The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that where no deduction is claimed under Section 80IA of the Income Tax Act, 1961, the transfer pricing adjustments under Section 92BA pertaining to specified domestic transactions are unwarranted.
Sanghi Industries Limited (assessee), a major cement manufacturer, operates a captive power unit eligible for deduction under Section 80IA. The assessee transferred power from the eligible unit to its own cement unit and disclosed the transaction in Form 3CEB. However, the assessee did not claim deduction under Section 80IA due to business losses.
The case was referred to the Transfer Pricing Officer (TPO), who held that the internal CUP method applied by the assessee was incorrect and proceeded to benchmark the transaction using average rates charged to third parties.
The TPO determined a lower ALP of Rs. 2.97/unit as against the assessee’s rate of Rs. 7.85/unit. The TPO computed a total adjustment of Rs. 154.38 crores, including on account of fly ash transfer and re allocation of employee expenses. The Dispute Resolution Panel (DRP) upheld the TPO’s order.
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Aggrieved by the order, the assessee filed an appeal before ITAT. The assessee argued that the power unit, although eligible under Section 80IA, had not claimed any deduction, and therefore, Section 92BA could not be invoked.
The assessee relied on the decision of the ITAT Kolkata in Star Paper Mills Ltd v. DCIT, where a similar adjustment was held to be unwarranted in the absence of an 80IA deduction.
The Revenue contended that since the unit was eligible for deduction under 80IA, the reporting of transactions in Form 3CEB triggered the application of Section 92BA. The counsel for Revenue argued that the transfer pricing provisions aim to ensure correct computation of profits for eligible units.
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The counsel also argued that even if deductions are not claimed in a particular year, as losses may impact future deductions within the 10-year tax holiday window.
The two-member bench comprising Laliet Kumar (Judicial Member) and Madhusudan Sawdia, (Accountant Member) observed that the conjoint reading of section 92BA with section 80IA makes it abundantly clear that unless a deduction under section 80IA is claimed, the determination of ALP in respect of specified domestic transactions is academic.
The Tribunal observed that the lower authorities have erred in applying transfer pricing adjustments in the absence of any deduction claimed under section 80IA. The tribunal held that the adjustments made by the TPO were deleted.
The appeal of the assessee was allowed.
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