ITAT Chennai’s Ruling in MRF Limited Vs DCIT for AY 2014-15: Key Findings on Section 80JJAA, Transfer Pricing, Forex Hedges & MAT

1. Background of the Appeal

MRF Limited Vs DCIT came up before the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) in IT (TP) A No.68/Chny/2018, arising from a final assessment order dated 09.10.2018 for Assessment Year 2014-15. The order was framed under Section 143(3)/Section 144C(13) following directions of the Dispute Resolution Panel (DRP) dated 27.09.2018.

The assessee, a leading manufacturer of automobile tyres, tubes, flaps and other rubber products, had:

  • Returned total income of Rs.1054,17,99,530/-
  • Declared book profit under Section 115JB of Rs.770,49,49,961/-

The Assessing Officer (AO) made several additions and disallowances, leading to an assessed income of Rs.1135,96,10,750/-. The major issues in dispute were:

  • Transfer pricing adjustment relating to captive wind power – Rs.66,94,650/-
  • Disallowance of depreciation and expense linked to retention money – Rs.87,57,934/-
  • Rejection of additional deduction under Section 80JJAA – Rs.3,15,55,429/-
  • Disallowance of forward cover premium charges – Rs.52,32,74,580/-
  • Disallowance under Section 14A r.w. Rule 8D – Rs.31,10,129/-
  • Disallowance of expenditure on Cricket Pace Foundation – Rs.3,89,00,000/-
  • Restriction of weighted deduction under Section 35(2AB) – Rs.95,500/-
  • Disallowance of warranty provision – Rs.20,54,23,000/-

The ITAT examined each of these issues in light of earlier decisions in MRF’s own cases and various judicial precedents, and ultimately partly allowed the appeal.

2. Transfer Pricing on Captive Power – Wheeling Charges Controversy

2.1 Facts of the Captive Power Arrangement

The assessee operated an eligible wind energy division at Nettur claiming deduction under Section 80-IA. During the relevant year:

  • The wind unit generated 20,489,250 units of power
  • Electricity was transmitted through TNEB/TANGEDCO’s network to manufacturing units
  • For power supplied to non-eligible units, the eligible unit recorded revenue of Rs.11,35,28,828/-
  • Internal transfer price adopted: Rs.5.50 per unit
  • Method: CUP (Comparable Uncontrolled Price), benchmarked against TNEB’s tariff for industrial consumers (including the assessee’s Thiruvottiyur unit)

The TPO accepted the rate of Rs.5.50 per unit as such, but held that wheeling charges paid to TNEB should be reduced from the captive power transfer price, resulting in a downward adjustment of Rs.66,94,650/-, which the DRP endorsed.

2.2 Assessee’s Stand

The assessee argued that:

  • Under the Electricity Act, 2003, particularly Section 42, wheeling charges are levied on the consumer of electricity, not on the generating entity.
  • The Thiruvottiyur unit, as consumer, paid:
    • Tariff of Rs.5.50 per unit to TNEB, plus
    • Separate wheeling charges (shown in bills under “other adjustments”).
  • The benchmark tariff of Rs.5.50 per unit adopted under CUP excluded wheeling charges in the TNEB comparable; hence, by parity, captive power transfer price should also be Rs.5.50 per unit without reduction for wheeling.
  • Sample bills (e.g., showing Rs.6,84,183/- as wheeling charges separately over and above Rs.5.50 per unit) established that wheeling charges were always an additional levy on the consumer.

2.3 Tribunal’s Finding

The ITAT noted:

  • The consuming unit effectively paid TNEB Rs.5.50 per unit plus wheeling charges.
  • The CUP benchmark (TNEB industrial tariff) of Rs.5.50 per unit itself did not embed wheeling charges.
  • Under a correct CUP comparison, only items included in the comparable price can be mirrored in the controlled transaction. Since wheeling charges were outside the comparable tariff, reducing them from captive transfer price would violate like-for-like comparison.

The Tribunal held that the transfer price of Rs.5.50 per unit between the eligible and non-eligible units was correctly determined and required no adjustment. The transfer pricing adjustment of Rs.66,94,650/- was directed to be deleted.

3. Retention Money – Allowability of Depreciation and Revenue Expenditure

3.1 Nature of Retention Money

The assessee’s purchase contracts for both capital assets and revenue items contained a retention money component— a portion of the contract price withheld until satisfactory performance of the machinery or service.

  • Liability for the full contract value (including retention) was accounted for on mercantile basis upon receipt of invoices.
  • The AO viewed the retained portion as a contingent liability, and:
    • Disallowed depreciation to the extent of retention related to capital goods
    • Disallowed the corresponding revenue expenditure portion

The DRP sustained the disallowance.

3.2 Reliance on Earlier Decisions

The assessee pointed out that identical issues had been decided in its favour for AYs 2017-18 to 2019-20 in:

  • MRF Limited, ITA Nos.64 & 65/CHNY/2022 & 41/CHNY/2023
  • Earlier batch: MRF Limited, ITA Nos.641 to 645/Chny/2018

In those decisions, the Tribunal, following the Supreme Court ruling in `Bharat Earth Movers vs.