9911796707
TMI Blog2025 (1) TMI 1128X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its non-eligible unit. 4. The Transfer Pricing Officer (TPO) had made the said addition on account of rates of electricity quoted on the Indian Energy Exchange (hereafter IEX). The rates of energy quoted on IEX are hereafter referred to as IEX rates. The learned ITAT accepted that the IEX rates for electricity could not be used as an external comparable uncontrolled price (CUP) and held that the rates charged by the State Electricity Board (SEB) for supply of power to the Assessee was an appropriate external CUP for determining the market value of electricity as supplied by the Assessee's eligible unit to a non-eligible unit. 5. The said issue has arisen in the context of determining the quantum of exemption available to the Assessee under Section 80I of the Act. THE CONTEXT 6. The relevant facts necessary to address the aforesaid questions are briefly set out below: 7. The Assessee is a company engaged in the business of manufacturing and trading of chemicals, PVC resins, PVC compounds, UPVC windows and door systems, cement, sugar, fertilizers, seeds, textile yarn, power generation and operating retail outlets. 8. The Assessee filed its return of income for AY 2014-15 on 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred by its unit to Uttar Pradesh Power Corporation Limited (UPPCL) at the rate of Rs. 4.39 kWh; in the Gujrat Region at the rate of Rs. 38.56 kWh being the rate at which power was purchased from Dakshin Gujarat Vij Company Limited (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). 12. 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 IEX. 13. The TPO issued a notice dated 06.10.2017 under Section 133(6) of the Act to IEX. In response to the said notice, IEX furnished certain information according to which the average sale price of power at the IEX (IEX rates) during the financial year 2013-14 (relevant to AY 2014-15) was ascertained as under: "(i) UP Region Rs. 2.55 per KWH; (ii) Rajasthan Region Rs. 2.55 per KWH; (iii) Gujrat Region Rs. 2.52 per KWH" 14. 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 determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined at Rs. 267,14,55,411/-. Since the tax payable on the said amount was higher than the tax payable on book profits, the AO proposed a demand under the normal provisions of the Act. 18. The Assessee filed its objections before the Dispute Resolution Panel (DRP) against the draft assessment order dated 29.12.2017. 19. The Assessee also submitted that it had been consistently following methodology of using rates at which power was supplied and purchased by the SEBs as an internal CUP since 1997-98 and therefore, the said rates were required to be applied for AY 2014-15 as well. 20. The learned DRP did not accept that the rates at which it had purchased power from SEBs, could be considered as an internal CUP. The DRP held that only the rates at which the petitioner had sold power to SEB would be considered as an internal CUP and not the rates at which the Assessee had purchased electricity. Since the Assessee had not sold electricity to SEBs in Gujarat and Rajasthan region; the rates at which it purchased electricity from DGVCL and JVVNL could not be considered as internal CUPs. The relevant extract of the said decision is set out below: "2.2.5 We have considered the submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h at Loni (March 2014 and Rs. 4.24 per Kwh at Ajbapur. In view of the fact that internal CUP is available for these three units, the AO/TPO is directed to apply internal CUP for benchmarking the transfer/sale of power (electricity) by these three units and re-compute the adjustment in respect of these three units. 2.2.8 As discussed earlier herein above, in respect of the Kota unit (no adjustment was made in respect of Bharuch unit) the assessee has not applied correct internal CUP in as much as the assessee has applied the rate at which it is purchasing power from SEBs, which is an external CUP. Since the assessee has not sold power to any third party, the comparable sale rate for internal CUP is not available. In fact, had the assessee sold power to any independent third party, that could have been considered as correct internal CUP. Under CUP strict comparability is desired and adjustments for variations are not allowed, data of which in any case in respect of SEBs are not available. The TPO has applied the average price of power traded by IEX applicable for Kota, Rajasthan and the price at which the assessee has purchased power from Jaipur Vidyut Vitran Nigam Ltd. Under these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as if the transfer had been made at market value of such goods or services. 28. Section 80IA (1) and 80IA (8) of the Act is set out below: "80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. *** *** *** (8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reading of Explanation to Sub-section (8) of Section 80IA, Section 92BA and Section 92F (ii) of the Act that the market value in relation to any goods or services under Sub-section (8) of Section 80IA is required to be determined in terms of Section 92C of the Act, which contains provisions regarding computation of the ALP. 33. It is relevant to refer to Sub-sections (1) and (2) of Section 92C of the Act. The same are set out below: "92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; (b) resale price method, by which,-- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled 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. 37. It is relevant to refer to OECD Guidelines2, 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made to achieve comparability. 2.18. Subject to the guidance in paragraph 2.2 for selecting 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 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used and risks assumed by other entities in the supply chain should 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 Compendium3, 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 Pvt. Ltd. v. CIT Neutral Citation No. 2016:DHC:5154-DB, this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the supply of power is unreliable. 47. It is stated that in order for a party to purchase power from IEX, the said party has to participate in the bidding process. The same entails furnishing a bid in advance for supply of fifteen minutes slots. Illustratively, it is stated that if a party requires power supply for a period of four hours, it would be required to submit sixteen bids for fifteen minutes slots. Further, the bidder cannot resile from the bids furnished by it in advance. 48. In view of the above, it is contended that power traded on IEX cannot be compared with the power supplied by a SEB. 49. It is not disputed that IEX is a platform, which is used by power producing units to sell surplus power for short term requirements. IEX is not a platform for sourcing continuous power for power consuming units. It is also pointed out that there is a high level of volatility in the IEX rates as it depends on immediate availability of surplus electricity. 50. It is also contended by the Assessee that the rates quoted on IEX are in respect of power supplied and not the power that is consumed and therefore, there is a material difference between the power that is purchased fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y SEBs to the Assessee and the supply of electricity by the Assessee's eligible units. However, there is a difference between the transactions being benchmarked, which is supply of electricity by captive units, and the transaction of supply of electricity by distribution companies/corporations. The power distribution companies enjoy a near monopoly status. The tariff charged by such companies are regulated tariffs. However, we accept that there is a sufficient degree of similarity between the said transaction for reasonably determining the ALP by using the CUP method. 57. We also consider it apposite to refer to the recent decision of the Supreme Court in Commissioner of Income Tax v. Jindal Steel and Power Limited (2024) 460 ITR 162. The principal issue involved in the said decision was the determination of market value of goods and services. In terms of Clause (i) of Explanation to Sub-section (8) of Section 80IA of the Act, the market value in relation to goods and services would mean the price that such goods or services would ordinarily fetch in the open market. In the aforesaid context, the Supreme Court had considered the question of what would constitute an open market in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricity Board or avail electricity produced by its own captive power generating unit. No other entity could supply electricity to any consumer. A private person could set up a power generating unit having restrictions on the use of power generated and at the same time, the tariff at which the said power plant could supply surplus power to the State Electricity Board was also liable to be determined in accordance with the statutory requirements. In the present case, as the electricity from the State Electricity Board was inadequate to meet power requirements of the industrial units of the assessee, it set up captive power plants to supply electricity to its industrial units. However, the captive power plants of the assessee could sell or supply the surplus electricity (after supplying electricity to its industrial units) to the State Electricity Board only and not to any other authority or person. Therefore, the surplus electricity had to be compulsorily supplied by the assessee to the State Electricity Board and in terms of Sections 43 and 43A of the 1948 Act, a contract was entered into between the assessee and the State Electricity Board for supply of the surplus electricity by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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. 60. In view of the above, the questions of law are answered in favour of the Assessee and against the Revenue. 61. The appeal is dismissed in the aforesaid terms. --------------------- Notes: 1. 92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:-- (i) [***] (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or (va) any business transacted between the persons referred to in sub-section (6) of section 115BAB; (vb) any business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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