Order giving effect by TPO is procedural, not appealable; deduction u/s 80IA allowed; CUP additions deleted; 35(2AB) denied without Form 3CL

ITAT Mumbai held that the order giving effect passed by the TPO pursuant to DRP directions is a procedural document and not independently appealable. The AO/TPO failed to conform to DRP directions regarding deduction u/s 80IA on steam transfer, rendering the assessment void ab initio; the claim of deduction was allowed as the DRP's directive to treat it as nil was set aside. Additions on sale of electricity using CUP method were deleted as enhancements by AO/TPO and DRP were unjustified. Deduction u/s 35(2AB) was denied due to absence of Form 3CL, but allowed under sections 35(1)(i) and 35(1)(iv). Issues of double depreciation disallowance, processing fees amortization, and computational errors were remitted to AO for verification and relief if found tenable. Grounds related to these matters were accordingly allowed or dismissed in part.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether the Assessing Officer erred in making transfer pricing additions on account of arm's length price (ALP) adjustments relating to specified domestic transactions (SDT) involving sale of electricity and steam between eligible and non-eligible units.

2. Whether the final assessment order passed by the Assessing Officer is in conformity with the directions issued by the Dispute Resolution Panel (DRP) under section 144C(5) and 144C(13) of the Income-tax Act, 1961.

3. Whether the internal computation/order issued by the Transfer Pricing Officer (TPO) pursuant to DRP directions without formal service is valid and binding.

4. Whether the benchmarking of electricity sale price adopted by the assessee using Comparable Uncontrolled Price (CUP) method and external comparables is valid and sustainable in law.

5. Whether the substitution of the assessee's CUP comparable by the revenue authorities with an alternate comparable without fulfilling the preconditions of Rule 10B(2)(b) and demonstrating appropriateness is legally permissible.

6. Whether the enhancement of ALP adjustment on sale of electricity by the DRP is justified.

7. Whether the denial of deduction claimed under section 80IA in respect of steam transfer by treating it as nil is justified.

8. Whether the rejection of the assessee's CUP benchmarking for steam sale and adoption of NIL arm's length price for steam is sustainable.

9. Whether the disallowance of weighted deduction claimed under section 35(2AB) relating to in-house scientific research and development expenses is justified in absence of DSIR's quantification (Form 3CL Part B).

10. Whether the assessee is entitled to alternative deduction under sections 35(1)(i) and 35(1)(iv) in case of disallowance under section 35(2AB).

11. Whether the Assessing Officer erred in not considering the claim of inadvertent double disallowance of depreciation on Right of Use (RoU) asset due to IND AS adjustments.

12. Whether the claim for additional expenditure of processing fees on term loan made during assessment proceedings is allowable despite not being declared in return.

13. Whether computational errors and denial of credit for taxes (including MAT credit and Dividend Distribution Tax) require rectification.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 4 & 5 & 6: Transfer Pricing Adjustments on Sale of Electricity - Validity of Benchmarking and Enhancement

Legal Framework and Precedents: The arm's length price (ALP) for specified domestic transactions is to be determined under Rule 10B of the Income Tax Rules, 1962, using prescribed methods including Comparable Uncontrolled Price (CUP) method (Rule 10B(1)(a)) or Other Method (Rule 10B(1)(f)) read with Rule 10AB. FAR (Functions, Assets, Risks) analysis under Rule 10B(2)(b) is relevant only to the extent differences materially affect prices in the open market. The Supreme Court judgment in CIT vs. Jindal Steel & Power Ltd. holds that market value of electricity supplied by eligible units should be computed with reference to rates at which State Electricity Board supplies power to consumers in the open market, not the price at which power is sold to distribution companies.

Court's Interpretation and Reasoning: The assessee benchmarked the electricity sale price at Rs. 8.85 per unit using external CUP (Reliance Infrastructure Ltd.), which was rejected by the TPO and DRP on grounds of non-comparable FAR analysis. The TPO substituted the comparable with weighted average purchase price of electricity by BEST at Rs. 5.11 per unit, adding adjustments for government duty and coal cost, arriving at Rs. 7.49 per unit. DRP rejected these adjustments and increased the ALP adjustment to Rs. 21.44 crores.

The Tribunal noted that FAR analysis is only relevant to the extent it materially affects price under Rule 10B(1)(a)(ii). The TPO and DRP failed to demonstrate that the substituted comparable did not suffer from the same shortcomings as the rejected comparable of the assessee. The substitution was thus vitiated in law. The adjustments made by TPO for additional costs were negated by DRP for lack of factual basis and enquiry.

The Tribunal relied on the Supreme Court's ruling in Jindal Steel & Power Ltd. that the market value of electricity is the rate at which it is supplied to end consumers, not the rate at which power generators sell to distribution companies. It held that the ALP adjustment and enhancement made by TPO and DRP were unjustified and deleted them.

Key Evidence and Findings: The assessee's benchmarking was supported by external CUP and MERC order. The TPO's substituted comparable lacked FAR analysis and factual verification. DRP's rejection of TPO's adjustments was based on lack of enquiry and evidence. Judicial precedents supported the assessee's position.

Application of Law to Facts: The Tribunal applied Rule 10B strictly, emphasizing that substitution of CUP requires demonstration of appropriateness and FAR comparability. The Supreme Court's interpretation of market value under section 80IA was applied to reject revenue's approach.

Treatment of Competing Arguments: Revenue's reliance on BEST price and adjustments was rejected for lack of factual basis and failure to meet legal preconditions. Assessee's CUP benchmarking and reliance on Supreme Court precedent were accepted.

Conclusion: The ALP adjustments and enhancement on sale of electricity by TPO and DRP are deleted. The assessee's CUP benchmarking is upheld.

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Issue 7 & 8: Denial of Deduction under Section 80IA for Steam Transfer and Rejection of CUP Benchmarking

Legal Framework and Precedents: Section 80IA(4)(iv) allows deduction for profits from eligible units generating steam and electricity. Transfer pricing provisions apply to specified domestic transactions including steam transfer. CUP method under Rule 10B(1)(a) is applicable. The Supreme Court's ruling in Jindal Steel & Power Ltd. on market value applies analogously. The DRP's powers under section 144C(8) are confined to variations proposed in draft assessment orders.

Court's Interpretation and Reasoning: The assessee claimed deduction under section 80IA for steam transfer benchmarked using external CUP method with comparables from independent suppliers. The DRP rejected the claim, treating the arm's length price of steam as nil, and directed denial of deduction. The Tribunal found that the DRP's rejection was based on incorrect factual assumptions including failure to accept contemporaneous documentation, misinterpretation of steam quality parameters, and absence of third-party certificates.

The Tribunal noted the extensive documentation maintained by the assessee, including daily logbooks, monthly reports, SAP records, and expert opinion confirming comparability of steam quality. It held that the DRP erred in disregarding valid CUP benchmarking without providing an alternative method. The denial of deduction was contrary to the directions in the draft assessment order and beyond the DRP's enhancement powers.

Key Evidence and Findings: Detailed contemporaneous records of steam generation and consumption, expert technical opinion on steam characteristics, invoices and quotations from independent suppliers, and prior acceptance of similar claims in earlier years.

Application of Law to Facts: The Tribunal applied Rule 10B and Supreme Court precedent to uphold the CUP method adopted by the assessee. It held that denial of deduction without cogent evidence or alternative benchmarking is unsustainable. The DRP's direction to treat deduction as nil was quashed.

Treatment of Competing Arguments: Revenue's reliance on absence of third-party verification and alleged discrepancies was rejected due to substantial documentary evidence. Assessee's detailed records and expert opinion were accepted.

Conclusion: The claim of deduction under section 80IA in respect of steam transfer is allowed. The DRP's direction to treat it as nil is set aside.

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Issue 2 & 3: Validity of Final Assessment Order and Internal TPO Computation Post DRP Directions

Legal Framework and Precedents: Section 144C(5) mandates the DRP to issue directions on objections to draft assessment orders. Section 144C(13) requires the Assessing Officer to pass final assessment order in conformity with DRP directions without further hearing. The internal computational document by TPO is not a statutory order requiring service. Judicial precedents hold that failure to comply with DRP directions renders the assessment order void.

Court's Interpretation and Reasoning: The assessee contended that the TPO's internal order dated 28.06.2024 was not served and thus invalid. The Tribunal held that such internal documents are procedural, not appealable, and need not be served. It is a clerical act to implement binding DRP directions.

However, the Tribunal found that the final assessment order did not conform to DRP directions, particularly in respect of steam transfer deduction where cost was taken as nil leading to excessive ALP adjustment exceeding the deduction claimed. This substantial deviation rendered the assessment order non-est and void ab initio.

The Tribunal relied on coordinate bench decisions and High Court rulings affirming that failure to follow DRP directions invalidates the assessment order. It quashed the impugned assessment order for non-conformity.

Key Evidence and Findings: The computation sheets and final assessment order showed additions inconsistent with DRP directions. Judicial precedents supported the principle of mandatory compliance with DRP directions.

Application of Law to Facts: The Tribunal applied section 144C strictly to ensure compliance with DRP directions. It distinguished internal TPO computations from statutory orders requiring service.

Treatment of Competing Arguments: Revenue's contention on validity of internal documents was accepted. Revenue's claim that computational inconsistencies are clerical errors was rejected as the deviation was substantial.

Conclusion: The internal TPO order is valid. The final assessment order is quashed for non-conformity with DRP directions.

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Issue 9 & 10: Disallowance of Deduction under Section 35(2AB) and Alternative Deduction under Sections 35(1)(i) and 35(1)(iv)

Legal Framework and Precedents: Section 35(2AB) provides weighted deduction for in-house scientific research and development (R&D) expenses subject to approval and quantification by DSIR through Form 3CM and Form 3CL respectively. Rule 6(7A) mandates submission of these forms. Deduction under sections 35(1)(i) and 35(1)(iv) is available for revenue and capital expenditure on scientific research respectively. Judicial precedents allow alternative deduction under sections 35(1)(i) and 35(1)(iv) where section 35(2AB) claim is disallowed due to procedural non-compliance.

Court's Interpretation and Reasoning: The assessee furnished Form 3CM and auditor's certificate (Form 3CLA) but did not produce Form 3CL Part B quantifying eligible expenditure. The Tribunal held that without DSIR's quantification, the claim under section 35(2AB) cannot be allowed. The delay or silence by DSIR does not estop the Department.

However, the Tribunal allowed the alternative claim under sections 35(1)(i) and 35(1)(iv) to the extent of Rs. 2.60 crores as per judicial precedents, since the expenditure was not disputed.

Key Evidence and Findings: Absence of Form 3CL Part B on record. Submission of Form 3CM and Form 3CLA. Judicial precedents supporting alternative claims.

Application of Law to Facts: The Tribunal applied statutory conditions strictly and allowed alternative deductions as a matter of equity and settled law.

Treatment of Competing Arguments: Revenue's rejection on procedural grounds upheld. Assessee's alternative claim accepted.

Conclusion: Deduction under section 35(2AB) disallowed for want of DSIR quantification. Alternative deduction under sections 35(1)(i) and 35(1)(iv) allowed to the extent of Rs. 2.60 crores.

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Issue 11 & 12: Claims for Double Disallowance of Depreciation and Additional Processing Fees

Legal Framework and Precedents: Claims raised during assessment proceedings require verification and examination by Assessing Officer. Procedural compliance and opportunity for verification are essential.

Court's Interpretation and Reasoning: The assessee claimed inadvertent double disallowance of depreciation on RoU asset and additional claim of processing fees on term loan during assessment proceedings. The Tribunal observed these claims involve factual assertions requiring verification of computations and documents.

Accordingly, the Tribunal remitted these issues to the Assessing Officer for limited purpose of verification and granting relief if found factually and legally tenable.

Key Evidence and Findings: Letters dated 11.09.2023 and 21.09.2023 with explanations and supporting documents submitted by assessee.

Application of Law to Facts: The Tribunal exercised judicial discretion to remit issues for factual verification.

Treatment of Competing Arguments: Revenue did not dispute factual merit but emphasized procedural non-compliance. Tribunal balanced interests by remitting issues.

Conclusion: Issues remitted to Assessing Officer for verification and appropriate relief.

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Issue 13: Computational Errors and Tax Credits

Legal Framework and Precedents: Rectification under section 154 is available for clerical or arithmetical mistakes. Tax credits including MAT credit and Dividend Distribution Tax credit are to be allowed if substantiated.

Court's Interpretation and Reasoning: The assessee raised grounds relating to incorrect income figures, tax computations, and denial of tax credits. The Tribunal noted that rectification applications were pending and directed the Assessing Officer to verify and examine claims and grant relief if found tenable.

Key Evidence and Findings: Pending rectification applications and submissions by assessee.

Application of Law to Facts: Tribunal directed compliance with procedural rectification mechanisms.

Treatment of Competing Arguments: Revenue did not oppose examination of claims. Tribunal ordered verification.

Conclusion: Grounds allowed for statistical purposes with directions for verification and relief.

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