/Chny/2023 :: 43 ::

under any ‘other method‘ is perfectly in accordance with prescribed

method for bench marking this kind of transactions between an assessee

and its AE. Thus, in our considered view, the TPO is erred in making

downward adjustment towards cost of equipment imported from AE,

including enhancement of downward adjustment by the Ld.CIT(A).

Hence, we approve the TP study conducted by the assessee including

selection of ‘other method‘as per Rule 10 AB and thus, we are of the

considered view that the transactions of the assessee with its AE for

import of capital equipment in terms of equipment supply agreement are

at arm’s length price and thus, no adjustment is required to the price paid

for import of equipment to the AE. Thus, we set aside the order of the

Ld.CIT(A) on this issue and direct the AO/TPO to delete downward

adjustment made towards cost of capital equipment imported from AE

and consequent reduction of downward adjustment to capital work in

progress.

assessment in respect of disallowance of interest u/s.36(1)(iii) of the Act,

amounting to Rs.108,03,37,425/-. The assessee has paid Rs.1471.30 Crs.

towards the cost of equipment imported from AE, M/s.MIPPIL. The TPO &

Ld.CIT(A) has made downward adjustment of Rs.744.03 Crs. towards

price paid for import of capital goods from AE. Thus, essentially after

downward adjustment to the cost of equipment, the net price of

IT (TP) A No.44/Chny/2023 :: 44 ::

equipment imported by the assessee got reduced to Rs.727.27 Crs. The

Ld.CIT(A) was of the opinion that the amount paid by the assessee to the

AE for import of capital goods to the extent of downward adjustment of

Rs.744.043 Crs. is diversion of interest bearing funds to AE for non-

business purpose. Therefore, the Ld.CIT(A) disallowed proportionate

interest on borrowings as per P&L A/c of the assessee and capitalized to

work in progress u/s.36(1)(iii) of the Act, by adopting average rate of

interest @14.52% on Rs.744.03 Crs. and worked out disallowance of

Rs.108,03,37,425/-.

available on record. First of all, enhancement of interest disallowance

u/s.36(1)(iii) of the Act, is hypothetical and purely on assumptions and

presumptions. The assessee has paid sum of Rs.1471.30 crores towards

cost of equipment imported from AE. The TPO & the Ld.CIT(A) made

downward adjustment of Rs.744.03 Crs. The Ld.CIT(A) assumed that

said downward adjustment is diversion of interest bearing funds to AE for

non-business purpose and disallowed interest expenditure u/s.36(1)(iii) of

the Act. We find that downward adjustment made by the TPO and upheld

by the Ld.CIT(A) including enhancement has been deleted by us. Since,

the downward adjustment towards price paid for cost of equipment

imported from AE, has been deleted and further, the amount paid by the

assessee towards cost of equipment imported from AE is held to be at

IT (TP) A No.44/Chny/2023 :: 45 :: arm’s length price, in our considered view, additions made by the Ld.CIT(A) by way of enhancement towards interest disallowances u/s.36(1)(iii) of the Act, cannot be sustained. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the Assessing Officer to delete additions towards disallowance of interest u/s.36(1)(iii) of the Act for Rs.108,03,37,425/- from reduction of capital work in progress for the year ending 31.03.2014 relevant to AY 2014-15.

Order pronounced on the 08th day of March, 2024, in Chennai.

Sd/- Sd/- (मनोमोहन दास) (मंजूनाथा. जी) (MANJUNATHA.G) (MANOMOHAN DAS) लेखा सद�/ACCOUNTANT MEMBER �ाियक सद�/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 08th March, 2024. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT 4.िवभागीय�ितिनिध/DR 5. गाड!फाईल/GF