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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice-(KZ) & Shri Rajesh Kumar
Per Rajesh Kumar, Accountant Member:- This appeal preferred by the Revenue is directed against the order of ld. Commissioner of Income Tax (Appeals)-22, Kolkata dated 22.05.2019 for the assessment year 2015-16.
The Revenue in its appeal has raised the following grounds:- “In respect of Corporate Guarantee (1) That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the AO/TPO amounting to Rs. 28,56,796/- with respect to corporate guarantee provided by the assessee.
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) (2) That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that, the external loan comparables of companies with BB+ and BB- credit rating are not comparable with the AE without giving any cogent reason.
(3) That on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that, the data set of loan comparables was identified taking into consideration the credit rating of AE and other associated factors.
In respect of Transfer of Power (4)That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the AO/TPO amounting to Rs. 6,75,22,000/- for transaction with respect to transfer of power/electricity.
(5)That on the facts and circumstances of the case and in law, the Ld.CIT(A) had failed to appreciate the analysis undertaken by the TPO while concluding the said transaction were not at the arm’s length.
(6) That on the facts and circumstances of the case and in taw, the Ld.CIT(A) had failed to appreciate that, even if we consider the electricity board rate i.e. rate at which assessee purchases power from the distributors, for transfer pricing purpose, adequate adjustment has to be made for the costs which the distributors incurs towards transmission of power and other additional costs for arriving at arm’s length price.
(7) That on the facts and circumstances of the case and in law, the Ld.CIT(A) had erred in deleting the downward adjustment made by the TPO/AO pertaining to the exaggerated profit of captive power generating unit by claiming higher rate than the cost price or market price as determined in tariff order of electricity board for independent power generating units”.
The first issue raised by the Revenue in its appeal is against the deletion of addition by the ld. CIT(Appeals) of Rs.28,56,796/- as made by the ld. A.O./TPO on account of corporate guarantee fees.
The facts in brief are that the assessee filed its return of income on 27.11.2015 declaring total income of Rs.18,18,54,168/-. The case of the assessee was selected for scrutiny through CASS and statutory notice was served upon the assessee. Ld. Assessing Officer from perusal of Form 3CEB observed that the assessee has entered into specified domestic
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) transactions to the tune of Rs.91,35,81,226/- and accordingly referred to the Addl./JCIT (TPO), Kolkata for determination of ALP of these specified domestic transactions after obtaining due approval of the ld. Principal CIT-2, Kolkata. Subsequently the ld. TPO passed an order under section 92CA of the Act dated 30.10.2018 proposing an upward adjustment to the Arm’s Length Price (in short ‘ALP’) of the specified domestic transactions to the tune of Rs.7,03,78,796/-, which was added by the ld. TPO. The said upward adjustment comprised of two components of additions, i.e. (1) in respect of corporate guarantee fees given by the assessee to Standard Chartered Bank, Singapore Branch in connection with loan taken by its AE viz. Dhunsari Petrochem and Tea Pte. Limited (hereinafter referred to as ‘DPTPL’). The assessee in the TP Study Report (hereinafter referred to as ‘TPSR’) had benchmarked the transactions under the CUP Method at 30 bps by following interest savings approach to benchmark the corporate guarantee. The assessee took the independent credit rating of the AE, which was BB and selected five external loan comparables from Loan Connector Database. The assessee further identified similar rated companies, i.e. BB, who had obtained third party loans on similar terms and conditions. The assessee noted that aggregate interest savings of 30 bps were made as a result of standby letter of credit issued by the assessee in favour of Standard Chartered Bank, Singapore Branch and thus the corporate guarantee was benchmarked in the TP Study Report.
The ld. TPO had not disputed the method followed by the assessee to benchmark the corporate guarantee, interest savings approach which was the basis for determining the interest savings made by the AE, which was BB and loan connector database. However, ld. TPO held that five external loan comparables from loan connector database as identified by the assessee are same rated companies, i.e. BB. Further similar rated companies were not having sufficient datas and, therefore, he included the comparables having rating of BB (plus) & BB (minus) and thus expanded the comparable base. The ld. TPO on the basis of broad
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) functional comparability approach under CUP Method computed the interest savings by applying the percentile approach at 137.5 bps and assuming that 50% benefit ought to have been paid by the AE to the assessee in the form of corporate guarantee fee, the ALP of the corporate guarantee fee was computed at 69 bps and thereby proposing an upward adjustment of Rs.28,56,796/-, which was added by the AO in the draft assessment order passed under section 144C read with section 92CA of the Income Tax Act, 1961. The assessee challenged the adjustment made by the AO/TPO, Ward-4 before the ld. CIT(A) and ld. CIT(A) allowed the appeal of the assessee by directing the TPO/AO to delete the upward adjustment of Rs.28,56,796/- by observing as under:- “1. I have carefully considered the action of the Id. TPO, as also equally carefully perused the submissions made by the Ld. A.Rs, and the documents available in the Paper Book filed by the appellant. The issue involved in these grounds concerns determination of the ALP fees in respect of the Standby Letter of Credit issued by the appellant i.e. the guarantor to the lender, Standard Chartered Bank, Singapore Branch for loan taken by its AE, viz. Dhunseri Petrochem and Tea Pte Limited (DPTPL). From the TPSR as well as the submissions of the appellant it is observed that the guarantee fee was determined and benchmarked by the appellant at 30 bps. The appellant had followed the interest savings approach to benchmark the corporate guarantee. It obtained an independent credit rating of the AE which was reported to be BB (rated). From the Loan Connector Database, the appellant identified 5 external loan comparables for same rated companies i.e. BB (rated), who have obtained third party loans on similar terms & conditions. Upon comparison of the average interest of the external loan comparables vis-a- vis the guaranteed loan obtained from the Standard Chartered Bank by the AE, it was noted that the aggregate interest savings as a consequence of issue of SLBC was 30 bps. Without apportioning this benefit between themselves, the appellant benchmarked the corporate guarantee at the entire value of interest savings i.e. 30 bps. 2. From the order of the Ld. TPO is noted that the following factors involved in the benchmarking of the corporate guarantee are not disputed by either parties. Method to be followed: CUP Method Basis : Interest Savings Approach Credit Rating of AE : BB(rated) Database : Loan Connector Database 3. The only disputed position is the identification df loan comparables from the Loan Connector Database. According to the Ld. TPO, the five external loan comparables identified by the appellant for the same rated companies i.e. BB (rated) was insufficient data and therefore he was of the considered view that a broad search ought to be undertaken to include comparable loan profiles of BB+ & 3B- companies as well. By undertaking this expanded search, the Ld. TPO
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) indentified further seven loan comparables viz., three loan comparables of BB+ companies and three loan comparables of BB- companies and one loan comparable of BB company. Adopting this broad comparability approach under CUP Method, the Ld. TPO re-computed the interest savings by applying the percentile approach at 137.5 bps. Assuming that 50% benefit ought to have been paid by the AE to the appellant in form of CG fee, the ALP CG fee was computed at 69 bps and hence further adjustment of Rs.28,56,796/- [69 bps - 30 bps] was recommended by the Ld. TPO. 4. After going through the contentions of both parties, I find that the undisputed position is that CUP Method is the most suitable method to benchmark the international transaction in question. It needs to be appreciated that CUP requires an apple to apple comparability of products (completed in all respects). CUP method cannot be applied where comparables are of different profiles different economics, different financial conditions etc. Meaning thereby if the comparables so identified are not absolutely identical, then CUP Method cannot be applied. It is by now a settled position that for application of the CUP method, highest degree of comparability is required. In case of Intervet India Private Limited (2010) 39 SOT 93, the Hon'ble ITAT, Mumbai has observed that standard of comparable data while applying CUP method is more stringent and need of similar economic relevant transactions is of paramount importance. Identical view has been expressed by the Hon'ble ITAT, Kolkata in the case of Dy.CIT Vs Emami Ltd (ITA No. 1066/Kol/2017) dated 15.06.2018. For the reasons aforesaid I am of the considered view that the Ld. TPO was unjustified in broadening the search process to encompass external loan comparables of companies having BB+ and BB- rating since they were not strictly comparable with the AE which carried BB rating. 5. The Ld. TPO's argument that the external loan comparables identified by the appellant was not sufficient also does not hold any water. I find that the appellant was able to identify five comparable loan profiles of same rated companies which in my considered view are sufficient data to benchmark the impugned transaction. It is noted that the Ld. TPO has not disputed any of five loan comparables identified by the appellant and has included the same in his set as well. The Ld. TPO has additionally identified one more external loan comparable. Hence the final set of comparable loan profiles of same BB rated companies is as follows: Sl. No. Name Interest rate 1. Lifepoint Hospitals Inc. L+250 2. Century Link Inc. L+200 3. Windstream Corp. L+300 4. FREIF North American Power L+450 LLC 5. Windsor Financing LLC L+500 6. NGPL Pipe Co. LLC L+550 Average L+375 bps Actual Interest Rate L+300 bps Interest Savings 75 bps
Applying the Ld. TPO's percentile approach to the above set, the following picture emerges: Sl. No. Values of margin
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) 1. 200 2. 250 3. 300 4. 450 5. 500 6. 550 Total no. of entries = 12 35th Percentile is = 5*35/100 = 2.1 Since this is not a whole number, the number succeeding the above no. is considered as the 35th percentile, i.e. 3. 65th percentile is = 5*65/100 = 3.9 Since the above no. is not a whole number, the number succeeding the above no. will be treated as 65th percentile, i.e.4. Therefore the arm's length range is 300 to 450. 7. In the present case the margin of the appellant (as stated by the Ld. TPO) is 300 bps which is falling within the above median range and in that view of the matter the international transaction involving issuance of corporate guarantee is at arm's length. The CG fee of 30 bps as benchmarked by the appellant is hence held to fair and reasonable and no transfer pricing adjustment in this regard is found to be warranted. The Ld. AO/TPO is accordingly directed to delete the adjustment of Rs.28,56,796/-. Ground Nos. 1 & 2are therefore allowed”.
We have heard the rival submissions and perused the relevant material available on record. From the impugned order of ld. CIT(A), we note that there is no dispute as to the fact that the assessee has issued standby letter of credit i.e. corporate guarantor to the lender i.e. Standard Chartered Bank, Singapore Branch from which the assessee-firm obtained loan. There is also no dispute as to the method followed by the assessee for benchmark the transactions, which was CUP basis adopted and interest savings approach aggregating of the AE, which was BB and loan connected data base. The assessee selected five comparables in the TP Study Report. The assessee selected five external loan comparables of similar rated companies and determined the interest savings at 30 bps. The ld. TPO accepted the methodology of the assessee adopting the benchmark for corporate guarantee. However, differing on the issue of only five comparables and by obtaining data from loan connector data base, the TPO identified seven loan comparables with three comparables of BB plus rating and three comparables of BB minus rating and one of BB 6
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) and determined the interest savings by applying the percentile approach of 137.5 bps and after taking 50% by the assessee and by assuming that 50% benefit ought to have been paid by the AE to the assessee in the form of corporate guarantee fee, the ALP corporate guarantee fee was computed at 69 bps and hence further adjustment of Rs.28,56,796/- was proposed. The ld. CIT(Appeals) deleted the same by holding that undisputedly CUP method was more suitable method to benchmark the international transaction, which requires strict comparability and cannot be applied where comparables are different profiles having different economics, different financial conditions etc. The ld. CIT(A) also referred to the decision of the Hon’ble Calcutta High Court in the case of Intervet India Private Limited (supra), where Coordinate Bench has held that standard of comparable data while applying CUP method is more stringent and need of similar economic relevant transactions is of paramount importance. Identical view has been taken by another Coordinate Bench in Kolkata in the case of DCIT –vs.- Emami Limited (supra). Thus the ld. CIT(A) rejected the TPO’s proposition for upward adjustment on the ground that the ld. TPO has erred in selecting these seven more comparables by ignoring the basic principle to be followed while applying the CUP Method. The ld. CIT(A) also computed the ALP under the range of 300 to 450 bps. The ld. CIT(A) finally held that since the margin of the assessee as stated by the TPO as 300 basis point, which is falling within the above medium range and, therefore, the international transaction involving issuance of corporate guarantee is at arm’s length and corporate guarantee fees of 30 bps as benchmark by the assessee is held to be fair and reasonable and accordingly directed the TPO/AO to delete the adjustment. We also carefully perused the decision furnished by the ld. DR in the case of Rose India Pvt. Ltd. –vs.- DCIT (2021) 127 taxman.com 591 (Mumbai Trib.), wherein the Coordinate Bench has held that where a corporate guarantee to benchmark was issued by on behalf of the AE, the arm’s length guarantee fees would be 0.5%. Considering the facts on record and perusing the rival submissions, we are of the view
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) that it would be reasonable if corporate guarantee fee of 0.5% is applied to benchmark the international transactions. Accordingly we set aside the impugned order of ld. CIT(A) on this issue and direct the ld. AO to benchmark the transactions by applying 0.5%. Thus Ground No. 1 raised by the Revenue in respect of corporate guarantee fees is partly allowed.
The second issue raised by the Revenue in its appeal is against the order of ld. CIT(A) deleting the adjustment of Rs.6,75,22,000/- as proposed by the ld. AO/TPO for transactions with respect to transfer of power/electricity.
The facts in brief are that the assessee was having two Power Generation Plants (hereinafter referred to as CPPs) and the power generated by the CPPs was consumed captively by the assessee’s PET Resin Manufacturing Units(hereinafter referred to as Non Eligible Units). The assessee was entitled for exemption of profit generated from the CPPs under section 80IA of the Act. In order to determine the profits of the CPPs on transfer electricity to non eligible units on standalone basis, the assessee valued the electricity at the rate at which the electricity was supplied by the State Electricity Board (hereinafter referred to as ‘SEB’)to the consumers and accordingly the transactions of transfer of power by CPPs to non eligible units were benchmarked and the profits of CPPs were claimed under section 80IA of the Act. The assessee duly disclosed this captive consumption of power by the non eligible units in the audit report filed in Form 3CEB. The AO referred the matter for transfer pricing scrutiny to the TPO. According to the ld. TPO, the captive consumption of power by the non-eligible units from the eligible units has to be determined at a price at which the electricity was procured by other electricity distribution companies. Pertinent to mention both the assessee and TPO adopted the same method of determining ALP i.e. CUP. According to the ld. TPO, the average tariff orders issued by the SEB in respect of other power producers was the most relevant indicator of ALP
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) for powers supplied by eligible units to non-eligible units against the assessee’s internal CUP data i.e. the rate at which the non-eligible units procured from the unrelated parties by relying on the decision of the Hon’ble Calcutta High Court in the case of ITC Limited as reported in (2015) 64 taxmann.com 214 and finally proposed an adjustment of Rs.6,75,22,000/- to the specified domestic transactions of transfer of power for captive consumption by eligible units to non-eligible units. The AO accordingly framed the draft assessment order by adding the same to the income of the assessee.
9.1. In the appellate proceeding, ld. CIT(A) allowed the appeal of the assessee by observing as under:- “1. I have carefully considered the action of the Id. TPO, as also equally carefully perused the submissions made by the Ld. A.Rs, and the documents available in the Paper Book filed by the appellant. The appellant operated eligible power undertakings ('CPPs') in West Bengal. The power, generated by the eligible units was consumed captively by other non-eligible unit. For the purposes of Section 80IA(8) and in order to determine the stand-alone profits of the eligible unit, the transfer value of power to non-eligible unit was-adopted at" Rs.7.66- 7.87/unit having reference to average landed cost at which t-he non-eligible unit procured power from the SEB. The aforesaid transaction was reported by the appellant in the transfer pricing audit report filed in Form 3CEB and thereafter the Ld. AO referred the matters for transfer pricing scrutiny. Before the Ld. TPO the appellant was required to demonstrate that the profits of the eligible units were arrived at by adopting fair value of the goods & services provided to non- eligible undertaking and also prove that the price charged was at arm's length.
From the orders of the lower authorities as also from the contentions of the appellant, it is noted that both the parties have in principle accepted and agreed that the most appropriate method for determination of ALP of power tariff is CUP Method. In the Ld. TPO's opinion however the average tariff orders issued by SEB in respect of other independent power producers was the most relevant indicator of the arm's length price for power supplied by CPPs to non-eligible unit as opposed to the appellant's internal CUP i.e. the rate at which the non-eligible units procured from from unrelated entity i.e. SEB apart from the CPP. The Ld. TPO in this regard relied on the judgment of the Hon'ble Calcutta High Court in ITC Limited reported in (2015) 64 Taxman.com 214. The Ld. TPO took into consideration the fact that during the relevant year the appellant itself had sold power generated by CPP to unrelated party under a PPA agreement where per unit price realized was Rs.4.77. Keeping in view these facts, the Ld. AO concluded that the rate adopted by the appellant at Rs.8.30/unit excessive and did neither represent fair market value nor the ALP of the power supplied by CPP. On the contrary he adopted Rs.4.90/unit per unit as the ALP for the power generated by the eligible unit.
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited)
Per contra, the Ld. AR of the appellant has made detailed submissions rebutting the Ld. TPO's conclusion, which have extensively been extracted in the earlier paragraphs. From the foregoing the question to be decided is that for application of CUP Method what should be the most appropriate data and the price to be adopted. It is well understood that CUP Method can be applied where AEs buy or sell similar goods or services in comparable transactions with unrelated enterprises or when unrelated enterprises buy or sell similar goods or services, as is being done between the AEs. The CUP Method, can be broadly classified into two categories i.e. Internal CUP Method & External CUP Method. Under the Internal CUP Method, the transaction between the AEs involving buy or sell of goods & services are comparable to the transacted conducted by any of the AEs with unrelated parties for buy or sell of similar goods or services under similar conditions. However when such internal data is not available, then one may apply external CUP which involves comparison of prices paid/ charged between two unrelated third parties in uncontrolled conditions with the transaction conducted between the AEs. 4. From the material on record it is noted that the eligible CPP supplied power only to the AE i.e, the non-eligible unit and it did not have any transaction with any unrelated enterprises. In the circumstances the eligible unit at West Bengal cannot be considered as the tested party for the purposes of application of CUP. On the contrary, it is noted that the non-eligible unit was sourcing power both from the AE i.e. the eligible undertaking as well as unrelated enterprises i.e. the SEB. In the circumstances it is noted that reliable internal CUP data was available with the appellant to benchmark the ALP of the power generated & supplied by the eligible undertaking to the non-eligible unit by taking the non- eligible unit to be the tested party. 5. On the other hand, I find that the basis and benchmarking exercise followed by the Ld. AO/TPO suffered from apparent infirmities. From the facts on record I note that the Ld. TPO wrongly assumed that the CPP was neither discharging distribution functions nor transmission functions and therefore sought to functionally distinguish it from the SEBs. It is however found from the facts on record that the CPP was indeed distributing and supplying power to the non-eligible undertaking through transmission lines and hence the FAR analysis performed by the Ld. AO/TPO was unjustified. It is also observed that the Ld. TPO/AO erred in considering different forms of power units such as coal based, waste heat gas based etc. to be comparable to the assessee CPP when the jurisdictional fact remained that the assessee's CPP was a thermal based power plant. The Ld.TPO/A0 also selected the tariff schedule on random & pick and chose basis without ascertaining as to whether the Tariff schedule was for low Tension or for High Tension or for that matter for which class of consumers was the tariff rates notified. It is evident from the tariff orders that depending on the class of consumers e.g., Railways, Mines, Seasonal, Industrial /Non-industrial, agriculture etc. the rates varied from Rs.1.80 to Rs.5.90 per unit. I therefore find merit in the contention of the Ld. AR that the FAR as well as the Economic Analysis performed by Ld. TPO was fundamentally flawed and unsustainable on facts and in law. Also the tariff orders issued by SEB in respect of other independent power producers are regulated by the WBSEB and are subject to statutory clearances and approval. The 1 said rate is dependent more on the socio-economic objectives of the State government and cannot be said to be an open market price determined by the
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) prevailing demand & supply in open market under uncontrolled conditions, Hence the tariff orders referred to by the Ld, TPO cannot be held as reliable data because the facts indicate that the rates are regulated and not determined under uncontrolled conditions. 6. On the other hand, I find that the benchmarking exercise followed by the appellant not only fulfils the internal CUP parameters but reliable data is also available in this regard. This landed cost payable to the SEB represents the rate which is available in open market and determined under uncontrolled conditions and is hence a reliable internal CUP available in the given facts of the case. I therefore find merit in the submissions of the Ld. AR as well as the TPSR that the average landed tariff rate notified by the UPSCB is a fair, reliable and reasonable basis to benchmark the transfer value of power procured by the non-eligible undertaking from the eligible unit. 7. The Ld. TPO's reference to the judgment of the Hon'ble Calcutta High Court in ITC Limited (supra) is wholly distinguishable since the appellant has sufficiently, demonstrated that not only is it is permitted to supply power independently to unrelated parties but it has actually supplied substantial .quantities of power t'o unrelated parties. Instead I find that the issue of allowability of deduction under Section 80IA in respect of profits derived by CPP came up for consideration before another coordinate Bench in' the case of M/s Electrosteel Castings Ltd in I.T. (SS) No. 47 to 60/ Kol/ 2014, 313 and 256/Kol/2015, 66 and 124/Kol/2016dated 25th November 2016. In respect of appeals relating to abated assessment years, the Revenue had relied on the judgment of Calcutta High Court in the case of CIT Vs ITC Ltd (supra) to contend that the deduction was required to be allowed taking into account the price at which distribution companies were purchasing electricity. After taking into account the provisions of the Electricity Act of 2003, and the regulatory provisions applicable in the State of West Bengal, the coordinate Bench accepted the assessee's contention that in view of the provisions of Electricity Act of 2003, which were applicable in the concerned AY 2011-12, the decision of Calcutta High Court in the case of CIT Vs ITC Ltd (supra) was not applicable. 8. It is further noted that subsequent to rendering of the judgment of Calcutta High Court in the case of CIT Vs ITC Ltd (supra), the coordinate Benches of the Tribunal at Kolkata in the following cases dismissed the Revenue's appeal against the CIT(A)'s order wherein the relief was allowed under Section 80IA in respect of profits of CPPs by taking selling price of electricity equal to the landed cost at which the electricity was supplied by SEBs to the assessee's other Units consuming electricity. -Dy.CIT Vs Kanoria Chemicals & Industries Ltd (ITA N0.944/K/16) - Graphite India Ltd Vs Addl.CIT (ITA No. 304-305/K/08) 9. I further note that the Hon'ble Gujarat High Court in its judgment dated 03.10.2016 in the case of Pr.CIT Vs Gujarat Alkalies & Chemicals Ltd (ITA No. 544 of 2016) dismissed the Revenue's appeal on the following specific question: "(ii) Whether the Tribunal was right in law in allowing the assessees claim of deduction of Rs. 1954 Crores u/s 80IA(4) of the I.T. Act, 1961, when the assessee had adopted rate of power generation at Rs.4.73 per unit, rate on which the CEB supplied power to its consumers, ignoring
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) the rate of Rs.2.36 per unit, the rate on which power generating company supplied its power to GEB ?" 10. The Hon'ble Gujarat High Court thus specifically decided the issue in favour of the assessee by holding that the deduction under Section 80IA in respect of CPP shall be computed by taking the per unit selling price of electricity equal to the rate at which the assessee purchased the electricity from SEB. 11. Reliance is further placed on the judgment of the Hon'ble Chhattisgarh High Court in case of CIT v. Godawari Power &Ispat Ltd. [2014] 42 taxmann.com 551/223 Taxman 234, in which the Court held and observed as under: * "31. The market value of the power supplied to the Steel-Division 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 when it is sold to a supplier as this is not the rate for which a consumer or the Steel-Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market. 32. In our opinion, the AO committed an illegality in computing the market value by taking into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer." 12. This question again came up for consideration before the Hon'ble Bombay High Court in the case of CIT Vs Reliance Industries Limited [2019] (102 taxmann.com 372) wherein the Hon'ble Court after considering the judgment of the Hon'ble Calcutta High Court in case of CIT vs ITC Ltd (supra), Hon'ble Chattisgarh High Court in case of CIT v. Godawari Power & Ispat Ltd. (supra) & Hon'ble Gujarat High Court in the case of ofPr.CIT Vs Gujarat Alkalies & Chemicals Ltd (supra) held that the valuation of electricity provided by eligible unit to another non-eligible unit for the purposes of Section 801A (8) should be at rate at which electricity distribution companies were allowed to supply electricity to consumers.
I further rely on the decision of the Hon'ble ITAT, Koikata in the case of Dy.CIT Birla Corporation Ltd (ITA Nos. 971/Kol/ 2012 & 298/Kol/2013) dated 25.08.2017 wherein the Hon'ble ITAT, Kolkata after considering the judgment of the Calcutta High Court in the case of CIT Vs ITC Ltd (supra) and the provisions of Electricity Act, 2003 and the decision of Apex Court n the case of ThiruArooran Sugars Ltd (227 ITR 432) upheld the assessee's contention that the open market value of electricity for the purposes of Section 80IA should be the price at which the assessees procures power from SEBs. Identical view was again expressed in the case of Dy.CIT Vs Kesoram Industries Limited for AYs 2008- 09 & 2009-10 vide the lead order in ITA No,1722/Kol/2012.
For the reasons set out in the foregoing therefore I hold that the methodology and benchmarking performed by the appellant (also judicially approved by higher judicial forums discussed above) was justified. Accordingly the Ld. AO/TPC is directed to delete the transfer pricing adjustment and further direct the Ld. AO/TPO to grant the deduction u/s 80IA based on the transfer price of Rs.8.30/unit. While computing
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) the deduction permissible, the Ld. AO/TPO shall give an opportunity of hearing to the appellant and will re-compute the deduction in terms of the directions above. Ground Nos. 4& 5 are therefore allowed”.
9.2. The ld. D.R. vehemently argued before the Bench that the Ld. CIT(A) has erroneously deleted the addition by taking average landing Cost of non-eligible units ranging from Rs. 7.66 to Rs. 7.87 per unit as the rate for bench marking the captive consumption of power by ignoring the facts the rate per unit at which the electricity distribution companies used to procure power from power generation companies. The Ld. D.R. also brought to the notice to the Bench the chart/details of per unit electricity as determined through tariff order by the Electricity Regulatory body and therefore argued that the TPO has rightly calculated arm’s length price by taking the rate at which power was sold to the distribution companies and thus justified the proposed TP adjustment of Rs. 6,75,22,000/- in respect of specified domestic transactions for the purpose of determining the profits of the CPPs on standalone basis for allowing claim u/s 80IA of the Act. The Ld. D.R. relied on the decision of Hon’ble Calcutta High Court in the case of CIT vs. ITC Ltd. in 236 Taxman 612 to buttress his arguments. The Ld. D.R. finally submitted that the order of Ld. CIT(A) may kindly be reversed on this issue by restoring the order of AO by allowing the revenue’s appeal on this issue.
9.3. The Ld. A.R. vehemently argued before us that the assessee has correctly bench marked the specified domestic transactions of transfer of power for captive consumption by taking the non eligible units as tested party and taking the ALC at which the non eligible units/tested party procured the electricity from SEB ranging from Rs. 7.66 to Rs. 7.87 per unit. The Ld. A.R. submitted that the TPO has wrongly adopted the average rate at which the power was sold by the power producing companies or CPPs/IPPs to power distribution companies or third parties at Rs. 3.47 per unit by treating the third parties as tested party. The Ld. A.R. ,while referring to the appellate order ,submitted that the Ld. CIT(A) has allowed the appeal of the assessee on this issue after going into the issue at great length and after giving comprehensive findings by relying on series of decisions as mentioned in the appellate order. The Ld. A.R reiterated his contentions as made before the Ld. CIT(A) by submitting that in the following decisions which were also considered by the Ld. CIT(A) in which ALC at which the power is purchased by non-eligible units is considered to be fair market value / transfer price/ ALP of power supplied by eligible units to the non-eligible 13
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) units. The Ld. A.R. took us through the various decisions of various High Courts and Tribunals in order to prove his averments on the issue of pricing of captive consumption of power from eligible units to non-eligible units. The Ld. A.R. referred to the following decisions to defend his arguments:
i) CIT vs. Reliance Industries Ltd. [2019] 102 taxmann.com 372 (Bombay)
ii) CIT vs. Gujarat Alkalies & Chemicals Ltd. (ITA No. 544 of 2016) (Guj HC)
iii) CIT vs. Reliance Infrastructure Ltd. (ITA No. 2180 of 2011) (Bom HC)
iv) CIT vs. Godawari Power & Ispat Ltd. (223 Taxman 234) (Chhat. HC)
v) ACIT vs. Birla Corporation Ltd. (ITA No. 971/Kol/2012)(ITAT Kol)
9.4. The Ld. A.R. has submitted that in the following cases non-eligible manufacturing unit was treated as tested party and ALC at which the power is purchased by the tested party from SEB was held to be most captively ALP consumed to benchmark the transfer price of power supplied by the eligible units to the non-eligible units:
i) Star Paper Mills Ltd. vs. DCIT [2022] 134 taxmann.com 177 (Kolkata-Trib.)
ii) DCIT vs. Balarampur Chini Mills Ltd. (IT Appeal No. 1672 (Kol) of 2019, dated 5.5.2021)
Finally the Ld. A.R. submitted that the arguments by the Ld. D.R. that the average rate calculated on the basis of rates at which power was sold to independent parties by CPPs/IPPs i.e. Rs. 3.47 per unit be taken as the arm’s length price for the purpose of calculating deduction u/s 80IA is wrong and contrary to the provision of the Act and various judicial decisions. The Ld. A.R. submitted that such arguments are fallacious as it is a settled position of law that for the purpose of computing deduction u/s 80IA the power used captively in the assessee’s non-eligible units by transferring power from eligible units has to be computed at the rate at which the electricity was procured by the non-eligible units from SEB. The Ld. A.R. finally prayed before the Bench that the order of Ld. CIT(A) may kindly be upheld by dismissing the ground raised by the revenue.
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) 9.5. We have heard rival submissions and perused the material as placed before us carefully including the impugned order and case laws relied upon by the assessee and the revenue. The undisputed facts in brief are that the assessee has two CPPs or eligible units generating electricity which was consumed captively by other non-eligible units i.e PET Resin Manufacturing Units(hereinafter referred to as Non Eligible Units). for carrying out the manufacturing. Noteworthy that non eligible units have also consumed power by purchasing the same from SEB. We observe that the assessee determined the ALP of specified domestic transactions at rate ranging from Rs. 7.66 per unit to Rs. 7.87 per unit which was the Average Annual Landed Cost (AALC) at which the non-eligible unit procured power from SEB. Thus , the assessee followed internal CUP for bench marking the specified domestic transactions of transfer of power from CPPs to non eligible unit at average landed cost at which the non eligible units procured electricity from the SEB by taking non eligible units as the tested party in the TP Study Report and accordingly ALP of the power captively consumed has been benchmarked at ALC of power purchased by the tested party from SEB. The assessee also duly reported these transactions in the audited report in Form 3CEB. Accordingly to the TPO the average rate of Rs. 3.47 per unit calculated on the basis of sale data of power by independent CPPs/IPPs as determined by various tariff orders would be the ALP of the domestic specified transactions. Accordingly the TPO recommended adjustment to the tune of Rs. 6,75,22,00,000/- and the AO passed the draft assessment accordingly. According to the assessee the internal CUP has to be used for the determination of ALP at which the non-eligible units/manufacturing units procured the power from unrelated party i.e. SEB. Now the issue before us whether the CUP method can be applied to bench mark specified domestic transactions of transferring power by CPPs to non eligible units. We have also perused the provisions as contained in Rule 10B of the Income Tax Rules which provide as to where the CUP can be and has to be applied. We observe from the said rule 10B that we have to see the price at which the property ,goods or service has been acquired under similar market conditions. It is also settled that choice of tested party is of lesser significance for the purpose of application of CUP method but instead key factor in application of CUP is product comparability and similar market conditions. Further the CUP method can be classified into two categories i.e. internal CUP method and external CUP method. Under internal CUP method the transactions between the AE’s involving buying or
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) selling of goods and services are comparable to the transactions entered into by the AE’s with the unrelated parties for buying and selling similar goods and service under similar circumstances. However when such internal data was not available then one may apply external CUP which involves comparison of price paid/charged between the two unrelated parties in uncontrolled condition for transactions entered into between the AE’s. In the instant case as noted elsewhere hereinabove that the CPPs bench marked the transactions with non eligible units at a rate at which power is supplied by the SEB to the non eligible units and therefore is the prevailing rate at which the power has been supplied by the SEB to other parties/factories located in the same geographical areas/location. It is also undisputed that both CPPs as well as SEB supplied/sold power during the year and thus there is no timing difference as well. Thus we are in agreement with the conclusion of Ld. CIT(A) that transactions of purchase of power by the non eligible units from SEB fulfil the internal CUP parameters vis product comparability and similar market conditions and thus the ALC paid by the non eligible units to the SEB represented the internal comparable ALP.
9.6. According to Ld. CIT(A), the excess surplus power sold in the open market at a price which was lower than the price at which the manufacturing units procured electricity from the SEB cannot the arm’s length price of the power. Thus, the Ld. CIT(A) reversed the order of TPO/AO by directing that the price at which the SEB sold power in the open market under uncontrolled conditions is reliable internal CUP and accordingly came to the conclusion that ALC notified by the SEB is a fair, reliable and reasonable basis to bench mark the power procured by non-eligible unit from the eligible unit. The Ld. CIT(A) while allowing the appeal of the assessee has relied on the series of decisions namely PCIT vs. Gujarat Alkalies & Chemicals Ltd. (supra), CIT vs. Godawari Power & Ispat Ltd. (supra) and Reliance Infrastructure Ltd. in ITA No. 2180 of 2011 (Bombay-High Court) and the decision of Co- ordinate Bench of Kolkata in the case of DCIT vs. Birla Corporation Ltd. in ITA No. 971/Kol/2012 for AY 2008-09. We note that in all the above decisions, the AALC at which the power is purchased by the non-eligible unit of the assessee was considered to be the fair market value / transfer price of power supplied by the eligible unit to the non-eligible unit. Before us, the Ld. A.R also argued that non-eligible units has to be held as a tested party and AALC at which the power was purchased by the tested party from SEB/ third party is the
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited) most appropriate ALP to bench mark the transfer of power supplied by eligible unit to non- eligible unit. The said view of the assessee is squarely covered by the two decisions of Hon’ble Benches namely Star Paper Mills Ltd. vs. DCIT (supra) and DCIT vs. Balrampur Chini Mills Ltd. (supra). Having considered the ratio laid down, we are of the view that there is no infirmity in the order of Ld. CIT(A) which is a very reasoned and speaking order passed after following the decision of various Hon’ble High Courts and decision of Co-ordinate Benches of the Tribunal. We have also noted the arguments advanced by the ld DR that average rate of Rs. 3.47 per unit as calculated on the basis of sale data of power by independent CPPs /IPPs as determined by various tariff orders should be taken as ALP however can not overlook the fact that the said transactions did not take place under similar market conditions and that price cannot be taken as ALP under CUP method. The power supplied by the CPPs to non eligible units was business to consumer (commonly known As B2C) meaning thereby the rate at which the ultimate consumers can purchase the power for their consumption is relevant. In the instant case before us, the B2C market comprises the sale of power by SEB and other distribution companies to different categories of consumers. Thus the power sold by other CPPs/IPPs to unrelated parties was in altogether different market conditions which is business to business commonly known as B2B model and the said rate represented the rate at which the distribution companies purchased power from generation companies. Further no consumer can buy the power in the open market at a rate generation companies sell power to distribution companies. Thus we do not find any force in the contentions of the ld DR that rate at which the power was sold to unrelated parties by the CPP is the ALP. We also note that decision of the Calcutta High court in the case of CIT Vs ITC 236 Taxman 612 which was relied by the TPO/AO and the functional dissimilarity between CPPs and SEB have been considered by the coordinate bench of the tribunal in the case of Star Paper Mills Ltd Vs DCIT in ITA No. 127/Kol/2021. Therefore , we are inclined to uphold the order of Ld. CIT(A) by holding that the ALC at which the power is procured by non-eligible units from SEB is the most appropriate ALP to bench mark the specified domestic transactions and accordingly the order passed by Ld. CIT(A) is upheld by dismissing the revenue’s appeal on this issue. The grounds of appeal pertaining to this issue are dismissed.
ITA No. 1989/KOL/2019 A.Y. 2015-2016 M/s. Dhunseri Venture Ltd. (Formerly :Dhunsari Petrochem Limited)
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on August 29, 2022.
Sd/- Sd/- (Rajpal Yadav) (Rajesh Kumar) Vice-President (KZ) Accountant Member
Kolkata, the 29th day of August, 2022
Copies to : (1) Deputy Commissioner of Income Tax, Circle-5(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700069 (2) M/s. Dhunseri Ventures Limited, (Formerly: Dhunseri Petrochem Limtied) 4A, Dhunseri House, Woodburn Park, Kolkata-700020
(3) Commissioner of Income Tax (Appeals)-22, Kolkata, (4) Commissioner of Income Tax- , Kolkata (5) The Departmental Representative (6) Guard File