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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri Aby T. Varkey
order
: May 5th, 2021 ORDER
Per J. Sudhakar Reddy, AM:
This is an appeal filed by the Revenue directed against the order of the Learned Commissioner of Income Tax (Appeals)-22, Kolkata [hereinafter the “CIT(A)”], passed u/s 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’), dated 30.04.2019 for the Assessment Year 2015-16.
Facts of the case are that the assessee company is engaged in the business of manufacturing and sale of sugar, Molasses, Industrial Alcohol, Ethanol, Organic Man manufacture and generation and distribution of power in the form of steam and electricity. All its factories, power undertakings, distilleries etc. are located at different places in U.P., whereas its head-office is at Kolkata. For AY 2016-17, the assessee company filed its return of income electronically on 26.11.2016 showing total income of Rs. 65,88,72,120/- under the normal provisions of the Income-tax Act, 1961. However, its Book-profits were Rs 1,02,89,54,675/-. The assessee company claimed deduction u/s 80IA of the Act amounting to Rs. 2,43,24,28.803/- for generation and distribution of power. The assessee company had considered rate of electricity at Rs. 8.30 per Kwh for Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. transferring the same to other units of the assessee company The said rate of Rs. 8.30 per kwh was considered as per tariff orders issued by Uttar Pradesh Electricity Regulatory Commission in accordance with which tariff rates were notified by Uttar Pradesh Power Corporation Limited for sale of electricity in that area, under the provisions contained in sub-section 6 of section 80A and sub-section 8 of section 80IA of the Act. The A.O. took up the case as a scrutiny assessment and issued notices u/s 143(2) and u/s 142(1) of the Act. As the assessee company was having a specified domestic transactions with its Associated Enterprise, the case of the assessee company was referred so the Transfer Pricing Officer (TPO) to determine Arms Length Price. The TPO-1, Kolkata passed an Order under sub-section 3 of section 92CA on 08.03.2019 after determining the arms length price adjustment of Rs. 41,65,23,644/- by considering rate of electricity at Rs. 4.90 per Kwh. The said adjustment was made after considering the average rate at which the generating companies can sell electricity to the distribution licensees as governed by sections 61 and 62 of the Electricity Act 2003 and the rate at which the assessee company had sold electricity under Power Purchase Agreement PPA. The adjustment was determined by the TPO by relying on the judgement of the Hon’ble Calcutta High Court in the case of CIT Vs ITC Limited reported in 236 Taxman 612. The ld. TPO did not agree to the contention of the assessee company. The tariff orders issued by Uttar Pradesh Electricity Regulatory Commission in accordance with the tariff rates which were notified by Uttar Pradesh Power Corporation Limited for sale of electricity in that area was the market rate for sale of power under provisions contained in sub-section 6 of section 80A and sub-section 8 of section 80IA of the Act. The A.O. gave effect to the aforesaid order of TPO and the assessment was ultimately completed on 26.03.2019 under sub-section 3 of section 143 of the Act after making a reduction in deduction of claim under section 80IA of the Act amounting to Rs. 40.82,45,314/- and thereby restricting the assessees deduction under section 80IA to Rs. 2,02,41,83,489/- as against Rs. 2,43,24,28,803/- claimed by the assessee company. Being aggrieved by the actions of the A.O. the company has come up in appeal before the CIT(A).
3. The ld. CIT(A) agreed with the contention of the assessee and granted relief. He held that the rate at which electricity was transferred by the CPP to the manufacturing unit was the rate charged by the SEB of UPPCL to the other manufacturing units. He held Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. that the case law relied upon by the TPO/AO are distinguishable. Aggrieved, the assessee is in appeal.
4. The ld. CIT(D/R) argued that the fair market value determined by the assessee for transferring from CPP (Captive Power Plant) to the manufacturing unit was not correctly done. He submitted that the assessee has wrongly adopted the rate, charged by the State Electricity Board UPPCL to its Maizapur and Tulsipur manufacturing units as the rate for transferring power. He submits that the TPO was right in adopting the average rate at which the power was sold by the eligible unit i.e. CPP to an unrelated party as the rate of power specified under the PPA (Power Purchase Agreement) by the CPP to the distribution company. He submits that the distribution company of UPPCL is an unrelated party and the rate is that CUP and this is ALP. 4.1. The ld. CIT(D/R) further submitted that the judgement in the case of ITC Ltd.. (236 Taxman 612) of the jurisdictional High Court is not distinguishable on facts as in that case the power units could only be sold to power distribution licensees and not to outside parties. 4.2. The ld. CIT(D/R) further submitted that the value chain of power generation consists of manufacturing costs and distribution costs and as the assessee is only a manufacturer and that the power distribution cost should not be considered while determining the market value or rate at which the power transferred. Thus he submits that price charged by the distribution company to the parties cannot be compared to the “charge” by the generating company. He argued that several additional fixed and variable costs like transmission network cost, commercial losses, wheeling charges, cross subsidy charges, customer servicing charges etc. are not included in a generation tariff as in the case of distribution tariff determination. He submits that distribution companies further include various charges like demand charges etc. which are not applicable by the generation companies. 4.3. He submitted that the ld. CIT(A) was in error in relying on the judgements of Reliance Industries {TS-606-ITAT-2020(Mum)}, Birla Corporation (ITA No. 971/Kol/2012) and Kesoram Industries (ITA No. 773/Kol/2013) and others for the reason that ALP (Arm’s Length Price) is distinguished and different from the fair market price or market value and both should not be confused with each other. He referred to the Explanation Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. to Section 80IA of the Act by the Finance Act, 2012 w.e.f. 01.04.2013 and submitted that the difference between the price of goods or services which ordinarily fetch in the open market and ALP are different concepts. He submits that the word “goods or services would ordinarily fetch in the open market” is different from the wording in Section 92F(ii) of the Act which is “price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”. He refers to the judgement of the Hon’ble Supreme Court of India in the case of CIT vs. Glaxo SmithKline Asia (P.) Ltd. ([2010] 195 Taxman 35) and submits that ALP can be determined based on fair market value. He also relied on the Internal Revenue Service of the United States of America guidelines to demonstrate this point. 4.4. He distinguished the case law relied upon by the ld. CIT(A). He vehemently contended that in the case on hand CUP is the rate at which the assessee has sold power under purchase agreements to distribution companies and this rate at which they, sold electricity becomes an internal CUP. He pointed out that u/s 62 of Electricity Act, 2003 the tariffs of supply of electricity by a generating company to a distribution company and the tariff of supply by a distribution company to a consumer are both determined by the determined by Electricity Regulatory Commission. Thus he submits that the amount received by power generating companies, under CUP, as per the tariff determined by U.P. Electricity Regulatory Commission is to be considered as the ALP. He further submits that there is no concept of tested party when CUP is the Most Appropriate Method (MAM) for determining the ALP. For this proposition he relied on the order of the Mumbai Tribunal in the case of India Debt Management (P) Ltd. vs. DCIT ([2016] 69 taxmann.com 125). Alternatively he submitted that the power generating unit should be considered as a tested party and not the manufacturing unit as was done by the assessee, as the captive power plant has the least complex functions among the two. He prayed that the order of the AO/TPO be restored.
5. The ld. Counsel for the assessee relied on the order of the ld. CIT(A) and submitted that the issue has been already adjudicated in favour of the assessee by the Coordinate Bench of the Tribunal in the case of M/s. Electrosteel Casting Limited vs. DCIT in 139, 191 & 192/Kol/2018 order dated 28.02.2019 and submitted that the issue is squarely covered in favour of the assessee both in facts and in law. He vehemently contended that the ld. CIT(D/R) has not brought out any case law in Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. support of his contention and is unsuccessfully trying to distinguish the judgements of the Tribunal and the High Court which fully cover the case of the assessee. 5.1. He referred to the Electricity Act of U.P. and submitted that, the assessee company is legally eligible to sell power in the open market under the present statute and whereas in the case of ITC Ltd. (supra) they did not have such a right to sell power in the open market. Thus he submits that the ld. CIT(D/R) was factually and legally incorrect in stating that the assessee company should not supply power in the open market. He further pointed out that in the case of M/s. Electrosteel Casting Limited (supra) the issue of market value versus ALP has been considered and hence the proposition of law laid down in that case by a Coordinate Bench of the Tribunal has to be followed in this case. He vehemently contended that sale of electricity under the PPA to the distribution companies cannot be considered as an uncontrolled transaction. He argued that a long term agreement under various clauses and conditions is not an uncontrolled transaction. 5.2. He submitted that the tested party has to be identified even under the CUP method. For this proposition that even when the MAM is CUP, tested party has to be identified and then ALP determined he relied on publication of the ICAI Guidance note on the issue. He filed detailed written submissions and relied on a number of case law in support of the order of the ld. CIT(A). Thus he submits that the order of the ld. CIT(A) be upheld.
The ld. D/R reiterated his contention in his reply and filed written submission.
We have heard rival contentions on these grounds on merits. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows.
The issue on hand is determination of the quantum of profit which could be claimed as deduction under Section 80IA of the Act for which we have to determine the price at which the electricity is transferred by the Captive Power Plant of the assessee company to the manufacturing unit of the assessee company. 8.1. Explanation to Section 80IA(8) inserted by the Finance Act, 2012 w.e.f. 01.04.2013 reads as follows:
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. “Explanation. —For the purposes of this sub-section, "market value", in relation to any goods or services, means— (i) the price that such goods or services would ordinarily fetch in the open market; OR (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.” (Emphasis ours) 8.2. A plain reading of the above explanation demonstrates that, for determination of market value, you can adopt the price at which the goods or services would ordinarily fetch in the open market OR the ALP as defined in Section 92F(ii) of the Act where the transfer of such goods or services is a specified domestic transaction referred u/s 92BA of the Act. The Act states that either of the above two may be adopted as the “market value”. This, in our view justifies the claim of the assessee that it can claim “Market Value” as per limb (i) of the Explanation.
8.3. Limb (ii) of the above referred Explanation Section 92BA of the Act defines specified domestic transaction is as follows:
“For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction in case of an assessee means any of the following transactions, not being an international transaction, namely:— (i) [***] (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub- section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or [(va) any business transacted between the persons referred to in sub-section (6) of section 115BAB;] (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees.
We would refer to this limb in the later part of our order.
8.4. The ld. CIT(A) considered these submissions of the assessee, the order of the TPO as well as the facts and circumstances in the case and held as follows:
“1. I have carefully considered the action of the Ld. TPO, as also equally carefully perused the submissions made by the Ld. A.R for the appellant-company, and the documents available in the Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. Paper Book filed by the appellant. The appellant operated an eligible power undertaking ('CPPs') in Uttar Pradesh. The power generated by the eligible unit was consumed captively by other non-eligible unit and also sold to unrelated party under a regulated PPA approved by the SEB. 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.8.30/unit having reference to the tariff order issued by the UPSCB. 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 unit was 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.
2. 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 of the rate at which eligible unit supplied power to unrelated party and the power tariff orders issued the relevant SEC was the most relevant indicator of the arm's length price for power supplied by CPP to non-eligible unit as opposed to the appellant's contention that the tariff rate prescribed by SEB for supply to consumers was the fair & reasonable ALP. 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 was 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.
3. 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 and accepted 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. In the facts of the- present case, the transaction in question involves supply of power by the eligible unit to the non-eligible sugar unit of the appellant in Uttar Pradesh. From the facts on record, it is noted that the eligible unit at Uttar Pradesh had supplied power to the AE as well as unrelated enterprise under a PPA agreement. It is however noted that the power which the eligible undertaking supplied to non-AE was regulated by the UPSC and subject to statutory clearances and approval. The said rate was agreed under a 20-year agreement and in these circumstances therefore the rate at which the transaction was conducted by the eligible unit with non-AE cannot be considered to price prevailing in open market under uncontrolled conditions. Hence the rate at which the eligible unit supplied electricity to unrelated entities cannot be held as reliable data because the facts indicate that the rates are regulated and not determined under uncontrolled conditions.
On the contrary however, it is noted that the non-eligible undertaking to which the eligible unit supplied power, had procured substantial quantity of power throughout the year from unrelated enterprise i.e. SEB under uncontrolled conditions and prevailing market circumstances at the rate of Rs.ll.22/unit. Therefore the tariff at which the other non-eligible Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. units purchased power from SEB can be taken to be a fair indicator to benchmark the transfer value of Rs.8.30/unit adopted by the appellant. It is noted that the transfer value of Rs.8.30 / unit was based on the tariff order issued by the SEB in respect of supply of power to units located in the same region as that of the non-eligible unit which procured power from the eligible unit. This tariff order issued by the SEB was available in open market and determined under uncontrolled conditions and is hence a reliable external CUP available in the given facts of the case. On comparing the rates in tariff order with the rates at which other non-eligible units procured power from open market under uncontrolled conditions; it is noted therefore that the transfer value of Rs.8.30/unit determined by the appellant is fair and reasonable. 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.
6. 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 to 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 of the Hon'ble Jurisdictional ITAT 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.
7. 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 Ld. 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 No.944/K/16) - Graphite India Ltd Vs Addl.CIT (ITA No. 304-305/K/08) 8. 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: "(77) 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 GEB supplied power to its consumers, ignoring the rate of Rs.2.36 per unit, the rate on which power generating company supplied its power to GEB?"
The Hon'ble Gujarat High Court thus specifically decided the issue in favour of the assessee / taxpayer 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.
10. 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:
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. "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."
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 Chhattisgarh 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 80IA(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, Kolkata in the case of Dy.CIT Vs 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 in the case of Thiru Arooran 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.
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 in the facts and circumstances of the case. Accordingly the Ld. AO/TPO 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 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. Grounds Nos. 2 to 5 are therefore allowed.
8. Ground No 6 taken by the appellant-company relates to the rights of the appellant to take additional grounds during appeal, or to modify or alter any of the grounds already taken. As no such rights were exercised by the appellant, there was no occasion to adjudicate in the matter. In the final result, the appeal filed by the appellant is treated as "allowed".” 8.5. This decision is in consonance to the propositions of law laid down by the Coordinate Bench of the ITAT in the case of M/s. Electrosteel Casting Limited (supra) wherein it is held as follows:
“1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/ AO. The appellant-company operates a captive power plant ('CPP') and the power generated therein is consumed by the appellant-company itself. For the purposes of computing profits of the captive power unit, eligible for deduction under Section 80LA, the appellant-company has adopted the tariff rates at which it purchased electricity in the State of West Bengal to be 'open market value' in terms of Section 8oIA(8) of the Income- tax Act, 1961. In the transfer pricing proceedings, the appellant explained that it had applied the internal Comparable Uncontrolled Price Method. It was submitted that the price/rate at which the appellant-company purchased the electricity was the most appropriate comparable rate to benchmark the rate at which the CPP had transferred power to the appellant-company. The Ld. TPO/AO were however not agreeable with the explanation & details put forth by the Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. appellant. According to Ld. TPO/AO the internal CUP adopted by the appellant-company was not the most appropriate method. Instead the Ld. TPO/AO was of the view that the price at which Electricity Board sold power to distribution licensees was a better parameter to benchmark the specified domestic transaction; i.e. transfer of power by CPP Unit to other non- eligible units of the Page | 271.T.A Nos.191 & 192/K0I/2018 & & 139/K0I/2018 M/s. Electrosteel Castings Ltd. Assessment Year: 2012-13 & 2013-14 appellant-company. This manner & methodology adopted by the Ld. TPO/AO was following the principles laid down in judgment of the Hon'ble Calcutta High Court in the case of ITC Ltd. (supra). The Ld. TPO/AO therefore computed ALP at Rs.2.88/unit.
2. In the appellate proceedings, the Ld. ARs of the appellant reiterated the submissions made before the Ld. TPO/AO. The ld. ARs pointed out the infirmities and deficiencies in the manner and methodology adopted by the ld. TPO/AO to benchmark the impugned transaction. The Ld. ARs of the appellant placed reliance on the decision rendered by the Hon'ble ITAT, Kolkata in their own case for AYs 2003-04 to 2011-12, wherein the Hon'ble ITAT had distinguished the judgment of the Calcutta High Court in the case of ITC Ltd. (supra). The Tribunal held that this judgment was not applicable to the appellant's case. Relying on the decision of the Apex Court in case of ThiruArooran Sugars Ltd. Vs. CIT(supra); the ARs of the appellant-company therefore contended that open market value of power transferred by CPP to other non-eligible units would be the same at which power was purchased by such non-eligible units.
The Hon'ble ITAT, Kolkata in the appellant's own case in I.T. (SS) No.47 to 60/K0I/2014, 313 and 256/K0I/2015, 66 and 124/K0I/2016 25.11.2015 for AY 2003-04 to 2011-12 has held as follows: 46. We have given a very careful consideration to the rival submissions. We have already seen that the assessee manufactures DI spun pipes, D) fittings, etc., at its factory at Khardah (West Bengal) Cl spun pipes at its factory- at Elavur (Tamil Nadu) and low ash metallurgical coke at its factory at Haldia (West Bengal). At Khardah and Haldia factory the assessee also has its own power plant generating electricity from heat emitted .from blast furnaces in the process of manufacturing of DI Pipes at Khardah, where power generated is entirely consumed for own use (i.e., captive consumption), and sponge iron plant and coke oven plant at Haldia where the power generated is consumed for own use (captive consumption and surplus power generated is sold to the West Bengal State Electricity Board (WBSEB), It is not in dispute that the assessee is entitled to claim deduction under section 80-IA of the Act on the profits derived by the assessee from generation of power, Since the power generated is consumed by the assessee for own use and not sold to a third party, section 8o-IA(8) of the Act prescribes a method of determination of profits derived by the undertaking generating power. In such cases/ the profits and gains of such eligible business has to be computed as if the transfer had been made at the market value of such goods or services as on the relevant date. ’Market value" has been defined in the Explanation to section 8o-IA(B) of the Act as the "the price that such goods or services would ordinarily fetch in the open market". In India the business of generation of electricity and its distribution is governed by the Indian Electricity Act, 2003. The electrical power system mainly consists of generation, transmission and distribution. For generation of electrical power there are many public sector undertakings and private owned generating stations (GS). The Electrical transmission system is mainly carried out by Central Government body PGCIL (Power Grid Corporation of India Limited). To facilitate this process, India is divided into 5 regions : Northern, Southern, Eastern, Western and North Eastern region. Further within every State we have a SLDC (State load dispatch centre). The distribution system is carried out by many distribution companies (DISCOMS) and SEBs (State Electricity Board). There are two tariff systems, one for the consumer which they pay to the DISCOMS and the other one is for the DISCOMS which they pay to the generating stations. The rate at which electricity can be supplied to a consumer by the distribution licensee and the rate at which the generating companies can sell electricity to the distribution licensee are governed respectively by sections 61 and 62 of the Electricity Act, 2003. There is tariff regulatory commission which fixes both the rates for sale and purchase of electricity by the distribution licensee. There is thus Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. an in-built Page | 28 & 192/K0I/2018 & I.T.A Nos.138 & 139/K0I/2018 M/s. Electrosteel Castings Ltd. Assessment Year: 2012-13 & 2013-14 mechanism to ensure permissible profit both to the generating companies and the distribution licensees.
The Hon'ble Calcutta High Court in the case ITC Ltd. (supra) had to deal with similar issue of own consumption of power generated by an assessee engaged in the business of paper manufacture. The question that was examined by the Hon'ble court was as to what would be market value for the purpose of computation of deduction under section 80-IA of the Act in the context of section 8o-IA(8) of the Act. The Hon'ble Calcutta High Court held deduction under section 80-LA had to be computed in such circumstances not on the basis of rates chargeable by distribution licensee from consumer and that the same can be claimed only on the basis of rates fixed by tariff regulation commission for sale of electricity by generating companies to distribution licensees.
The submission of the learned counsel for the assessee was that the decision of the Hon'ble Calcutta High Court is not applicable to the case of the assessee as in the case before the Hon'ble Calcutta High Court, the undertaking that generated power was situated in the State of Andhra Pradesh where electricity generated could not be sold to anyone other than a distribution company or a company which is engaged both in generation and distribution. In this regard an order of the Andhra Pradesh Electricity Regulatory Commission, Hyderabad in O. P, No, 1075/2000, dated June 20,2001 was filed before us, The said order deals with generation of non-conventional energy and it lays down in paragraph 25 of its order that third party sales of power generated by non-conventional means cannot be made. In paragraph 28 power generated by such generators have to be sold in public interest only to APTRANSCO at rates specified in the said paragraph, Our attention was drawn to paragraph 4 of the West Bengal Electricity Regulatory Commission (Open Access) Regulations, 2007, which lays down that a licensee or a generating company or a captive generating plant or a consumer or any person engaged in the business of supplying electricity to the public under the Act (Electricity Act, 2003) shall be eligible for open access to the intra-state transmission lines or associated facilities of the STU or any transmission licensee on payment of charges, as may be specified by the commission, for using the transmission system of the transmission licensee. It was submitted that power generators in West Bengal are free to trade in power on exchange or sell excess power to third parties. Therefore, the judgment of the Hon’ble Calcutta High Court in the case of ITC Ltd.. (supra) will not apply to the case of the assessee. [ Unquote] 4. In view of the above and the judgment of the Hon'ble ITAT, Kolkata in appellant's own case, I therefore hold that the ALP determined by the Ld. TPO in his order u/s 92CA(3) in terms of the principles laid down by the Hon'ble Calcutta High Court in the case of ITC Ltd.. (supra) was unjustified. Following the judgment of the Supreme Court in the case of Thiru Arooran Sugars Ltd. Vs. CIT (supra); I am of the considered view that the tariff rates at which the non-eligible units procured power from Electricity Board was the most appropriate and internal comparable rate to benchmark the transfer of power by appellant's CPP to other non-eligible units. The benchmarking exercise conducted by the appellant is found to the appropriate and reasonable and hence no further transfer pricing adjustment is warranted on this count. The ld. AO/TPO erred in making the downward adjustment with respect to eligible profits u/s 8oIAby Rs.1,92,23,674/- and the same is hereby directed to be deleted. These grounds are therefore allowed."
We adopt learned coordinate bench's discussion mutatis mutandis to uphold the CIT(A)'s findings deleting the impugned transfer pricing adjustments Page | 29 I.T.A Nos.191 & 192/K0I/2018 & I.T.A Nos.138 & 139/K0I/2018 M/s. Electrosteel Castings Ltd. Assessment Year: 2012-13 & 2013-14 pertaining to specified domestic transactions in the absence of any distinction on facts or law pin-pointed at revenue's behest. It fails in both of its cross-appeals ITAN0.191 & 192/K0I/2018.
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. 17. The assessee's appeals in ITAN0.138 & 139/K0I/2018 are allowed and Revenue's cross- appeals ITAN0.191 & 192/K0I/2018 are dismissed.” 8.6. The ld. CIT(D/R) tried to argue that the order of the Tribunal in the case of M/s. Electrosteel Casting Limited (supra) is erroneous. Such argument cannot be countenanced as no distinguished feature have been brought out by the ld. CIT(D/R).
8.7. The Bench in the case of M/s. Electrosteel Casting Limited (supra) has recorded that, the propositions of law laid down in the case of ITC Ltd. (supra) are not applicable to the facts of the case for the reason that the captive power plant of ITC Ltd. was located in the state of Andhra Pradesh and it had no right to sell electricity other than to the electricity distribution companies and whereas in the present case, the captive power plant is located in the state of Uttar Pradesh and as per the provisions of Uttar Pradesh Electricity Act, the assessee was entitled to sell power in open market. Hence the ld. CIT(A) has rightly stated that this case law is distinguishable.
8.8. The Hon’ble Calcutta High Court in the case of CIT vs. Graphite India Ltd., GA No. 3114 of 2008, of 2008 order dated 10.12.2008 held as follows:
7.1. From the facts it is clear that the assessee was not a regular supplier of power and could not supply power on any regular and sustained basis. In terms of the agreement with KSEB it was allowed to sell the surplus power banked with it subject to the condition that such surplus would lapse at the end of the monsoon year. The assessee had therefore to dispose of its such surplus banked power which remained after its own use on adhoc basis to avoid loosing the benefit altogether. In terms of the provisions of section 80IA(8) such transfer price has to be taken at the market value of such goods which the Explanation to the said sub section defines to mean the price that such goods would ordinarily fetch in the open market. _ It cannot be disputed that the amount charged by KSEB for supply of the power to the assessee is the price which is ordinarily charged in the open market. This issue also came up for consideration in several decisions of the Tribunal in the undernoted cases: (i) Assam Carbon Products Ltd. vs. ACIT (2006) 100 TTJ 224 (Kol) (ii) JCIT vs. Cipla Ltd. (2005) 2 SOT 617 (Mum) (iii) West Coast Paper Mills Ltd. vs. JCIT (2006) 100 TTJ 833 (Mum) (iv) Addl. CIT vs. Jindal Steel & Power Ltd. (2007) 16 SOT 509 (Del) Furthermore, it appears that during the subsequent assessment year also, the learned Tribunal has also accepted such position and the appeal preferred before this Court which was not pressed by the appeals at that point of time. Therefore, the law has already been settled by this Court. Therefore, in our considered opinion, we do not find that there is any substantial question of law involved in this matter which is to be gone into by this Court. Hence, the appeal being ITAT No. 733 of 2008 is dismissed.
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. 8.9. The Hon’ble Calcutta High Court in the case of CIT vs. M/s. Kanoria Chemicals & Industries Ltd., GA No. 670 of 2013, ITAT No. 58 of 2013 order dated 08.05.2013 held as follows:
“We find that the price at which State Electricity Boards sells electricity to industrial consumers is representative; of the price that electricity would ordinarily fetch in the open market and i.e. the price which has been adopted by the assessee for the electricity generated by the eligible business transferred to its other business for the purpose of computation of profits and gains of the eligible business in terms of section 80IA(8) of the Act. We find that the AO has taken figures from units of powers sold to UPPCL at 0.89 units @ Rs.24,43,159/- as against the price of assessee i.e. inter-unit transfer @ Rs.43,02,187/- per unit. Wc are of the view that the figures picked up by the AO from the orders of UPPCL does not represent the open market value of electricity.” The learned Tribunal also allowed the claim for deduction under Section 80IA following the judgment of this Court in the case of CIT Vs. Graphite India Limited. From the aforesaid brief narration, it would appear that the views adopted by the learned Tribunal, prima facie, are correct. We have enquired of Mr. Dudheria, learned Advocate appearing for the Revenue, as to on what basis does he dispute the correctness of the order passed by the learned Tribunal. Mr. Dudheria submitted that he has placed all the facts and circumstances of the case. He has nothing more to do. We have considered his submission and also considered the submissions advanced by learned Senior Advocate appearing for the Assessee and we are of the opinion that this appeal does not involve any substantial question of law and is, therefore, not admitted and thus rejected.” 8.10. The Hon’ble Gujarat High Court in the case of Pr. CIT vs. Gujarat Alkalies and Chemicals Ltd., [2017] 395 ITR 247 (Guj.) has held the market value of per unit of electricity sold by the assessee in the open market, is the price charged by the Gujarat Electricity Board to its customers.
8.11. The Hon’ble Chhattisgarh High Court at Bilaspur in the case of CIT vs. Godawari Power & Ispat Ltd., Tax Case Nos. 31, 32 & 34 of 2012 order dated 02.08.20013 held as follows:
“30. 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.
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.
It is admitted by the Department that in Chhattisgarh the power was supplied to the industrial consumers at the rate of 3.20/- per unit for the AY 2004-05 and ' 3.75/- per unit for the AYs 2005-06 and 2006-07. It was this rate that was to be considered while computing the market value of the power.”
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd. 8.12. In all the above case laws, the Courts have determined that the market value should be the rate at which electricity is supplied by the State Electricity Boards to its industrial customers. As already stated the Explanation to Section 80IA(8) inserted by the Finance Act, 2012 w.e.f. 01.04.2013 gives an option for determination of “Market Value” as the ALP under the transfer pricing provisions OR as the price of such goods and services as, that it would fetch in the open market. 8.13. If it is taken that ALP is the market value, then we find there is no dispute that the MAM is CUP. The contention of the ld. D/R that when MAM is taken as CUP, we need not determine a tested party is erroneous. The ICAI in Guidance note u/s 94B of the Act has laid down that the tested party has to be identified even when MAM is CUP. In this case the assessee has taken that the tested party as the non-eligible unit and whereas the TPO has taken the tested party as the CPP i.e. the eligible unit. In our view the profit of the non-eligible unit also has to be properly determined. The only purpose for which the manufacturing unit is taken as the tested party was to determine the market value at which the manufacturing unit purchases power from unrelated third parties. No other function etc. are in question. In our view taking the manufacturing unit as tested party for the purpose of determination of ALP with MAM being CUP, cannot be found fault with. The TPO has chosen to take the price specified in the PPAs for purchase of power as the market value. The PPA is a 20 year agreement. The assessee required to take statutory clearances and approvals. The price is regulated. The sale of power under the terms and conditions of PPA cannot be considered as the market value of the sale of electricity. Such sales cannot be considered as made in “uncontrolled conditions”. The ld. D/R submitted that the power generating company does not have distribution costs. When a captive power plant in an industry supplies electricity to its own manufacturing unit, there is no power distribution cost. The savings of cost of power can be determined only when the rate at which the manufacturing unit of the company purchases power in the open market from the power distribution companies is considered. Imaginary costs which are not incurred cannot guide our decision. 8.14. Thus while determining the ALP under transfer pricing provisions, in our view the assessee has correctly identified the manufacturing unit as the tested party and CUP as the MAM and the purchase price of electricity in the open market from the State Electricity Board to the manufacturing units in uncontrolled conditions as the ALP.
Assessment Year: 2016-17 M/s. Balarampur Chini Mills Ltd.
9. In view of the above discussion, consistent with the view taken in the case of M/s. Electrosteel Casting Limited (supra) and applying the propositions of law laid down by the jurisdictional High Court in the case of Graphite India Ltd. (supra), M/s. Kanoria Chemicals & Industries Ltd. (supra) and the Gujarat High Court in the case of Gujarat Alkalies and Chemicals Ltd. (supra) as well as the judgement of the Hon’ble Chhattisgarh High Court in the case of Godawari Power & Ispat Ltd. (supra) we uphold the finding of the ld. CIT(A) and dismiss this appeal of the Revenue.
In the result, the appeal filed by the Revenue is dismissed. Kolkata, the 5th May, 2021. Sd/- Sd/- [Aby T. Varkey] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated: 05.05.2021 Bidhan (P.S.) Copy of the order forwarded to:
1. 1. DCIT, Circle-10(2), Kolkata.
2. M/s. Balarampur Chini Mills Ltd., 234/3A. FMC Fortuna, AJC Bose Road, Minto Park, Kolkata-700 020.
3. CIT(A)-22, Kolkata (sent through mail) 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. (sent through mail)