2025 (3) TMI 1415 - AT - Income Tax

Assessee wins transfer pricing appeal on power steam transactions but loses Section 80G deduction on CSR contributions

ITAT Amritsar allowed the assessee's appeal on transfer pricing adjustments for power and steam transactions, ruling that the assessee's arm's length ... TP Adjustment - addition made by AO concerning the variation in the arm's length price of power, where the AO, following the directions of the Dispute Resolution Panel (DRP), reduced the sales value of power from the assessee's reported value - AR submitted that the price at which surplus power is supplied by producers to the Indian Energy Exchange (IEX) is determined by state regulations and contracts and, therefore, cannot be considered the market value for the purposes of Section 80-IA(8) - HELD THAT:- We are of the considered view that the method adopted by the Assessee for determining the arm's length price was correct, and the adjustments made by the AO were not in line with the applicable provisions of the Income Tax Act. Therefore, in this situation, and in our opinion, the addition made by the AO on this account cannot be sustained. Accordingly, the Assessee's appeal on this issue is allowed. Arm's length price of steam - MAM selection - TPO in his order, has held that the Cost-Pius Method (CPM) is the most appropriate method for determining the arm's length price for the transaction pertaining to the transfer of steam, as opposed to the Transactional Net Margin Method (TNMM) adopted by the assessee - HELD THAT:-We are of the considered view that the AO's approach to the adjustments regarding the transfer of steam and the arm's length pricing is not consistent with the facts and circumstances of the case. Moreover. A.O. erred in reducing the loss @ 20.50% which have already been considered by Assessee. Therefore, in this situation, and in our opinion, the addition made by the Assessing Officer on this account cannot be sustained. Accordingly, the Assessee's appeal on this issue is allowed. Deduction u/s 80G for CSR contributions - As we are of the considered view that CSR contribution / expenditure, if claimed u/s 80G would defeat the very basic requirement of CSR expenditure (on total amount), Therefore, claim of 80G on CSR expenditure is not tobe allowed as per se. Accordingly, AO’s action of rejecting the claim of 80G on CSR expenditure is justified. Hence, Assessee’s appeal on this Ground is dismissed. Deemed income u/s 41(1) - HELD THAT:- We find that as the Assessee itself has deducted the same amount in the next years return of income, therefore, disallowing the same in this year would be tantamount to double taxation. Accordingly, Assessee’s appeal on this ground is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:The legality and validity of the reduction in the deduction claimed by the assessee under Section 80-IA of the Income Tax Act, 1961.The determination of the arm's length price (ALP) for the transfer of power and steam between the assessee's units and the appropriate method for such determination.The applicability of Section 41(1) regarding deemed income and the treatment of liabilities.The eligibility of deductions under Section 80G for donations, including those related to Corporate Social Responsibility (CSR).The initiation of penalty proceedings under Section 270A of the Income Tax Act, 1961.2. ISSUE-WISE DETAILED ANALYSISReduction in Deduction under Section 80-IA:Legal Framework and Precedents: Section 80-IA of the Income Tax Act provides deductions for profits and gains from infrastructure undertakings. The determination of market value for internal transfers is crucial for computing eligible deductions.Court's Interpretation and Reasoning: The Tribunal scrutinized whether the AO's reduction in deduction was consistent with the provisions of Section 80-IA, particularly concerning the market value of goods/services transferred between units.Key Evidence and Findings: The Tribunal found that the AO's approach to determining the market value was inconsistent with the statutory requirements, as it did not reflect the open market value or the arm's length price.Application of Law to Facts: The Tribunal emphasized that the price at which electricity is sold to the Indian Energy Exchange does not equate to market value for Section 80-IA purposes. Instead, the rate charged by the State Electricity Board to industrial consumers should be considered.Conclusions: The Tribunal allowed the appeal, finding the AO's adjustments unsustainable.Determination of Arm's Length Price for Power and Steam:Legal Framework and Precedents: Section 92C and Rule 10B of the Income Tax Act and Rules govern the determination of ALP using methods like TNMM and CUP.Court's Interpretation and Reasoning: The Tribunal assessed whether the AO and DRP's adoption of the External CUP method over the TNMM was justified.Key Evidence and Findings: The Tribunal found that the AO's adjustments were not aligned with the provisions of the Income Tax Act and lacked consideration of internal CUP data.Application of Law to Facts: The Tribunal noted that the internal CUP method was more appropriate given the availability of comparable transactions within the assessee's operations.Conclusions: The Tribunal ruled in favor of the assessee, allowing the appeal regarding the ALP determination for power and steam transfers.Deemed Income under Section 41(1):Legal Framework and Precedents: Section 41(1) deals with the treatment of liabilities that cease to exist as deemed income.Court's Interpretation and Reasoning: The Tribunal examined whether the AO correctly applied Section 41(1) to the assessee's liabilities.Key Evidence and Findings: The Tribunal found that the liability was active, and the AO's application of Section 41(1) was erroneous.Application of Law to Facts: The Tribunal noted that the liability had not become extinct, and the assessee had accounted for it in subsequent years.Conclusions: The Tribunal allowed the appeal, preventing double taxation.Deductions under Section 80G for Donations:Legal Framework and Precedents: Section 80G provides deductions for donations, with specific provisions for CSR-related contributions.Court's Interpretation and Reasoning: The Tribunal considered whether CSR-related donations qualify for deductions under Section 80G.Key Evidence and Findings: The Tribunal found that CSR contributions are not eligible for deductions under Section 80G as per the legislative framework.Application of Law to Facts: The Tribunal upheld the AO's decision to reject the deduction claim for CSR-related donations.Conclusions: The Tribunal dismissed the appeal on this ground.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The Tribunal found that the AO's approach to determining the market value was inconsistent with the statutory requirements, as it did not reflect the open market value or the arm's length price.'Core principles established: The determination of market value for internal transfers should reflect open market conditions, and internal CUP data should be prioritized when available.Final determinations on each issue: The Tribunal allowed the appeal concerning the reduction in deduction under Section 80-IA and the determination of ALP for power and steam. It dismissed the appeal regarding CSR-related deductions under Section 80G and allowed the appeal on deemed income under Section 41(1).