Delhi High Court
Pr. Commissioner Of Income Tax vs Dcm Shriram Ltd on 21 January, 2025
Author: Vibhu Bakhru
Bench: Swarana Kanta Sharma, Vibhu Bakhru
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 21.01.2025
+ ITA 566/2023
PRINCIPAL COMMISSIONER OF
INCOME TAX - 1, NEW DELHI .....Appellant
Versus
DCM SHRIRAM LTD. ....Respondent
Advocates who appeared in this case:
For the Appellant: Mr Induraj Singh Rai, SSC with Mr Sanjeev
Menon, Mr Rahul Singh, and Mr Anmol
Jagga, Advocates.
For the Respondent: Mr S. Ganesh, Senior Advocate with Mr V.P.
Gupta and Mr Anurav Kumar, Advocates.
CORAM
HON'BLE THE ACTING CHIEF JUSTICE
HON'BLE MS JUSTICE SWARANA KANTA SHARMA
JUDGMENT
VIBHU BAKHRU, ACJ
1. The Revenue has filed the present appeal under Section 260A of
the Income Tax Act, 1961 (hereafter the Act) impugning an order dated
28.10.2021 (hereafter the impugned order) passed by the learned
Income Tax Appellate Tribunal (hereafter the ITAT) in ITA
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No.7362/Del/2018 captioned DCM Shriram Ltd. v. Addl. CIT in respect
of the assessment year (AY) 2014-15.
QUESTIONS OF LAW
2. The Revenue had projected several questions of law for
consideration of this court. However, this court had, by an order dated
02.05.2024, confined the present appeal to the following questions:
“A. Whether on the facts and circumstances of the case
and law, the Hon’ble ITAT has erred in law and on facts
in deleting the adjustment proposed by the TPO on
account of ALP adjustment of specified domestic
transactions from Associated Enterprises for the A.Y
2014-15?
B. Whether ITAT was right in deleting adjustments made
on account of transfer of power as per the provision of
section 92F r.w.s 80IA of the Act without appreciating
that there was suitable selling CUP rate from the central
agency in the field of power trading?
3. The learned ITAT had allowed the appeal (ITA
No.7362/Del/2018) preferred by the respondent (hereafter the
Assessee), inter alia, in regard to the adjustment of ₹26,52,98,490/- in
respect of electric power transferred by the Assessee from its eligible
unit to 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
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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
28.11.2014 declaring its taxable income at ₹1,37,91,54,650/-. The
Assessee disclosed its book profit for the purposes of Section 115JB of
the Act at ₹3,16,84,96,338/-. The Assessee also paid tax of
₹66,41,32,675/- on its book profits. Subsequently, the Assessee filed a
revised return claiming a higher TDS of ₹3,53,99,761/- as against
₹3,53,76,361/- claimed in the original return.
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9. The Assessee’s return was picked up for scrutiny. During the said
proceedings, it was found that the Assessee had an international
transaction with associated enterprise (AE) and accordingly, the
Assessing Officer (AO) referred the Assessee’s return to the Transfer
Pricing Officer (TPO) for determination of the arm’s length price (ALP)
on the international transaction. The TPO passed an order dated
31.10.2017 accepting that the Assessee’s “international transactions”
were on arm’s length basis. However, in respect of certain eligible
domestic transaction, it was held that the profits of the power
undertaking qualifying for deduction under Section 80IA of the Act
needed to be reduced by ₹30,83,65,268/-. The said adjustment was
determined, inter alia, on the basis that the transfer of electricity
generated by the Assessee’s eligible power units was not at the market
value.
10. The Assessee had transferred power from its eligible units to non-
eligible units in three regions. A tabular statement setting out the power
transferred by the Assessee’s eligible units to ineligible units as set out
in the order dated 31.10.2017 passed by the TPO, is reproduced below:
“UP Region
Transferor Transferree Quantity Rate Amount
TG-1, Loni Sugar Plant 1,86,41,986 4.29 7,99,74,118
(Eligible) (Non-Eligible) KWHTG-II, Loni Sugar Plant 9,23,797 KWH 4.20 38,79,947
(Eligible) (Non-Eligible)
TG-1, hariawan Sugar Unit 1,93,06,294 4.29 8,28,24,001
(Eligible)
TG-II, hariawan Sugar Unit 8,51,577 4.29 36,53,265
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TG-II, Ajbapur Sugar Unit 34,83.722 4.24 1,47,70,983
(Eligible)
TG-III, Ajbapur Sugar Unit 1,02,52,023 4.24 4,34,68,579
(Eligible)
Rajasthan Region
Kota Power Fertilizer & 31,21,15,871 6.30 196,63,29,987/-
Chemical Plant
Plant
Gujrat Region
Bharuch Power Alkali & 40,31,84,860 6.67 268,96,24,567/-
Plant Chemical Plant KWH
Total 4884525447"
11. The Assessee had benchmarked the transactions at the rate on
which electricity was transferred by its unit to Uttar Pradesh Power
Corporation Limited (UPPCL) at the rate of ₹4.39 kWh; in the Gujrat
Region at the rate of ₹38.56 kWh being the rate at which power was
purchased from Dakshin Gujarat Vij Company Limited (DGVCL); and
at the rate of ₹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:
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"(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 determined the ALP rates at ₹3.47 for the UP
Region, ₹5.45 for Rajasthan Region; and ₹20.54 for the Gujarat Region.
Based on the aforesaid rates, the TPO directed a transfer pricing
adjustment of ₹30,83,65,268/-. A tabular statement of determination of
the aforesaid adjustment as set out by the TPO in its order dated
31.10.2017, is reproduced below:
“UP Region
Transf Transf Quantit Ra Amount Rate at which Aver F=(D+ Differ Adjustm
y (A) te (C=A*B) power was age ence
eror eree E)/2 ent
(B purchased/sold IEX in
) from rates rates (h=A*G
UPPCL/DGVCL/ (E) of
)
JVVNL(D) power
(G=F-
B)
TG-I, Sugar 1,86,41, 4. 7,99,74,1 4.39 2.55 3.47 0.82 1,52,86,
Loni Plant 29
986 18 429
(Eligi (Non-
ble) Eligib KWH
le)
TG-II, Sugar 9,23,79 4. 38,79,94 4.39 2.55 3.47 0.73 6,74,372
Loni Plant 20
7 KWH 7
(Eligi (Non-
ble Eligib
le)
TG-I, Sugar 1,93,06, 4. 8,28,24,0 4.39 2.55 3.47 0.82 1,58,31,
haria Unit 29
294 01 161
wan
(Eligi
ble)
TG-II, Sugar 8,51,57 4. 36,53,26 4.39 2.55 3.47 0.82 6,98,293
haria Unit 29
7 5
wan
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(Eligi
ble)
TG-II, Sugar 34,83,7 4. 1,47,70,9 4.39 2.55 3.47 0.77 26,82,46
Ajbap Unit 24
22 83 6
ur
(Eligi
ble)
TG- Sugar 1,02,52, 4. 4,34,68,5 4.39 2.55 3.47 0.77 78,94,05
III, Unit 24
023 79 8
Ajbap
ur
(Eligi
ble)
Rajasthan Region
Kota Fertili 31,21,1 6. 196,63,2 8.35 2.55 5.45 0.85 26,52,98
Power zer & 30
5,871 9,987/- ,490
Plant Chemi
cal KWH
Plant
Gujrat Region
Bharu Alkali 40,31,8 6. 268,96,2 38.56 2.52 20.54 Nil Nil
ch & 67
4,860 4,567/-
Power Chemi
Plant cal KWH
Plant
Total 488,45,2 30,83,65
5,447 ,268"
15. The TPO also directed a transfer pricing adjustment of
₹1,03,57,45,275/- on account of transfer of steam from power plants to
manufacturing plants as according to the TPO, the said transfer was
required to be made at Nil value.
16. The AO framed a draft assessment order dated 29.12.2017, inter
alia, including an adjustment of ₹134,41,10,543/- on account of transfer
pricing of power and steam (₹30,83,65,268 on transfer of power from
eligible units to ineligible units and ₹103,57,45,275/- on account of
transfer of steam from power plants to manufacturing plants).
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17. The Assessee had claimed a deduction of ₹220,24,71,231/- under
Chapter VIA (Section 80IA) of the Act, which was reduced by the
aforesaid adjustment of ₹1,34,41,10,543/-. Accordingly, the Assessee’s
income under the normal provisions was determined at
₹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:
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“2.2.5 We have considered the submissions of the assessee and
the TP order. We have also considered the judgments relied
upon by the assessee. The various judgments referred to by the
assessee have held that in terms of the provisions of sub-
section (8) of s. 80IA of the Act the ‘market value’ referred to
in the Explanation below the sub-section (8) should be taken
as the rate, in this case the rate of power, to a consumer in the
open market and not the rate at which power is sold to supplier.
Thus, unambiguously it is held in these judgments that the rate
at which the supplier sells in the open market should be
considered for benchmarking the transactions. Therefore, the
rate at which IEX or the Electricity Boards sells power to the
consumer are para materia for determining the ALP of the
impugned transactions. IEX is the central exchange which
buys power from various producers of power irrespective of
the sources material from which power is produced, and sells
power to the consumer as per their demand. If the IEX sells
power to consumers at lower price, any consumer would
prefer to purchase power from IEX, or any other supplier of
power and certainly not from a supplier who sells power at
high cost.
2.2.6 On consideration of the facts of the case it is apparent
that the assessee has sold surplus power generated from the
power units at Ajbapur. Hariawan and Loni in UP to SEBs as
per agreements with them for sale of surplus power and in
respect of the power unit at Kota in Rajasthan the assessee has
purchased power from the SEB. The assessee has taken both
the power sold to the three SEBs in UP as well as power
purchased from SEB in Kota as internal CUP. This is a
fallacious and incorrect method since while the former are
internal CUP, the latter could only be an external CUP.
2.2.7 The assessee has submitted copies of agreements with
SEBs in respect of the three power units in UP for sale of
surplus power to them. The assessee has entered into separate
agreements with Madhyanchal Vidyut Vitran Nigam Ltd. in
respect of the three units at Hariawan) (w.e.f. 01.03.2006),
Loni (w.e.f. 06.12.2006 and Ajbapur w.e.f. 26.12.2006). The
assessee has also submitted the invoices of power bills duly
verified by the Executive Engineer & Nodal Officer of theSignature Not Verified
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respective SEB according to which the rate of sale of power
by the assessee to the SEBs at Hariawans Rs. 4.39 per Kwh
(March 2014), Rs. 4.39 per Kwh 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 facts and
circumstances, the adjustment made by the TPO in respect of
power transferred/sold from its power unit at Kota, Rajasthan
is upheld.”
21. In view of the aforesaid directions, the transfer pricing
adjustment in respect of power supplied by the Assessee’s eligible units
to ineligible units was determined at ₹26,52,98,490/-.
22. The Assessee appealed the said decision before the learned ITAT
(ITA No.7362/Del/2018). The learned ITAT upheld the decision of the
DRP in holding that the rates at which the power was sold in the UP
region by the Assessee’s power units could be considered as an internal
CUP and the rates at which power was purchased by the Assessee from
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DGVCL and JVVNL in Rajasthan and Gujarat region were required to
be treated as external CUPs.
23. However, the learned ITAT accepted the Assessee’s contention
that the rates at which electricity was traded on IEX could not be
considered as external CUPs as the products (energy sold on spot rates
and energy supplied/purchased by State Electricity Board) were not
sufficiently comparable. Accordingly, the learned ITAT deleted the
additions made on account of transfer pricing of power from the
Assessee’s eligible units to ineligible units.
24. The learned ITAT also accepted the Assessee’s contention in
regard to the other issues, which are not presently relevant as the present
appeal is confined only to two questions relating to whether the IEX
rates could be considered for benchmarking the market rates for the
purposes of Sub-section (8) of Section 80IA of the Act.
25. The Revenue being aggrieved by the said decision has filed the
present appeal.
REASONS AND CONCLUSION
26. As noted above, the controversy in the present case relates to the
quantum of deduction available to the Assessee under Section 80IA of
the Act. Section 80IA of the Act provides for deduction in respect of
profits and gains arising from industrial undertaking or enterprises
engaged in infrastructure development.
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27. Sub-section (8) of Section 80IA of the Act provides that in cases
where goods or services of an eligible business are transferred to any
other business carried on by an assessee and the consideration for such
transfer does not correspond to the market value of such goods or
services, then for the purposes of deduction under Section 80IA of the
Act, the profit and gains of eligible business would be computed 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, then, for the purposes
of the deduction under this section, the profits and gains of
such eligible business shall be computed as if the transfer,Signature Not Verified
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in either case, had been made at the market value of such
goods or services as on that date :
Provided that where, in the opinion of the Assessing
Officer, the computation of the profits and gains of the
eligible business in the manner hereinbefore specified
presents exceptional difficulties, the Assessing Officer may
compute such profits and gains on such reasonable basis as
he may deem fit.
Explanation – For the purposes of this sub-section, “market
value”, in relation to any goods or services, means-
(i) the price that such goods or services would
ordinarily fetch in the open market; or
(ii) the arm’s length price as defined in clause (ii)
of section 92F, where the transfer of such goods
or services is a specified domestic transaction
referred to in section 92BA.”
29. The Explanation to Sub-section (8) of Section 80IA of the Act
expressly provides that the expression ‘market value’ as used in the said
sub-section would mean the price that such goods or services would
ordinarily fetch in the open market or the ALP as defined in Clause (ii)
of Section 92F of the Act, in case where the transfer of goods or the
services is a specified domestic transaction referred to in Section 92BA
of the Act.
30. Section 92BA1 of the Act defines the expression ‘specified
domestic transaction’ as used in Section 92 (92C, 92D and 92E) of the
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;
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Act. In terms of Clause (iii) of Section 92BA of the Act, the same
includes any transfer of goods or services referred to in Sub-section (8)
of Section 80IA of the Act.
31. Section 92C of the Act contains provisions regarding
computations of ALP. By virtue of Clause (ii) of Explanation to sub-
section (8) of Section 80IA of the Act, the market value in relation to
goods and services as specified would mean the ALP as is defined under
Clause (ii) of Section 92F of the Act. The said Clause [Clause (ii) of
Section 92F of the Act], which defines the ALP, reads as under:
“92F. In sections 92, 92A, 92B, 92C, 92D and 92E,
unless the context otherwise requires,–
*** *** ***
(ii) “arm’s length price” means a price which is
applied or proposed to be applied in a transaction between
persons other than associated enterprises, in uncontrolled
conditions;”
32. It is apparent from the conjoint reading of Explanation to Sub-
section (8) of Section 80IA, Section 92BA and Section 92F(ii) of the
(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 transacted between the assessee and other person as referred to in sub-section
(4) of section 115BAE
(vi) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous year
exceeds a sum of twenty crore rupees.
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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,
in the manner as may be prescribed:
Provided that where more than one price is determined by
the most appropriate method, the arm’s length price shall be
taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm’s
length price so determined and price at which the
international transaction or specified domestic transaction has
actually been undertaken does not exceed such percentage notSignature Not Verified
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exceeding three per cent of the latter, as may be notified by
the Central Government in the Official Gazette in this behalf,
the price at which the international transaction or specified
domestic transaction has actually been undertaken shall be
deemed to be the arm’s length price:
Provided also that where more than one price is determined
by the most appropriate method, the arm’s length price in
relation to an international transaction or specified domestic
transaction undertaken on or after the 1st day of April, 2014,
shall be computed in such manner as may be prescribed and
accordingly the first and second proviso shall not apply.
Explanation.–For the removal of doubts, it is hereby
clarified that the provisions of the second proviso shall also
be applicable to all assessment or reassessment proceedings
pending before an Assessing Officer as on the 1st day of
October, 2009.”
34. It is also material to refer to Rule 10B of the Income Tax Rules,
1962 (hereafter the Rules) which provides for determination of an ALP
under Section 92C of the Act. Rule 10B(1) of the Rules is set out below:
“10B. (1) For the purposes of sub-section (2) of section 92C,
the arm’s length price in relation to an international
transaction or a specified domestic transaction shall be
determined by any of the following methods, being the most
appropriate method, in the following manner, namely :–
(a) comparable uncontrolled price method, by which,–
(i) the price charged or paid for property transferred
or services provided in a comparable
uncontrolled transaction, or a number of such
transactions, is identified;
(ii) such price is adjusted to account for differences,
if any, between the international transaction or
the specified domestic transaction and the
comparable uncontrolled transactions or
between the enterprises entering into suchSignature Not Verified
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transactions, which could materially affect the
price in the open market;
(iii) the 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 uncontrolled transactions, or
between the enterprises entering into such
transactions, which could materially affect the
amount of gross profit margin in the open
market;
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(v) the adjusted price arrived at under sub-clause
(iv) is taken to be an arm’s length price in respect
of the purchase of the property or obtaining of
the services by the enterprise from the
associated enterprise;
(c) cost plus method, by which,–
(i) the direct and indirect costs of production
incurred by the enterprise in respect of property
transferred or services provided to an associated
enterprise, are determined;
(ii) the amount of a normal gross profit mark-up to
such costs (computed according to the same
accounting norms) arising from the transfer or
provision of the same or similar property or
services by the enterprise, or by an unrelated
enterprise, in a comparable uncontrolled
transaction, or a number of such transactions, is
determined;
(iii) the normal gross profit mark-up referred to in
subclause (ii) is adjusted to take into account the
functional and other differences, if any, between
the international transaction or the specified
domestic transaction and the comparable
uncontrolled transactions, or between the
enterprises entering into such transactions,
which could materially affect such profit mark-
up in the open market;
(iv) the costs referred to in sub-clause (i) are
increased by the adjusted profit mark-up arrived
at under sub-clause (iii);
(v) the sum so arrived at is taken to be an arm’s
length price in relation to the supply of the
property or provision of services by the
enterprise;
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(d) profit split method, which may be applicable mainly in
international transactions or specified domestic transactions
involving transfer of unique intangibles or in multiple
international transactions or specified domestic transactions
which are so interrelated that they cannot be evaluated
separately for the purpose of determining the arm’s length
price of any one transaction, by which–
(i) the combined net profit of the associated
enterprises arising from the international
transaction or the specified domestic transaction
in which they are engaged, is determined;
(ii) the relative contribution made by each of the
associated enterprises to the earning of such
combined net profit, is then evaluated on the
basis of the functions performed, assets
employed 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 relativeSignature Not Verified
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contribution in the manner specified under sub-clauses (ii)
and (iii), and in such a case the aggregate of the net profit
allocated to the enterprise in the first instance together with
the residual net profit apportioned to that enterprise on the
basis of its relative contribution shall be taken to be the net
profit arising to that enterprise from the international
transaction or the specified domestic transaction;
(e) transactional net margin method, by which,–
(i) the net profit margin realised by the enterprise
from an international transaction or a specified
domestic transaction entered into with an
associated enterprise is computed in relation to
costs incurred or sales effected or assets
employed or to be employed by the enterprise or
having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise
or by an unrelated enterprise from a comparable
uncontrolled transaction or a number of such
transactions is computed having regard to the
same base;
(iii) the net profit margin referred to in sub-clause
(ii) arising in comparable uncontrolled
transactions is adjusted to take into account the
differences, if any, between the international
transaction or the specified domestic transaction
and the comparable uncontrolled transactions,
or between the enterprises entering into such
transactions, which could materially affect the
amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise
and referred to in sub-clause (i) is established to
be the same as the net profit margin referred to
in sub-clause (iii);
(v) the net profit margin thus established is then
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price in relation to the international transaction
or the specified domestic transaction;
(f) any other method as provided in rule 10AB.”
35. 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.
The 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.
36. 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.
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
2
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022Signature Not Verified
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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 purposes of the CUP method if one of two
conditions is met: a) none of the differences (if any)
between the transactions being compared or between the
enterprises undertaking those transactions could
materially affect the price in the open market; or, b)
reasonably accurate adjustments can be made to eliminate
the material effects of such differences. Where it is possible
to locate comparable uncontrolled transactions, the CUP
method is the most direct and reliable way to apply the arm’s
length principle. Consequently, in such cases the CUP method
is preferable over all other methods.
2.16. It may be difficult to find a transaction between
independent enterprises that is similar enough to a controlled
transaction such that no differences have a material effect on
price. For example, a minor difference in the property
transferred in the controlled and uncontrolled transactions
could materially affect the price even though the nature of the
business activities undertaken may be sufficiently similar to
generate the same overall profit margin. When this is the case,
some adjustments will be appropriate. As discussed below in
paragraph 2.17, the extent and reliability of such adjustments
will affect the relative reliability of the analysis under the CUP
method.
2.17. In considering whether controlled and uncontrolled
transactions are comparable, regard should be had to the effect
on price of broader business functions other than just product
comparability (i.e. factors relevant to determining
comparability under Chapter I). Where differences exist
between the controlled and uncontrolled transactions or
between the enterprises undertaking those transactions, it maySignature Not Verified
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be difficult to determine reasonably accurate adjustments to
eliminate the effect on price. The difficulties that arise in
attempting to make reasonably accurate adjustments should
not routinely preclude the possible application of the CUP
method. Practical considerations dictate a more flexible
approach to enable the CUP method to be used and to be
supplemented as necessary by other appropriate methods, all
of which should be evaluated according to their relative
accuracy. Every effort should be made to adjust the data so
that it may be used appropriately in a CUP method. As for any
method, the relative reliability of the CUP method is affected
by the degree of accuracy with which adjustments can 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
comparable uncontrolled arrangements represented by the
quoted price. Quoted commodity prices generally reflect the
agreement between independent buyers and sellers in the
market on the price for a specific type and amount of
commodity, traded under specific conditions at a certain point
in time. A relevant factor in determining the appropriatenessSignature Not Verified
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of using the quoted price for a specific commodity is the extent
to which the quoted price is widely and routinely used in the
ordinary course of business in the industry to negotiate prices
for uncontrolled transactions comparable to the controlled
transaction. Accordingly, depending on the facts and
circumstances of each case, quoted prices can be considered
as a reference for pricing commodity transactions between
associated enterprises. Taxpayers and tax administrations
should be consistent in their application of the appropriately
selected quoted price.
2.20. For the CUP method to be reliably applied to commodity
transactions, the economically relevant characteristics of the
controlled transaction and the uncontrolled transactions or the
uncontrolled arrangements represented by the quoted price
need to be comparable. For commodities, the economically
relevant characteristics include, among others, the physical
features and quality of the commodity; the contractual terms
of the controlled transaction, such as volumes traded, period
of the arrangements, the timing and terms of delivery,
transportation, insurance, and foreign currency terms. For
some commodities, certain economically relevant
characteristics (e.g. prompt delivery) may lead to a premium
or a discount. If the quoted price is used as a reference for
determining the arm’s length price or price range, the
standardised contracts which stipulate specifications on the
basis of which commodities are traded on the exchange and
which result in a quoted price for the commodity may be
relevant. Where there are differences between the conditions
of the controlled transaction and the conditions of the
uncontrolled transactions or the conditions determining the
quoted price for the commodity that materially affect the price
of the commodity transactions being examined, reasonably
accurate adjustments should be made to ensure that the
economically relevant characteristics of the transactions are
comparable. Contributions made in the form of functions
performed, assets 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]
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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. CIT4, this court
made the following observations: –
“34. However, we find that the Tribunal erred in
proceeding to determine the ALP on the basis of the rate
of commission reported by the Assessee in respect of
indenting transactions with Non-AEs, without further
examination as to the similarity between the two
transactions. The Tribunal effectively used the CUP
Method for imputing the ALP of Assessee’s indenting
transaction with AEs. This may well be the most
appropriate method to be used for determining the ALP.
3
Chapter 12- Comparable Uncontrolled Price Method, Resale Proce Method and Cost Plus
Method at Pg no. 469, Volume 1.
4
Neutral Citation No. 2016:DHC:5154-DB
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However, if the Tribunal thought that this was the case, it
was necessary for the Tribunal to conduct a further in-
depth inquiry as to the relevant uncontrolled transactions.
It is well settled that in applying the CUP Method, a
very high degree of similarity between the controlled
and uncontrolled transactions is required.”
[emphasis added]
41. A similar view has also been expressed by the Income Tax
Appellate Tribunal in various decisions5.
42. It is clear from the above that the 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.
43. In the present case, the question is to determine the market value
or the ALP of power supplied by power plants established by the
Assessee to its other units. Supplying of electricity is governed by the
Electricity (Supply) Act, 1948 and Electricity Act, 2003. The
transmission of electricity is also governed by the Electricity Rules,
2005.
5
Star India Pvt. Ltd. v. ACIT-16(1), ITA No. 7872/MUM/2019 decided on 05.06.2023; M/s. Qual
Core Logic Ltd. v. Dy. Commissioner of Income-tax, Circle-16(3), ITA No. 893/Hyd/2011; Aztec
Software & Technology Services Ltd. v. Astt. CIT: [2007] 107 ITD 141; UCB India (P.) Ltd. v.
Astt. CIT, ITA No. ITA 428/Mum/2007 decided on 06.02.2009.
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44. Thus, 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.
45. The question whether the average IEX rate at which power is
traded on IEX, is a comparable uncontrolled transaction, is required to
be evaluated by determining whether there are any differences between
the specified domestic transaction6 and the uncontrolled transaction of
trade on the IEX.
46. The Assessee states – and the same is not controverted – that the
availability of power on IEX is unpredictable 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.
6
As defined under Section 92BA of the Act.
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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 from IEX and the power which is supplied by the SEBs or
power distribution companies. The said submission is also not
controverted. The Assessee claims that it had on occasions purchased
power from IEX.
51. We find considerable merit in the Assessee’s contention that the
transactions of sale and purchase of power on the IEX is not comparable
to the regular supply of power by the SEB or the power distribution
companies. Undisputedly, IEX is not a source for uninterrupted power
on the basis of which any power consumer can set up its unit. It is also
not disputed that there is a wide fluctuation in the IEX rates. The
Revenue has also not controverted the assertion that rates for power
quoted on IEX are for power purchased and not for power consumed.
Thus, if an entity bids for certain quantity of power on IEX and is
successful, it is required to pay for the same. However, the electricity
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supplied by power distribution companies is charged on the basis of the
power consumed, which is recorded in the metering devices.
52. It is also clear that the said material differences between the
electricity supplied by SEBs or power distribution companies and those
secured by bidding on IEX would have a significant bearing on the price
of power.
53. As noted above, the CUP method is an appropriate method only
in cases where there is sufficient degree of identity between the tested
transactions and comparable uncontrolled transactions. 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.
54. In the present case, the Assessee had supplied excess power to
UPPCL in UP region at the rate of ₹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 ₹4.39 per kWh, was
rightly accepted as an ALP.
55. As noted above, the learned ITAT also accepted the rates at
which electricity was supplied by the SEBs/power distribution
companies to the Assessee in Gujarat and Rajasthan regions as the said
rates was considered as an external CUP.
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56. Undoubtedly, there is a degree of similarity between the
transaction of supply of electricity by 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 Limited7. 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 the context of determining
the market value of electricity supplied by captive power units of the
assessee in that case. In that case, the assessee had entered into an
agreement with the SEB of State of Madhya Pradesh to supply surplus
electricity at the rate of ₹2.32 per unit. However, the Assessee had
7
(2024) 460 ITR 162
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computed the revenue from supply of electricity to its own unit at the
rate of ₹3.72 per unit. It was the Assessee’s case that the market value
of the electricity was ₹3.72 per unit as that was the rate charged by the
SEB for supply of electricity to industrial consumers including the
Assessee. The learned ITAT had accepted the assessee’s stand and had
set aside the order passed by the CIT(A) rejecting the assessee’s appeal
in that regard. The High Court had also rejected the Revenue’s appeal
by referring to its earlier decision where the question of law had been
answered against the Revenue and in favour of the Assessee.
58. The Revenue had approached the Supreme Court assailing the
orders passed by the learned ITAT and the High Court. In the aforesaid
context, the Supreme Court had held as under:
“23. This brings to the fore as to what do we mean by the
expression “open market” which is not a defined
expression.
24. Black’s Law Dictionary, 10th Edition, defines the
expression “open market” to mean a market in which any
buyer or seller may trade and in which prices and product
availability are determined by free competition. P.
Ramanatha Aiyer’s Advanced Law Lexicon has also
defined the expression “open market” to mean a market
in which goods are available to be bought and sold by
anyone who cares to. Prices in an open market are
determined by the laws of supply and demand.
25. Therefore, the expression “market value” in relation
to any goods as defined by the Explanation below the
proviso to sub-section (8) of section 80 IA would mean
the price of such goods determined in an environment ofSignature Not Verified
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free trade or competition. “Market value” is an
expression which denotes the price of a good arrived at
between a buyer and a seller in the open market i.e.,
where the transaction takes place in the normal course of
trading. Such pricing is unfettered by any control or
regulation; rather, it is determined by the economics of
demand and supply.
26. Under the electricity regime in force, an industrial
consumer could purchase electricity from the State
Electricity 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 the former to the latter. The price
for supply of such electricity by the assessee to the State
Electricity Board was fixed at Rs. 2.32 per unit as per the
contract. This price is, therefore, a contracted price.
Further, there was no room or any elbow space for
negotiation on the part of the assessee. Under theSignature Not Verified
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statutory regime in place, the assessee had no other
alternative but to sell or supply the surplus electricity to
the State Electricity Board. Being in a dominant position,
the State Electricity Board could fix the price to which
the assessee really had little or no scope to either oppose
or negotiate. Therefore, it is evident that determination
of tariff between the assessee and the State Electricity
Board cannot be said to be an exercise between a buyer
and a seller in a competitive environment or in the
ordinary course of trade and business i.e., in the open
market. Such a price cannot be said to be the price which
is determined in the normal course of trade and
competition.
27. Another way of looking at the issue is, if the
industrial units of the assessee did not have the option of
obtaining power from the captive power plants of the
assessee, then in that case it would have had to purchase
electricity from the State Electricity Board. In such a
scenario, the industrial units of the assessee would have
had to purchase power from the State Electricity Board
at the same rate at which the State Electricity Board
supplied to the industrial consumers i.e., Rs. 3.72 per
unit.
28. Thus, 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. It is clear that the rate at
which power was supplied to a supplier could not be the
market rate of electricity purchased by a consumer in the
open market. On the contrary, the rate at which the State
Electricity Board supplied power to the industrialSignature Not Verified
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consumers has to be taken as the market value for
computing deduction under Section 80 IA of the Act.”
[emphasis added]
59. As is apparent from the above, the 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.
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.
VIBHU BAKHRU, ACJ
SWARANA KANTA SHARMA, J
JANUARY 21, 2025
RK
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