TMI Blog2022 (8) TMI 1342X X X X Extracts X X X X X X X X Extracts X X X X ..... nch has held that where a corporate guarantee to benchmark was issued by on behalf of the AE, the arm s length guarantee fees would be 0.5%. Considering the facts on record and perusing the rival submissions, we are of the view that it would be reasonable if corporate guarantee fee of 0.5% is appl ied to benchmark the international transactions. Accordingly we set aside the impugned order of ld. CIT(A) on this issue and direct the ld. AO to benchmark the transactions by applying 0.5%. Thus Ground No. 1 raised by the Revenue in respect of corporate guarantee fees is partly allowed. Adjustment for transactions with respect to transfer of power/electricity - HELD THAT:- The power supplied by the CPPs to non eligible units was business to consumer (commonly known As B2C) meaning thereby the rate at which the ultimate consumers can purchase the power for their consumption is relevant. In the instant case before us, the B2C market comprises the sale of power by SEB and other distribution companies to different categories of consumers. Thus the power sold by other CPPs/IPPs to unrelated parties was in altogether different market conditions which is business to business commonly known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated factors. In respect of Transfer of Power (4) That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the AO/TPO amounting to Rs. 6,75,22,000/- for transaction with respect to transfer of power/electricity. (5) That on the facts and circumstances of the case and in law, the Ld.CIT(A) had failed to appreciate the analysis undertaken by the TPO while concluding the said transaction were not at the arm s length. (6) That on the facts and circumstances of the case and in taw, the Ld.CIT(A) had failed to appreciate that, even if we consider the electricity board rate i.e. rate at which assessee purchases power from the distributors, for transfer pricing purpose, adequate adjustment has to be made for the costs which the distributors incurs towards transmission of power and other additional costs for arriving at arm s length price. (7) That on the facts and circumstances of the case and in law, the Ld.CIT(A) had erred in deleting the downward adjustment made by the TPO/AO pertaining to the exaggerated profit of captive power generating unit by claiming higher rate than the cost price or market price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest savings made by the AE, which was BB and loan connector database. However, ld. TPO held that five external loan comparables from loan connector database as identified by the assessee are same rated companies, i .e. BB. Further similar rated companies were not having sufficient datas and, therefore, he included the comparables having rating of BB (plus) BB (minus) and thus expanded the comparable base. The ld. TPO on the basis of broad functional comparability approach under CUP Method computed the interest savings by applying the percentile approach at 137.5 bps and assuming that 50% benefit ought to have been paid by the AE to the assessee in the form of corporate guarantee fee, the ALP of the corporate guarantee fee was computed at 69 bps and thereby proposing an upward adjustment of Rs.28,56,796/-, which was added by the AO in the draft assessment order passed under section 144C read with section 92CA of the Income Tax Act , 1961. The assessee challenged the adjustment made by the AO/TPO, Ward-4 before the ld. CIT(A) and ld. CIT(A) allowed the appeal of the assessee by directing the TPO/AO to delete the upward adjustment of Rs.28,56,796/- by observing as under: - 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adopting this broad comparability approach under CUP Method, the Ld. TPO re-computed the interest savings by applying the percentile approach at 137.5 bps. Assuming that 50% benefit ought to have been paid by the AE to the appellant in form of CG fee, the ALP CG fee was computed at 69 bps and hence further adjustment of Rs.28,56,796/- [69 bps - 30 bps] was recommended by the Ld. TPO. 4. After going through the contentions of both parties, I find that the undisputed position is that CUP Method is the most suitable method to benchmark the international transaction in question. It needs to be appreciated that CUP requires an apple to apple comparability of products (completed in all respects). CUP method cannot be applied where comparables are of different profiles different economics, different financial conditions etc. Meaning thereby if the comparables so identified are not absolutely identical, then CUP Method cannot be applied. It is by now a settled position that for application of the CUP method, highest degree of comparability is required. In case of Intervet India Private Limited (2010) 39 SOT 93, the Hon'ble ITAT, Mumbai has observed that standard of comparable da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 300 4. 450 5. 500 6. 550 Total no. of entries = 12 35th Percentile is = 5*35/100 = 2.1 Since this is not a whole number, the number succeeding the above no. is considered as the 35th percentile, i.e. 3. 65th percentile is = 5*65/100 = 3.9 Since the above no. is not a whole number, the number succeeding the above no. will be treated as 65th percentile, i.e.4. Therefore the arm's length range is 300 to 450. 7. In the present case the margin of the appellant (as stated by the Ld. TPO) is 300 bps which is falling within the above median range and in that view of the matter the international transaction involving issuance of corporate guarantee is at arm's length. The CG fee of 30 bps as benchmarked by the appellant is hence held to fair and reasonable and no transfer pricing adjustment in this regard is found to be warranted. The Ld. AO/TPO is accordingly directed to delete the adjustment of Rs.28,56,796/-. Ground Nos. 1 2are therefore allowed . 6. We have heard the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be followed while applying the CUP Method. The ld. CIT(A) also computed the ALP under the range of 300 to 450 bps. The ld. CIT(A) finally held that since the margin of the assessee as stated by the TPO as 300 basis point, which is falling within the above medium range and, therefore, the international transaction involving issuance of corporate guarantee is at arm s length and corporate guarantee fees of 30 bps as benchmark by the assessee is held to be fair and reasonable and accordingly directed the TPO/AO to delete the adjustment. We also carefully perused the decision furnished by the ld. DR in the case of Rose India Pvt. Ltd. vs. - DCIT (2021) 127 taxman.com 591 (Mumbai Trib.), wherein the Coordinate Bench has held that where a corporate guarantee to benchmark was issued by on behalf of the AE, the arm s length guarantee fees would be 0.5%. Considering the facts on record and perusing the rival submissions, we are of the view that it would be reasonable if corporate guarantee fee of 0.5% is appl ied to benchmark the international transactions. Accordingly we set aside the impugned order of ld. CIT(A) on this issue and direct the ld. AO to benchmark the transactions by applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame to the income of the assessee. 9.1. In the appellate proceeding, ld. CIT(A) allowed the appeal of the assessee by observing as under:- 1. I have carefully considered the action of the Id. TPO, as also equally carefully perused the submissions made by the Ld. A.Rs, and the documents available in the Paper Book filed by the appellant. The appellant operated eligible power undertakings ('CPPs') in West Bengal. The power, generated by the eligible units was consumed captively by other non-eligible unit. For the purposes of Section 80IA(8) and in order to determine the stand-alone profits of the eligible unit, the transfer value of power to non-eligible unit was-adopted at Rs.7.66- 7.87/unit having reference to average landed cost at which t-he non-eligible unit procured power from the SEB. The aforesaid transaction was reported by the appellant in the transfer pricing audit report filed in Form 3CEB and thereafter the Ld. AO referred the matters for transfer pricing scrutiny. Before the Ld. TPO the appellant was required to demonstrate that the profits of the eligible units were arrived at by adopting fair value of the goods services provided to noneligible under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en one may apply external CUP which involves comparison of prices paid/ charged between two unrelated third parties in uncontrolled conditions with the transaction conducted between the AEs. 4. From the material on record it is noted that the eligible CPP supplied power only to the AE i.e, the non-eligible unit and it did not have any transaction with any unrelated enterprises. In the circumstances the eligible unit at West Bengal cannot be considered as the tested party for the purposes of application of CUP. On the contrary, it is noted that the non-eligible unit was sourcing power both from the AE i.e. the eligible undertaking as well as unrelated enterprises i.e. the SEB. In the circumstances it is noted that reliable internal CUP data was available with the appellant to benchmark the ALP of the power generated supplied by the eligible undertaking to the non-eligible unit by taking the noneligible unit to be the tested party. 5. On the other hand, I find that the basis and benchmarking exercise followed by the Ld. AO/TPO suffered from apparent infirmities. From the facts on record I note that the Ld. TPO wrongly assumed that the CPP was neither discharging distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and reasonable basis to benchmark the transfer value of power procured by the non-eligible undertaking from the eligible unit. 7. The Ld. TPO's reference to the judgment of the Hon'ble Calcutta High Court in ITC Limited (supra) is wholly distinguishable since the appellant has sufficiently, demonstrated that not only is it is permitted to supply power independently to unrelated parties but it has actually supplied substantial .quantities of power t'o unrelated parties. Instead I find that the issue of allowability of deduction under Section 80IA in respect of profits derived by CPP came up for consideration before another coordinate Bench in' the case of M/s Electrosteel Castings Ltd in I.T. (SS) No. 47 to 60/ Kol/ 2014, 313 and 256/Kol/2015, 66 and 124/Kol/2016dated 25th November 2016. In respect of appeals relating to abated assessment years, the Revenue had relied on the judgment of Calcutta High Court in the case of CIT Vs ITC Ltd (supra) to contend that the deduction was required to be allowed taking into account the price at which distribution companies were purchasing electricity. After taking into account the provisions of the Electricity Act of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold to a supplier as this is not the rate for which a consumer or the Steel-Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market. 32. In our opinion, the AO committed an illegality in computing the market value by taking into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer. 12. This question again came up for consideration before the Hon'ble Bombay High Court in the case of CIT Vs Reliance Industries Limited [2019] (102 taxmann.com 372) wherein the Hon'ble Court after considering the judgment of the Hon'ble Calcutta High Court in case of CIT vs ITC Ltd (supra), Hon'ble Chattisgarh High Court in case of CIT v. Godawari Power Ispat Ltd. (supra) Hon'ble Gujarat High Court in the case of of Pr.CIT Vs Gujarat Alkalies Chemicals Ltd (supra) held that the valuation of electricity provided by eligible unit to another non-eligible unit for the purposes of Section 801A (8) should be at rate at which electricity distribution companies were allowed to supply electricity to consumers. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Calcutta High Court in the case of CIT vs. ITC Ltd. in 236 Taxman 612 to buttress his arguments. The Ld. D.R. finally submitted that the order of Ld. CIT(A) may kindly be reversed on this issue by restoring the order of AO by allowing the revenue s appeal on this issue. 9.3. The Ld. A.R. vehemently argued before us that the assessee has correctly bench marked the specified domestic transactions of transfer of power for captive consumption by taking the non eligible units as tested party and taking the ALC at which the non eligible units/tested party procured the electricity from SEB ranging from Rs. 7.66 to Rs. 7.87 per unit. The Ld. A.R. submitted that the TPO has wrongly adopted the average rate at which the power was sold by the power producing companies or CPPs/IPPs to power distribution companies or third parties at Rs. 3.47 per unit by treating the third parties as tested party. The Ld. A.R. ,while referring to the appellate order ,submitted that the Ld. CIT(A) has allowed the appeal of the assessee on this issue after going into the issue at great length and after giving comprehensive findings by relying on series of decisions as mentioned in the appellate order. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. We have heard rival submissions and perused the material as placed before us carefully including the impugned order and case laws relied upon by the assessee and the revenue. The undisputed facts in brief are that the assessee has two CPPs or eligible units generating electricity which was consumed captively by other non-eligible units i.e PET Resin Manufacturing Units(hereinafter referred to as Non Eligible Units) . for carrying out the manufacturing. Noteworthy that non eligible units have also consumed power by purchasing the same from SEB. We observe that the assessee determined the ALP of specified domestic transactions at rate ranging from Rs. 7.66 per unit to Rs. 7.87 per unit which was the Average Annual Landed Cost (AALC) at which the non-eligible unit procured power from SEB. Thus , the assessee followed internal CUP for bench marking the specified domestic transactions of transfer of power from CPPs to non eligible unit at average landed cost at which the non eligible units procured electricity from the SEB by taking non eligible units as the tested party in the TP Study Report and accordingly ALP of the power captively consumed has been benchmarked at ALC of power pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power during the year and thus there is no timing difference as well. Thus we are in agreement with the conclusion of Ld. CIT(A) that transactions of purchase of power by the non eligible units from SEB fulfil the internal CUP parameters vis product comparability and similar market conditions and thus the ALC paid by the non eligible units to the SEB represented the internal comparable ALP. 9.6. According to Ld. CIT(A), the excess surplus power sold in the open market at a price which was lower than the price at which the manufacturing units procured electricity from the SEB cannot the arm s length price of the power. Thus, the Ld. CIT(A) reversed the order of TPO/AO by directing that the price at which the SEB sold power in the open market under uncontrolled conditions is reliable internal CUP and accordingly came to the conclusion that ALC notified by the SEB is a fair, reliable and reasonable basis to bench mark the power procured by non-eligible unit from the eligible unit. The Ld. CIT(A) while allowing the appeal of the assessee has relied on the series of decisions namely PCIT vs. Gujarat Alkalies Chemicals Ltd. (supra), CIT vs. Godawari Power Ispat Ltd. (supra) and R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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