ITAT Delhi Deletes Transfer Pricing Adjustments on Power and Steam in DCM Shriram Ltd. Case: Comprehensive Analysis
Overview of the Dispute
The Delhi Bench of the Income Tax Appellate Tribunal adjudicated a significant appeal filed by DCM Shriram Ltd. against the final assessment order passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961, pertaining to Assessment Year 2014-15. The order under challenge was dated 31/10/2018, passed by the Additional Commissioner of Income Tax, Special Range-3, New Delhi.
The appeal encompassed a wide range of contested issues, the most consequential being transfer pricing adjustments arising out of specified domestic transactions involving the transfer of power and low-pressure steam from eligible units to non-eligible units — transactions directly linked to the computation of deduction under Section 80-IA. In addition, the assessee challenged disallowances under Section 14A, additions under Section 50C, book profit adjustments under Section 115JB, and raised an additional ground concerning the deductibility of education cess under Section 37(1).
Background: The Assessee and Its Business Activities
DCM Shriram Ltd. is engaged in a diverse range of manufacturing and trading activities spanning chemicals, PVC resins, PVC compounds, UPVC windows and door systems, cement, sugar, fertilizers, seeds, textile yarn, power generation, and retail outlets operating under the name Hariyali Kisan Bazar.
The assessee filed its return of income on 28/11/2014, declaring income of Rs. 1,379,154,615/- under the normal provisions and book profit of Rs. 3,168,496,338/- under Section 115JB of the Income Tax Act, 1961. A revised return was filed on 23/3/2016, with income figures remaining unchanged, the revision being necessitated solely due to updated TDS credit as reflected in Form 26AS.
The case was selected for scrutiny, and notice under Section 143(2) was issued on 1/9/2015. During assessment, the Assessing Officer identified specified domestic transactions (SDTs) with associated enterprises covered under Section 40A(2)(b) and Section 80-IA, and consequently referred the matter to the Transfer Pricing Officer under Section 92CA.
Issue 1: Transfer Pricing Adjustment on Transfer of Power
The Assessee's Benchmarking Methodology
The assessee operated captive power plants in three geographic regions — Uttar Pradesh, Rajasthan, and Gujarat — and transferred power from these eligible units to non-eligible units. The transfers were benchmarked using the Comparable Uncontrolled Price (CUP) method with reference to actual transaction rates with State Electricity Boards and Distribution Companies (Discoms):
- Uttar Pradesh: Power sold to UPPCL at Rs. 4.39 per unit
- Gujarat: Power purchased from DGVCL at Rs. 38.56 per unit
- **Rajasthan (Kota)😗* Power purchased from Jaipur Vidyut Vitran Nigam Limited (JVVNL) at Rs. 8.35 per unit
The internal transfer rates adopted by the assessee for the eligible-to-non-eligible unit transfers were as follows:
| Transferor Unit | Transferee Unit | Quantity (KWH) | Rate (Rs.) | Amount (Rs.) |
|---|---|---|---|---|
| TG-1 (UP Region) | Loni Sugar Plant | 1,86,41,986 | 4.29 | 7,99,74,118 |
| TG-II (UP Region) | Loni Sugar Plant | 9,23,797 | 4.20 | 38,79,947 |
| TG-1 (UP Region) | Hariawan Sugar Unit | 1,93,06,294 | 4.29 | 8,28,24,001 |
| TG-II (UP Region) | Hariawan Sugar Unit | 8,51,577 | 4.29 | 36,53,265 |
| TG-II (UP Region) | Ajbapur Sugar Unit | 34,83,722 | 4.24 | 1,47,70,983 |
| TG-III (UP Region) | Ajbapur Sugar Unit | 1,02,52,023 | 4.24 | 4,34,68,579 |
| Kota Power Plant (Rajasthan) | Fertilizer & Chemical Plant | 31,21,15,871 | 6.30 | 196,63,29,987 |
| Bharuch Power Plant (Gujarat) | Alkali & Chemical Plant | 40,31,84,860 | 6.67 | 268,96,24,567 |
TPO's Approach: Adoption of IEX Rates
The Transfer Pricing Officer was not satisfied with the assessee's benchmarking approach. The TPO issued a notice under Section 133(6) to the Indian Energy Exchange (IEX) on 6/10/2017, which was replied to on 11/10/2017. The IEX data disclosed that average sale prices for 2013-14 per KWH were as follows:
- Uttar Pradesh: Rs. 2.55
- Rajasthan: Rs. 2.55
- Gujarat: Rs. 2.52
The TPO took the position that IEX, being the platform where approximately 95-96% of power is traded, represented reliable external CUP data. He accordingly averaged the IEX rates with the applicable Discom purchase/sale rates to arrive at arm's length prices of Rs. 3.47 per unit for Uttar Pradesh and Rs. 5.45 per unit for Rajasthan, proposing an adjustment of Rs. 308,365,268/- for those two regions. In Gujarat, since the blended rate (Rs. 20.54 per unit) exceeded the assessee's transfer price (Rs. 6.67 per unit), no upward adjustment was proposed.