ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-5(1), HYDERABAD, HYDERABAD vs. MYTRAH VAYU (GUJARAT) PRIVATE LIMITED, HYDERABAD

Ground of appeal No.2 to 5 raised by the Revenue reads as under:

Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in allowing the claim of the reimbursement of expenses to AE by not appreciating the fact that the assessee has not justified the allocation key i.e. project [ACIT vs. Mytrah Vayu (Gujarat) Private Limited] A.Y. 2014-15 - 4 – capacity which was not based on actual usage but on arbitrary and generic parameter.

The grievance raised by the Revenue in the above ground relates to deletion of addition made to the income of the assessee on account of transfer pricing adjustment made to Specified Domestic Transaction (‘SDT’) entered into by the assessee with its Associate Enterprise. The quantum of adjustment so made being Rs.2.38 Crores and the nature of transaction with the Associate Enterprise being reimbursement of expenses.

The orders of the authorities below reveal that the assessee had reported SDT of reimbursement of expenses with its related party Mytrah Energy (India) Private Limited (‘MEIPL’) to the tune of Rs.2,83,00,139/- in Form 3CEB, audit report, benchmarking the transaction using the Comparable Uncontrolled Price (‘CUP’) method. The assessee had explained the nature of transaction contending that MEIPL was incorporated on 12th November, 2019 and its principal activity was to generate and sell electricity from wind energy farms by itself and through its subsidiaries and engaged itself in wind farm development and infrastructure maintenance services to its group entities. It was explained that generally for setting up of any wind/solar based projects MEIPL [ACIT vs. Mytrah Vayu (Gujarat) Private Limited] A.Y. 2014-15 - 5 – floats a Special Purpose Vehicle (‘SPV’) and the respective project was housed in the said SPV. The purpose being to satisfy the lenders requirements since housing separate projects in separate SPVs resulted in limiting the lenders exposure. MEIPL acted as a sponsor of the project undertaken in each such separate SPV. As a sponsor MEIPL undertook responsibility to ensure that the project was executed on time and rendered host of other services to the SPVs. For all such services, which was directly or indirectly rendered for the benefit of SPV MEIPL allocated the expenditure based on Mega Watt (‘MW’) capacity of the projects of the respective SPVs. The assessee explained that during the impugned year expenses incurred by MEIPL were apportioned to two projects, namely, Mytrah Vayu (Indravati) Private Limited and Mytrah Vayu (Gujarat) Private Limited, the assessee before us ,on the basis of capacity of the project i.e. 150 MW to 50MW.It was contended that MEIPL was allocated professional consultancy amounting to Rs.8,11,56,04,668/- and salaries amounting to Rs.5,69,87,978/- to the two SPVs resulting in an allocation of Rs.2,83,00,139/- to the assessee. The assessee pointed out that the expenses allocated by MEIPL were only a portion of the professional fee and salaries paid by it and said expenditures were incurred for the direct and immediate benefit of the projects undertaken in the SPVs. The assessee further pointed out that the entire expenses so allocated to the assessee had been debited to capital work in progress and no portion of the same had been as an expense in the P&L account. The assessee contended the transaction to be capital in nature and not covered for the purposes [ACIT vs. Mytrah Vayu (Gujarat) Private Limited] A.Y. 2014-15 - 6 – of transfer pricing as per provisions of Section 92BA r.w.s. 40A(2)(b) of the Act. However, he stated that out of abundant caution, the assessee had reported the transaction in Form 3CEB. It was also contended that the assessee was eligible for claiming benefit of deduction of profits under 80IA of the Act though it had not claimed any benefit during the impugned year, but, by virtue of allocation of said expense to the assessee, it had resulted in reduction of profits of the assessee and, therefore, business transacted between the assessee and MEIPL was not covered under 80IA(10) of the Act. The contention, therefore, was that the assessee did not qualify as a specified domestic transaction in terms of 92BA of the Act. The AO, however, noted that the assessee itself had disclosed the impugned transaction in Form 3CEB under the head SDT in the nature of any business transacted which has resulted in more than ordinary profits to an eligible business to which 80IA or Section 10AA of the Act is applicable. He, accordingly, rejected the contention of the assessee that the impugned transaction was not a SDT as per Section 92BA of the Act. He further found that allocation of expenses based on adopted allocation key i.e. the project capacity, failed the benefit test since he found the assessee to have derived no benefit from the same. He found that the allocation key i.e. project capacity was Nil and noting that the assessee had failed to explain how the reimbursement of expenses was wholly and exclusively connected with his business, he benchmarked the transaction at Nil. Accordingly, TP adjustment of Rs.2.83 Crores was made to the [ACIT vs. Mytrah Vayu (Gujarat) Private Limited] A.Y. 2014-15 - 7 – income of the assessee by adding the same to the income of the assessee.

The Ld. CIT(A), however, noted that the TPO’s disqualification of the expenditure stating the same to have not resulted in any benefit to the assessee was not correct since he found that the TPO had found no defect or fault either in the calculation of total cost or apportioning of the same between the parties. He noted that the assessee had submitted all details and documents and explained the nature of expenses and method of apportioning. He held that unless it is proved by the TPO that there was an error in either the nature of expenditure or in apportioning the same it could not be treated as Nil by the TPO saying no benefit was received. He further noted that the impugned expenses were not debited to the P&L account, but, were capitalized towards capital work in progress and accordingly, he directed the deletion of addition made to the income of the assessee on account of TP adjustment made. His finding in this regard are contained at page no.55 to 56 of his order as under:

We have heard both the parties. The facts which are not disputed are that the impugned transaction is a SDT. The same relates to reimbursement of expenses to the associate entity of the assessee. The impugned amount has not been debited to the P&L account but has been capitalized as capital work-in-progress. The above facts are not disputed.

The contention of the assessee is that the impugned transaction does not qualify as SDT, since, it is not an expense which qualifies u/s.40A(2)(b) of the Act nor is it any transaction of the nature relating to Section 80IA of the Act as specified under the said Section. The case of the Revenue, however, is that the assessee itself had reported the transaction as qualifying u/s.80IA (10) of the Act referred to in Sub-Section (4) of 92BA of the Act. Section 80IA(10) of the Act reads as under: “Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1)……… ………………….. (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F.”

In the result, appeal filed by the Revenue is dismissed.