2024 (5) TMI 1511 - HC - Income Tax

Delhi HC Examines TPO Adjustments on ALP, Power Transfer; No Major Issues Found on Section 14A, Education Cess.

The Delhi HC addressed an appeal concerning adjustments made by the TPO related to transfer pricing and tax matters. The court focused on two main issues: ... TP adjustment - ALP adjustment of specified domestic transactions from Associated Enterprises - exclusion of Indian Energy Exchange [‘IEX’] as a comparable while determining the ALP - HELD THAT:- While the ultimate conclusions recorded by the ITAT in this respect may not be strictly correct since the mere growth of 3% of the “overall power exchange-based market” could not possibly have had a bearing on the extent of transactions that may have taken place on that Exchange, we note that the exclusion of IEX appears to have been accepted while completing assessment for subsequent Assessment Year ['AY'] namely 2015-16. Appellant prays for time to examine the order passed by CIT(A) for AY 2015-16 and which is referred to by the ITAT. Transfer of steam from the eligible unit to the non-eligible unit of the assessee - appellant seeks to contend that since steam was a by-product of the business and would have been included in the cost of power generation, it should not have been taken into account. We, however, find that the aforesaid issue and aspect was concerned with the transfer of steam to the non-eligible unit and for the purposes of which the assessee would have been justified in relying on the cost of production. We, therefore, are of the opinion that Question C raises no substantial issue. Additional material which was taken into account and admitted by the ITAT - The said power undoubtedly vests in the ITAT. We, therefore, find no justification to entertain the appeal on that score. The judgment from the Delhi High Court addresses a series of legal issues arising from an appeal concerning adjustments made by the Transfer Pricing Officer (TPO) and other related tax matters. The court considered several questions related to the Income Tax Appellate Tribunal's (ITAT) decisions on these matters. Below is an analysis of the issues presented and considered, along with the court's reasoning and conclusions.Issues Presented and ConsideredThe court identified and considered the following core legal questions:A. Whether the ITAT erred in law and on facts by deleting the adjustment proposed by the TPO on account of Arm's Length Price (ALP) adjustment of specified domestic transactions from Associated Enterprises for the Assessment Year (AY) 2014-15.B. Whether the ITAT was correct in deleting adjustments made on account of the transfer of power as per the provision of section 92F read with section 80IA of the Income Tax Act, without considering the suitable selling Comparable Uncontrolled Price (CUP) rate from the central agency in the field of power trading.C. Whether the ITAT was right in deleting adjustments made on account of the transfer of steam from an eligible unit to a non-eligible unit, ignoring the fact that steam is a by-product of the business of the assessee and the cost of the same has already been included in the cost of power generation of the assessee.D. Whether the ITAT erred in law and on facts in deleting an addition amounting to Rs. 91,49,571/- made by the Assessing Officer (AO) on account of disallowance under section 14A read with Rule 8D of the Income Tax Act, 1961.E. Whether the ITAT erred in law and on facts in allowing an additional ground raised by the assessee for the deduction of education cess amounting to Rs. 1,33,41,210/- claimed by the assessee under section 37 of the Income Tax Act.Issue-Wise Detailed AnalysisQuestion A: The court focused on the deletion of the adjustment proposed by the TPO regarding the ALP adjustment. The relevant legal framework involves the determination of ALP for specified domestic transactions as per the Income Tax Act. The ITAT's decision was based on the failure of the appellant to establish the Indian Energy Exchange (IEX) as a material comparable. The court noted that while the ITAT's conclusions might not be strictly correct, the exclusion of IEX was accepted in the subsequent AY 2015-16, indicating a possible acceptance of the methodology used by the CIT(A) for benchmarking transactions. The court decided to confine further consideration of this appeal on this question.Question B: This question relates to the deletion of adjustments made on account of the transfer of power. The court considered the provisions of section 92F read with section 80IA of the Income Tax Act, which deal with the determination of transfer prices and the applicability of suitable CUP rates. The ITAT had discarded the Indian energy exchange rate, and this methodology was not challenged in subsequent assessments, suggesting its acceptance. The court decided to further consider this question in the appeal.Question C: The issue of transferring steam from an eligible unit to a non-eligible unit was raised by the appellant, arguing that steam, being a by-product, should not have been accounted for separately. The court found that the cost of production could be relied upon for such transfers and concluded that this question raised no substantial issue.Question D: The court had previously determined that this question raised no substantial issue of law, thereby not requiring further consideration.Question E: The ITAT had admitted additional material concerning the deduction of education cess, which the court found to be within the ITAT's powers. Therefore, the court found no justification to entertain the appeal on this ground.Significant HoldingsThe court decided to focus further consideration of the appeal on Questions A and B, which involve the deletion of adjustments related to ALP and the transfer of power. The court noted the acceptance of certain methodologies in subsequent assessments, indicating potential acceptance of the ITAT's approach. The court did not find substantial issues in Questions C, D, and E, thereby limiting the scope of the appeal.The final determination was to call the appeal again on a specified future date, allowing time for further examination of the relevant orders and methodologies used in the assessments.