2025 (1) TMI 1128 - HC - Income Tax

Quantum of deduction available u/s 80IA - determining the ALP and the market value for the purposes of Section 80IA - ALP adjustment of specified domestic transactions from Associated Enterprises - electric power transferred by the Assessee from its eligible unit to its non-eligible unit - adjustments made on account of transfer of power as per the provision of section 92F r.w.s 80IA HELD THAT - 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. 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. 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. CUP method would be an appropriate method only if the transactions are identical inasmuch as there are no differences that would materially affect the price in an open market. And if there is any difference which affects the price the same can be reasonably ascertained and its effect can be eliminated by an appropriate adjustment. Determine the market value or the ALP of power supplied by power plants established by the Assessee to its other units - 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. Whether power traded on IEX cannot be compared with the power supplied by a SEB ? - 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. Supreme Court in Jindal Steel and Power Limited 2023 (12) TMI 417 - 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. Decided in favour of the Assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

A. Whether the ITAT erred in law and on facts in deleting the adjustment proposed by the Transfer Pricing Officer (TPO) on account of Arm's Length Price (ALP) adjustment of specified domestic transactions from Associated Enterprises for the Assessment Year (AY) 2014-15?

B. Whether the ITAT was correct in deleting adjustments made on account of the transfer of power as per the provisions of Section 92F read with Section 80IA of the Income Tax Act, 1961, without appreciating that there was a suitable selling Comparable Uncontrolled Price (CUP) rate from the central agency in the field of power trading?

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: ALP Adjustment of Specified Domestic Transactions

Relevant Legal Framework and Precedents:

Section 80IA of the Income Tax Act provides deductions for profits and gains from industrial undertakings or enterprises engaged in infrastructure development. Sub-section (8) of Section 80IA mandates that if the transfer of goods or services between eligible and non-eligible businesses does not reflect market value, profits must be computed as if the transfer was made at market value. The market value is defined under Section 92F(ii) as the ALP.

Court's Interpretation and Reasoning:

The court focused on whether the ITAT correctly applied the CUP method to determine the ALP for electricity transferred between the Assessee's eligible and non-eligible units. The ITAT's decision was based on the premise that the IEX rates could not serve as a valid external CUP due to significant differences in transaction characteristics.

Key Evidence and Findings:

The court noted that the Assessee had historically used rates from State Electricity Boards (SEBs) as internal CUPs. The TPO had used IEX rates to propose adjustments, but the ITAT found these rates unsuitable due to differences in transaction nature and reliability.

Application of Law to Facts:

The court applied the legal framework of Section 80IA and the definition of ALP under Section 92F(ii), emphasizing the need for comparable transactions to determine market value. The court agreed with the ITAT that IEX rates were not comparable due to their volatile and short-term nature.

Treatment of Competing Arguments:

The Revenue argued that IEX rates were appropriate for benchmarking. However, the court sided with the Assessee, finding that the nature of IEX transactions (short-term, bid-based) differed materially from the continuous supply agreements with SEBs.

Conclusions:

The court concluded that the ITAT was correct in deleting the adjustment proposed by the TPO, as the IEX rates were not a suitable benchmark for determining the ALP of the electricity transferred.

Issue B: Transfer of Power and Section 80IA

Relevant Legal Framework and Precedents:

Section 80IA(8) requires that the transfer of goods or services between eligible and non-eligible units be at market value, defined as the ALP. The ALP must be determined using the most appropriate method under Section 92C.

Court's Interpretation and Reasoning:

The court examined whether the ITAT correctly rejected the use of IEX rates as an external CUP. The court acknowledged the differences in transaction characteristics between IEX trades and SEB agreements, supporting the ITAT's decision.

Key Evidence and Findings:

The court highlighted the Assessee's use of SEB rates as internal CUPs and noted the ITAT's agreement that these rates were more appropriate than IEX rates due to the latter's volatility and short-term nature.

Application of Law to Facts:

The court applied the legal principles under Section 80IA and Section 92F(ii) to determine that the ITAT correctly identified the SEB rates as a better reflection of market value than IEX rates.

Treatment of Competing Arguments:

The Revenue's argument that IEX rates should be used was countered by the Assessee's evidence of significant differences in transaction characteristics, which the court found persuasive.

Conclusions:

The court concluded that the ITAT was correct in its decision to delete the adjustments based on IEX rates, as these rates did not adequately represent the market value for the Assessee's transactions.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"The CUP method cannot be applied where there is significant dissimilarity between the comparable transactions and it is not feasible to determine an adjustment to eliminate the impact of the said differences on the prices of comparable transactions."

Core Principles Established:

The court reaffirmed the necessity of using comparable transactions to determine ALP under the CUP method. It emphasized that transactions must be materially similar to serve as valid benchmarks.

Final Determinations on Each Issue:

For Issue A, the court upheld the ITAT's decision to delete the proposed ALP adjustment, finding that IEX rates were not suitable comparables. For Issue B, the court agreed with the ITAT that SEB rates were more appropriate than IEX rates for determining market value under Section 80IA.

In conclusion, the court dismissed the Revenue's appeal, affirming the ITAT's decision in favor of the Assessee. The court's analysis focused on the appropriateness of using IEX rates as a benchmark for ALP, ultimately determining that SEB rates provided a more accurate reflection of market value for the Assessee's transactions.