2025 (7) TMI 964 - AT - Income Tax

TP Adjustment - Reference made to the TPO for determination of Arm s Length Price ( ALP ) of the specified domestic transaction - HELD THAT - We find that the action of the AO is in accordance with the provisions of law and therefore we do not find any force in the arguments in accordance are placed in the written submissions filed by the assessee. Accordingly Ground No.1 raised by the assessee is hereby dismissed. Denial of deduction claimed by the assessee u/s 80IA (4) on transfer of electricity - adjustment made by TPO on the price of power charged by eligible unit to non-eligible unit and adjustment made by TPO/AO towards the sale price of steam transferred from eligible unit to non-eligible unit - HELD THAT - TPO made the adjustments towards the sale price taken for transfer of electricity as per the average rate at IEX in Uttar Pradesh. Further the cost of production of Steam from eligible unit to non-eligible unit is taken at NIL by holding the same as By-Product. The appellant had generated electricity from two power plants and the electricity produced is only meant for captive consumption and not otherwise. The appellant did not sell any electricity to the outsiders. The generation of electricity and its supply are controlled by the Electricity Act 2003 and the Electricity (Supply) Act 1948. As per the Act no person without a license can trade in the electricity. The generation companies are different from the distribution companies. The generation companies as per the statutory mandate are bound to sell electricity to the distribution companies and the price thereof is determined as per the formula given in the Electricity Act and the contracts as executed between the generation companies and distribution companies. In the open market none of the generation companies can supply electricity. So the end consumers always remain served by the electricity supplied by the distribution companies. The eligible units of the appellant are also involved in supply of electricity to the non-eligible units for consumption. The non-eligible units are the end user of the supplies made by the eligible units. What rate it should be charged/ priced when transferred to another unit? - For the purposes of determination of the market value of the transfer of electricity from eligible unit to non-eligible unit is to be taken at the market value at which the electricity company charges from consumers as has been requested by Ld.AR. Since in the present case the assessee has taken the price at the rates at which the electricity is supplied by MVVNL to the industrial consumers i.e. Rs. 6.36 per unit thus the sale value computed by the assessee for transfer of electricity from eligible unit to non-eligible unit is at Arm length price and accordingly the adjustment made by the AO / TPO at Rs. 32, 68, 31, 286/- is hereby deleted. The grounds of appeal are allowed. Adjustment made by the AO/TPO on the transfer of steam from eligible unit to non-eligible unit by taking the cost of production of steam at NIL in our considered view steam is commercial and viable product and its value cannot be taken at NIL. Since the steam is one of the forms of power and thus can be considered as joint product and not as by-product. Similar issue was came for consideration before the Co-ordinate Bench of the ITAT Delhi bench in the case of DCM Sriram Ltd. 2021 (11) TMI 260 - ITAT DELHI wherein a detailed discussion is made on this issue and thereafter the Hon ble Co-ordinate Bench of the Tribunal was of the view that the steam is a valuable source of power and has cost of production As respectfully following the decision of Co-ordinate Bench and of the Hon ble jurisdictional high court in the case of DCM Shriram Ltd. 2025 (1) TMI 1128 - DELHI HIGH COURT and further relying upon the judgement of Cushman Wakefield 2014 (5) TMI 897 - DELHI HIGH COURT transfer of steam from eligible unit valued at cost of production for the purpose of claiming deduction u/s 80IA is hereby held as reasonable and the adjustment of Rs.51, 63, 85, 174/- made by AO/TPO by taking the cost of production of steam at NIL is deleted. Accordingly Ground No. 4 to 4.1 taken by the assessee are allowed. Adhoc disallowance @ 10% made out of legal professional and consultancy charges paid - We find that AO has not followed the directions given by Ld.DRP in the final assessment order and therefore we set aside the order of AO and remand back this issue to the file of AO to follow the directions as made by Ld.DRP by making verification of facts whether TDS was deducted and deposited on such payments claimed towards legal professional and consultancy expenses and if found so no disallowance is to be made. With these directions this Ground of appeal is partly allowed for statistical purposes. Difference between custom duty as per export-import data and is reflected in the return of income - From the submissions of the assessee and the orders of the lower authorities we find that the re-conciliation statement as stated to have been submitted before the AO and Ld.DRP was not considered by them in proper perspective and therefore in the interest of justice we remand back this issue to the file of the AO with the direction that to verified the difference as explained by the assessee in terms of the re-conciliation statement and other evidences stated above as and decide the issue in accordance with law Levy of interest u/s 234B 234C - The levy of interest is mandatory however the amount charged is consequential to the income finally determined and therefore the AO is directed to charge the interest u/s 234B on the income finally computed after giving effect to the order of the Tribunal.

Summary

The core legal questions considered by the Tribunal in these appeals pertain to the determination of the Arm's Length Price (ALP) for specified domestic transactions under the Income Tax Act, 1961, specifically in relation to the transfer pricing adjustments made on the transfer of electricity and steam from eligible units (captive power plants) to non-eligible units within the same company. The issues also include the admissibility of deduction claimed under section 80IA(4) of the Act, the valuation of steam as a product for transfer pricing purposes, the correctness of disallowance of certain expenses on an adhoc basis, the addition on account of difference in custom duty as per export-import data, and the levy of interest under sections 234B and 234C of the Act.

The principal issues identified and considered are:

• Whether the assessment order and reference to the Transfer Pricing Officer (TPO) for determination of ALP under section 92CA(1) is valid and in accordance with law.
• The correctness of disallowance of deduction claimed under section 80IA(4)(iv) on account of transfer of electricity and steam from eligible units to non-eligible units, including the methodology adopted for determining ALP of these transfers.
• The validity of the adjustment made by the TPO/AO on the sale price of power transferred, specifically the adoption of average rates from Indian Energy Exchange (IEX) as the comparable uncontrolled price versus the price charged by the State Electricity Board (MVVNL) to industrial consumers.
• The appropriateness of treating steam as a by-product with nil cost for transfer pricing purposes, and the consequent adjustment made by the TPO/AO.
• The legality and reasonableness of the adhoc disallowance of legal, professional, and consultancy expenses made by the AO contrary to the directions of the Dispute Resolution Panel (DRP).
• The justification for addition made on account of difference in custom duty between export-import data and return of income.
• The correctness of levy of interest under sections 234B and 234C of the Act.

Issue-wise Detailed Analysis:

1. Validity of Reference to TPO for ALP Determination

The Tribunal observed that the AO's action in referring the specified domestic transactions to the TPO for determination of ALP under section 92CA(1) was in accordance with the provisions of the Income Tax Act. The assessee's contention challenging this procedural step was dismissed as lacking merit.

2. Disallowance of Deduction under Section 80IA(4)(iv) on Transfer of Electricity and Steam

The assessee claimed deduction under section 80IA(4) on the transfer of electricity and steam from eligible units (power plants) to non-eligible units (paper manufacturing units) for captive consumption. The deduction was supported by audit reports. The TPO made significant downward adjustments to the price of electricity transferred, reducing it from INR 6.36 per unit to INR 2.58 per unit based on average IEX rates for Uttar Pradesh, resulting in an adjustment of over INR 32.68 crores. Similarly, the TPO treated steam as a by-product with nil cost, disallowing the deduction claimed on the transfer of steam, resulting in an adjustment of over INR 51.63 crores.

The Tribunal took note of the statutory framework under sections 80A(6) and 80IA(8) of the Act, which define "market value" in relation to transfer pricing provisions, mandating that the market value for goods transferred between eligible and non-eligible units should be the ALP as defined under section 92F.

In assessing the transfer price of electricity, the Tribunal relied extensively on the Supreme Court's ruling in Jindal Steel & Power Ltd., which clarified that the market value of electricity supplied by captive power plants to industrial units should be determined by reference to the price at which State Electricity Boards supply electricity to industrial consumers in the open market, rather than the price at which power producers sell to the distribution companies. The Tribunal further observed that the IEX rates are not comparable uncontrolled prices because power traded on IEX is short-term, volatile, and subject to bidding, unlike the continuous, regulated supply by State Electricity Boards.

The Tribunal also noted that in the assessee's own case for earlier assessment years, similar adjustments were deleted by the Tribunal and no appeal was preferred by the Revenue, thus invoking the principle of consistency. The Tribunal accordingly deleted the adjustment of INR 32.68 crores made by the AO/TPO on transfer of electricity.

Regarding steam, the Tribunal rejected the TPO's approach of treating steam as a by-product with nil cost. It held that steam is a commercial and viable product, a form of power with a cost of production. The Tribunal relied on detailed technical evidence provided by the assessee, including certified cost sheets prepared in accordance with the Cost Accounting Standards issued by the Institute of Cost Accountants of India. It also referred to judicial precedents, including decisions by coordinate benches of the Tribunal and High Courts, which recognized steam as a joint product with a definable cost and entitled to deduction under section 80IA.

The Tribunal cited the detailed cost accounting guidance which treats utilities such as steam as distinct cost objects with separately ascertainable costs, including direct material, employee cost, expenses, and overheads. It also referred to a case involving the assessee's sister concern where the dispute resolution panel accepted the cost-based valuation of steam.

Following these precedents and technical standards, the Tribunal deleted the adjustment of INR 51.63 crores made by the AO/TPO on the transfer price of steam.

3. Disallowance of Legal, Professional, and Consultancy Expenses

The AO made an adhoc disallowance of 10% of these expenses, citing lack of details and steep increase in expenses. The DRP directed the AO to allow the expenses if tax was deducted at source and paid to the Government. However, the AO failed to follow the DRP's directions in the final order.

The Tribunal held that adhoc disallowances are not sustainable in law without concrete evidence of bogus or excessive claims. It remanded the issue to the AO to verify whether TDS was deducted and deposited, and if so, to allow the expenses as per DRP's directions.

4. Addition on Account of Difference in Custom Duty

The AO made an addition of over INR 1.21 crores on account of alleged difference between custom duty as per export-import data and return of income. The assessee submitted detailed reconciliation statements and evidence of payment of customs duty along with challans.

The Tribunal found that the AO and DRP did not properly consider the reconciliation and remanded the matter to the AO for verification and decision in accordance with law.

5. Levy of Interest under Sections 234B and 234C

The Tribunal noted that the levy of interest under these sections is mandatory but consequential to the final income determined. It directed the AO to compute interest based on the income finally determined after giving effect to the Tribunal's order.

Significant Holdings and Core Principles:

"The market value of the power supplied by the assessee to its industrial 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."

"Steam is a valuable source of power; it has a cost of production which can be determined by accepted cost accounting standards; it cannot be treated as a by-product with nil cost for transfer pricing purposes."

"Adhoc disallowances of expenses without concrete evidence are not sustainable; directions of the Dispute Resolution Panel must be followed unless successfully challenged."

"The levy of interest under sections 234B and 234C is mandatory but must be computed on the income finally determined after giving effect to the Tribunal's order."

"The transactions between power producers and State Electricity Boards are regulated and not undertaken in uncontrolled conditions; hence, prices under such transactions cannot be treated as comparable uncontrolled prices for transfer pricing purposes."

"The principle of consistency applies where similar issues in earlier years were decided in favour of the assessee and no appeal was preferred by the Revenue."

In conclusion, the Tribunal partly allowed the appeals by deleting the large transfer pricing adjustments on transfer of electricity and steam, directing adherence to the market prices charged by State Electricity Boards to industrial consumers, recognizing steam as a joint product with ascertainable cost, remanding the adhoc disallowance of expenses for verification, and remanding the addition on custom duty difference for proper verification. The interest levied was directed to be recalculated in accordance with the final income determined.