2025 (7) TMI 1038 - AT - Income Tax

TP adjustment - transfer of electricity from eligible units to non-eligible units - adjustment as made for electricity transfer from captive power division to other division/ paper unit and adjustment towards sale of power to RPG Industrial power product ( RPG ) - AR submits that the assessee has entered into two types of specified domestic transactions transfer of electricity from eligible unit to non-eligible unit and sale of power - HELD THAT - It is true that the actual loss includes certain factors which are not affected the electricity transmitted by the eligible unit to non-eligible unit such as loss due to theft loss due to unusual circumstances such as lightning etc. since it is not dealing with the public at large. The loss of electricity Board like PVVNL is affected by certain extraordinary and exceptional circumstances which are not in existence in the close distribution environment i.e. between eligible unit to non-eligible unit of the assessee. Therefore as against the actual loss approved/standard loss prevailing in the industry should be taken as the benchmark. Accordingly we direct the AO/TPO to take the approved/standard loss as determined by the Regulatory Authority in this regard and re-worked the price of electricity for the purpose of adjustment if any required to be made by reducing such transmission loss from the price charged by PVVNL from consumers which is not in dispute. We are not sure whether transmission loss of 17.49% as taken by the assessee is approved/standard loss as no supporting evidences filed before us. Therefore the same should be taken as per norms prescribed by the regulatory authorities towards transmission/distribution loss and ALP would be worked out accordingly. With these directions this issue is allowed in favour of the assessee. Transfer of steam from eligible unit to non-eligible unit and sale thereof for captive consumption in other units - We hold that the working of TPO by converting the HPS to LPS and electricity as common measurement unit i.e. kcal is incorrect and correct calculation as given by the assessee in written submission. Therefore the AO/TPO is directed to re-workout the cost of steam after considering the errors and omissions brought to the notice by the assessee and then worked out the amount of adjustment if any. With these directions all grounds of appeal are partly allowed for statistical purposes.

Summary

ISSUES:

• Whether the transfer pricing adjustment on transfer of electricity from eligible units to non-eligible units is correctly determined considering transmission/distribution losses.
• Whether the transfer pricing adjustment on transfer and sale of steam from eligible units to non-eligible units is correctly determined, particularly regarding cost of production and valuation methodology.
• Whether steam qualifies as "power" under section 80IA of the Income Tax Act and is eligible for deduction accordingly.
• Whether the Transfer Pricing Officer (TPO) erred in computational methodology by converting steam and electricity into a common unit (kcal) and combining costs.
• Whether the assessment order is barred by limitation and whether interest under sections 234A, 234B, and 234C is correctly charged.

RULINGS / HOLDINGS:

• Regarding transfer of electricity, the Court held that the actual transmission loss of 20.63% taken by the TPO includes extraordinary losses not applicable to the intra-group transfer; therefore, the approved/standard loss as determined by the Regulatory Authority should be applied for arm's length price (ALP) calculation.
• Regarding transfer and sale of steam, the Court held that steam is a valuable source of power with a cost of production, and the TPO erred in treating steam cost as nil; the ALP should be based on the cost certified by cost accountants and other professionals, not nil.
• The Court held that steam qualifies as "power" under section 80IA(4) of the Act, interpreting "power" in common parlance as "energy" in any form, including steam, and thus is eligible for deduction under section 80IA.
• The Court found that the TPO's method of converting high-pressure steam (HPS), low-pressure steam (LPS), and electricity into a single unit (kcal) and combining costs was incorrect; the cost of steam and electricity should be calculated separately, and the TPO is directed to rework the cost accordingly.
• Grounds relating to limitation and interest under sections 234A, 234B, and 234C were either not pressed or dismissed without detailed adjudication.

RATIONALE:

• The Court applied the provisions of the Income Tax Act, 1961, particularly sections 80IA(4), 92C(2), 143(3), and 144C(13), and relied on established Transfer Pricing principles including the Comparable Uncontrolled Price (CUP) method.
• The Court referred to authoritative guidance from the Institute of Cost and Works Accountants' "Guidance Note on Cost Accounting Standard on Cost of Utilities (CAS-8)," which treats utilities such as steam as distinct cost objects with separately ascertainable costs.
• Precedents from coordinate benches and higher courts, including judgments of the Hon'ble Supreme Court and jurisdictional High Courts, were relied upon to affirm that steam has a determinable cost and qualifies as power for deduction purposes under section 80IA.
• The Court distinguished the actual transmission loss from the standard regulatory loss, emphasizing that extraordinary losses (e.g., theft, lightning) affecting public utilities do not apply to intra-group transfers, necessitating use of standard loss norms for ALP determination.
• The Court identified a computational error by the TPO in aggregating steam and electricity costs into a common unit without proper segregation, directing recalculation consistent with professional cost certifications and accepted accounting standards.
• No substantial question of law was admitted by the jurisdictional High Court on the steam transfer issue, reinforcing the Tribunal's view that steam transfer valuation based on cost is appropriate.
• The Court declined to apply adverse precedents that were factually distinguishable, maintaining the principle that the cost of steam must be recognized rather than treated as nil.