M/S EVEREADY SPINNING MILLS P LTD.,TIRUPUR vs. ADIT,NFAC , DELHI

आदेश / O R D E R PER MANJUNATHA. G, AM: This appeal filed by the assessee is directed against final

assessment order passed by the AO u/s.143(3) r.w.s.144C(13)

r.w.s.144B of the Income Tax Act, 1961, (in short “the Act") dated

16.02.2022, in pursuant to directions of the Dispute Resolution Panel-2,

Bangalore, u/s.144C(5) of the Act, dated 24.01.2022, and pertains to

assessment year 2017-18.

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the ALP for the transaction under scrutiny was correct inasmuch as further ought to have appreciated that there was proper understanding and implementation of the said method in determining the ALP and its consequential compilation of the financial statements in relation thereto.

engaged in the business of manufacturing of various types of cotton &

manmade yarns, fabric (both knitted and woven). The assessee had also

engaged in the business of generation and distribution of wind energy.

The electricity generated by Windmills are captively consumed by

Spinning Division. The assessee had filed its return of income for AY

2017-18 on 24.11.2017 declaring total income of Rs.20,90,01,310/-

under normal provisions of the Income Tax Act, 1961, and book profit of

Rs.34,28,11,303/- u/s.115JB of the Act. The case was selected for

scrutiny. During the course of assessment proceedings, a reference

u/s.92CA (1) of the Act, was made to the Transfer Pricing Officer (in short

“TPO") to determine Arm’s Length Price (in short “ALP") in respect of the

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Specified Domestic Transactions reported in Form No.3CEB filed along

with return of income. During TP proceedings, the TPO noticed that

during the Financial Year relevant to AY 2017-18, the assessee has sold

power generated from Windmill Division to Textile Division, amounting to

Rs.47,04,49,594/-. The assessee has adopted CUP method and taken

M/s.TANGEDCO Ltd., selling price of power to consumers and claimed that

transactions of Windmill Division with Textile Division is at ALP. During

the course of TP proceedings, the TPO noticed that M/s.TANGEDCO Ltd.,

entered into various Power Purchase Agreements with power generating

companies and distributes to consumers. The TPO further noted that

TNEB is charging different tariffs to different kind of customers

considering various factors. Therefore, after analyzing FAR of the

assessee and FAR of M/s.TANGEDCO Ltd., came to the conclusion that

comparison of price charged by distributors for the price to be charged by

manufacture is incorrect, because, power distribution companies are

operating under different set of facts and their FAR is entirely different

from functions performed by the assessee and asset employed.

Therefore, rejected TP study conducted by the assessee and has adopted

CUP method by considering Power Purchase Agreement entered into by

the TNERC with various power generators, where, the TNERC has fixed

tariff ranging from Rs.2.73 per unit to Rs.3.70 per unit. Therefore, issued

a show cause notice and called upon the assessee to explain ‘as to why’

deduction claimed u/s.80IA of the Act, for Wind Power Mill Division shall

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not recomputed. In response, the assessee submitted that when the

assessee has adopted CUP method as Most Appropriate Method and

selected a comparable which is into similar kind of business, then, the

TPO adopting rate charged by TNERC for power suppliers, is incorrect.

The assessee had also relied upon certain judicial precedents, including

ITAT Chennai Benches in the assessee’s own case for earlier assessment

years. The TPO after considering relevant submissions of the assessee

and also taken note of relevant facts opined that the assessee company

has mainly relied on the rate, at which, power is available to end user

without considering various economic circumstances which is relevant to

determine comparability. Therefore, by considering the decision of the

Hon’ble Calcutta High Court in the case of CIT v. ITC Ltd., reported in

[2015] 64 taxmann.com 214 (Calcutta), opined that rate adopted by the

assessee based on power tariff charged by M/s.TANGEDCO Ltd., to end

users, is not the correct method for determining the comparability, and

thus, adopted rates of power purchased by M/s.TANGEDCO Ltd., as the

basis for comparison, and thus, adopted rates as per the TNERC order for

different period, and then, compared with rate charged by the assessee to

its domestic transactions and excess amount has been quantified at

Rs.24,23,06,318/- and re-worked deduction available u/s.80IA of the Act.

passed draft assessment order u/s.144C(1) of the Act, on 28.04.2021 and

made addition towards deduction claimed u/s.80IA of the Act, for power

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generating division. In the meantime, the assessee has filed an

application u/s.154 of the Act, and the TPO has passed order u/s.154 of

the Act, dated 20.01.2022 and reduced the TP adjustment to

Rs.15,10,15,315/-. The AO has also made additions towards disallowance

of employee’s contribution to PF, amounting to Rs.9,78,114 u/s.36(1)(va)

of the Act r.w.s.43(b) of the Act.

an objection before the DRP-2, Bangalore, and reiterated its arguments

taken before the TPO towards TP adjustment as suggested by the TPO.

The DRP vide directions dated 24.01.2022, issued u/s.144C(5) of the Act,

observed that FAR analysis of the assessee wind energy unit makes it

comparable with other wind energy generators operating in the state as

the assessee is captive service provider employees the same assets like in

other wind energy generators. The assessee faces the risk similar like any

other wind energy generators i.e. risk of operations and maintenance of

the wind energy generators. The functions performed by the assessee for

generation of electricity through wind energy generators and supplying it

to M/s.TANGEDCO Ltd., which is also functions performed by any wind

energy in the state except different that the assessee is making captive

consumption and others are selling to M/s.TANGEDCO Ltd. Therefore,

when the FAR analysis of the assessee and FAR analysis of distributor

companies is different, the question of comparison rate charged by power

Distribution Company to power Generation Company is incorrect.

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Therefore, by considering relevant facts and also by following the decision

of the Hon’ble High Calcutta Court in the case of CIT v. ITC Ltd. (supra)

rejected arguments of the assessee and upheld TP adjustment as

suggested by the TPO by taking into account power purchase rate of

TNERC from power generating companies, and then, compared with price

charged by the assessee to its other divisions.

final assessment order and determined total income of Rs.49,48,04,732/-

by making additions towards TP adjustment as suggested by the TPO. The

Assessing Officer had also made additions towards employee’s

contribution to PF u/s.36(1)(va) of the Act r.w.s.43(b) of the Act.

Aggrieved by the final assessment order, the assessee preferred an

appeal before the Tribunal.

that the DRP is erred in not appreciating the fact that the entire approach

of the TPO in rejecting the rate adopted by the assessee by reckoning

M/s.TANGEDCO Ltd., selling rate was only unjustified, because, when it

comes to CUP method external CUP is more accurate than internal CUP.

The Ld. Counsel for the assessee further submits that although, there is a

functional difference between wind energy generating companies and

M/s.TANGEDCO Ltd., but when it comes to comparison of rate, the rate

charged by M/s.TANGEDCO Ltd., to end users is appropriate, because,

what was sold by the assessee to its other division, is power generated

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through Wind Energy Division and if the assessee ought to purchase

power from outside suppliers, the same rate should have been paid. He

further referring to the decision of the ITAT Chennai Benches in the

assessee’s own case for AY 2007-08 in ITA No.1571/Mds/2011 dated

30.11.2011, submits that the Tribunal after considering relevant facts has

held that the price at which assessee sold its power to the Electricity

Board, cannot be equated with market rate as understood for the purpose

of sec.80IA of the Act. The Ld.Counsel for the assessee further referring

to the decision of the ITAT Chennai Benches in the case of The India

Cements Ltd. v. in ITA No.2038/Chny/2017 submits that deduction

u/s.80IA of the Act, is allowable to the power generating units for captive

consumption and that the rate of power charged to consumer in the open

market should be compared instead of rate of power at which power

generating company sold power to State Electricity Boards. The

Ld.Counsel for the assessee further referring to the decision of the

Hon’ble Calcutta High Court in the case of CIT v. ITC Ltd., and also the

decision of the ITAT Chennai Benches in the assessee’s own case held

that for the purpose of bench marking the transactions of the assessee

with other Department for captive consumption of power rate charged by

power distribution companies to consumers, needs to be compared, but

not rate paid by the TNERC to power generating companies. Therefore,

he submits that the issue is squarely covered in favour of the assessee by

the decision of the ITAT Chennai Benches in the assessee’s own case and

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also decision in the case of The India Cements Ltd., and thus, additions

made by the AO should be deleted.

that when it comes to comparison of tested party, FAR analysis of the

assessee and the tested party should be considered and in case, any

difference in functions performed by the tested party, then the purpose of

comparative analysis will defeat. In the present case, the assessee has

compared rate charged by electricity distribution companies to end users,

even though, FAR analysis of the assessee and electricity distribution

companies are entirely different. The TPO and the DRP after considering

relevant facts has rightly rejected TP study conducted by the assessee

and has adopted rate at which TNERC purchased power from power

generating companies and compare with price charged by the assessee.

Therefore, he submits that there is no error in the reasons given by the

TPO to make downward adjustment towards deduction claimed u/s.80IA

of the Act, and their orders should be upheld. The Ld. DR has filed

written submissions on this issue which has been reproduced as under:

B. Written submission on merit: Without prejudice to the above the written submission on Merit is as under; The appellant claimed deduction of 80IA of the IT Act on sale of electricity from the "eligible business". The TP study in this case referred to TPO was determination of arm's length price on sale of electricity by the "eligible business" of "power generation" that was captively consumed by "other "Be" businesses of the appellant company. 1. TP adjustment that has undergone TP study: This Specified Domestic Transaction (SDT) was referred to TPO and it was discussed from Pgae.No.4 -9 of the TP order. TPO clearly mentioned that the eligible business of assessee was power generation and it was sold or captively consumed by other business. Difference between power generation and power distribution was discussed at para 7.2. Comparability factor was discussed at para 7.3 of the TP order.

1.1 What is the nature of transaction?

Assessee has power generation units at various places. The power generated by those eligible units were captively consumed by textile units pother business"). Whether power generated from those eligible units and sold/captively consumed by other business was at arm's length or not was determined by the TPO. What is the arm's length to be determined is sale of Power by the power generation units of eligible business and not purchase of power by "other business" from open market?

2.1 Hon'ble Supreme Court in the case of CIT Vs Glaxo Smithkline Asia (P) Limited [2010] in 195 Taxmann 35, has examined section 40A(2) and 80IA of the IT Act and directed Ministry of Finance and CBDT to enact special provisions in IT Act to deals such transactions empowering the AO to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between related parties. Thus, the AO can apply generally accepted methods of determination of arm's length price, including the methods provided under Transfer Pricing Regulations. It is as under;

As far as the instant special leave petition was concerned, no interference was called for as the entire exercise was a revenue neutral exercise. Hence, the special leave petition filed by the department stood dismissed. [Para 2]

However, a larger issue was involved in the instant case. The main issue which needed to be addressed was, whether Transfer Pricing Regulations should be limited to cross-border transactions or be extended to domestic transactions. In the case of domestic transactions the under-invoicing of sales and over-invoicing of expenses ordinarily would be revenue neutral in nature, except in the following two circumstances having tax arbitrage—

(i)If one of the related companies is a loss making company and the other is a profit making company and profit is shifted to the loss making concern; and

(ii)If there are different rates for two related units [on account of different status, area- based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of the tax arbitrage. For example, sale of goods or services from non-SEZ area, [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less taxable profit and non-taxable division will have a higher profit exemption. [Para 4]

AH these complications arise in cases where fair market value is required to be assigned to the transactions between related parties in terms of section 40A(2). To get over this situation, the matter needs to be examined by the CBDT. The matter has been examined by the CBDT and it is of the view that amendments would be required to be made to the provisions of the Act, if such Transfer Pricing Regulations are required to be applied to domestic transactions between related parties under section 40A(2). [Para 5]

In order to reduce litigation, certain provisions of the Act. Like section 404(2) and section 80-14(10), need to be amended to empower the Assessing Officer to make adjustments to the income declared by the assessse, having regard to the fair market value of the transactions between the related parties. The Assessing Officer may thereafter apply any of the generally accepted methods of determination of arm's length price, including the methods provided under the Transfer Pricing Regulations. However, in a number of matters, the Assessing Officer is constrained by non-maintenance of relevant documents by the taxpayers as, currently, there is no specific requirement for maintenance of documents or of getting specific transfer pricing audit done by the taxpayers in respect of domestic transactions between the related parties. One of the suggestions which needs consideration is whether the law should be amended to make it compulsory for the taxpayers to maintain books of account and other documents on the lines prescribed under rule 10D in respect of such domestic transactions and whether the taxpayers should obtain audit reports from their chartered accountants so that the taxpayers would maintain proper documents and requisite books of account reflecting the transactions between related entities at arm's length price, based on generally accepted methods specified under the Transfer Pricing Regulations. Normally, the Supreme Court does not make recommendations or suggestions. However, in order to reduce litigation in complicated matters, the question of amendment, as indicated above, may require consideration expeditiously by the Ministry of Finance. In the meantime, the CBDT may also consider to issue appropriate instructions in this regard [Para 6]

2.2 This lead to enactment of special provisions of Specified Domestic Transaction. in section 92BA. Requirement of report of an accountant in section 92E, 92F and Explanation in section 80IA(8) of the IT Act in Finance Act 2012, w.e.f. 1-4-2013. This is applicable from AY 2013-14. TPO clearly mentioned the same at page number -7 of the TP order.

2.3 The Explanation to section 80IA(8) introduced in Finance Act defines "market value" for the purpose of above said provision placed in Chapter X.

The explanatory memorandum is as under:

"Transfer Pricing Regulations to apply to certain domestic transactions Section 40A of the Act empowers the Assessing Officer to disallow unreasonable expenditure incurred between related parties. Further, under Chapter VI-A and section 10AA, the Assessing Officer is empowered to re-compute the income (based on fair market value) of the undertaking to which profit linked deduction is provided if there are transactions with the related parties or other undertakings of the same entity. However, no specific method to determine reasonableness of expenditure or fair market value to re-compute the income in such related transactions is provided under these sections.

The Supreme Court in the case of CIT Vs. Glaxo SmithKline Asia (P) Ltd., in its order has, after examining the complications which arise in cases where fair market value is to be assigned to transactions between domestic related parties, suggested that Ministry of Finance should consider appropriate provisions in law to make transfer pricing regulations applicable to such related party domestic transactions.

The application and extension of scope of transfer pricing regulations to domestic transactions would provide objectivity in determination of income from domestic related party transactions and determination of reasonableness of expenditure between related domestic parties. It will create legally enforceable obligation on assessees to maintain proper documentation. However, extending the transfer pricing requirements to all domestic transactions will lead to increase in compliance burden on all assessees which may not be desirable.

Therefore, the transfer pricing regulations need to be extended to the transactions entered into by domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A and section 10AA. The concerns of administrative and compliance burden are addressed by restricting its applicability to the transactions, which exceed a monetary threshold of Rs.5 crores in aggregate during the year. In view of the circumstances which were present in the case before the Supreme Court, there is a need to expand the definition of related parties for purpose of section 40A to cover cases of companies which have the same parent company.

It is, therefore, proposed to amend the Act to provide applicability of transfer pricing regulations (including procedural and penalty provisions) to transactions between related resident parties for. the purposes of computation of income, disallowance of expenses etc. as required under provisions of sections 404, 80-IA, 104A, 804, sections where reference is made to section 80-IA, or to transactions as may be prescribed by the Board, if aggregate amount of all such domestic transactions exceeds Rupees 5 crore in a year. It is further proposed to amend the meaning of related persons as provided in section 40A to include companies having the same holding company.

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the Assessment Year 2013-14 and subsequent assessment years."

AU these aspects were discussed in detail in para7.8.3.

3.1 Section 80IA(8):

Where any goods or services held for the purpose of eligible business are

transferred to any other business carried on by the assessee Or - First limb.

or

Where any goods or services held for the purpose of any other business are

transferred to eligible business carried on by the assessee - Second limb.

In either case

If consideration recorded in the accounts of eligible business does not correspond to market value of such goods, then for the purpose of section 80IA(8), profit and gains of such eligible business shall be computed as if the transfer in either case had been made at market value of the goods as on date of transfer. These discussions were made by the TPO at para7.3.

i. The good transferred or sold here is electricity.

ii. The assessee company has generated power from eligible units andi

transferred to other business carried on by them.

iii. It was captively consumed by other business carried on by the assessee.

iv. Hence first limb of section 80IA(8) discussed above is attracted.

Being the power generator in eligible units, the rate at which they can sell in open market to State Electricity Board is the "market value". All the power generation units have to either captively consume or sell to State Electricity Board. That is the market rate as per the explanation discussed above and that is needed for determination of arm's length price. The arm's length price is explained in the pictorial diagram enclosed along with this submission.

In view of the above show cause notice was issued by TPO and it was discussed at para-9 of the TP study. Reply of the assessee and TPOs observation are discussed at para 10 and 11 of the TP order. The assessee considered power consuming unity as the tested party. In their TP study the assessee determined the arm's length of the captive consumption of "other business" by treating the purchase price of electricity of the consuming unit from the power distribution company namely TANGEDCO and concluded that their transaction was within arm's length for the captive consumption. That rate is the retail market rate of power sold by power distribution companies of power in open market. Their TP study was fundamentally against the scope of Specified Domestic Transaction brought into legislature.

If we follow the method of assessee, the entire purpose of legislation of section 92B, 92E and explanation to section 80IA consequent to direction of Supreme Court in the case of CIT Vs Glaxo Smithkline Asia (P) Limited [2010] in 195 Taxmann 35 will be defeated.

The TPO has examined the transaction in the following line;

> What we have to examine in TP study is the sale price of power generation units/eligible units to State Electricity Board.

> The tested party is the power generation units i.e. 'eligible units' and not the captive consumption unit as contended by the appellant.

> Because what the assesssee claimed deduction u/s 80IA was on sale of power of eligible business

> Here, the determination of arm's length of eligible business only underwent TP study and not other business of captive consumption.

> That is what Hon'ble SC has prescribed in its decision.

Show cause notice by TPO:

TPO issued detailed show cause notice and considered submissions of the appellant and adopted right method of TP study in the TP order.

With due regard, it is submitted that this is new area of TP study where the power generation unit being the tested party and sale of electricity of that eligible business undergone TP study in the light of Hon'ble Supreme Court and new legislation brought into statute in Finance Act in section 80IA(8) and in section 92 BA(2) read with section 92F(ii) and Ruled 10B(2) of the IT Act and IT Rules. Hence those earlier decisions are not applicable for the present appeal of AY 2017-18. This was brought out in TP order unambiguously and it was also argued in length before Hon'ble ITAT.

Accordingly, w.e.f. 1-4-2013 significant amendment was brought in the statue to address such specified domestic transaction.

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

engaged in the business of power generation through windmills and has

used power generated from its Windmill Division for captive consumption

in Textile Division. The assessee has claimed deduction u/s.80IA of the

Act, for Windmill Division and has determined profit from eligible

undertaking by charging power to Textile Division at the rate at which the

assessee buys power from M/s.TANGEDCO Ltd. The TPO has rejected rate

adopted by the assessee and has adopted rate paid by TNERC to power

generating companies for purchase of power. According to the TPO, FAR

analysis of the assessee and FAR analysis of the comparable company is

entirely different. The power generating company operates under different

set of facts and functions performed by the assessee are entirely different

from functions carried out by power distribution companies. Since,

M/s.TANGEDCO Ltd., perform both generation and distribution functions

only rate charged by power generating companies is the appropriate

method to compare rate charged by the assessee to its other division.

Therefore, considering various power purchased agreements entered into

by TNERC with various power generating companies compared with rate

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charged by the assessee to its other division for computing deduction

u/s.80IA of the Act and determined TP adjustment of Rs.15,10,15,315/-.

the TPO and the DRP in light of various arguments advanced by the

assessee and we find that this issue is squarely covered in favour of the

assessee by the decision of ITAT Chennai Benches, in the assessee’s own

case for AY 2007-08 in ITA No.1571/Mds/2011, where the Tribunal has

considered an identical issue in light of deduction claimed u/s.80IA of the

Act, and observed that for the purpose of computing deduction u/s.80IA

of the Act, price at which the TNERC purchased power from the power

generating companies is not correct rate to be adopted, but the price at

which the assessee purchased power from electricity supply companies is

the rate to be compared for the purpose of determining ALP of price

charged by the assessee to its other division. The ITAT Chennai Benches

in the case of M/s The India Cements Limited vs. The DCIT, in ITA No.

2415 and 2210/Chny/2017 has considered an identical issue in light of

deduction claimed u/s.80IA of the Act, for profit derived from eligible

undertaking in respect of transfer of power from Windmill Division to

other division and observed that while computing deduction u/s.80IA of

the Act, for power generation units for captive consumption of power, rate

at which Electricity Boards supplies power to its consumers should be

considered instead of the rate at which the power generating companies supply power to the Electricity Boards. The relevant findings of the

Tribunal are as under:

18.5 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in assessee’s own case for assessment year 2011-12 in ITA No.2412/Chny/2019 dated 12.12.2019, where the Tribunal under identical set of facts by following certain judicial precedents including the decision of Hon’ble Bombay High Court in the case of Reliance Industries Ltd., and the decision of Hon’ble Chhattisgarh High Court in the case of M/s.Godavari Power and Ispat Ltd., supra held that while computing deduction u/s.80IA for generation of power for captive consumption, the rate at which electricity board supply power to its consumers should be considered instead of the rate at which the power generating companies supply its power to the electricity board. The relevant findings of the Tribunal are as under:-

“31. We have considered the rival submission and perused the materials available on record.

18.6 In the present case, the facts are identical with that of the facts considered by the Tribunal in earlier year. The CIT(A) after considering relevant facts and also by following the decision of the ITAT, Chennai in the case of Eveready Spinning Mills (P) Ltd., vs. ACIT, (2012) 17 taxmann.com 254 and the decision in the case of Shri Velayudhaswamy Spinning Mills (P) Ltd., vs. DCIT, (2012) 19 taxmann.com 28 has deleted additions made

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by the AO by holding that market value of the power captively consumed should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power at which power could have been sold to SEBs because this is not the rate for which a consumer could have purchased power in the open market. Therefore, we are of the considered view that there is no error in the finding recorded by the ld.CIT(A) to delete additions made by the AO towards TP adjustment on deduction claimed u/s.80IA of the Act. Hence, we reject the ground taken by the Revenue.

CIT-LTU v. Reliance Industries Ltd. in ITA No.1056 of 2016 dated

30.01.2019, has also considered similar issue and held that for the

purpose of computing deduction u/s.80IA of the Act, the rate at which the

assessee purchased power from distribution companies is to be

considered instead of rate at which the power distribution companies

purchased power from generating companies. The ratio laid down by

various High Courts and Tribunals for determining ALP of domestic

transactions in case of captive consumption of power generated by one

unit and consumed in other unit, the rate at which power purchased by

the assessee from distribution company is alone needs to be considered

but not the rate at which distribution companies purchased power from

generating companies. In the present case, the TPO and the DRP has

adopted rate fixed by TNERC for purchase of power from various power

generating companies by TNEB. Therefore, we are of the considered view

that the TPO as well as the DRP are completely erred in making

downward adjustment towards deduction claimed u/s.80IA of the Act, in

respect of Wind Power Division, and thus, we direct the Assessing

Officer/TPO to delete TP adjustment made towards deduction u/s.80IA of

the Act.

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Order pronounced on the day of 30th August, 2023, in Chennai.

Sd/- Sd/- (मंजूनाथा.जी) (मनोमोहनदास) (MANJUNATHA.G) (MANOMOHAN DAS) लेखासद�/ACCOUNTANT MEMBER �ाियकसद�/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 30th August, 2023. TLN आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकरआयु�/CIT 5. गाड�फाईल/GF 2. ��यथ�/Respondent 4.िवभागीय�ितिनिध/DR