CUP Method Misapplied: ITAT Corrects TPO in Section 80IA Assessment

The assessee, a company in the business of manufacturing and exporting garments, filed its revised return for A.Y. 2021-22, declaring an income of Rs. 2.85 crore. Since the company had transferred steam generated at its eligible units under Section 80IA to its own non-eligible units, the matter was referred to the Transfer Pricing Officer (TPO) to determine if the pricing of this internal transfer was fair.

The assessee’s Section 80IA claim was lowered by Rs. 33.59 crore by the TPO on October 31, 2023, on the grounds that the steam transfer price was not at arm’s length. The DRP upheld the draft order on September 19, 2024. The final order followed on 25.10.2024, leading to the present appeal before the ITAT.

Main issue: Whether the adjustment made by reducing the deduction under Section 80IA for inter-unit transfer of steam was correct in law and based on a valid benchmarking methodology under the arm’s length standard.

ITAT’s Ruling: The ITAT used the Comparable Uncontrolled Price (CUP) method to benchmark the pricing, which was based on rates that State Electricity Boards charged end users, after observing that the assessee had moved steam from eligible units to non-eligible units. The Tribunal determined that the TPO’s application of average rates paid by power-generating companies to the Boards was inappropriate because those rates are not comparable to open market transactions and instead belong to a regulated and controlled environment.

In order to recalculate the eligible profits for deduction under Section 80IA(8), the ITAT instructed the Assessing Officer to apply the electricity rates that the corresponding State Electricity Boards and distribution companies charge to end users in the open market. The grounds under Sections 234B and 234C pertaining to tax demand and interest were regarded as consequential. Thus, the appeal were partially allowed.

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