2023 (3) TMI 1587 - AT - Income Tax

TP adjustment - arm s length price (ALP) of the specified domestic transaction relating to transfer of power from eligible unit to non-eligible units - HELD THAT - On a specific query of the Bench CIT(DR) has furnished letter enclosing a sworn affidavit of the Assessing Officer admitting that against the order of Commissioner (Appeals) for assessment year 2015-16 no appeal has been preferred by the Revenue before the Tribunal. The aforesaid factual position makes it clear that the AO instead of implementing the direction of learned DRP in letter and spirit has tried to circumvent it by mis-stating the fact that department has preferred an appeal against the decision of Commissioner (Appeals) in assessment year 2015-16. In view of the aforesaid we delete the addition. Grounds raised are allowed. Adjustments made with reference to the specified domestic transaction being the transfer of steam from eligible unit to non-eligible units - As could be seen from the materials on record the TP adjustments have been made in the final assessment orders by stating that against the decision of Commissioner (Appeals) in assessment year 2015-16 the department has preferred appeal. However in the affidavit filed before us the Assessing Officer has admitted that no appeal has been filed by the department against the order of Commissioner (Appeals) in assessment year 2015-16. That being the factual position in terms with the direction of learned DRP no addition can be made. Accordingly we delete the additions in both the assessment years. Re-determination of ALP of steam transferred from eligible unit to non-eligible units and consequent enhancement of deduction u/s 80IA - It is the say of the assessee in course of proceedings before the DRP the assessee has raised the issue of enhanced claim of deduction under section 80IA of the Act through submissions - HELD THAT - Having heard the parties and considering the fact that neither the AO nor DRP have examined this particular claim of the assessee we are inclined to restore this issue to the file of the AO for verifying assessee s claim and deciding the issue in accordance with law. However the AO is directed to provide reasonable opportunity of being heard to assessee. The grounds are allowed for statistical purposes. Disallowance of payment made out of marriage fund - assessee created marriage fund long back to assist its employees who face hardship at the time of marriage of their children - HELD THAT -While deciding assessee s objections on the issue DRP directed the Assessing Officer to verify whether any appeal has been filed by the department against the order of Commissioner (Appeals) who decided the issue in favour of the assessee in assessment year 2015-16 and in case no such appeal was filed to allow the deduction. However in the final assessment order the AO retained the addition by stating that department has challenged the order of Commissioner (Appeals) in assessment year 2015-16. Before us learned CIT(DR) has furnished an affidavit of the Assessing Officer admitting that against the decision of learned Commissioner (Appeals) for assessment year 2015-16 no appeal has been preferred by the department in any higher forum. Considering the aforesaid factual position we delete the additions in both the assessment years under dispute. These grounds are allowed. Disallowance u/s 14A read with rule 8D while computing income both under the normal provisions as well as under section 115JB - HELD THAT - Admittedly in the assessment year under dispute the assessee had not earned any exempt income. Therefore as per the settled legal principles no disallowance under section 14A read with Rule 8D is called for. It is observed while deciding assessee s appeal on identical issue in assessment years 2011-12 2013-14 and 2015-16 learned Commissioner (Appeals) considering the fact that the assessee had not earned any exempt income deleted the disallowance under section 14A. In an affidavit furnished before us the Assessing Officer has admitted that department has not preferred any appeal against the decision of Commissioner (Appeals) in assessment year 2015-16 Therefore in view of specific directions of learned DRP the disallowances cannot be sustained. Accordingly we delete them in both the assessment years. Grounds are allowed. Nature and character of receipts - sale of Renewable Energy Certificates (RECs) - whether capital or revenue? - HELD THAT -DR had attempted to make out a case for the Revenue by submitting that RECs are different from carbon credits however that is not in sync with the reasoning of the departmental authorities while rejecting assessee s claim that the receipts from RECs are of capital nature. The only reason on which the departmental authorities have rejected assessee s claim is filing of SLP against the decision of the Hon ble Andhra Pradesh High Court in case of My Home Power Ltd 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT - Thus in our view the decisions cited by learned counsel for the assessee and more particularly the decisions of the Coordinate Benches discussed hereinabove clearly support the case of the assessee that the receipts from RECs are not in the nature of revenue receipt. Therefore we hold that the amounts received by the assessee from sale of RECs being in the nature of capital receipts are not taxable at the hands of the assessee. In view of our decision above the alternative claim of the assessee of allowing deduction under section 80IA of the Act on receipts from RECs no longer survives. MAT - whether the receipts from RECs being in the nature of capital receipts will form part of book profit computed under section 115JB? - As relying on SRF Ltd 2023 (2) TMI 1113 - ITAT DELHI we hold that the receipts from sale of RECs being in the nature of capital receipts should be excluded for the purpose of computing book profit under section 115JB of the Act. Grounds are allowed to the extent indicate above. Mistakes in assessment order - Grievance of the assessee is against various computational errors committed by AO while computing deduction under various provisions of the Act as well as computation of income. As stated before us by assessee a rectification application in this regard is pending for disposal before the AO. We direct the AP to verify assessee s claim with reference to the rectification application filed u/s154 of the Act and thereafter carry out necessary rectification if warranted after providing reasonable opportunity of being heard to the assessee. These grounds are allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in these appeals relate primarily to transfer pricing adjustments on inter-unit transfers of power and steam, the nature and tax treatment of receipts from sale of Renewable Energy Certificates (RECs), disallowances under various provisions of the Income Tax Act, and computational errors in assessment orders. Specifically, the issues include:

1. Whether transfer pricing adjustments made on transfer of power from eligible units to non-eligible units are justified, especially in light of prior appellate decisions and departmental appeals.

2. Whether transfer pricing adjustments on transfer of steam from eligible units to non-eligible units are sustainable, considering the nature of steam and benchmarking issues.

3. The correctness of re-determination of arm's length price (ALP) of steam transferred and consequent enhancement of deduction under section 80IA of the Income Tax Act.

4. Disallowance of payments made from a marriage fund created for employees' welfare.

5. Disallowance under section 14A read with Rule 8D in the absence of exempt income.

6. The nature and character of receipts from sale of Renewable Energy Certificates (RECs) - whether they are capital or revenue receipts, and their taxability under normal provisions and under section 115JB dealing with minimum alternate tax (MAT).

7. Computational and procedural errors in assessment orders, including incorrect additions, incorrect income computation, and interest levies.

These issues arise across assessment years 2015-16, 2016-17, 2017-18, and 2018-19, and have been clubbed for common adjudication due to their overlapping nature.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments on Transfer of Power (AY 2016-17)

The Transfer Pricing Officer (TPO) made an adjustment of approximately Rs. 9.7 crores to the arm's length price (ALP) of power transferred from an eligible unit (entitled to deduction under section 80IA) to non-eligible units. The TPO benchmarked the transfer price with the rate charged to Uttar Pradesh Power Corporation Ltd. (UPPCL), but found this inappropriate since 95-96% of power is traded through Indian Energy Exchange (IEX). Using data obtained under section 133(6) from IEX, the TPO applied an external comparable uncontrolled price (CUP) of Rs. 2.77 per KWH for the UP region, resulting in the adjustment.

The Dispute Resolution Panel (DRP) noted that a similar disallowance for AY 2015-16 was deleted by the Commissioner of Income Tax (Appeals) (CIT(A)) and directed the Assessing Officer (AO) to verify if the department had appealed against that decision. The AO incorrectly stated that an appeal was pending and retained the addition.

Upon inquiry, the AO admitted via affidavit that no appeal was filed by the department against the CIT(A)'s order for AY 2015-16. The Tribunal held that the AO's attempt to circumvent the DRP's direction was improper and deleted the transfer pricing adjustment. The principle applied is that prior appellate decisions in identical issues must be followed unless successfully challenged.

2. Transfer Pricing Adjustments on Transfer of Steam (AYs 2016-17 & 2017-18)

The TPO made adjustments on steam transfers from eligible to non-eligible units, treating the ALP as nil due to lack of comparable data and rejecting the assessee's claim that steam generation was the main function. The DRP again directed verification of any departmental appeal against CIT(A)'s favorable order for AY 2015-16. The AO erroneously retained the addition claiming an appeal was filed, which was disproved by affidavit.

The Tribunal deleted the additions following the DRP's directions and the absence of any departmental appeal, emphasizing adherence to judicial discipline and consistency in transfer pricing matters.

3. Re-determination of ALP of Steam and Enhanced Deduction under Section 80IA (AYs 2016-17 & 2017-18)

The assessee raised this issue for the first time before the Tribunal via additional grounds, claiming entitlement to enhanced deduction under section 80IA based on re-determined ALP of steam transferred. Neither the AO nor DRP examined this claim during assessment proceedings.

The Tribunal restored this issue to the file of the AO for fresh verification and decision in accordance with law, directing reasonable opportunity of hearing to the assessee. This reflects the principle that issues not adjudicated at lower levels but raised at appellate stage may be remanded for proper adjudication.

4. Disallowance of Payment from Marriage Fund (AYs 2016-17 & 2017-18)

The assessee maintained a marriage fund to assist employees during their children's marriages, with contributions from both employer and employees. The AO disallowed the deduction of payments made from this fund, following earlier adverse views. The DRP directed verification of any departmental appeal against CIT(A)'s favorable order for AY 2015-16.

Again, the AO incorrectly claimed an appeal was pending, but an affidavit confirmed no such appeal was filed. The Tribunal deleted the disallowance, reaffirming the principle of respecting prior appellate decisions and proper application of procedural fairness.

5. Disallowance Under Section 14A Read with Rule 8D (AYs 2016-17 & 2017-18)

The assessee made a suo motu disallowance under section 14A (which disallows expenditure incurred to earn exempt income) despite not earning any exempt income during the years. The DRP, noting identical favorable decisions for AY 2015-16, directed deletion of the disallowance if no departmental appeal was filed.

The AO again erroneously retained the addition claiming an appeal was filed, disproved by affidavit. The Tribunal deleted the disallowance, applying the settled legal principle that section 14A disallowance is not warranted in the absence of exempt income.

6. Nature and Taxability of Receipts from Sale of Renewable Energy Certificates (RECs) (AYs 2015-16, 2016-17 & 2018-19)

The assessee received substantial receipts from sale of RECs, which are market-based instruments certifying generation of electricity from renewable sources, designed to incentivize reduction of environmental pollution and greenhouse gas emissions. The assessee claimed these receipts were capital in nature, akin to carbon credits, and hence not taxable as business income.

The AO treated the receipts as revenue income, relying on the fact that the department had filed a Special Leave Petition (SLP) against the Andhra Pradesh High Court decision in CIT vs. My Home Power Ltd., which held carbon credits as capital receipts. The CIT(A) and DRP upheld the AO's view.

The Tribunal analyzed the legal framework and precedents extensively:

• RECs and carbon credits serve similar environmental objectives, incentivizing renewable energy generation and emission reduction.
• Judicial precedents, including the Andhra Pradesh High Court in My Home Power Ltd., have held carbon credits as capital receipts, not business income, since they arise from environmental concerns rather than business operations.
• Coordinate Benches of the Tribunal have consistently followed these precedents, including decisions in SRF Ltd., Dwarikesh Sugar Industries Ltd., and others, holding carbon credits and by extension RECs as capital receipts.
• The introduction of section 115BBG (effective from AY 2018-19) taxing income from transfer of certain carbon credits at concessional rates further supports that such receipts are not regular business income.
• Decisions relied upon by the Revenue have been overruled or distinguished by higher courts or coordinate benches.
• Receipts from sale of RECs are not connected with or incidental to the assessee's core business activities and no asset is generated in the course of business.
• The Tribunal rejected the Revenue's argument that RECs differ from carbon credits due to lack of Kyoto Protocol approval, emphasizing purposive interpretation and functional equivalence.

The Tribunal held that receipts from sale of RECs are capital receipts and not taxable as business income under section 28 or under the head "profits and gains of business or profession."

Regarding minimum alternate tax (MAT) under section 115JB, the Tribunal followed authoritative precedents holding that capital receipts not chargeable as income cannot be included in book profits for MAT computation. Thus, receipts from RECs are to be excluded from book profit computation.

7. Computational and Procedural Errors in Assessment Orders (AY 2017-18)

The assessee raised issues of incorrect transfer pricing additions, inflated total income, incorrect book profit computation, erroneous interest levy under section 234A, and incorrect demand on account of dividend distribution tax (DDT) and interest under section 115P.

The assessee had filed a rectification application under section 154 of the Act addressing these errors, which was pending before the AO. The Tribunal directed restoration of these issues to the AO for verification and rectification after providing reasonable opportunity of hearing.

Significant Holdings:

On transfer pricing adjustments relating to power and steam transfers from eligible to non-eligible units, the Tribunal emphasized adherence to prior appellate decisions and the necessity of departmental appeals to challenge such decisions. The Tribunal stated:

"In view of the aforesaid factual position, we delete the addition. Grounds raised are allowed."

This underscores that transfer pricing adjustments cannot be sustained if prior appellate decisions in identical issues have not been successfully challenged by the department.

Regarding disallowances under section 14A and payments from marriage fund, the Tribunal held:

"Considering the aforesaid factual position, we delete the additions in both the assessment years under dispute."

Reaffirming that disallowances must be supported by applicable legal provisions and facts, and prior appellate decisions must be respected.

On the critical issue of the nature of receipts from RECs, the Tribunal held:

"Carbon credits are not offshoot of business but offshoot of environmental concerns and therefore cannot be said to be 'connected with' or 'incidental to' the business activities of assessee... The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act."

Further, on MAT computation:

"Once a particular receipt is treated as capital receipt, the same cannot be brought to tax in garb of 'minimum alternate tax' applicable on book profits computed u/s 115JB of the Act."

The Tribunal also noted the consistency and binding nature of judicial precedents, including High Court rulings and coordinate bench decisions, rejecting the Revenue's reliance on unsettled SLPs or overruled judgments.

On procedural and computational errors, the Tribunal held:

"We direct the Assessing Officer to verify assessee's claim with reference to the rectification application filed under section 154 of the Act and thereafter carry out necessary rectification, if warranted, after providing reasonable opportunity of being heard to the assessee."

This reflects the principle of procedural fairness and correctness in assessment proceedings.