TaxTMI 
TaxTMI 
2025 (1) TMI 1128
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....ther 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 the IEX rates for electricity could not be used as an external comparable uncontrolled price (CUP) and held that the rates....
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....ansferree 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 rate at which power was purchased from Dakshin Gujarat Vij Company Limited (DGVCL); and at the rate of Rs. 8.35 kWh in the Rajasthan Region being the rate at which the power was purchased from Jaipur Vidyut Vitran Nigam Limited (JVVNL). 12.....
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....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 adjustment of Rs. 1,34,41,10,543/-. Accordingly, the Assessee's income under the normal provisions was determined at Rs. 267,14,55,411/-. Since the tax payable on the said amount was higher than the tax payable on book profits, the AO proposed a demand under the normal provisions of the Act. 18. The Assessee filed its objections before the Dispute Resolution Panel (DRP) against the draft assessment order dated 29.12.2017. 19. The Assessee also submitted that it had been c....
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....hree 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 according to which the rate of sale of power by the assessee to the SEBs at Hariawans Rs. 4.39 per Kwh (March 2014) Rs. 4.39 per Kwh at Loni (March 2014 and Rs. 4.24 per Kwh at Ajbapur. In view of the fact that internal CUP is available for these three units, the AO/TPO is directed to apply internal CUP for benchmarking the transfer/sale of power (electricity) by these three units and re-compute the adjustment in respect of these three units. 2.2.8 As discussed earlier herein above, in respect of t....
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....nue 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 of such goods or services, then for the purposes of deduction under Section 80IA of the Act, the profit and gains of eligible business would be computed as if the transfer had been made at market value of such goods or services. 28. Section 80IA (1) and 80IA (8) of the Act is set out below: "80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as....
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....es 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,- *** *** *** (ii) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;" 32. It is apparent from the conjoint reading of Explanation to Sub-section (8) of Section 80IA, Section 92BA and Section 92F (ii) of the Act that the market value in relation to any goods or services under Sub-section (8) of Section 80IA is required to be determined in terms of Section 92C of the Act, which contains provisions regarding computation of the ALP. 33. It is relevant to refer to Sub-sections (1)....
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....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 such transactions, is identified; (ii) such price is adjusted to account for 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 price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is r....
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....rty 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 the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction or the specified domestic transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated....
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....us 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 by adopting the CUP method as provided in Rule 10B (1) (a) of the Rules. The TPO had also accepted it as the most appropriate method in the facts of the present case. Thus, there is no dispute that CUP method is required to be used for determining the ALP and the market value for the purposes of Section 80IA of the Act. 36. As is apparent from Sub-clause (i) of Clause (a) of Rule 10B (1) of the Rules, it is necessary to determine the price charged or paid for the property or goods transferred or services provided in a comparable uncontrolled transaction. In the present case, the transaction relates to the sale of electricity by the Assessee's eligible unit to a non-eligible unit. Thus, a comparable uncontrolled transaction would necessarily involve determining a transaction of sale of power in a similar uncontrolled transaction. 37. It is relevant to refer to OECD Guidelines2, which explains various methods fo....
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....he 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 in attempting to make reasonably accurate adjustments should not routinely preclude the possible application of the CUP method. Practical considerations dictate a more flexible approach to enable the CUP method to be used and to be supplemented as necessary by other appropriate methods, all of which should be evaluated according to their relative accuracy. Every effort should be made to adjust the data so that it may be used appropriately in a CUP method. As for any method, the relative reliability of the CUP method is affected by the degree of accuracy with which adjustments can be made to achieve comparability. 2.18. Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the CUP method would generally be an appropriate transfer pricing method for establishing the arm's length price for the transfer of commodities between associated enterprises. The reference to "com....
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....ompt 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 on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines." [emphasis added] 39. It is relevant to refer to Law & Practice of Transfer Pricing in India - A Compendium3, the relevant extract is set out below:- "While applying CUP method product comparability should be examined rather than bu....
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....ectricity Act, 2003. The transmission of electricity is also governed by the Electricity Rules, 2005. 44. Thus, the market for supply of electricity is regulated. Thus, to apply the CUP method, it would be necessary to ascertain the comparable transactions that are similar in material aspects and there is no difference between the transactions which has a bearing on the price of the power supplied. 45. The question whether the average IEX rate at which power is traded on IEX, is a comparable uncontrolled transaction, is required to be evaluated by determining whether there are any differences between the specified domestic transaction5 and the uncontrolled transaction of trade on the IEX. 46. The Assessee states - and the same is not controverted - that the availability of power on IEX is unpredictable and the supply of power is unreliable. 47. It is stated that in order for a party to purchase power from IEX, the said party has to participate in the bidding process. The same entails furnishing a bid in advance for supply of fifteen minutes slots. Illustratively, it is stated that if a party requires power supply for a period of four hours, it would be required to submit sixtee....
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....rmine an adjustment to eliminate the impact of the said differences on the prices of comparable transactions. 54. In the present case, the Assessee had supplied excess power to UPPCL in UP region at the rate of Rs. 4.39 per kWh. Thus, the said transaction was accepted by the learned DRP as well as the learned ITAT as an internal uncontrolled transaction. The rate at which such electricity was supplied by the Assessee being Rs. 4.39 per kWh, was rightly accepted as an ALP. 55. As noted above, the learned ITAT also accepted the rates at which electricity was supplied by the SEBs/power distribution companies to the Assessee in Gujarat and Rajasthan regions as the said rates was considered as an external CUP. 56. Undoubtedly, there is a degree of similarity between the transaction of supply of electricity by SEBs to the Assessee and the supply of electricity by the Assessee's eligible units. However, there is a difference between the transactions being benchmarked, which is supply of electricity by captive units, and the transaction of supply of electricity by distribution companies/corporations. The power distribution companies enjoy a near monopoly status. The tariff charged by su....
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....are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand. 25. Therefore, the expression "market value" in relation to any goods as defined by the Explanation below the proviso to sub-section (8) of section 80 IA would mean the price of such goods determined in an environment of free trade or competition. "Market value" is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or regulation; rather, it is determined by the economics of demand and supply. 26. Under the electricity regime in force, an industrial consumer could purchase electricity from the State Electricity Board or avail electricity produced by its own captive power generating unit. No other entity could supply electricity to any consumer. A private person could set up a power generating unit having restrictions on the use of power generated and at the same time, the tariff at which the said power plant could supply surplus power to the State Electricity Board was also liabl....
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....rial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under Section 80 IA of the Act." [emphasis added] 59. As is apparent from the above, the Supreme Court had accepted the rates at which electricity was supplied by the SEBs to industrial consumers as being the market value of the said supplies for the purposes of Sub-section (8) of Section 80IA of the Act. 60. In view of the above, the questions of law are answered in favour of the Assessee and against the Revenue. 61. The appeal is dismissed in the aforesaid terms. ---------------....