THE RAMCO CEMENTS LIMITED,RAJAPALAYAM V. .ACIT, MADURAI

ITTPA 14/CHNY/2024

AI Insights

The case involves The Ramco Cements Limited appealing against the order of the Commissioner of Income Tax (Transfer Pricing), which sought to revise the TPO's order concerning the valuation of specified domestic transactions (SDT) for the assessment year 2018-19. The TPO had earlier determined the arms-length price for the captive consumption of electricity by the assessee's cement units, which was accepted by the AO based on the DRP's directions for the earlier year. However, the CIT(TP) later found the TPO's order to be erroneous and prejudicial to the interest of the revenue, leading to the current appeal. The Tribunal's decision hinged on the interpretation of section 263 of the Income Tax Act, particularly in light of the recent amendments and the judicial precedents set by the Supreme Court.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 107383 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 13 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 09-12-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2018-2019
• Appeal Filed On: 26-04-2024
• Other Referred Cases: Malabar Industries Ltd. vs. CIT, Philips India Limited, Jindal Steel and Power Private Limited, Max India, Badarinath v. Tamil Nadu
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: MURALIDHARAN; J. PRABHAKAR
• Keywords: Set aside; Opportunity of being heard; Transfer pricing; International transaction; Principle of natural justice
• Section: 143(3); 263; 64; 13; 92CA

Judgement Text

"आयकर अपीलीय अिधकरण, ’डी’ \rा यपीठ, चे\u0012ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI \u0015ी एबी टी. वक\u001a, \rा ियक सद\u001d एवं \u0015ी अिमता भ शु$ा , लेखा सद\u001d क े सम& BEFORE SHRI ABY T. VARKEY, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.14/Chny/2024 िनधा (रण वष(/Assessment Year: 2018-19 The Ramco Cements Limited, Ramamandiram, Rajapalayam 626 117. [PAN: AABCM8375L] Vs. The Assistant Commissioner of Income Tax, Corporate Circle-2, Madurai. (अपीला थ\u001a/Appellant) (+,थ\u001a/Respondent) अपीला थ\u001a की ओर से/ Appellant by : Shri Muralidharan, CA & Shri J. Prabhakar, CA +,थ\u001a की ओर से /Respondent by : Shri A. Sasikumar, CIT सुनवा ईकीता रीख/Date of Hearing : 08.10.2024 घोषणा कीता रीख /Date of Pronouncement : 09.12.2024 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Transfer Pricing), NFAC Delhi (hereinafter in short “CIT(TP)\") dated 18.03.2024 for assessment year 2018-19 (hereinafter in short “AY\"). 2. The assessee has raised inter-alia legal issues which challenges the impugned action of the Ld. CIT(TP) exercised under section 263 of the Income Tax Act, 1961 [herein after “Act”] directing revision of Transfer Pricing Officer’s [TPO] order under section 92CA(3) of the Act dated IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 2 :: 01.07.2021 for AY 2018-19 as not valid, since the final assessment order for that year dated 29.09.2022 has been quashed by this Tribunal on the ground of being time-barred and therefore, the impugned action of the Ld. CIT(TP) seeking to revise a non-existent order is legally unsustainable in law. Thus, according to the Ld. AR of the assessee the impugned action of the Ld. CIT(TP) exercising his jurisdiction under section 263 of the Act against the TPO’s order dated 01.07.2021 passed under section 92CA(3) of the Act is wholly without jurisdiction and therefore bad in law. 3. Brief facts relating to the legal issue are that the assessee company filed its original return of income (RoI) for AY 2018-19 on 26.11.2018 declaring a total income of ₹.577,77,68,240/-. The assessee revised its RoI on 30.03.2019 declaring the same total income. Later the RoI was selected for scrutiny. And the AO referred the valuation of the assessee's Specified Domestic Transactions (SDT), being the captive consumption of electricity by the cement units of the assessee, to the TPO u/s 92CA for determining the Arms-Length Price (ALP). The TPO, vide order u/s 92CA(3) dated 01.07.2021 determined the ALP of the SDT in conformity with the Direction of the DRP of the earlier assessment year, namely AY 2016-17 in the assessee's own case. Accordingly, the TPO accepted the assessee's valuation of the SDT (being captive consumption of electricity) at the IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 3 :: adjusted retail rate, being rate at which TANGEDCO supplied power to the consuming cement unit (hereinafter referred to as \"retail rate\") less transmission charges, distribution charges, electricity tax, peak hour charges and demand charges, as stated in para 6.6 of the TPO's order (such rate hereinafter referred to as the adjusted retail rate). As the assessee had not made any adjustment for transmission losses as directed by the DRP for the earlier year namely AY 2016-17, the TPO made downward adjustment in the transfer price adopted by the assessee to the tune of Rs. 5,82,23,432 and forwarded his order to AO for inclusion in the assessment order. 4. In the Draft Assessment order passed u/s 144C(1) dated 27.09.2021, the AO, proposed various additions, including the valuation determined by the TPO. Upon filing of objections by the assessee, the Dispute Resolution Panel (DRP) issued Directions 144C(5) on 29.06.2022 and, based on these directions, the assessment was completed by AO on 29.09.2022 u/s 143(3) read with 144C(13) and section 144B of the Act. 5. Against the aforesaid assessment, the assessee preferred an appeal before this Tribunal and one of the legal ground raised by the assessee was that the final assessment order passed on 29.09.2022 was time- barred. And after hearing the case, the Tribunal, vide order dated IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 4 :: 07.07.2023, upheld the assessee's contention and concluded that the final assessment order was time-barred, and on this ground, the assessment was quashed. 6. Thereafter, the Ld. CIT(TP), Chennai issued show cause notice (SCN) conveying his desire to exercise the revisional jurisdiction under section 263 of the Act against the TPO’s order passed under section 92CA(3) of the Act dated 01.07.2021 i.e., in respect of valuation of captive consumption of electricity by Cement Units of the assessee. Pursuant to SCN, the assessee objected to the proposed revisional action of TPO’s order by raising various contention, which were repelled the Ld. CIT(TP) by passing the impugned order dated 18.03.2024 and held that the order of the TPO was erroneous as well as prejudicial to the interest of the Revenue and therefore, he was pleased to set aside the TPO’s order and restored the matter back to TPO for passing fresh order by ascertaining competitive market price of electricity available in the market under long term contracts and adopting the same for computing the revenue of the eligible unit from sale of power to its associated enterprises being the power consuming unit. Thus, he directed the TPO to compute the Arms Length Price (ALP) accordingly. This impugned action of Ld.CIT(TP) is under challenge before IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 5 :: us, wherein the Ld.AR has raised legal issue of lack of jurisdiction of Ld.CIT(TP) to invoke/pass the impugned order. 7. The legal issue raised by the assessee are twofold. One is that since the final assessment order passed by the Assessing Officer dated 29.09.2022 under section 143(3) r.w.s. 144C(13) w.r.s. 144B of the Act had been quashed by this Tribunal being time barred, the action of the Ld. CIT(TP) to revise the TPO’s order is bad in law based on the principle that when the foundation goes, super structure falls; and the other ground is that even if the Ld. CIT(TP) has been empowered to revise the TPO’s order passed under section 92CA of the Act, still the Ld. CIT(TP) has to satisfy the essential pre-condition for invoking section 263 of the Act, i.e., the Ld. CIT(TP) should find the TPO’s order to be erroneous as well as prejudicial to the interest of the Revenue. 8. Before adjudicating the legal issue raised against the impugned order, we have to first examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence as laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s.263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 6 :: of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. \"prejudicial to the interest of the revenue'' has to be read in conjunction with an \"erroneous\" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 7 :: the said judgment held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. 9. In this regard, first of all, we note that the Parliament has amended section 263 of the Act by Finance Act, 2022 and by doing so, the PCIT/CIT in addition to their power to interfere with the assessment orders passed under their jurisdiction, has been empowered to interfere with the order passed by the TPO, if they consider any order passed by the TPO as erroneous as well as prejudicial to the interests of the revenue; and after hearing the assessee, pass an order enhancing or modifying the order passed under section 92CA of the Act or directing TPO to pass fresh order. It would be gainful to reproduce the amended section 263 of the Act which reads as under: “263 (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 8 :: Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including- (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under section 92CA or (iii) an order cancelling the order under section 92CA and directing a fresh order under the said section. 10. Thus, we find that the Finance Act, 2022 has conferred power to the CIT(TP) to revise TPO's order, if it was found to be erroneous and prejudicial to the interest of the Revenue. We note that CIT(TP) in this case has issued notice under section 263 of the Act on 02.03.2023, i.e., post 2022 amendment which action of the CIT(TP) per-se cannot be said to be without jurisdiction. Having said so, we have to examine whether the essential condition precedent for invoking section 263 of the Act, i.e., whether or not the TPO's order is erroneous as well as prejudicial to the interest of the Revenue. In order to examine the same, first we have to examine whether the TPO has examined the issue that has been found fault by the Ld. CIT(TP) i.e., the Specified Domestic Transaction in question. IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 9 :: 11. In this regard, it is noted that the TPO had issued notice dated 23.10.2020 (found placed at page No.1 of the supplementary paper-book) calling for information and documents in respect to 18 matters such as the complete set of audited accounts, the Transfer Pricing Study report, the status of the past transfer pricing assessments and litigation including orders of the appellate authorities, copies of relevant agreements, details of all specified domestic transactions with segment wise break of the same, details of shareholding structure and changes if any, details of transactions with associated enterprises relating to transfer of tangible and intangible goods or provision of services, details of transactions with third parties in India or outside India along with their comparability with the domestic transactions, details of Transfer pricing adjustments, if any, offered in the Return, fact sheet showing business description, total turnover, Gross, operating and net profit, method applied value of domestic transactions, PLI etc of three years including the relevant year, global TP policy and copy of tax return of AE filed in India. It is noted that the assessee pursuant to the notice, furnished reply dated 05.11.2020 (found placed at page No.3 of Ibid paper-book) and on 06.05.2021 wherein it furnished the details called for, including the Transfer Pricing Study Report (TPSR). The TPSR contained the details and description of the SDT, the description of the comparable transaction, namely the purchase of electricity by the cement IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 10 :: unit from TANGEDCO, the basis for arriving at the ALP, namely the adjusted retail price, the reasons for taking the cement unit as the tested party etc. Further, in the reply of 06.05.2021, the assessee also brought to the Notice of the TPO that the DRP had recently passed orders in the assessee’s own case for AY 2016-17 on 31.03.2021 in which the DRP had approved the adjusted retail rate adopted by the assessee as the Transfer Price for the SDT. The assessee further added that in the year under consideration, namely AY 2018-19 certain adjustments were required to be made to the value of the SDT in order to fall in line with the directions of the DRP, namely that transmission and distribution losses not considered earlier had to be reduced from the gross units of electricity generated and further, the increase in wheeling charges by three paise per unit with effect from 11.08.2017 had to be considered. And that the impact of these adjustments would be a downward adjustment in the value of SDT by Rs. 5,82,23,432/-. And the assessee also furnished the detailed workings for the adjustment as discussed and after going through the replies, the TPO issued Show Cause Notice on 24.06.2021 (found placed at page 10 of supplementary paper-book) wherein he summarized the Specified Domestic Transaction of the assessee and the transfer price adopted by the assessee for the specified domestic transaction carried out by each of the power plants of the assessee and the fact that the assessee had IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 11 :: adopted the cement unit as the tested party, the details of the SDT and the comparable uncontrolled transaction (being the purchase of electricity by the power plant from TANGEDCO), relevant extracts from the Transfer Pricing Study Report and also relevant extracts from the directions of the DRP in the assessee’s own case for AY 2016-17. Thereafter, the TPO proposed a downward adjustment of Rs. 5,82,23,432/- to the value of SDT in order to be consistent with the directions of the DRP referred to above. The assessee replied to the SCN on 25.06.2021 (found placed at page 17 of supplementary paper-book) stating that it has no objection to the adjustment of Rs 5,82,23,432/- proposed in the Show Cause Notice. After considering these replies the TPO passed a detailed order u/s 92CA(3) on 01.07.2021, in which he discussed in detail the facts of the case as gathered in the course of the TP assessment, the DRP’s order for the earlier year and concluded by suggesting a downward adjustment of Rs 5,82,23,432/- to the value of SDT. Therefore, we find that in the TP proceedings detailed inquiries had been made and adjudication made by TPO and after proper application of mind, the TPO suggested a downward adjustment of Rs. 5,82,23,432/- to the Transfer Price adopted by the assessee. From the aforesaid discussion, it is noted that TPO has discharged his duty to enquire into the issue raised by the Ld. CIT(TP). IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 12 :: 12) Having taken note that TPO has carried out enquiry into the issue, we need to examine as to whether his view on the issue is a plausible view or a view unsustainable in law. In this regard, we find that TPO while determining the arms-length of SDT was inline as taken by the DRP in the assessee’s own case for an earlier year namely AY 2016-17. It is noted that in AY 2016-17, the DRP vide its order dated 31-3-2021 had approved taking the adjusted retail price as the Transfer Price for the captive consumption of electricity (refer DRP’s order reproduced in para 6.6 of the TPO’s order for the year under appeal, AY 2018-19). The TPO relied on this order and approved the assessee’s transfer price for AY 2018-19 (year under appeal), subject to the downward adjustment of Rs.5,82,23,432/-. The Ld.AR relying on the decision of the Hon’ble Calcutta High Court in Philips India Limited (2015) 64 taxmann.com 402 (Cal.) submitted that where the AO passed orders following the direction of the DRP for an earlier year, the CIT cannot consider the AO’s order to be erroneous u/s 263 of the Act. 13) In this context, the Ld.AR brought to our notice that the issue regarding the determination of market value of electricity captively consumed (being the SDT) has been settled by the Hon’ble Supreme Court in the case of Jindal Steel and Power Private Limited – 157 taxmann.com IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 13 :: 207 wherein the Supreme Court concluded that “the market value of power supplied by the assessee to its industrial units should be computed by considering the rate at which the state electricity board supplied power to the consumers in the open market and not comparing it if the rate of power when sold to a supplier i.e sold by the assessee to the state electricity board as this was not the rate at which an industrial consumer would have purchased power in the open market”. Thus, the Hon’ble Supreme Court had held that the retail price of electricity, being the price at which the Electricity Board supplies electricity to the industrial consumers needs to be considered as the market value of the electricity captively consumed. Therefore according to Ld.AR, since, the assessee’s approach was in conformity with the ratio of the decision of the Hon’ble Supreme Court, the order passed by the TPO could not be considered as erroneous. The Ld. AR also brought to the notice that in a recent decision in the assessee’s own case for AY 2013-14 this Tribunal in its order dated 03.07.2024 (found placed at page 166 to 193 of paper-book volume-I) had upheld the assessee’s transfer price methodology following the decision of the Hon’ble Supreme Court in Jindal Steel and Power Pvt Ltd (supra). And in that year also the assessee had followed the very same approach in the determination of transfer price as in AY 2018-19, under appeal. The Ld. AR also pointed out that in a recent order dated 26-6-2024 in the assessee’s IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 14 :: own case for AY 2020-21, the DRP had approved the assessee’s transfer price by relying on the Hon’ble Supreme Court decision in Jindal Steel and Power Pvt Ltd.(supra), and drew our attention to Para 2.2.3 of the DRP’s order for AY 2020-21 which shows that the assessee has followed the same approach in arriving at the transfer price for AY 2020-21 as in AY 2018-19, i.e., the year under appeal. Moreover, as noted in Para 2.2.7 of the DRP’s order the assessee’s transfer price was in line with the Hon’ble Bombay High Court decision in Reliance Industries Ltd – [2019] 102 taxmann.com 372, Chhattisgarh High Court in the case of Godavari Power Ltd &Ispat ltd – [2014] 42 taxmann.com 551 and Gujarat High Court in the case of Gujarat Alkalis and Chemicals Ltd – [2017] 395 ITR 247. 14) Thus, we note that the view taken by the TPO was in conformity with the several judicial decisions cited above, including the decision of the Hon’ble Supreme Court in Jindal Steel and Power Pvt Ltd (supra). Therefore, the TPO’s order is a plausible view and cannot be considered as unsustainable in law. In the light of the discussions, we rely upon the decision of the Hon’ble Supreme Court in the case of Max India – [2008] 166 Taxman 188 (SC) wherein it was held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 15 :: prejudicial to the interest of the revenue. Therefore, we find that Ld.CIT(TP) erred in holding that TPO’s order is erroneous as well as prejudicial to the Revenue. 15. Having held that the Ld. CIT(TP) erred in exercising his revisional jurisdiction u/s.263 of the Act, we also find considerable force in the other legal issue raised by the assessee in the facts of this case that since the final assessment order passed by the AO dated 29.09.2022 was quashed by this Tribunal being time barred, the action of the Ld. CIT(TP) to exercise his jurisdiction u/s.263 of the Act only on the ground that the Department has preferred an appeal against the Tribunal order before the Hon’ble High Court cannot be accepted, since, if the Hon’ble High Court reverses the action of this Tribunal dated 07.07.2023, then the consequence is that the assessment order which includes the specified domestic transaction would be considered on its merits. Therefore, the reason given by the Ld.CIT(TP) to exercise revisional jurisdiction is not acceptable. In addition to the same, we also find that the reference made by the AO to the TPO to compute the Arm’s Length Price in relation to the international transaction / specified domestic transaction would trigger the TPO to determine the Arm’s Length Price in relation to the international transaction / specified domestic transaction as indicated in section 92CA of the Act. And thereafter, the AO IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 16 :: has to incorporate in the assessment order, the order of TPO u/s.92CA and pass the draft assessment order u/s.144C(1) of the Act, which can be assailed before the DRP by filing objections against the proposed draft assessment, which includes the transfer pricing adjustments which determine the Arm’s Length Price related to international transaction / specific domestic transaction. Thereafter, based on the DRP’s direction, the AO has to pass the final assessment order. Since the final assessment order in this case has been quashed by this Tribunal by order dated 07.07.2023, being time barred, there is no order which exists in the eyes of law and therefore, the final assessment order which includes the TPO order (regarding the Arm’s Length Price determined in relation to international transactions / specified domestic transactions), is also non-est. Meaning, there is no TP order / assessment order which exists in the eyes of law after quashing of the final assessment order. Therefore, in this case, the legal maxim “sublato Fundmento Credit opus” is attracted, meaning in case a foundation is removed, the super-structure falls. In Badarinath v. Tamil Nadu AIR 2000 SC 3243, the Hon’ble Supreme Court held that once the basis of proceedings is gone, all consequential orders & acts would fall on the ground automatically which is applicable to judicial and quasi judicial proceedings. Therefore, it is held that the impugned order of the Ld. CIT(TP) passed u/s.263 of the Act dated 18.03.2024 is also null / non-est IT (TP) A No.14/Chny/2024 (AY 2018-19 ) The Ramco Cements Limited :: 17 :: in the eyes of law. Therefore, the assessee succeeds on the legal issue and therefore, we are inclined to quash the impugned order passed by Ld CIT(TP). 16. In the result, appeal of the assessee is allowed Order pronounced on 09th December, 2024 at Chennai. Sd/- (अिमताभ शु ा) (AMITABH SHUKLA) लेखा सद\u0003य/ACCOUNTANT MEMBER Sd/- (एबी टी. वक\u0012) (ABY T. VARKEY) \u0005याियक सद\u0003य/JUDICIAL MEMBER चे\u0003ई/Chennai, \u0005दनांक/Dated: 09th December, 2024. Vm/- आदेश की +ितिलिप अ0ेिषत/Copy to: 1. अपीला थ\u001a/Appellant, 2.+,थ\u001a/ Respondent, 3. आयकर आयु1/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभा गीय +ितिनिध/DR & 5. गा ड( फा ईल/GF. "