TaxTMI 
TaxTMI 
2025 (1) TMI 1128
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....ourt had, by an order dated 02.05.2024, confined the present appeal to the following questions: "A. Whether on the facts and circumstances of the case and law, the Hon'ble ITAT has erred in law and on facts in deleting the adjustment proposed by the TPO on account of ALP adjustment of specified domestic transactions from Associated Enterprises for the A.Y 2014-15? B. Whether ITAT was right in deleting adjustments made on account of transfer of power as per the provision of section 92F r.w.s 80IA of the Act without appreciating that there was suitable selling CUP rate from the central agency in the field of power trading? 3. The learned ITAT had allowed the appeal (ITA No. 7362/Del/2018) preferred by the respondent (hereafter the Assessee), inter alia, in regard to the adjustment of Rs. 26,52,98,490/- in respect of electric power transferred by the Assessee from its eligible unit to its non-eligible unit. 4. The Transfer Pricing Officer (TPO) had made the said addition on account of rates of electricity quoted on the Indian Energy Exchange (hereafter IEX). The rates of energy quoted on IEX are hereafter referred to as IEX rates. The learned ITAT accepted that....
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....le units to ineligible units as set out in the order dated 31.10.2017 passed by the TPO, is reproduced below: "UP Region Transferor Transferree Quantity Rate Amount TG-1, Loni (Eligible) Sugar Plant (Non-Eligible) 1,86,41,986 KWH 4.29 7,99,74,118 TG-II, Loni (Eligible) Sugar Plant (Non-Eligible) 9,23,797 KWH 4.20 38,79,947 TG-1, hariawan (Eligible) Sugar Unit 1,93,06,294 4.29 8,28,24,001 TG-II, hariawan (Eligible) Sugar Unit 8,51,577 4.29 36,53,265 TG-II, Ajbapur (Eligible) Sugar Unit 34,83.722 4.24 1,47,70,983 TG-III, Ajbapur (Eligible) Sugar Unit 1,02,52,023 4.24 4,34,68,579 Rajasthan Region Kota Power Plant Fertilizer & Chemical Plant 31,21,15,871 6.30 196,63,29,987/- Gujrat Region Bharuch Power Plant Alkali & Chemical Plant 40,31,84,860 KWH 6.67 268,96,24,567/- Total 4884525447" 11. The Assessee had benchmarked the transactions at the rate on which electricity was transferred by its unit to Uttar Pradesh Power Corporation Limited (UPPCL) at the rate of Rs. 4.39 kWh; in the Gujrat Region at the rate of Rs. 38.56 kWh being the ra....
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....4,68,579 4.39 2.55 3.47 0.77 78,94,058 Rajasthan Region Kota Power Plant Fertilizer & Chemical Plant 31,21,15,871 KWH 6.30 196,63,29,987/- 8.35 2.55 5.45 0.85 26,52,98,490 Gujrat Region Bharuch Power Plant Alkali & Chemical Plant 40,31,84,860 KWH 6.67 268,96,24,567/- 38.56 2.52 20.54 Nil Nil Total 488,45,25,447 30,83,65,268" 15. The TPO also directed a transfer pricing adjustment of Rs. 1,03,57,45,275/- on account of transfer of steam from power plants to manufacturing plants as according to the TPO, the said transfer was required to be made at Nil value. 16. The AO framed a draft assessment order dated 29.12.2017, inter alia, including an adjustment of Rs. 134,41,10,543/- on account of transfer pricing of power and steam (Rs. 30,83,65,268 on transfer of power from eligible units to ineligible units and Rs. 103,57,45,275/- on account of transfer of steam from power plants to manufacturing plants). 17. The Assessee had claimed a deduction of Rs. 220,24,71,231/- under Chapter VIA (Section 80IA) of the Act, which was reduced by the aforesaid adjust....
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....X, or any other supplier of power and certainly not from a supplier who sells power at high cost. 2.2.6 On consideration of the facts of the case it is apparent that the assessee has sold surplus power generated from the power units at Ajbapur. Hariawan and Loni in UP to SEBs as per agreements with them for sale of surplus power and in respect of the power unit at Kota in Rajasthan the assessee has purchased power from the SEB. The assessee has taken both the power sold to the three SEBs in UP as well as power purchased from SEB in Kota as internal CUP. This is a fallacious and incorrect method since while the former are internal CUP, the latter could only be an external CUP. 2.2.7 The assessee has submitted copies of agreements with SEBs in respect of the three power units in UP for sale of surplus power to them. The assessee has entered into separate agreements with Madhyanchal Vidyut Vitran Nigam Ltd. in respect of the three units at Hariawan) (w.e.f. 01.03.2006), Loni (w.e.f. 06.12.2006 and Ajbapur w.e.f. 26.12.2006). The assessee has also submitted the invoices of power bills duly verified by the Executive Engineer & Nodal Officer of the respective SEB accord....
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....comparable. Accordingly, the learned ITAT deleted the additions made on account of transfer pricing of power from the Assessee's eligible units to ineligible units. 24. The learned ITAT also accepted the Assessee's contention in regard to the other issues, which are not presently relevant as the present appeal is confined only to two questions relating to whether the IEX rates could be considered for benchmarking the market rates for the purposes of Sub-section (8) of Section 80IA of the Act. 25. The Revenue being aggrieved by the said decision has filed the present appeal. REASONS AND CONCLUSION 26. As noted above, the controversy in the present case relates to the quantum of deduction available to the Assessee under Section 80IA of the Act. Section 80IA of the Act provides for deduction in respect of profits and gains arising from industrial undertaking or enterprises engaged in infrastructure development. 27. Sub-section (8) of Section 80IA of the Act provides that in cases where goods or services of an eligible business are transferred to any other business carried on by an assessee and the consideration for such transfer does not correspond to the market value o....
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....e Act expressly provides that the expression 'market value' as used in the said sub-section would mean the price that such goods or services would ordinarily fetch in the open market or the ALP as defined in Clause (ii) of Section 92F of the Act, in case where the transfer of goods or the services is a specified domestic transaction referred to in Section 92BA of the Act. 30. Section 92BA^1 of the Act defines the expression 'specified domestic transaction' as used in Section 92 (92C, 92D and 92E) of the Act. In terms of Clause (iii) of Section 92BA of the Act, the same includes any transfer of goods or services referred to in Sub-section (8) of Section 80IA of the Act. 31. Section 92C of the Act contains provisions regarding computations of ALP. By virtue of Clause (ii) of Explanation to sub-section (8) of Section 80IA of the Act, the market value in relation to goods and services as specified would mean the ALP as is defined under Clause (ii) of Section 92F of the Act. The said Clause [Clause (ii) of Section 92F of the Act], which defines the ALP, reads as under: "92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,- *** *....
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....ational transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. Explanation.-For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009." 34. It is also material to refer to Rule 10B of the Income Tax Rules, 1962 (hereafter the Rules) which provides for determination of an ALP under Section 92C of the Act. Rule 10B (1) of the Rules is set out below: "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of suc....
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....e or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in subclause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions which are so interrelated that they cannot be evaluated separately for th....
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....having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; (f) any other method as provided in rule 10AB." 35. In the present case, the Assessee had computed the ALP b....
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....t to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate. As discussed below in paragraph 2.17, the extent and reliability of such adjustments will affect the relative reliability of the analysis under the CUP method. 2.17. In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business functions other than just product comparability (i.e. factors relevant to determining comparability under Chapter I). Where differences exist between the controlled and uncontrolled transactions or between the enterprises undertaking those transactions, it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price. The difficulties that arise....
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....action. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpayers and tax administrations should be consistent in their application of the appropriately selected quoted price. 2.20. For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm's length price or price range, the standardised contracts which stipulate specifications ....
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....hought that this was the case, it was necessary for the Tribunal to conduct a further in-depth inquiry as to the relevant uncontrolled transactions. It is well settled that in applying the CUP Method, a very high degree of similarity between the controlled and uncontrolled transactions is required." [emphasis added] 41. A similar view has also been expressed by the Income Tax Appellate Tribunal in various decisions^4. 42. It is clear from the above that the CUP method would be an appropriate method only if the transactions are identical inasmuch as there are no differences that would materially affect the price in an open market. And, if there is any difference which affects the price, the same can be reasonably ascertained and its effect can be eliminated by an appropriate adjustment. 43. In the present case, the question is to determine the market value or the ALP of power supplied by power plants established by the Assessee to its other units. Supplying of electricity is governed by the Electricity (Supply) Act, 1948 and Electricity Act, 2003. The transmission of electricity is also governed by the Electricity Rules, 2005. 44. Thus, the market for supply of ....
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....ower consumer can set up its unit. It is also not disputed that there is a wide fluctuation in the IEX rates. The Revenue has also not controverted the assertion that rates for power quoted on IEX are for power purchased and not for power consumed. Thus, if an entity bids for certain quantity of power on IEX and is successful, it is required to pay for the same. However, the electricity supplied by power distribution companies is charged on the basis of the power consumed, which is recorded in the metering devices. 52. It is also clear that the said material differences between the electricity supplied by SEBs or power distribution companies and those secured by bidding on IEX would have a significant bearing on the price of power. 53. As noted above, the CUP method is an appropriate method only in cases where there is sufficient degree of identity between the tested transactions and comparable uncontrolled transactions. The CUP method cannot be applied where there is significant dissimilarity between the comparable transactions and it is not feasible to determine an adjustment to eliminate the impact of the said differences on the prices of comparable transactions. 54. In....
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....t as that was the rate charged by the SEB for supply of electricity to industrial consumers including the Assessee. The learned ITAT had accepted the assessee's stand and had set aside the order passed by the CIT(A) rejecting the assessee's appeal in that regard. The High Court had also rejected the Revenue's appeal by referring to its earlier decision where the question of law had been answered against the Revenue and in favour of the Assessee. 58. The Revenue had approached the Supreme Court assailing the orders passed by the learned ITAT and the High Court. In the aforesaid context, the Supreme Court had held as under: "23. This brings to the fore as to what do we mean by the expression "open market" which is not a defined expression. 24. Black's Law Dictionary, 10th Edition, defines the expression "open market" to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. P. Ramanatha Aiyer's Advanced Law Lexicon has also defined the expression "open market" to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determ....
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....a dominant position, the State Electricity Board could fix the price to which the assessee really had little or no scope to either oppose or negotiate. Therefore, it is evident that determination of tariff between the assessee and the State Electricity Board cannot be said to be an exercise between a buyer and a seller in a competitive environment or in the ordinary course of trade and business i.e., in the open market. Such a price cannot be said to be the price which is determined in the normal course of trade and competition. 27. Another way of looking at the issue is, if the industrial units of the assessee did not have the option of obtaining power from the captive power plants of the assessee, then in that case it would have had to purchase electricity from the State Electricity Board. In such a scenario, the industrial units of the assessee would have had to purchase power from the State Electricity Board at the same rate at which the State Electricity Board supplied to the industrial consumers i.e. Rs. 3.72 per unit. 28. Thus, market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the ....