2025 (1) TMI 177 - AT - Income Tax

TP Adjustment - determination of transfer price for supply of electricity from thermal unit to washeries division of the assessee during the year - reference u/s 92CA(1) - TPO applied an average of the rate published by CSEB (as adjusted by transmission and distribution cost but not adjusted for transmission and distribution losses) and the rate of trade as per IEX (without adjusting for any transmission / distribution loss or charges) and arrived at the rate of Rs 2.868 per unit to be the ALP - fair market value for the transfer rate of power or the selling rate of power in the industry by CSEB is Rs 4.05 per unit - HELD THAT - Whether the said rate of Rs 4.05 per unit being the prevailing market rate could be used for transfer of electricity between two units of the same Assessee for captive consumption was subject matter of consideration by the Hon ble Supreme Court in the case of CIT vs Jindal Steel Power Ltd 2023 (12) TMI 417 - SUPREME COURT as held market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board's rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under section 80-IA of the Act. Thus, Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. In the present case before us, the market value is Rs 4.05 per unit being the rate charged by CSEB on the industrial consumers, whereas the transfer price between two units of the assessee was Rs 4 per unit. The same is well within the market rate of Rs 4.05 per unit and hence the price of Rs 4 per unit is to be construed to be at ALP. Accordingly, no transfer pricing adjustment is warranted. Addition towards Employees contribution to PF and towards disallowance of depreciation on the ground that the said figures does not even pertain to the assessee before us - AR was very fair in stating that the said issue may be restored to the file of Learned AO for denovo adjudication for adopting the correct figures in accordance with law after considering the facts and figures pertaining to the assessee and make an addition if warranted.

2023 (12) TMI 417 - SC

1. ISSUES PRESENTED and CONSIDERED

The core legal issues addressed in this judgment are:

Whether the transfer price of electricity from the thermal unit to the washeries division of the assessee was at Arm's Length Price (ALP) under the transfer pricing regulations.
Whether the market value of electricity should be determined based on the rate charged by the State Electricity Board (CSEB) to industrial consumers or other benchmarks.
The appropriateness of the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO).
Resolution of discrepancies in the figures related to Employees' contribution to PF and depreciation disallowance.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Determination of Transfer Price for Electricity

Relevant legal framework and precedents: The case primarily revolves around Section 92CA(1) and Section 80IA of the Income-tax Act, 1961. The judgment references the Supreme Court decision in CIT vs Jindal Steel & Power Ltd, which discusses the determination of market value for captive consumption.
Court's interpretation and reasoning: The court emphasized that the market value should be determined based on the rate at which the State Electricity Board supplies electricity to industrial consumers, not the rate at which the electricity is sold to the Board.
Key evidence and findings: The assessee transferred electricity at Rs 4 per unit, whereas the CSEB rate was Rs 4.05 per unit. The TPO initially determined the ALP at Rs 2.868 per unit, leading to a transfer pricing adjustment.
Application of law to facts: The court applied the principle that the market value should reflect the price in an open market, as defined in the Jindal Steel case. The transfer price of Rs 4 per unit was deemed to be within the market rate.
Treatment of competing arguments: The revenue argued for a lower ALP, while the assessee contended that Rs 4 per unit was appropriate. The court sided with the assessee, referencing the Supreme Court's interpretation of market value.
Conclusions: The court concluded that no transfer pricing adjustment was warranted, as the transfer price was within the acceptable market range.

Issue 2: Discrepancies in PF and Depreciation Figures

Relevant legal framework and precedents: The issue pertains to the accuracy of figures related to Employees' contribution to PF and depreciation.
Court's interpretation and reasoning: The court acknowledged the need for accurate figures and accepted the assessee's request for a re-evaluation.
Key evidence and findings: The figures in question were not clearly attributable to the assessee.
Application of law to facts: The court decided to remand the issue to the AO for a fresh determination based on correct figures.
Treatment of competing arguments: The court accepted the assessee's argument for re-evaluation in the interest of fairness.
Conclusions: The court allowed the grounds for statistical purposes, directing a re-assessment by the AO.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market."
Core principles established: The market value for transfer pricing should reflect the rate at which goods or services are available in an open market, characterized by free competition and the laws of supply and demand.
Final determinations on each issue: The court dismissed the revenue's appeal regarding the transfer pricing adjustment and allowed the assessee's cross-objections for statistical purposes, directing a re-evaluation of the PF and depreciation figures.

In conclusion, the judgment underscores the importance of aligning transfer pricing determinations with market realities and acknowledges the necessity for accurate financial reporting in tax assessments.

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