2016 (12) TMI 1659 - AT - Income Tax

Claim of deduction under section 80IA on electricity generation unit at Ankleshwar - Held that - Keeping in view the provisions of section 80IA(8) electricity consumed by the other business of the assessee has to be construed as sales of electricity by eligible undertaking. As rightly observed by the learned Commissioner (Appeals) the Assessing Officer has not doubted that Ankleshwar plant is otherwise eligible for deduction under section 80IA. He has denied assessee s claim of deduction under section 80IA only for the reason that electricity generated by the Ankleshwar Unit was used for captive consumption in other businesses of the assessee. Therefore we uphold the order of the learned Commissioner (Appeals) on the issue thereby dismissing the ground raised by the Department. Quantum of deduction allowable u/s 80IA - assessee has computed the cost of electricity generated and consumed for captive used at Rs. 6.17 per unit the rate at which it purchases electricity from GSEB - Held that - Considering the fact that assessee has computed income from electricity generated and consumed on captive basis by applying the rate at which it purchases from GSEB. The deduction claimed under section 80IA should be allowed. We order accordingly. Assessee s grounds are allowed and Department s ground is dismissed. Addition made on account of transfer pricing adjustment - applying a method of segregation - Held that - As per definition of transaction under rule 10A(d) it includes a number of closely linked transaction. There is no doubt all the products sold by the assessee to its A.E. are coming within the genus pesticides. Therefore the international transactions relating to sale of all the products are closely linked hence the overall margin of the international transaction with the A.E. has to be considered for the purpose of determining the arm s length price. The learned Commissioner (Appeals) is also convinced that over all margin shown by the assessee is at arm s length. That being the case the transfer pricing adjustment cannot be made in respect of one product sold by the assessee by applying a method of segregation. Disallowance made under section 14A r/w rule 8D - Held that - The fact that assessee was having substantial interest free funds available with it to take care of the exempt income yielding investment has not been disputed by the Departmental Authorities. Therefore applying ratio laid down by the Hon ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT 2016 (3) TMI 755 - BOMBAY HIGH COURT and CIT v/s HDFC Bank Ltd. v/s DCIT 2014 (8) TMI 119 - BOMBAY HIGH COURT we hold that no disallowance of interest expenditure under rule 8D(2)(ii) can be made. As far as disallowance of administrative expenditure under rule 8D(2)(iii) is concerned it is the contention of the assessee that one of the employee is looking after the investment activity. Therefore the salary cost of the employee has already been disallowed by the assessee. We have noted in assessment year 2007-08 the Tribunal in assessee s own case has held 2% of the dividend income earned by the assessee to be a reasonable disallowance under section 14A

Summary

Issues Involved:
1. Claim of deduction under section 80IA of the Act.
2. Transfer pricing adjustment.
3. Disallowance under section 14A r/w rule 8D.

Issue-wise Analysis:

1. Claim of Deduction under Section 80IA of the Act:

The primary issue pertains to the deduction claimed under section 80IA by the assessee for its captive power plant at Ankleshwar. The assessee claimed a deduction of Rs. 87,86,871, which was partially disallowed by the Assessing Officer (AO) on the grounds that cost savings cannot be construed as sales of the undertaking, and thus, the undertaking had not earned any income. The AO concluded that the profit reflected in the Profit & Loss account was a camouflaged figure to claim a fictitious deduction.

The Commissioner (Appeals) held that section 80IA(8) specifically provides for a situation where any goods or services held for the purpose of eligible business are transferred to any other business carried on by the assessee. The power generated from the eligible business was transferred for captive consumption, satisfying the condition of section 80IA(8). However, the Commissioner (Appeals) directed the AO to compute the deduction under section 80IA based on a 16% return on capital base as per a notification, which was not applicable to the assessee.

The Tribunal upheld the Commissioner (Appeals)'s view that the captive consumption of electricity should be construed as sales of electricity by the eligible undertaking. However, it disagreed with the computation of deduction based on a 16% return on capital base, concluding that the deduction should be computed by applying the rate at which the assessee purchases electricity from the Gujarat State Electricity Board (GSEB), i.e., Rs. 6.17 per unit.

2. Transfer Pricing Adjustment:

The second issue involves a transfer pricing adjustment amounting to Rs. 20,23,348. The AO rejected the Comparable Uncontrolled Price (CUP) method adopted by the assessee for benchmarking the price charged to its Associated Enterprises (A.E.), proposing the Transactional Net Margin Method (TNMM) instead. The AO proposed an adjustment based on the Product Tebuconazola, for which the price charged to the A.E. was lower than the average price.

The Commissioner (Appeals) found that the assessee had internal CUP for three out of four products sold to the A.E., which favorably compared to the average price charged to third parties. For the fourth product, Tebuconazola, the Commissioner (Appeals) upheld the adjustment by computing the margin on a cost-plus basis.

The Tribunal held that the adjustment of Rs. 20,23,348 by segregating one product was not proper. It emphasized that all closely linked transactions should be clubbed together for determining the arm's length price, as per rule 10A(d). The Tribunal deleted the adjustment, following the principle that the overall margin of the international transaction with the A.E. should be considered.

3. Disallowance under Section 14A r/w Rule 8D:

The third issue concerns the disallowance under section 14A r/w rule 8D related to the expenditure incurred for earning exempt income. The AO made a disallowance of Rs. 73.58 lakh, which was sustained by the Commissioner (Appeals). The assessee contended that it had sufficient interest-free funds available to make the investment and that only one employee was looking after the investment, whose salary had already been disallowed.

The Tribunal noted that the assessee had substantial interest-free funds available, and applying the ratio laid down by the jurisdictional High Court, it held that no disallowance of interest expenditure under rule 8D(2)(ii) could be made. For administrative expenditure under rule 8D(2)(iii), the Tribunal directed the AO to disallow 2% of the dividend income, following the Tribunal's decision in the assessee’s own case for the previous assessment year.

Conclusion:

The Tribunal partly allowed the assessee’s appeal and dismissed the Department’s appeal. It upheld the eligibility for deduction under section 80IA but directed the computation based on the rate at which electricity was purchased from GSEB. The transfer pricing adjustment for one product was deleted, emphasizing the aggregation of closely linked transactions. The disallowance under section 14A was restricted to 2% of the dividend income.