TATA CHEMICALS LTD,MUMBAI vs. DCIT - 2 (3)(1), MUMBAI

The assessee is a company engaged in the business of manufacturing and sale of inorganic chemicals, fertilizers and bio-fuels. The assessee is operating inorganic chemical complex at Mithapur in Gujarat, its fertilizer complex at Babrala in Uttar Pradesh and phosphatic fertilizers complex at Haldia in West Bengal. The assessee filed the return of income for AY 2019-20 on 29.11.2019 declaring a total income of Rs. 1040,85,22,356/-. The return was subsequently revised on 17.08.2020 in which the assessee declared total income of Rs. 1004,02,49,100/-. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. During the year under consideration the assessee has reported specific domestic transactions (SDT) to the tune of Rs.115,22,57,650/- with respect to sale of electricity from unit Power Plant – TT– 12 which is eligible for deduction under section 80IA(8) of the Act (eligible unit) to the manufacturing unit in Mithapur (non-eligible unit). Accordingly the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the impugned transactions. The assessee, in the Transfer Pricing Report has bench marked the transaction using Comparable Uncontrolled Method (CUP) in which the rate at which Gujarat Electricity Board supplies electricity to the assessee is compared with the rate of Rs.6.58/Kwh at which the eligible unit supplies electricity to non-eligible unit to conclude that the same is at arm's length. However the TPO did not accept the bench marking done by the assessee and passed an order making an adjustment of Rs. 15,10,08,540/- by adopting the power purchase cost charged by Gujarat Urja Vikas Nigam Ltd. (GUVNL) while purchasing power from coal based thermal power generating units in Gujarat i.e. Rs.4.09 / Kwh. Aggrieved assessee filed its objection before the DRP. The DRP directed the TPO to adopt the rate at which electricity is supplied by Torrent Power Ltd (TPL) and accordingly the TP Adjustment was revised to Rs.14,37,31,020. The AO in the final assessment order restricted the disallowance to Rs.12,99,46,410/- being the amount claimed by the assessee under section 80IA of the Act. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.

Brief facts pertaining to the issue under consideration. During the Financial Year relevant to AY 2019-20 the assessee has transferred 6,06,46,000 kwh units of electricity from Power Plant –TT-12 which is eligible for deduction under section 80IA to the manufacturing unit at Mithapur at a cost of Rs. 39,88,16,944/-. In the TP report the assessee has followed CUP as the most appropriate method whereby the assessee has stated that the price charged by the eligible unit are compared with the prices charged by Gujarat Electricity Board (GEB) to the Mithapur Unit for supply of electricity under similar comparable circumstances. The assessee has further stated that GEB charges an average rate of Rs. 6.90 per unit and the eligible unit has also transferred to the Mithapur Unit at the same rate and therefore the price charged by the eligible unit is at ALP.

The TPO did not accept the TP report by holding that the comparison to sale price charged by eligible unit of the assessee with that of GEB is not correct considering the fact that functions performed, asset employed and the risk assumed by GEB is completely different from the eligible unit. The TPO further held that in the case of GEB huge distribution cost are involved whereas in assessee's case no such cost are involved as the transfer is an inter-unit transfer of power. The TPO also held that the assessee has not made any adjustment towards the distribution cost to make the prices comparable and thus the CUP data used by the assessee is defective. The TPO proceeded to adopt the power purchase cost charged by Gujarat Urja Vikas Nigam Ltd. (GUVNL) while purchasing power from coal based thermal power generating units in Gujarat and the power charged by power generating units in Gujarat which are functionally similar to the assessee. The TPO adopted the rate of Rs. 4.09 per kwh i.e. the cost at which the power from the coal based thermal power generating units are purchase by GUVNL and accordingly made a TP Adjustment of Rs. 15,10,08,540/-. On further appeal before the DRP, the DRP followed its own decision for AY 2017-18 and directed the TPO to adopt the rate at which electricity is supplied by TPL. Accordingly the TP Adjustment was revised to reduced to Rs.14,37,31,020 which got restricted to Rs. 12,99,46,410/- being the amount claimed as deduction under section 80IA(8) of the Act.

Before us the ld. AR submitted that the identical issue for AY 2017-18 has been considered by the co-ordinate bench in assessee's own case wherein the Tribunal has held in favour of the assessee. The ld AR drew our attention to the decision of the Hon'ble Supreme Court in the case of CIT vs Jindal Steel & Power Limited ([2023] 157 taxmann.com 207 (SC)) where it has been held that the market value of power supplied by assessee to its industrial units should be computed by considering rate at which State Electricity Board supplied power to consumers in open market for the purpose of deduction under section 80IA(8) of the Act. The ld AR also submitted that the rate at which TPL as held by the DRP is not the correct comparable since many factors which the revenue raised while comparing rate charged by GEB are applicable to TPL also.

We have heard the parties and perused the material available on record. We notice that the co-ordinate bench has considered the similar issue in assessee's own case for AY 2017-18 ([2023] 155 taxmann.com 461) where it has been held that “9. We have heard both the parties at length and also perused the relevant finding given in the impugned orders. Before us, the ld. DR referred to various observations made by the ld. TPO in its TP order and submitted that the captive power generating unit which is eligible for deduction u/s.80IA, not only is to be taken as a tested party but also the FAR analysis has to be done from power generating entities and not the distribution entities because distribution companies incurred various other costs of transmission loss and distribution cost apart from other administrative costs for such distribution. The price at which Distribution Company sells the power to the customers cannot be the price at which power generating units sells the electricity. In this case, the ld. DRP has taken M/s. Torrent Power Ltd. (TPL) M/s. Tata Chemicals Ltd. 11 which is an electricity generation unit in whose case per unit has been determined at Rs.3.99/- which is in accordance with Safe Harbour Rules and also specific external CUP in the case of electricity generation unit. Secondly, he submitted that wherever transfer of goods and services falls under SDT, then market price has to be determined as per principles of ALP under transfer pricing mechanism as provide in clause (ii) of Explanation to section 80IA(8).

The entire controversy germinates from the fact, as to whether the sale of electricity by eligible unit entitled for deduction u/s.80IA which has supplied 5,23,42,000 KWH units of electricity to the manufacturing unit of TCL at Mithapur at transaction price of Rs. 36,09,44,480/- at the rate of Rs. 6.90/- per unit is at market value or not. In so far as determining market value in terms of Section 80 IA (8), the premise of the ld. TPO is that, firstly, it is a specific domestic transaction u/s.92BA and therefore, the market value of the electricity supply has to be determined in terms of transfer pricing provisions so as to determine the correct market value and the profits of eligible unit as per ALP within the scope and ambit of Section 80IA (8). Secondly, the ld. TPO has held that since the eligible unit is captive power generation unit and therefore, the price at which it has sold the electricity should be benchmarked with the comparables who are generating electricity and supplying it to the State Electricity Board which here in this case is GEB. ITA No.468/Mum/2022 M/s. Tata Chemicals Ltd. 13 Another point which has been raised by the ld. TPO is that, what is to be benchmarked is the profits of the eligible unit and therefore, eligible unit alone should be taken as a tested party and the FAR analysis has to be done of the eligible unit vis-à-vis the other units which are generating electricity. Lastly, he has given the detailed analysis as to why the price charged by the distribution companies cannot be compared with the assessee because it undertakes various functions, deploys various assets and assumes various risks and therefore, the price charged by the distribution company from the end customers cannot be the market value of the price on which assessee sold the price as power generation unit to another unit of the same assessee. Finally, the ld. DRP has given one comparable instance, of M/s. Torrent Power Ltd. (TPL) which was into generation of electricity in whose case, Gujarat Electricity Regulatory Commission (GERC) has determined the tariff for supply of electricity to State Electricity Board at Rs.3.99 per unit.

Both the authorities, i.e., ld. TPO and ld. DRP have held that in case of 80IA (8), the market value has to be compulsory governed by Explanation (ii) to Section 80IA (8), because in 92BA provides that such transfer of goods and services referred in this sub-section falls within SDT and therefore, arm‟s length price has to be determined as per Section 92F(ii). Further according to them Explanation (i) & (ii) have separate application because it is separated by word “or”, but how they are separately applicable and under which circumstances has not been elaborated. If such an interpretation is to be accepted, then clause-(i) of the Explanation will become otios and redundant, because then the transfer of the goods and services falling u/s.80IA(8) has to be compulsorily be determined under arm‟s length principle. Had it been so, then post introduction of SDT in Section 92BA w.e.f. 01/04/2013, then statute would have provided that for the purpose of Sub-section (8) to Section 80IA, “market value” in relation to goods or services means the arm‟s length price as defined in clause (ii) of Section 92F. If both the clauses exist then one has to see if the market value is discernable from the price for such goods would ordinarily fetch in the open market unless such price is not available, then there is an option for determining the market value as per the arm‟s length price.

The ld. DRP has taken M/s. Torrent Power Ltd. (TPL) which is the electricity generation entity supplying electricity to GEB. In that case Gujarat Electricity Regulatory Commission (GERC) has fixed tariff of Rs.3.99 per unit for supplying it to the GEB for F.Y.2016-17. First of all nothing has been brought on record whether, M/s. Torrent Power Ltd. (TPL) was supplying to other entities or industry or it was purely supplying to GEB. What is culled out is that, these power generating entities were manufacturing and supplying 100% to the GEB and the price is influenced by GEB, although fixed by GERC, but if there is only one party to whom sale is made and the prices and other conditions are purely influenced by that entity, then it becomes a tainted transaction. The reason being, Section 92A dealing with the meaning of the associated enterprises stipulates that two enterprises shall be deemed to be associated enterprises if any time during the previous year, the goods or articles manufactured or processed of one enterprise are sold to other enterprise which is specified by the other enterprises and the prices and the conditions are influenced by the other enterprise. This has been specifically provided in 92A (2)(i) which reads as under:-

We notice that in the above decision, the coordinate bench has held the issue in favour of the assessee stating that the rate charged by GEB to the assessee i.e. the price at which the electricity is procured by the assessee in the open market is the right comparison as per explanation (i) to section 80IA(8) of the Act. The said view is strengthened by the decision of the Hon'ble Supreme Court in the case of JindalSteel & Power Ltd (supra) where it is held that

We also notice that the coordination bench for AY 2017-18 has also held that TPL is not the correct comparison for CUP since the transaction of TPL which exclusively supplies to GEB is not an uncontrolled transaction. However the arguments of the ld DR is that if TPL is to be rejected then GEB also should be rejected since both are not un-controlled transactions and that the rate adopted in independent platform such as rates of Indian energy exchange needs to be considered. In this regard, we notice that Delhi Bench of the Tribunal while considering a similar issue in the case of DCM Shriram Ltd vs Addl.CIT (ITA No.7362/Del/2018 dated 28.10.2021) has held that –

Now the issue arises is that whether the learned that TPO has correctly adopted IEX rates for the purpose of benchmarking the transaction of sale of power by Kota eligible unit to non eligible unit. We look at the provisions of Section 92C (2) of the act which provides as per the first proviso to that Section that where more than one price is determined by the most appropriate method, the arm’s-length price shall be taken to be the arithmetical mean of such prices. The claim of the revenue is that according to the cup method, two external comparable is our available (1) rates at which the assessee purchases power at Rajasthan and (2) IEX rates applicable to Rajasthan. Therefore both of them can be averaged to determine the arm’s-length price. As we have already held that the rates at which the assessee purchases power at Rajasthan is a proper external cup upheld by the learned dispute resolution panel, which can be adopted by the learned TPO for benchmarking the arm’slength price of the transfer of power. However, the issue now arising is whether the Indian energy exchange rates are proper external cup or not.

Firstly if we look at the rate Indian energy exchange which is stated to be pertaining to Rajasthan region is Rs 2.55 per kilowatt whereas the rates at which the power was purchased by the assessee in Rajasthan from SEBs ₹ 8.35 per kilowatt. This shows that the rates at which the power is sold by SEBs is 3.30 times higher than the rates which are quoted by Indian energy exchange. It is also undisputed fact that most of the power is supplied in Rajasthan region by Jaipur Vidhyout Vitran Nigam Limited and used by the consumers. Whereas there is no data available that how much power is being sold at the platform of Indian energy exchange in Rajasthan region.

It is also an undisputed fact that product comparability is a critical element while applying cup method and needs to be closely examined. In case if there are any differences identified between the controlled and uncontrolled transaction that would affect price, adjustment should be made to the price of the uncontrolled transaction is in order to make the same comparable to the controlled transaction is. No doubt the product similarity exist in the above transactions. However comparability Under the cup method depends on the similarity with respect to the following factors also which could materially affect the price in uncontrolled transaction i. quality of the product ii. contractual terms (i.e. scope and terms of warranties provided, sales are purchased volume, credit terms, transport terms) iii. level of market (i.e. whole sale or retail etc) iv. geographic market in which the transaction takes place v. date of the transaction vi. intangible property associated with the sale, foreign currency risks and alternatives realistically available to the buyer and seller the learned transfer pricing officer has used the average sale price for the financial year 2013 – 14 available at the Indian energy exchange. Therefore there cannot be much of the grievance when the assessee also charges the same rate for the whole year. However the claim made by the assessee before us which remains uncontroverted is that Indian energy exchange is not the main exchange where the power is traded. As per the Indian power market journey so far and way forward June 2014 report published by Indian energy exchange which is available in public domain has categorically stated that the size of power exchange-based market has grown to 3% approximately of the total electricity generated. Therefore the argument of the learned transfer pricing officer that Indian energy exchange is the main exchange where nearly 95 – 96% of power is traded is a negative by the report of Indian energy exchange itself. Therefore it is apparent that it is the very minuscule part of the total power traded. Further the Indian energy exchange is a spot exchange and cannot be compared with the continuous power supplied by SEBs to the assessee. Of course, in Indian energy exchange there would always be a doubt about the availability of continuous power. This shows that there are material differences existing between the transaction entered into by the assessee for transfer of power and the rates stated by Indian energy exchange. Undoubtedly the rates quoted at Indian energy exchange are based on the bid price rather than the actual quantity consumed by the assessee. Even otherwise the data is not available in the public domain and learned transfer pricing officer has used the powers u/s 133 (6) of the act to obtain such rates i.e. data. Furthermore the Indian energy exchange rates are also required to be adjusted for the various levies and other variable charges of transmission et cetera as well as the transmission loss. Even otherwise the assessee has submitted the land rate at Indian energy exchange which shows the average price at ₹ 6.36 per kilowatt by taking base rate at Rs 2.55. Even if the average of the SEBI rates at ₹ 8.35 per kilowatt and the landed rate at Indian energy exchange at ₹ 6.36 per kilowatt is averaged out it comes to ₹ 7.355 per kilowatt which is more than the rates at which the power is transferred from eligible unit to non-eligible unit at Kota Rajasthan by the assessee i.e. at ₹ 6.30 kilowatt.

There is no doubt that the rates at which the SEBs supplies power to the assessee is an perfect external cup. Such rates are ₹ 8.35 per kilowatt. Rates of Indian energy exchange shown at Rs 2 .55 per kilowatt. If the rates of SEB compared with the rates of Indian energy exchange clearly shows that there is a wide disparity between the two rates. It is not in dispute that SEB in Rajasthan is supplying power to majority of the consumer using electricity. Therefore, much sanctity is attached to the rates adopted by SEBs. However, the learned transfer pricing officer has failed to show the reason of such a wide disparity between the rates of Indian energy exchange which is a spot exchange compared with the rates at which the energy is actually consumed in that geographical region. This does not mean that the quoted price cannot be used for the comparability analysis in cup method. But if the prices are so divergent and the difference between the two external cup becomes irreconcilable, the external cup price which is more reliable should be used. Therefore, in our view, IEX rates for these reasons cannot be said to be an external cup available for invoking the provisions of first proviso to Section 92C (2) of the act.

In assessee's case CUP method is applied where rate at which GEB supplies electricity to the non-eligible unit is compared with rate which the eligible unit supplies electricity. These facts being similar to the above decision of the Tribunal we are of the considered view that GEB is the right comparison for external CUP and that there is no reason to hold that rates of Indian energy exchange need to be considered in assessee's case even in case where explanation (ii) to section 8-0IA is applicable in assessee's case. Accordingly on that count also we hold that no further adjustment is necessary and that the addition done in this regard is hereby deleted.

On merits, the ld DR submitted that steam cannot be considered as "goods" and that the assessee has not paid any excise duty on the sale of steam. Further the ld DR submitted that since there is no marketability and excisability for steam there is no question of claiming deduction under section 80IA of the Act towards transfer of steam. The ld DR relied on various judgments rendered in the context of Excise and Customs in this regard.

We notice from the perusal of record that the steam and power have been considered together while arriving at the profits eligible for deduction under section 80IA and the assessee in Form 3CEB has considered the transfer of steam at cost as being at arm's length by stating that the market value steam cannot be determined as there is no open market for steam. Accordingly we see merit in the contention that the claim made through additional ground is a not fresh one but is only an incremental claim towards transfer at market value instead of cost. Now coming to the issue of whether a claim which was not made before the lower authorities can be made for the first time before the Tribunal through additional ground we rely on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs CIT ([1998] 97 Taxman 358 (SC)) where it has been held that – 4. The Tribunal has framed as many as five questions while making a reference to us. Since the Tribunal has not examined the additional grounds raised

In the case of Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688, this Court, while dealing with the powers of the AAC, observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised

With regard to the decisions relied on by the ld DR they are rendered prior to the decision of the Apex Court in the case of National Thermal Power Co. Ltd and are distinguishable. The decision of decision in the case of Jay Bharat Co-op Housing Society (surpa) relied on by the ld DR also the facts are distinguishable since the claim made before the lower authorities which was rejected by placing reliance on the decision in the case of Goetz India Ltd vs CIT (284 ITR 323).

On the merits of the issue under consideration, since the issue has not been examined by the lower authorities on merits, we deem it fit to remit the same to the AO for a denovo consideration. The additional evidence now submitted goes to the root of the issue of whether the market value of steam should be considered for the purpose of determining deduction under section 80IA of the Act. Therefore For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. The AO is directed to call for any further details as may required in this regard. The AO is further directed to take into account the additional evidence, the case laws placed by the ld DR on merits while considering the issue and decide in accordance with law. Needless to say that the assessee be given a proper opportunity of being heard. It is ordered accordingly

In the result, the appeal of the assessee is allowed.