TaxTMI 
TaxTMI 
2025 (8) TMI 1276
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.... Ld. AO), making an addition of Rs. 62,97,51,510/- to the returned income pursuant to the directions of the Ld. Dispute Resolution Panel-II, Delhi ('Ld. DRP') is bad in law and, therefore, liable to be set aside. 2. That on the facts and circumstances of the case & in law, the order passed under section 92CA(3) of the Act by Ld. Deputy Commissioner of Income Tax, Transfer Pricing-1, Kolkata (Ld. TPO') on September 12, 2023, proposing a downward adjustment of Rs. 182,23,39,293, which was subsequently approved by the Ld. DRP vide directions dated September 30, 2024, is bad in law and, therefore, liable to be set aside. 3. That on the facts and circumstances of the case and in law, the Ld. TPO, as well as the Ld. DRP has erred in making a downward adjustment of Rs. 182,23,39,293/-to the arm's length price determined by the Appellant with respect to the Specified Domestic Transaction of transfer of power Eligible unit to the manufacturing unit and, in doing so, has erred in disregarding the arm's length price determined by the assessee in the transfer pricing documentation under section 92D of the Act. 4. That on the facts and circumstance....
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....from the Pr. Commissioner of Income Tax for referring the case to the Transfer Pricing Officer('TPO'). Thereafter, the case was referred to the TPO u/s 92CA(1) of the Act on 15.09.2022. Consequent to the reference, the TPO passed an order u/s 92CA(3) of the Act and made the downward adjustment of Rs.182,23,39,293/- with respect to 80-IA units vide DIN & Order No: ITBA/TPO/F/92CA3/2023-24/1056266035(1) dated 19.09.2023, which was issued and served upon the assessee. Thereafter, a show cause notice was issued to the assessee for making the proposed adjustments. Since no satisfactory reply was received from the assessee, the downward adjustments of Rs.182,23,39,293/- made by the Ld. TPO was added to the taxable income of the assessee. However, since the claim of deduction u/s 80-IA of the Act was only at Rs.62,97,51,510/-, the adjustment was restricted to the same amount. Accordingly, draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act was passed. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel which passed an order u/s 144C(5) of the Act upholding the additions proposed by the Ld. TPO. The directions of the Dispute Resolut....
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....of the issue at hand, the Panel hereby upholds the methodology proposed by the TPO to benchmark the transfer price of power generated by the CPP is wholly correct and hence, this Panel hereby confirms the adjustment of Rs. 182,23,39,293/-, The Ground No. 3 is accordingly disposed of. Effect to the directions of the Ld. DRP: Ld. DRP vide Para no. 5.6-5.14 of its direction has upheld the adjustment proposed by the TPO and accordingly the adjustment made by TPO vide order u/s. 92CA (3) dated 20.10.2023 stands. This is issued with the approval of the JCIT (TP) Range-3, Kolkata. 4. In view of the above as discussed in the draft assessment order, the Assessing Officer (hereinafter referred to as Ld. 'AO') added a sum of Rs.62,97,51,510/- to the total income of the assessee by holding as under: "7. In view of the above, as discussed in draft assessment order the total taxable income of assessee is computed based on the additions proposed by Ld. TPO. That is, the downward adjustment of Rs. 182,23,39,293/- to the income of the assessee with respect to 80-IA units. However, the claim of deduction u/s. 80-IA of the I.T. Act by the assessee is onl....
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....rried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-For the purposes of this sub-section, "market value", in relation to any goods or services, means- (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domes....
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....d (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). The TPO found that the rates at which the transactions in Uttar Pradesh, Rajasthan and Gujarat Regions were benchmarked were significantly higher than the average rate of power traded on the International Energy Exchange (IEX). The TPO thereafter averaged the rates at which the assessee had benchmarked the transactions and the average rates on which power was traded at the IEX and determined the ALP rates at Rs. 3.47 for the UP Region Rs. 5.45 for Rajasthan Region; and Rs. 20.54 for the Gujarat Region. Based on the aforesaid rates, the TPO directed a transfer pricing adjustment of Rs. 30.83 crores. The Assessing Officer framed a draft assessment order inter alia, including an adjustment on account of transfer pricing of power and steam (Rs. 30.83 crores on transfer of power from eligible units to ineligible units and Rs. 103.57 crores on account of transfer of steam from power plants to manufacturing plants). The assessee had claimed a deduction of Rs. 220.25 crores under Chapter VIA (section 80-IA), which was reduced by....
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..... 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 Guidelines, which explains various methods for determining the ALP. 38. The relevant extract of the said guidelines is set out below: "2.14. The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the associated enterprises are not arm's length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. 2.15. Following the principles in Chapter I, an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the CUP method if one of two conditions is met: (a) none of the differences (if any) between the transacti....
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....ting 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 "commodities" shall be understood to encompass physical products for which a quoted price is used as a reference by independent parties in the industry to set prices in uncontrolled transactions. The term "quoted price" refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. 2.19. Under the CUP method, the arm's length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodit....
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....ld 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 Compendium, the relevant extract is set out below:- "While applying CUP method product comparability should be examined rather than business functions. The CUP method is used in cases where an independent enterprise buys or sells products that are identical or very similar to those purchase/sold by one AE to another AE or in situations where services are rendered that are identical or very similar to those rendered in the controlled transaction. While product comparability is the most important factor under the CUP method, the following other comparability factor also play a vital role: (i) Contractual terms; and (ii) Economic circumstance Where there are difference between controlled transaction and transaction with/ between unrelated parties due to other comparability factors, adjustments should be made to enhance reliability." 40. In Sumitomo Corporation India (P.) Ltd. v. CIT Neutral Citation No. 2016:DHC:5154-DB/[2016] 71 taxmann.com 290/242 Taxma....
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....and purchase of power on the IEX is not comparable to the regular supply of power by the SEB or the power distribution companies. Undisputedly, IEX is not a source for uninterrupted power on the basis of which any power 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....
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....he SEB of State of Madhya Pradesh to supply surplus electricity at the rate of Rs. 2.32 per unit. However, the Assessee had computed the revenue from supply of electricity to its own unit at the rate of Rs. 3.72 per unit. It was the Assessee's case that the market value of the electricity was Rs. 3.72 per unit 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....
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....t Rs. 2.32 per unit as per the contract. This price is, therefore, a contracted price. Further, there was no room or any elbow space for negotiation on the part of the assessee. Under the statutory regime in place, the assessee had no other alternative but to sell or supply the surplus electricity to the State Electricity Board. Being in 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 ....