Income Tax Appellate Tribunal - Chennai
Rkm Powergen Private Limited, Chennai vs Deputy Commissioner Of Income Tax ... on 8 March, 2024
आयकर अपीलीय अिधकरण, 'डी' यायपीठ, चे ई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH: CHENNAI
ी मंजूनाथा. जी, लेखा सद एवं
ी मनोमोहनदास, ाियक सद के सम
BEFORE SHRI MANJUNATHA. G, ACCOUNTANT MEMBER
AND SHRI MANOMOHAN DAS,JUDICIAL MEMBER
IT (TP) A No.44/Chny/2023
िनधा रण वष /Assessment Year: 2013-14
M/s.RKM Powergen Private Limited, v. The Deputy Commissioner -
No. 14, Dr.Giriappa Road, of Income Tax,
T. Nagar, Chennai - 600 017 Central Circle -1(1),
[PAN: AADCR 0301 B] Chennai.
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Shri V. Ravichandran, FCA
यथ क ओर से /Respondent by : Dr. R.Mohan Reddy, CIT
सुनवाई क तारीख/Date of Hearing : 30.01.2024
घोषणा क तारीख /Date of Pronouncement : 08.03.2024
आदेश / O R D E R
PER MANJUNATHA. G, AM:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-18, Chennai, dated 20.03.2023, and pertains to assessment year 2013-14.
2. The assessee has raised the following grounds of appeal:
1. The disallowance under Section 14A is erroneous and excessive, since the Appellant was possessed of own funds and had claimed no expenditure in relation to the investments and in any case, such disallowance cannot be made in the computation of book profits.
2. The assessment of interest earned on fixed deposits made for identified project purposes is erroneous and if so assessed, the interest paid on loans obtained for making such deposits ought to be allowed as a deduction.
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3. The downward adjustment by the TPO was erroneous and excessive, particularly by adopting a different method from the earlier years when the transactions in these years were in fulfillment of the same contracts.
4. The reliance on a single page unaudited statements of the AE was erroneous particularly when a copy was not even furnished to the Appellant.
5. The reliance on a copy of a survey report was erroneous particularly when a copy was not even furnished to the Appellant.
6. The arm's length price had to be fixed in accordance with the norms and findings of the Electricity Regulatory Commissions, which are statutory and specialized bodies manned by experts.
7. The enhancement made by the learned CIT (Appeals) to the downward adjustment made by the TPO by adopting safe harbor provisions is unjustified since the Associated Enterprises was rendering complex services and the Appellant had not opted for the safe harbor provisions.
8. The learned CIT (Appeals) erred in making an enhancement by directing disallowance of interest.
9. The impugned orders are barred by limitation and passed in violation of the principles of natural justice.
3. The brief facts of the case are that, the assessee company is engaged in the business of construction and operation of power plants. The assessee is a joint venture company promoted by M/s. R K Powergen Pvt. Ltd., (in short "M/s.RKPPL") & M/s. Mudayaja Corporation, Berhad, Malaysia, (in short "M/s.MJC") with the objectives of setting up of 4 x 360 MW coal based Thermal Power Project at Jangir, Champa District, Chhattisgarh. M/s.MJC was incorporated under the Malaysian Companies Act, 1965, as a Public Limited Company. M/s.MIPP International Ltd. (in short "M/s.MIPPIL") was incorporated in the republican of Mauritius as a Private Limited Company and the company is a subsidiary of M/s.MJC. M/s.MIPPIL was granted a Global License Category-2 u/s. 20(5) of the Financial Services Development Act, 2001, and it is kept valid with annual certification. The principle activity of M/s.MIPPIL is supply of power IT (TP) A No.44/Chny/2023 :: 3 ::
equipments for the Indian market. The assessee company entered into an agreement dated 18.07.2017 with M/s MIPPIL for supply of mechanical and electrical plant & machinery for setting up of 360 MW coal based Power Plant for Phase-I and also entered into agreement for supply of mechanical and electrical plant & machinery for setting up of 3 x 360MW coal based Power Plant for Phase-II. The mechanical equipment procured from M/s.MIPPIL includes boilers, steel turbines, generators, coal handling system, cooling water system, etc. During the FY 2012-13, relevant to assessment year 2013-14, the assessee has imported capital equipments from its AEs, M/s.MIPPIL amounting to Rs.1471,30,09,946/- pursuant to supply contract agreements entered into with above company. The equipments were supplied on FOB basis by M/s.MIPPIL.
4. The assessee company has filed its return of income for AY 2013-14 on 27.11.2013 admitting a total income of Rs.NIL under normal provisions of the Act and book loss of Rs.12,41,817/- u/s.115JB of the Income Tax Act, 1961 (in short "the Act"). The assessee had also filed a Transfer Pricing Report and also reported international transactions with its AEs in Form No.3CEB in respect of import of plant & machinery from M/s.MIPPIL, at a cost of Rs.1471,30,09,946/-. The assessee has selected 'other method' as per Rule 10AB of the Income Tax Rules, 1962 and has claimed that its transactions with its AEs are at arm's Length Price and for this purpose, it has relied upon the comparable information from M/s. Power Finance Corporation Information Memorandum in respect of Thermal IT (TP) A No.44/Chny/2023 :: 4 ::
Power Project, Suratgarh, which has been chosen as a comparable project. The assessee had obtained a Valuation Report from Chartered Engineer dated 11.11.2013 and as per the report of Chartered Engineer, per MW cost incurred by the assessee for setting up of power project is lesser than per MW cost incurred by the Thermal Power Projects at Suratgarh.
5. The case was selected for scrutiny and during the course of assessment proceedings; a reference was made to the TPO for determining ALP of international transactions of the assessee company with its AEs, M/s.MIPPIL, in respect of import of mechanical and electrical plant & machinery for setting up of Coal Based Power Plant at Chhattisgarh. During the proceedings before the TPO, the assessee furnished information and documents called for. The assessee submitted that there was a standard per MW cost for large Coal Based Power Plants that was well-known and served as a benchmark and that its original project cost was well within the benchmark. The assessee also submitted that its project had been apprised and funded by two leading Specialized Power Finance Corporations, that had a deep knowledge of power sector and that the appraisal of the project cost itself established that the imported cost of plant & machinery was reasonable and at arm's length price. The assessee also pointed out that imports were made pursuant to a procurement contract entered into with M/s.MIPPIL and that imports IT (TP) A No.44/Chny/2023 :: 5 ::
made in the earlier Financial Years pursuant to the same contract had been accepted in earlier years in TP proceedings.
6. The TPO after considering relevant submissions of the assessee and also taken note of various facts including financial statement of AEs, M/s.MIPPIL obtained under exchange of information observed that, the margin earned by the AE @ 33.5% was high considering the role of the AEs as per FAR analysis. The TPO has analyzed the transactions in light of TP report submitted by the assessee by adopting 'other method' as per Rule 10AB of the Income Tax Rules, 1962, in light relevant information, including agreement between the parties for purchase of Plant & Machinery. The TPO observed that based on functions performed by AE, it can be treated as a trader and thus, margin earned by the AE on total transactions with the assessee company in respect of import of Plant & Machinery is considerably high. Therefore, rejected TP report submitted by the assessee and has carried out independent TP study and has applied TNMM as most appropriate method in the given facts and circumstances of the case. The TPO had also selected M/s.Shicagen India Ltd., as a comparable company, which is in the business of trading in construction materials. The TPO had also computed PLI (OP/OC) of M/s.Shicagen India Ltd., (trading segment) at 2.74% and made certain economic adjustment to arrive at PLI of 8.74%. The TPO had also computed PLI of M/s.MIPPIL at 50.36% based on its financial statement obtained under Exchange of Information Scheme and then, made IT (TP) A No.44/Chny/2023 :: 6 ::
downward adjustment of Rs.407,25,95,597/- to the value of imports of Plant & Machinery from AE.
7. Thereafter, the AO passed final assessment order u/s.143(3) r.w.s.92CA of the Act dated 31.03.2017 and made TP adjustment of Rs.407,25,95,597/- towards downward adjustment suggested by the TPO in respect of import of Plant & Machinery and reduced from value of fixed assets/capital work-in-progress, since, the business of the assessee is not commenced. The AO further stated that when the business of the assessee is commenced, the depreciation to the extent of downward adjustment to be disallowed. The AO had also made addition of Rs.25,93,58,803/- towards interest income earned from fixed deposit with banks on the ground that any income earned like interest income, dividend, etc., should be assessed under the head 'income from other sources' irrespective of source of fund. The AO had also made additions of Rs.1,70,83,176/- u/s.14A r.w.r.8D of the Income Tax Rules, 1962, towards expenses relatable to exempt income and disallowed interest on borrowings u/r.8D(ii) and other expenses u/r.8D(iii) of the Income Tax Rules, 1962.
8. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions on the issue which has been reproduced at Para No.6 on pages 11 to 48 of the Ld.CIT(A)'s order. The assessee has challenged downward adjustment made by the TPO towards import of IT (TP) A No.44/Chny/2023 :: 7 ::
capital goods from AE, M/s.MIPPIL and also challenged additions made by the AO towards disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962, and also assessment of interest income under the head 'income from other sources' as against reduction of interest income from capital work-in-progress account.
9. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of various reasons given by the AO sustained additions made by the AO towards downward adjustment proposed by the TPO in respect of import of capital goods from AE. Further, the Ld.CIT(A) has enhanced the assessment and directed the AO to make further adjustment in respect of import of capital goods from AE amounting to Rs.378,10,39,958/- by holding that the AE is a low risk trader and accordingly, by considering Safe Harbor Rules applied 5% margin on overhead cost incurred by the AE to arrive at total ALP of capital goods imported by the assessee company from its AE, and thus, computed downward adjustment of Rs.744,03,40,395/-. Since, the AO has already been made downward adjustment in TP order dated 01.02.2017 amounting to Rs.407,25,06,299/-, the balance short adjustment of Rs.336,78,34,096/- has been enhanced and directed the AO to reduce from capital work-in-progress. The Ld.CIT(A) while doing so, has rejected TP study conducted by the assessee company and adoption of any 'other method' as per Rule 10AB of the Income Tax Rules, 1962 and also rejected selection of most appropriate method by the AO IT (TP) A No.44/Chny/2023 :: 8 ::
and selection of comparable M/s.Shicagen India Ltd., on the ground that in the given facts and circumstances of the case, the most appropriate method can be considered is any 'other method' as provided u/r.10AB of the Income Tax Rules, 1962, but not TNMM as considered by the TPO. The Ld.CIT(A) has also categorized the AE, M/s.MIPPIL as low profile trader with very low risk and accordingly, applied 5% margin on overhead cost and suggested downward adjustment in respect of import of capital goods. The Ld.CIT(A) had also upheld additions made by the AO towards disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962 and also assessment of interest income earned from fixed deposits kept with banks under the head 'income from other sources'. The Ld.CIT(A) had also enhanced assessment and direct the AO to disallow interest of Rs.108,03,37,425/- u/s.36(1)(iii) of the Act, for diversion of interest bearing funds for non-business purpose in respect of amount paid to AEs for import of capital goods on the ground that downward adjustment suggested towards import of capital goods is nothing but payment of amount to AEs, which is nothing but diversion of interest bearing funds. The Ld.CIT(A) had also directed the AO to reduce interest disallowances from the capital work-in-progress for AY 2014-15. Thus, the Ld.CIT(A) dismissed the appeal filed by the assessee with enhancement. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.
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10. The first issue that came up for our consideration from Ground No.1 of the assessee appeal is disallowance of expenditure relatable to exempt income u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962. The facts with regard to impugned dispute are that the assessee has earned exempt dividend income of Rs.5,31,21,556/-. The assessee has disallowed an amount of Rs.8,79,013/- u/s.14A of the Act. The AO has determined total disallowance of Rs.1,70,83,176/- u/s.14A of the Act, by invoking Rule 8D of the Income Tax Rules, 1962, which includes interest on borrowings, disallowance u/r.8D(ii) of the Income Tax Rules, 1962, of Rs.82,93,040/-, and disallowance of other expenses @ 0.5% of average value of investment u/r.8D(iii) of the Income Tax Rules, 1962, for Rs.87,90,136/-. The AO had also made re-computation of book profit u/s.115JB of the Act, by making additions towards disallowance u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962. On appeal, the Ld.CIT(A) sustained the additions made by the AO towards disallowance of expenditure relatable to exempt income u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962, and also re-computation of book profit u/s.115JB of the Act, by making additions towards disallowance u/s.14A of the Act. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.
11. The Ld.Counsel for the assessee, Shri. V. Ravichandran, FCA, submitted that the AO has disallowed Rs.1,70,83,176/- which is IT (TP) A No.44/Chny/2023 :: 10 ::
comprising of Rs.87,90,136/- u/r.8D(iii) of the Income Tax Rules, 1962, and Rs.82,93,040/- u/r.8D(ii) of the Income Tax Rules, 1962. The assessee has not challenged the disallowance of other expenses u/r.8D(iii) of the Income Tax Rules, 1962. In respect of disallowance of interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, the assessee company is having sufficient funds comprising of share capital, reserves and surplus, which is more than the amount of investment in shares and securities, mutual funds which yielded exempt income. Therefore, when own funds including mixed funds is in excess of investments, the question of disallowance of interest expenditure does not arise. In this regard, he relied upon the decision of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. v. CIT reported in [2021] 130 taxmann.com 178 (SC). The Ld.Counsel for the assessee further submitted that disallowance of expenditure u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962, cannot be added back to book profit computed u/s.115JB of the Act, and in this regard, he relied upon the decision of ITAT Special Bench in the case of ACIT v. Vireet Investment (P.) Ltd., reported in [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB).
12. The Ld.DR, Dr. R. Mohan Reddy, CIT, on the other hand, supporting the order of the Ld.CIT(A) submitted that although, the assessee claims to have sufficient own funds in excess of investments made in shares and IT (TP) A No.44/Chny/2023 :: 11 ::
securities which yielded exempt income, but no details has been filed, including cash flow statement to establish availability of own funds. Therefore, Ld.CIT(A) has rightly sustained additions made by the AO u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962, and their orders should be upheld. He further submitted that disallowance contemplated u/s.14A of the Act, should be added back to the book profit computed u/s.115JB of the Act. As per Clause (f) of Explanation-1 to Sec.115JB of the Act, any amount of expenditure relatable to any income referred to in Sections 10, 11 or 12 should be added back. Therefore, there is no error in the reasons given by the AO to make additions, and thus, the order of the Ld.CIT(A) should be upheld.
13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee has not challenged the disallowance of other expenses @ 0.5% on average value of investment u/r.8D(iii) of the Income Tax Rules, 1962, amounting to Rs.87,90,136/-, and thus, we are inclined to upheld the findings of the Ld.CIT(A). In so far as disallowance of interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, the assessee has filed necessary details to prove availability of sufficient own funds in excess of investments made in shares and securities and mutual funds which yielded exempt income. From the details filed by the assessee, we find that the assessee own funds at Rs.10585.28 Crs., whereas the average value of the investments made in shares and securities and also IT (TP) A No.44/Chny/2023 :: 12 ::
mutual funds was at Rs.175.80 Crs. From the above, it is undisputedly clear that the assessee is having sufficient own funds in excess of investments made in shares and securities, and thus, in our considered view, the case of the assessee is squarely covered by the decision of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (supra), wherein, the Hon'ble Supreme Court clearly held that if investments in securities is made out of common funds and the assessee has available non-interest bearing funds larger than the investment made in tax free securities, in such cases, disallowance u/s.14A of the Act, cannot be made. The relevant findings of the Hon'ble Supreme Court are as under:
17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of '2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court Judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion. 18. In the above context, it would be apposite to refer to a similar decision in CITv. Reliance Industries Ltd. [2019] 102 taxmann,com 52/261 Taxman 165/410ITR 466 (SC). { where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds.
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19. In HDFC Bank Ltd. v. Dy. CIT[2016] 67 taxmann.com 42/383 ITR 529 (Bom.), the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee's case for a different Assessment Year) that, if assessee possesses sufficient interest free funds. as against investment in tax-free securities then, there is a presumption that investment which has been made in tax-free securities, has come out of interest free funds available with assessee. In such situation section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CITv. Suzlon Energy ltd. [2013] 33 taxmann.com 157/215 Taxman 272/354 ITR 630 (Guj.),CIT v. Microlabs ' Ltd. [2017] 79 taxmann.com 365/12016] 383 ITR 490 (Kar.) and CIT v. Max India Ltd. [2016] 75 taxmann.com 268/388 ITR 81 (Punj. & Har.). Mr.S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of section 14A of the Act in their decisions favouring the assessees.
20, Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A of the Act. in other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made.
14. In this view of the matter and by respectfully following the decision of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (supra), we are of the considered view that the AO is erred in disallowing interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, and thus, we reversed the findings of the Ld.CIT(A) on this issue and direct the AO to delete the additions made towards disallowance of expenditure u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962 on interest expenditure.
15. Coming back to re-computation of book profit u/s.115JB of the Act, by making additions towards disallowance u/s.14A of the Act, r.w.r.8D of IT (TP) A No.44/Chny/2023 :: 14 ::
the Income Tax Rules, 1962. We find that this issue is also squarely covered in favour of the assessee by the decision of the ITAT Special Bench in the case of ACIT v. Vireet Investment (P.) Ltd., (supra), wherein, the ITAT Special Bench held that computation under Clause (f) to Section 115JB of the Act, is to be made without resorting to the computation as contemplated u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962. Therefore, we are of the considered view that the Ld.CIT(A) is erred in upholding the reasons given by the AO to re- compute book profit u/s.115JB of the Act, by making additions towards disallowance of expenditure relatable to exempt income u/s.14A of the Act, r.w.r.8D of the Income Tax Rules, 1962. Thus, we reverse the findings of the Ld.CIT(A) on this issue and direct the AO to delete additions made towards disallowance u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962, to book profit computed u/s.115JB of the Act.
16. The next issue that came up for our consideration from Ground No.2 of the assessee appeal is assessment of interest income during pre- commencement period under the head 'income from other sources' amounting to Rs.25,93,58,803/-. The facts with regard to impugned dispute are that during the FY 2012-13 relevant to AY 2013-14, the assessee has earned interest on Short Term Fixed Deposits with bank amounting to Rs.25,93,58,803/-. The assessee has reduced interest income from capital work-in-progress on the ground that interest earned on Fixed Deposits with banks is inextricably linked to project, and thus, IT (TP) A No.44/Chny/2023 :: 15 ::
during pre-commencement period any income, including interest income earned by the assessee should be reduced from capital work-in-progress. The AO assessed interest income earned on Short Term Fixed Deposits under the head 'income from other sources' by following the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172 (SC). On appeal, the Ld.CIT(A) sustained assessment of interest income under the head 'income from other sources'. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.
17. The Ld.Counsel for the assessee submitted that the Short Term Fixed Deposits were made for the purpose of setting up of power plant and as such; interest earned on Short Term Fixed Deposits ought to be reduced from capital work-in-progress. The Ld.Counsel for the assessee further submitted that the assessee company has imported power plant equipment and to secure the custom duty concession has kept Short Term Fixed Deposit with bank and earned interest income. Since, the deposits are inextricably linked with the project; interest earned on said deposits would go to reduce the capital work-in-progress. The Ld.Counsel for the assessee further submitted that although, the assessee has rightly reduced interest income from capital work-in-progress, but the ITAT in the assessee own case for AYs 2011-12, 2012-13 & 2014-15 has held that interest income is taxable under the head 'income from other sources'. But, if you go through the findings of the Tribunal, it went on IT (TP) A No.44/Chny/2023 :: 16 ::
the premise that the assessee business has been set up for the relevant assessment year and once business has been set up, the assessee would be eligible to claim business expenditure as Revenue expenditure and on the very same reasoning, any income earned after setting up of the business would be Revenue in nature and assessable to tax. But, for the impugned assessment year, it was categorical admission of the AO that the business of the assessee not commenced and the power plant is at pre-operative stage. Therefore, the decision of ITAT should not be followed and interest income earned from Short Term Fixed Deposits should be reduced from capital work-in-progress. The AO and the Ld.CIT(A) are erred in assessing said interest income under the head 'income from other sources'. In this regard, he relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Bokaro Steels Ltd., reported in [1999] 236 ITR 315 (SC) and CIT v. Karnal Co-operative Sugar Mills Ltd., reported in [2000] 243 ITR 2 (SC). The Ld.Counsel for the assessee further submitted that alternatively, interest income is assessed under the head 'income from other sources' then, expenses incurred in relation to earning such income being interest paid on borrowed capital, should be allowed as deduction. In this regard, he relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. VGR Foundation reported in [2008] 298 ITR 132.
18. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that interest income is taxable under the head 'income from IT (TP) A No.44/Chny/2023 :: 17 ::
other sources', whether such interest income is earned out of funds earmarked for specific purpose or surplus funds available with the assessee. This position has been reiterated by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra). The Ld.CIT(A) after considering relevant facts has rightly upheld assessment of interest income under the head 'income from other sources'. The ITAT Chennai Bench also in assessee own case in ITA Nos.577 to 579/Chny/2022 order dated 14.07.2023, has held that once business is set-up income arising after would be Revenue in nature and assessable to tax. Thus, the order of the AO should be upheld.
19. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to fact that the assessee has earned interest on Short Term Fixed Deposits kept with banks. It is also not in dispute that the assessee is in the process of establishing of power project and the project is under construction stage for the impugned assessment year. The assessee has imported capital goods for setting up of power project and for this purpose kept Short Term Fixed Deposits in bank to secure custom duty benefit. From the above, it is undisputedly clear that deposits with banks are inextricably linked with the project and thus, in our considered view, interest earned would go to reduce capital work-in-progress, in case, the project is under pre-implementation stage or pre-operative stage. This legal principle is supported by the decision of the Hon'ble IT (TP) A No.44/Chny/2023 :: 18 ::
Supreme Court in the case of CIT v. Bokaro Steels Ltd. (supra), where, it has been clearly held that if source for various Short Term Deposits is out of earmarked funds for any project, then, interest earned from said deposits is goes to reduce the capital work-in-progress. A similar view has been taken by the Hon'ble Supreme Court in the case of CIT v. Karnal Co- operative Sugar Mills Ltd. (supra), wherein, the Hon'ble Supreme Court after considering its earlier decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra) held that if funds are inextricably linked to project, then, any interest earned from said funds, including interest earned on Short Term Fixed Deposits, is goes to reduce the capital work-in-progress. Therefore, we are of the considered view that the AO and the Ld.CIT(A) are erred in assessment of interest income under the head 'income from other sources', even though, interest income earned by the assessee from Short Term Fixed Deposits is inextricably linked with the project.
20. Coming back to the decision of ITAT Chennai Bench in the assessee own case for AYs 2011-12, 2012-13 and 2014-15. The coordinate Bench of ITAT Chennai had considered an identical issue and held that once business is set-up, any income arising after setting up of the business would be Revenue in nature and assessable to tax. There is no dispute with regard to ratio laid down by the Tribunal on the issue of assessment of income after setting up of business, but fact remains to be considered is whether the business of the assessee has been set up or not. In the IT (TP) A No.44/Chny/2023 :: 19 ::
present case, admittedly, the AO has recorded categorical findings that the business of the assessee has not been set up and it is in pre-operative stage. Further, in our considered view when business can be said to have set up or commenced its business is important to decide the controversy. There is a distinction between setting up and commencement of business. When a business is established and it is ready to commence the business, it can be said that the business is set-up. The stage of set up of business is different in different cases. In case of manufacturing entity, the business can be said to have set up, in case, the installation of plant and machinery is complete and is ready for trial run or commercial production. In the present case, admittedly, the assessee is into setting up of power plant which is under construction for the impugned assessment year. When the plant was under construction, it cannot be said that the business of the assessee is set-up and is ready for commencement. If business is not set up and it is in pre-operative stage, then, as held by the coordinate Bench in the assessee own case and also as per the ratio laid down by the Hon'ble Supreme Court in the case of CIT v. Karnal Co- operative Sugar Mills Ltd., any income including interest income is goes to reduce the cost of capital work-in-progress. Since, the assessee business was not set up and it is under construction stage, in our considered view, the assessee has rightly reduced interest income from capital work-in- progress. Therefore, we are of the considered view that findings of the Tribunal in the assessee own case for the AY 2014-15 is not applicable for IT (TP) A No.44/Chny/2023 :: 20 ::
the present assessment year, because, it is not a case of the AO that the business of the assessee is set-up and ready for commencement.
21. In this view of the matter and considering the facts and circumstances of the case and by following the decision of the Hon'ble Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd., we are of the considered view that the assessee has rightly reduced interest income from capital work-in-progress. The Ld.CIT(A) without appreciating the relevant facts has upheld assessment of interest income under the head 'income from other sources'. Thus, we set aside the order of the ld. CIT(A) on this issue, and also direct the Assessing Officer to accept the method followed by the assessee for treatment of interest income in its books of accounts.
22. The next issue that came up for our consideration from Ground Nos.3-8 of the assessee appeal is downward adjustment towards international transactions with its AE in respect of import of capital goods and enhancement by the Ld.CIT(A) towards downward adjustment in respect of import of capital goods from AE. The Ld.Counsel for the assessee submitted that the TPO had made downward adjustment of Rs.407.25 Crs. on the cost of power project equipment imported by the assessee company from its AE, M/s.MIPPIL by adopting TNMM as most appropriate method as against 'other method' adopted by the assessee as specified u/r.10C & 10AB of the Income Tax Rules, 1962, even though, the Department has accepted very same international transactions with IT (TP) A No.44/Chny/2023 :: 21 ::
its AE towards import of capital goods for the purpose of setting up of power project for AYs 2011-12 & 2012-13. The Ld.Counsel for the assessee referring to TP study of the assessee submitted that, the assessee has conducted a TP study and after considering the given facts and circumstances of the case, has adopted 'other method' as most appropriate method for bench marking international transactions with its AE for import of capital goods, because, the import of capital goods is an entity specific without there being any comparable of similar nature. Further, the assessee company has justified its transactions with its AE under 'other method' as per rule 10AB of the Income Tax Rules, 1962, by comparing per MW cost of similar power project implemented by other companies, where per MW cost incurred by the assessee company is less than the per MW cost incurred by other costs. The Ld.Counsel for the assessee further referring to TP order passed by the TPO submitted that the TPO has rejected TP study without assigning proper reasons and also selected TNMM as most appropriate method by considering M/s.Sicagen India Ltd., which is engaged in the business of trading in construction materials as comparable, even though, the assessee has strongly raised its objection for selecting TNMM as most appropriate method and selection of M/s.Sicagen India Ltd., as comparable company. The Ld.Counsel for the assessee further submitted that M/s.Sicagen India Ltd., is engaged in various lines of business such as building materials, vehicle sales and services and governor services, chemicals, boat IT (TP) A No.44/Chny/2023 :: 22 ::
building, etc., whereas the assessee company is engaged in the business of setting up of Coal Based Thermal Plant which is unique in nature and entity specific. Therefore, selection of TNMM as comparable is totally against the functions performed by the assessee asset employed and risk assumed. The Ld.Counsel for the assessee further submitted that the TPO has obtained unaudited finance of AE, M/s.MIPPIL under Exchange Of Information Scheme and computed operating margin of 50.36% without appreciating the fact that the foreign AE cannot be considered as tested party and further, as per Rule 10TF in respect of eligible international transactions entered into with its AEs located in any country or territory referred u/s.94A of the Act or no tax or low tax country or territory, cannot be considered. The AE is situated in a low tax or no tax country, and thus, margin earned by AE cannot be considered for the purpose of comparing transactions of the assessee. The Ld.Counsel for the assessee further submitted that the assessee has rightly adopted 'other method' as per Rule 10AB of the Income Tax Rules, 1962, and also obtained Valuation Report from a Chartered Engineer, where, he has estimated per MW cost of a power project and then, compared with per MW cost incurred by other power projects. Further, the assessee company is substantially financed by two major Power Finance Companies in India and they have thoroughly appraised the cost of project before approving the project for finance. From the above, it is undisputedly clear that the cost incurred by the assessee for setting up of power project is IT (TP) A No.44/Chny/2023 :: 23 ::
comparable with other power projects in India and thus, TPO is erred in adopting TNMM as most appropriate method.
23. The Ld.Counsel for the assessee further referring to the order of the Ld.CIT(A) submitted that although, the Ld.CIT(A) has rejected TNMM method adopted by the TPO as incorrect, but proceeded to classify the AE as low risk trader to adopt Safe Harbor Rules and margin provided therein without appreciating the fact that the Safe Harbor Rules notified by the CBDT is not applicable for the impugned assessment year and further, said rules is for the assessee, but not for the TPO. The Ld.Counsel for the assessee further submitted that the Ld.CIT(A) has categorized the AE as low risk trader on the basis of survey conducted by the Department in the case of the assessee for the subsequent period which is not applicable for the impugned assessment year and further, said report has been used against the assessee without providing copy of Survey Report to the assessee in contravention of principles of natural justice. The Ld.Counsel for the assessee further submitted that although, the Ld.CIT(A) has relied upon the findings of the Survey Report to take an adverse inference against the assessee to classify the AE as low risk trader based on the involvement of the assessee company and their staff in the process of import of capital goods, but, fact remains that said findings alone cannot be a reason to make a downward adjustment of import of capital goods that too, to the extent of more that 50% of cost of equipment imported by the assessee. Therefore, he submitted that the TPO and the Ld.CIT(A) IT (TP) A No.44/Chny/2023 :: 24 ::
are completely erred in making downward adjustment to cost of capital goods imported by the assessee company from its AE.
24. The Ld. DR Shri. R Mohan Reddy, CIT, supporting the order of the TPO and the Ld.CIT(A) submitted that there was a survey u/s.133A of the Act, in the case of the assessee and during the course of survey, various information gathered by the Department suggest that most of the work has been executed by the assessee company for import of capital goods, including identification of supplier, location of plant & machinery, etc. The AE is only a pass through entity located in low tax or no tax country with high margin. Further, the global tender for supply of plant & machinery was given almost one year later than the agreement between the assessee company and the AE for supply of capital equipments. From the above, it is undisputedly clear that the AE is a pass through entity without there being any functions performed, asset employed and risk assumed. Therefore, the Ld.CIT(A) has rightly classified the AE as low risk trader and thus, adopted margin provided in Safe Harbor Rules for low risk traders to compare international transactions of the assessee company. The Ld.DR further submitted that the assessee has not provided comparables to bench mark import of capital goods. Further, the method followed by the assessee to take project cost as basis for bench mark import of capital goods is not correct. Further, Central Electricity Regulation Commission's order cannot be basis for bench marking transactions with its AE. The Ld.CIT(A) after considering relevant facts IT (TP) A No.44/Chny/2023 :: 25 ::
has rightly rejected TP study conducted by the assessee and has adopted 'other method' as per Rule 10AB of the Income Tax Rules, 1962. The Ld.CIT(A) has also rightly classified the AE as low risk trader and considered margin as per Safe Harbor Rules to bench mark import of capital goods, and thus, their orders should be upheld.
25. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts with regard to impugned dispute are that, the Appellant, a private Limited Company, was engaged during this assessment year 2013-14, in the setting up a 1440 MW coal based thermal mega power plant comprising 4 Units of 360 MW each at Chhattisgarh State ("Project"). Subsequently the Project has been commissioned and is now in operation. The Project is funded by a consortium of lenders with more than 75% of the loans coming from Power Finance Corporation Limited and Rural Electrification Corporation Limited and the balance loan from nationalised banks and financial institutions. The appellant company is a joint venture between M/s RK Powergen Pvt. Ltd. (RKPPL) with 74% share capital and M/s Mudajaya Corporation Berhad, Malasiya. ("MJC" or "Mudajaya"), a listed Malaysian company holding 26% of the share capital of the Appellant during this year. The Appellant sourced the majority of the plant and equipment for the Project from M/s MIPP International Limited ("MIPP" or "AE"), a subsidiary of Mudajaya Corporation Berhad. The imports were made pursuant to two Equipment Purchase Agreements dated 18.07.2007 IT (TP) A No.44/Chny/2023 :: 26 ::
and 20.02.2009. The appellant has conducted TP study and has adopted "Other Method" as per Rule 10AB of The Income tax Rules, 1962 as most appropriate method. The appellant claimed that transactions with its AE are at Arm's length price. For this, purpose, the appellant has obtained independent valuation report from Chartered Engineer, where he has worked out per MW cost of coal based power project and then compared with similar power projects in India and as per valuation report, the per MW cost of the appellant Company is lesser than per MW cost of similar other power projects in India.
26. The TPO made a downward adjustment of Rs. 407.25 crores on the cost of power project equipment imported from M/s MIPP ("AE") as against the actual price paid of Rs. 1,471.30 crores. The TPO has rejected TP report submitted by the assessee and has conducted fresh TP study. The TPO has adopted TNMM as most appropriate method for benchmarking international transactions of the assessee with its AE. The TPO had also obtained financial statements of the AE, M/s MIPP International Limited under exchange of information and computed PLI (OP/OC) at 50.36%. The TPO has selected M/s Sicagen India Limited, an Indian Company engaged in trading building materials as comparable to appellant Company. The TPO computed PLI (OP/OC) of M/s Sicagen India Limited at 8.74% for trading segment. Since, the margin of AE is more when compared to M/s Sicagen India Limited, the TPO has made downward adjustment of Rs. 407.26 crores to the value of imports from IT (TP) A No.44/Chny/2023 :: 27 ::
AE. At this stage, it is relevant to note that, the TPO passed orders for Assessment Years 2011-12 and 2012-13, accepting the contract price to be the arm's length price ("ALP") on the basis that the per megawatt cost of the equipment was on par with other companies and norms which constitutes "Other Method" as specified in Rule 10C and 10AB of The Income Tax Rules, 1962.
27. The learned CIT, Appeals in page 83 of the impugned order held that there was no possibility of adopting TNMM method for the reasons given in page 72 of the impugned order and that he was adopting 'Other Method" under Rule 10AB. From the observations of the ld. CIT(A), it is undoubtedly proved that 'Other method' selected by the appellant has been approved by the CIT(A), but with certain modifications. The appellant has not preferred any appeal against the order of the learned CIT(A) nor filed cross objections. As such the appellant has accepted adoption of "Other Method" is appropriate and in accordance with TP regulations. Further, the learned CIT Appeals -relied on a survey report prepared after the TPO order and the assessment order and held that the functions performed, and the risks undertaken by the AE were insignificant and that only invoicing was done by the AE. The CIT(A) characterized the AE as a low-level service provider and the arm's length margin was 5% based on the safe harbor provisions. The CIT(A) also applied this margin only on the overhead expenses of the AE (not on the cost of goods sold). By this process, the downward adjustment was IT (TP) A No.44/Chny/2023 :: 28 ::
enhanced to Rs 744.03 crores. It may be noted that the percentage of downward adjustment thus amounts to 50.5% when even according to the TPO the profit margin of the AE was around 30%.
28. In light of above factual background, we have considered the reason given by the ld. TPO and ld. CIT(A) to make downward adjustment to the value of import of cost of capital equipments from AE and we, find that the TPO and CIT(A) breached the rule of consistency. Admittedly, the appellant entered into equipment supply contract with AE, M/s MIPP International Limited dated 18-07-2007 and 20-02-2009. The contract for supply of capital equipment is spread over the period of more than one year. The appellant had also imported similar capital goods from AE for Asst. years 2011-12 and 2012-13. The TPO has accepted 'Other method' adopted by the assessee in their TP report for benchmarking import of capital goods from AE in light of valuation report obtained from Chartered Engineer, where he has compared per MV cost of power project of the appellant with similar other power projects in India. The appellant has furnished copies of TPO orders for Asst. year 2011-12 dated 21-01-2015 and Asst. year 2012-13 dated 08-09-2015 which are available on record. The TPO has discussed import of capital goods for both assessment years and has accepted value of imports without there being any adjustment to the value of imports. Therefore, in our considered view, when there are a series of transactions extending over several assessment years it is not open or the TPO to depart from the method adopted in the earlier years.
IT (TP) A No.44/Chny/2023 :: 29 ::
Further, the supplies during the year were based on a Contract that was spread over several assessment years. When the contract price had been held to be at ALP in the earlier two assessment years 2011-12 and 2012- 13 and during the subsequent assessment year further supplies is made under the same contract, it was not open to the TPO to adopt a different method. Although, res-judicata is not strictly applicable to income tax proceedings, but rule of consistency should be followed as held by the Hon'ble Supreme Court in case of Radhasoami Satsang vs. CIT (1992) 193 ITR 321(SC). The Hon'ble Supreme Court while deciding the appeal held that strictly speaking res-judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year, but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have followed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
From the ratio of the Hon'ble Supreme Court, it is undisputedly proved that, unless there is change in facts in subsequent year, settled position or accepted position cannot be changed. In the present case, the revenue having accepted 'other method' followed by the assessee for benchmarking import of capital equipments from AE and further, accepted price paid by the assessee to be at ALP for Asst. years 2011-12 and 2012- 13, cannot dispute imports of capital equipment from AE and price paid IT (TP) A No.44/Chny/2023 :: 30 ::
by the assessee to AE under very same equipment supply agreement between the parties for the impugned assessment year. Therefore, we are of the considered view that, on this ground itself downward adjustment made by the ld. TPO and enhancement made by the ld. CIT(A) cannot be sustained.
29. Having said so, let us come back whether adopting 'Other Method' requires looking at the cost to the Appellant or costs or profits of AE. In this regard, it is necessary to read Rule 10AB of The Income Tax Rules, 1962 which reads as follows:-
10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. The wording of 'Other method' is akin to that of the CUP method. In other words, the methods applying margins of profits are ruled out and the cost that would have been paid to a Non AE become significant. The TPO does not seriously dispute the Appellant's contention that the cost of equipment is on par with other power plants. The TPO case is that the AE has made excessive profits. This is not the correct approach to determine the ALP, since Rule 10AB would require the determination of the cost that the Appellant would have incurred., if the purchase had been made from an unrelated enterprise and whether in relation to that the price paid to the AE was excessive, which as can be seen from the cost incurred by IT (TP) A No.44/Chny/2023 :: 31 ::
other projects is not the case. It is a settled principle that what an independent party would have paid under the same or identical circumstances would be the ALP. What an assessee would have earned in case he would have entered into or gone ahead with a different transaction say with a party in India is not the criterion This position is upheld by Co-ordinate Bench of ITAT Delhi in case CIT vs. Cotton Naturals India Private Limited (2015) 231 Taxmann 401 (Delhi)). Therefore, in our considered view the method followed by the ld. TPO and ld. CIT(A) is completely opposed to scheme of TP regulations and thus, we reject method followed lower authorities.
30. Further, the choice of the foreign AE as "tested party" was erroneous, since the least complex party ought to be chosen as the tested party. It is a fundamental tenet of Transfer Pricing that the party performing less complex functions should be treated as the tested party. In this case, the Appellant was a project company and was awaiting the supply of equipment. The AE, on the other hand, was undertaking the complex task of ordering equipment from dozens of manufacturers in China, doing the inspection, monitoring progress, testing equipment before shipping etc. In this situation, treating the foreign AE as the tested party was erroneous. Further, reliable data is an important factor in considering tested party. Therefore, reliable data should be available in the case of the tested party. Further, adoption of the Foreign AE as a tested party is permissible only when reliable data is available. The IT (TP) A No.44/Chny/2023 :: 32 ::
reliance on a single page of unaudited statements of the AE was erroneous particularly when a copy was not even furnished to the Appellant. The financial statements of the AE are said to have been obtained under the Exchange of Information and have been reproduced in the Show Cause Notice dated 05.01.2017 (Page 46 of the paperbook). The appellant claims that in the course of the hearing, these were shown to the AR and it was observed that the financial statements were one page with no notes or schedules and were unaudited. Therefore, in our considered view the use of such unauthenticated financial statements is contrary to the principles of evidence and not furnishing copies to the Appellant contravenes principles of natural justice. The data contained in these statements cannot be said to be reliable on the face of it. Moreover, the profits disclosed by a company which is in a tax haven cannot be relied upon, particularly when it is violently opposed to external comparables as explained later. It is also to be appreciated that the AE is a subsidiary of Mudajaya Corporation Malaysia, and it is possible that most of the expenses were booked by the holding company. The financial statements extracted in the SCN do not show any line item for foreign exchange fluctuation, inspection charges, foreign travel, etc. The undesirability of using the values in such cases is codified in Rule 10TF and as per said rules Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A or in a no tax or low tax country or territory. Therefore, in our considered view, the IT (TP) A No.44/Chny/2023 :: 33 ::
ld. TPO and ld. CIT(A) are completely erred in considering foreign AE as tested party and further, relied upon un -udited financial statements of AE obtained under information exchange, that too without providing copies to the appellant.
31. The ld. Counsel for the assessee argued that the ld. CIT(A) completely rested his findings on the basis of survey report which was carried out subsequent to the assessment order passed by the AO and thus, any adverse findings on the basis of such report cannot be valid and to be rejected. In our considered view, the reliance on a copy of a survey report was erroneous particularly when a copy was not even furnished to the Appellant. The learned CIT Appeals relies on a Survey Report (Page number 88 of CIT(A) order) a copy of which was never furnished to the Appellant which is contrary to the principles of natural justice. It is settled law that all material that are used by the authorities are to be furnished to the assessee. It is also settled law that even statements recorded during a survey are not admissible as evidence. The survey report is not a statutory report nor is it capable of being challenged by the assessee. The only proper manner in which the report can be used, if at all, is by confronting the assessee with all the materials used to come to the conclusion in the report and giving an opportunity for rebuttal. Therefore the findings of the ld. CIT(A) to reclassify the AE as low risk trader and adopting 5% margin on overhead cost on the basis of safe harbour rules is incorrect and overruled.
IT (TP) A No.44/Chny/2023 :: 34 ::
32. Admittedly, the appellant has followed "Other Method" and rightly accepted by the ld. CIT(A), subject to certain modifications. The appellant has bench marked cost per megawatt of power project taking note of the Electricity Regulatory Commissions report or order, which are statutory and specialized bodies manned by experts. The cost per megawatt of power projects is adequately benchmarked. Moreover, the hard cost of plant and equipment for power projects has been benchmarked by the statutory body called the Central Electricity Regulatory Commission (hereinafter"CERC") which is constituted under the Electricity Act 2003. Power sector is a regulated Industry in India. CERC, a statutory body functioning as a quasi-judicial status under section 76 of the Electricity Act, 2003 is the key regulator of the power sector in India. As per section 3 of the Electricity Act, the Central Government is empowered to prepare the National Electricity Policy and Tariff Policy. The Central Government in exercise of its power under section 3, notified the Tariff Policy on 6 January 2006. The Tariff Policy provides that "while allowing the total capital cost of the project, the Appropriate Commission would ensure that these are reasonable and to achieve this objective, requisite benchmarks on capital costs should be evolved by the Regulatory Commission". Further, the first proviso to clause (2) of Regulation 7 of the 2009 Tariff Policy provides that "in case of the thermal generating station and the transmission system, prudence check of capital cost may be carried out based on the benchmarks norms to be specified by the Commission from IT (TP) A No.44/Chny/2023 :: 35 ::
time to time". From the CERC regulations, it is very clear that there is a check and balance for capital cost of power project and further, the CERC would undertake such exercise. The CERC vide order dated 4 June 2012 has fixed the benchmark hard cost for thermal power stations of capacities 500 megawatts and above. The Regulatory Commission has fixed the benchmark cost for a 500 MW unit as between Rs. 4.34 crores and 5.08 crores per MW (page 116 of paper book). This benchmark has to be scaled up for inflation index since 2011 and for the Company's unit capacity which is 360 MW. However even without such adjustments the hard cost incurred by the Company is in line with the benchmark fixed by the CERC. In the present case, the Project cost of the Appellant has been approved by the Chhattisgarh State Electricity Regulatory Commission ('CSERC') vide its order dated 26 December 2007. This order assumes importance since the tariff paid by the Chhattisgarh State Electricity Board is determined by the Project cost and the justification of the Project cost was necessary in public interest. The CSERC order in Para 8, after comparing the Project cost of all the other projects concluded that the Project cost of the Company is reasonable. The TPO takes the view that what has to be determined is not the total project cost which includes other components but only the international transactions with the AE. As pointed out earlier, the majority of the cost of the project is the equipment cost. Therefore if the project meets the project cost benchmarks, it follows that the equipment cost also meets the IT (TP) A No.44/Chny/2023 :: 36 ::
benchmark. The TPO also points out that the actual project cost turned out to be higher without realising that this supports the Appellant's case since when all the other costs ballooned the procurement price from M/s MIPP International Limited, AE did not escalate. In our considered view, if the TPO did not want to rely on the project cost but wanted to look at the hard cost of equipment, he ought to have done so rather than use this as a pretext to reject the methodology. If the TPO had undertaken such an exercise it would have been revealed that the equipment cost per MW of the Appellant was lower than that of other companies. It can be seen from the Chartered Accountant's Certificate dated 15.02.2019 that the actual cost of all equipment of the Appellant was Rs. 3.44 crores per MW, whereas those of two other power plants (Mettur Thermal Power Corporation of the Tamil Nadu Government and Paguthan Power Plant of CLP India Private Limited) were much higher based on the order of the Tamil Nadu Electricity Regulatory Commission. Therefore, in our considered view, the most reliable source of information is the order of the Central Electricity Regulatory Commission which is an expert quasi- judicial body and passed the order dated 04.06.2012 determining the benchmark hard cost of thermal power plants after extensive consultation with industry bodies, experts and other stakeholders. This finding must be read along with the hard cost per MW of the Appellant which can be readily seen from the CA certificate dated 15.02.2019. The most important criterion for using any method to fix the ALP is availability of IT (TP) A No.44/Chny/2023 :: 37 ::
reliable comparable data. The most reliable comparable data is that fixed by a statutory body. By an order in the public domain, CERC has fixed the price of hard cost at Rs. 4.34 crores per megawatt (page 116 of the paper book). The cost after completion of the power project was Rs. 3.44 crores per megawatt in the case of the Appellant (Page 345 of the paper book).
Therefore, we are of the considered view that the method followed by the appellant to bench mark hard cost of equipment imported from AE is in accordance with Rule 10AB and as per said rule, for the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non- associated enterprises, under similar circumstances, considering all the relevant facts. Therefore, we are of the considered view that the TPO and CIT(A) are completely erred in rejecting method selected by the assessee. Further, there is no basis for the TPO and CIT(A) to shift focus to comparison of margin even though 'Other Method' clearly advocates comparison of cost alone.
33. Further, the application of percentages prescribed under the safe harbor provisions by the learned CIT (Appeals) to determine the ALP is unjustified since the Associated Enterprises was rendering complex services and the Appellant had not opted for the safe harbor provisions.
IT (TP) A No.44/Chny/2023 :: 38 ::
The learned CIT Appeals went beyond the findings of the TPO and held that the AE performed low value services without appreciating that the AE had supplied equipment over a period of several years which have been commissioned and running successfully. It can be seen from the technical due diligence report of NTPC (Pages 125 to 232 of the paperbook) that the equipment supplied was of good quality as certified by NTPC. Such a supply of equipment over a period of several years by the AE manufactured in multiple factories in China, subject to multiple inspections and transported by dozens of ships for the creation of an important infrastructure project has been trivialized as a low value service addition. The conclusion from the survey report that the AE was a low end service provider is contrary to the facts on the grounds. When several power plants are stranded and incomplete, the Appellant's power plant is functioning and generating power based on the equipment supplied by the AE. The learned CIT(A) trivialises the functions of the AE even beyond what was done by the TPO. The TPO compared the AE to a retailer who sells mass produced goods. The CIT (A) goes further and states that the AE was a low level service provider who essentially did the billing and nothing more. The only fact that gives rise to this wild conclusion is that the technical head of the Appellant visited China multiple times. It is inconceivable that the Appellant would make advances for purchase of equipment of several crores without making periodic visits of inspection. This is analogous to a house owner visiting the construction site. If he IT (TP) A No.44/Chny/2023 :: 39 ::
were to visit every day would the architect, civil contractor and the interior decorator and the structural engineers be termed low level service providers. Therefore, the reasons given by the ld. CIT(A) to classify M/s MIPP, an AE as low value service provider and to be classified as low risk trader and margin of 5% on overhead cost is alone to considered for bench marking imports of capital goods from AE is totally devoid of merits and thus, rejected.
34. The consequence of these downward adjustments would be that the total equipment cost would be reduced to a level at which no power plant has been built in India during this period. As submitted earlier the benchmark power plant cost has been statutorily fixed by the Central Electricity Regulatory Commission and if the result of these downward adjustments would be to reduce the cost of power plant below these norms by 50%, which is absurd and impossible. It must be noted that the power plant is functioning and generating power at full load and that its technical excellence has been vouchsafed by NTPC. Further, the contract had been duly appraised by the project lenders who were well versed with the power sector. The Appellant's Project was funded by a consortium of lenders for the Project led by Power Finance Corporation ('PFC') conducted detailed feasibility analyses to determine the technical and financial feasibility of the Project. After having found the Project to be feasible, the consortium decided to fund the Project. The Information Memorandum prepared by PFC for Phase I in June 2007 and Phase II in IT (TP) A No.44/Chny/2023 :: 40 ::
September 2008 clearly records this fact. After analysis of the project cost of the Company on similar projects, PFC recorded a finding that the cost of project was comparative with other power projects which are coal based and of similar size. Further, PFC concluded that the Company had managed to maintain the cost of the project comparable with older projects through strong contractual management. It is significant to note that despite project delays, M/s MIPPIL supplied the plant and equipment at the contracted cost without claiming any additional amounts as escalation. The 2nd largest lender to the company is Rural Electrification Corporation Ltd. ('REC') that is also a specialist in financing power projects. The lenders have also appointed their own representative in the form of a Lenders Engineer Tractable Engineering to monitor both equipment quality as well as construction. It may be noted that PFC and REC are the biggest term-lending institutions for the power industry and as such have expert knowledge of the cost of power equipment. Such Government bodies will not approve the purchase of the equipment from suppliers who do not have experience or reputation. It is pertinent to note that the Appellant's relationship with MJC Group /MIPP had been fully disclosed to the lenders, who evaluated this closely and inter alia approved it, having found it to be at arm's length. Therefore, in our considered view adverse inference drawn by the ld. CIT(A) on the basis of survey findings that all work has been executed by the appellant and AE is only pass through entity without any risk is incorrect and purely on IT (TP) A No.44/Chny/2023 :: 41 ::
assumptions and thus, we reject ld. CIT(A) approach of looking at the issue and consequent downward adjustment to the cost of equipment imported from AE.
35. For the discussions given hereinabove and also after appraisal of relevant materials placed before us, we of the considered view that the Ld.TPO is totally erred in rejecting 'other method' as prescribed u/r.10AB of the IT Rules, 1962, by assigning improper and incorrect reasons. The Ld.TPO also erred in adopting TNMM as most appropriate method, which is further fortified by the observation of the Ld.CIT(A), where the Ld.CIT(A) rightly rejected TNMM as most appropriate method for the detailed reasons given in their order and said findings of the Ld.CIT(A) is final and not challenged by the Revenue. Further, once it is accepted position in the given facts and circumstances of the case that only 'other method' is suitable to bench mark import of capital goods from the AE, then the method followed by the assessee to compare per MW cost of power project with similar other power projects in India along with the valuation report from Chartered Engineer< order of Central Electricity Regulation Commission and project appraisal report of project financiers, M/s Power Finance Corporation Limited and M/s Rural Electrification Corporation Limited and the balance loan from nationalised banks and financial institutions to be accepted as it is. If you go by logic adopted by the Ld.TPO and Ld.CIT(A) that the assessee has almost paid more than IT (TP) A No.44/Chny/2023 :: 42 ::
50% excess consideration for import of capital equipment from AE, it appears that the project approved by the CERC and financed by various state Financial Institutions under power sector and their appraisal of project is flawed appears to be totally incorrect, absurd and illogical. Further, although the CIT(A) has approved 'other method' for bench marking transactions, but completely erred in deviating from the method adopted by the assessee and has choosing Safe Harbour Rules and percentage of margin provided therein for low risk traders. In our considered view, the reasons given by the Ld.CIT(A) to treat M/s.MIPPIL, an AE, as a low risk trader, is purely on hypothetical basis and further on the basis of survey report which is not at all applicable for the impugned assessment year and further cannot be relied upon. As we have already stated in earlier part of this order, the TPO and Ld.CIT(A) are not technical experts to analyze and appraise the power projects. Further, the project executed by the assessee is a unique and industry specific, which is very clear from equipment supply contract between the assessee and the AE where going by the terms of contract, it is undisputedly proved that the AE sourced various plant & machinery required for setting up of power project from China from different manufacturers. From the above, it is very clear that capital goods imported by the assessee are not general in nature and there is no comparables available in the public domain. Therefore, we are of the considered view that the method followed by the assessee to bench mark import of capital goods from AE IT (TP) A No.44/Chny/2023 :: 43 ::
under any 'other method' is perfectly in accordance with prescribed method for bench marking this kind of transactions between an assessee and its AE. Thus, in our considered view, the TPO is erred in making downward adjustment towards cost of equipment imported from AE, including enhancement of downward adjustment by the Ld.CIT(A). Hence, we approve the TP study conducted by the assessee including selection of 'other method'as per Rule 10 AB and thus, we are of the considered view that the transactions of the assessee with its AE for import of capital equipment in terms of equipment supply agreement are at arm's length price and thus, no adjustment is required to the price paid for import of equipment to the AE. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the AO/TPO to delete downward adjustment made towards cost of capital equipment imported from AE and consequent reduction of downward adjustment to capital work in progress.
36. The next issue that came up for our consideration is enhancement of assessment in respect of disallowance of interest u/s.36(1)(iii) of the Act, amounting to Rs.108,03,37,425/-. The assessee has paid Rs.1471.30 Crs. towards the cost of equipment imported from AE, M/s.MIPPIL. The TPO & Ld.CIT(A) has made downward adjustment of Rs.744.03 Crs. towards price paid for import of capital goods from AE. Thus, essentially after downward adjustment to the cost of equipment, the net price of IT (TP) A No.44/Chny/2023 :: 44 ::
equipment imported by the assessee got reduced to Rs.727.27 Crs. The Ld.CIT(A) was of the opinion that the amount paid by the assessee to the AE for import of capital goods to the extent of downward adjustment of Rs.744.043 Crs. is diversion of interest bearing funds to AE for non- business purpose. Therefore, the Ld.CIT(A) disallowed proportionate interest on borrowings as per P&L A/c of the assessee and capitalized to work in progress u/s.36(1)(iii) of the Act, by adopting average rate of interest @14.52% on Rs.744.03 Crs. and worked out disallowance of Rs.108,03,37,425/-.
37. We have heard both the parties and considered relevant materials available on record. First of all, enhancement of interest disallowance u/s.36(1)(iii) of the Act, is hypothetical and purely on assumptions and presumptions. The assessee has paid sum of Rs.1471.30 crores towards cost of equipment imported from AE. The TPO & the Ld.CIT(A) made downward adjustment of Rs.744.03 Crs. The Ld.CIT(A) assumed that said downward adjustment is diversion of interest bearing funds to AE for non-business purpose and disallowed interest expenditure u/s.36(1)(iii) of the Act. We find that downward adjustment made by the TPO and upheld by the Ld.CIT(A) including enhancement has been deleted by us. Since, the downward adjustment towards price paid for cost of equipment imported from AE, has been deleted and further, the amount paid by the assessee towards cost of equipment imported from AE is held to be at IT (TP) A No.44/Chny/2023 :: 45 ::
arm's length price, in our considered view, additions made by the Ld.CIT(A) by way of enhancement towards interest disallowances u/s.36(1)(iii) of the Act, cannot be sustained. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the Assessing Officer to delete additions towards disallowance of interest u/s.36(1)(iii) of the Act for Rs.108,03,37,425/- from reduction of capital work in progress for the year ending 31.03.2014 relevant to AY 2014-15.
38. In the result, appeal filed by the assessee is partly allowed.
Order pronounced on the 08th day of March, 2024, in Chennai.
Sd/- Sd/-
(मनोमोहन दास) (मंजूनाथा. जी)
(MANOMOHAN DAS) (MANJUNATHA.G)
ाियक सद /JUDICIAL MEMBER लेखा सद /ACCOUNTANT MEMBER
चे ई/Chennai,
दनांक/Dated: 08th March, 2024.
TLN
आदेश क ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant
2. थ /Respondent
3. आयकरआयु /CIT
4.िवभागीय ितिनिध/DR
5. गाड! फाईल/GF