DCIT Vs Nirma Limited (ITAT Ahmedabad)
Ahmedabad ITAT Upholds Depreciation on Goodwill and Brands; Deletes 106.56 Crore TP Adjustment-Steam Cannot Be Valued at Nil Merely Because It Is a By-product
Summary: The Revenue challenged the orders of the CIT(A) for Assessment Years 2018-19 and 2020-21, concerning depreciation on goodwill arising from amalgamation, depreciation on brands and trade names transferred pursuant to demerger, transfer-pricing adjustments relating to inter-unit electricity transfers, and valuation of steam transferred between eligible and non-eligible units.
On depreciation of goodwill and brands/trade names, the Tribunal upheld the CIT(A)’s deletion of the additions, relying upon earlier decisions of the Tribunal in the assessee’s own case for earlier assessment years. The Revenue’s contention that the earlier decisions had not attained finality because appeals were pending before the Gujarat High Court did not result in departure from those decisions.
In relation to captive electricity, the Tribunal upheld the CIT(A)’s acceptance of the assessee’s benchmarking. The CIT(A) had relied upon the jurisdictional Gujarat High Court decision in CIT vs. Gujarat Alkalies & Chemicals Ltd., 395 ITR 247, concerning valuation of electricity supplied by a captive power plant, as well as earlier decisions in the assessee’s own case. Consequently, the Revenue’s challenges to the adjustments of ₹117.72 crore for AY 2018-19 and ₹20.17 crore for AY 2020-21 were dismissed.
For the inter-unit transfer of steam in AY 2020-21, the AO/TPO had treated steam generated by the power-generating unit as a by-product having no cost and determined its arm’s-length price at nil, resulting in an adjustment of ₹106.55 crore. The Tribunal held that the fact that steam is generated as a by-product does not imply that it has no cost or that its value is nil. It noted the CIT(A)’s reliance on Vishal Fabrics Ltd., ITA No. 1802/Ahd/2019, order dated 07.01.2022, and Gujarat Alkalies & Chemicals Ltd., concerning use of external market comparables for valuation.
The Tribunal found no infirmity in the CIT(A)’s reasoning and dismissed the Revenue’s grounds concerning the steam adjustment. Accordingly, both Revenue appeals were dismissed.
The Revenue challenged the CIT(A)’s deletion of additions relating to:
- Depreciation on goodwill arising from the amalgamation of Saurashtra Chemicals Ltd.;
- Depreciation on brands and trade names transferred under a demerger;
- Transfer-pricing adjustments on inter-unit transfer of electricity; and
- A ₹106.56-crore adjustment arising from valuation of steam at nil.
The Ahmedabad ITAT upheld the depreciation on goodwill, brands and trade names, observing that identical issues had already been decided in Nirma Ltd.’s favour in earlier assessment years. The mere pendency of the Revenue’s appeals before the Gujarat High Court did not justify departure from the binding earlier Tribunal orders.
Regarding captive electricity, the Tribunal held that the market value of electricity transferred by the eligible power-generating unit must be determined with reference to the rate at which the manufacturing unit purchases electricity from the open market—not the lower rate at which generating companies sell power to distribution companies. The related adjustment of ₹117.72 crore for AY 2018-19 and ₹20.17 crore for AY 2020-21 was consequently deleted.
For the inter-unit transfer of steam, the AO/TPO treated steam as a by-product of power generation having no separate cost and determined its arm’s-length price at nil. The Tribunal rejected this approach, holding that:
- Steam is a commercially valuable form of energy;
- Its generation as a by-product does not make its market value nil;
- External market prices paid by independent buyers constitute valid comparables; and
- For Section 80-IA and transfer-pricing purposes, valuation cannot be confined merely to internal production cost.
Accordingly, the Tribunal upheld deletion of the ₹106.56-crore TP adjustment on steam and dismissed both Revenue appeals in full.
List of Cases Discussed / Relied Upon
- Nirma Limited Vs DCIT (ITAT Ahmedabad), ITA Nos. 2007 & 2008/Ahd/2017, ITA No. 516/Ahd/2018, ITA Nos. 2224/Ahd/2017, 791/Ahd/2018 and ITA Nos. 1412 & 1413/Ahd/2019 — earlier decisions in the assessee’s own case relied upon for depreciation on goodwill and intangible assets.
- CIT vs. Gujarat Alkalies & Chemicals Ltd., 395 ITR 247 (Gujarat High Court) — relied upon concerning valuation of captive electricity with reference to the prevailing market rate and for the proposition that meaningful comparables are not restricted to internal cost.
- Vishal Fabrics Ltd., ITA No. 1820/Ahd/2019, order dated 07.01.2022 (ITAT Ahmedabad) — relied upon for the proposition that the price paid by independent buyers in the external market can constitute a valid benchmark for determining the arm’s-length price of an internal product or energy transfer.
- Star Paper Mill Ltd. v. DCIT, 134 Taxmann.com 177 (ITAT Kolkata, 2022) — relied upon by the CIT(A) concerning benchmarking of power supplied by an eligible unit to a non-eligible unit using an external comparable price.
- Nandan Denim Ltd., 156 Taxmann.com 287 (ITAT Ahmedabad, 2023) — relied upon by the CIT(A) concerning arm’s-length valuation of power/steam generated by an eligible unit and transferred to another unit.
- Sap Labs India Pvt. Ltd. vs. ITO, Supreme Court — cited by the Revenue concerning the guidelines under the Income-tax Act and Rules governing determination of arm’s-length price.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These are two appeals preferred by the Revenue against the orders dated 09.02.2026 passed by the Ld. Commissioner of Income Tax (Appeals), Ahmedabad-13 (hereinafter referred to as ‘Ld. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for the Assessment Years 2018-19 & 2020-21. Since the appeals involved identical issues, the same were taken up together and are being disposed of by way of this common order.
2. The Revenue has raised following grounds of Appeal in ITA No. 1569 /AHD/2026:
“1) “On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition of Rs.4,09,94,465/- made by the Assessing Officer on account of disallowance of depreciation on goodwill arising out of amalgamation of Saurashtra Chemicals Limited, without appreciating that the amalgamating company was a sick, loss- making entity with negative net worth referred to BIFR, and therefore could not possess any genuine goodwill capable of depreciation. The so- called goodwill was merely a balancing entry created as an accounting facade to evade taxes rather than a genuine asset.
2) On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition of Rs. 1,73,64,618/- made by the Assessing Officer on account of disallowance of depreciation on intangible assets (brands and trade names) transferred from the demerged unit of Nirma Industries Ltd., without appreciating that the assessee failed to provide proper details in response to notice dated 26.08.2021 and the correct allowable depreciation based on the opening WDV determined for A.Y. 2017-18 was only Rs. 11,61,995/-, whereas the assessee claimed an excessive amount.
3) On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred to appreciate that his findings on both the above issues are inconsistent with the material on record and are perverse, as the CIT(A) had himself confirmed the disallowance of depreciation on goodwill for A.Y. 2016-17 vide order dated 08.07.2019, thereby making the deletion for the current year contradictory and unjustified.
4) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.117,72,05,188/- by accepting the assessee’s benchmarking for inter-unit sale of electricity instead of adopting the ALP of Rs. 3.67/kWh.
5) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the comparable adopted by TPO without appreciating that the same is identical transaction with the transaction entered by the assessee in view of the FAR (Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 10B(2)(b) of the I.T. Rules, 1962.
6) On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in allowing the comparable adopted by assessee without appreciating that the same has different FAR(Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 10B(2)(b) of the Income-tax Rules, 1962 and hence the same is not a comparable transaction under CUP method.
7) On facts and in the circumstances of the cases and in law, the Ld. CIT(A) has erred in accepting the ALP of the assessee determined by ignoring the guidelines laid down under the IT. Act and Rules and thereby violating the ratio laid down by the Hon’ble Supreme Court in the case of Sap Labs India Pvt. Ltd. vs. ITO.
8) The Revenue craves leave to add/alter/armed and/on substitute any or all of the grounds of appeal.”
3. The Revenue has raised following grounds of Appeal in ITA No. 1570 /AHD/2026:
“1) On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition of Rs. 97,67,598/ made by the Assessing Officer or account of disallowance of depreciation on intangible assets (brands and trade marks) transferred pursuant to a demerger, without appreciating that the Department has not accepted the valuation of these assets and the matter is pending before the Hon’ble Gujarat High Court and has therefore not attained finality. The reliance placed on the ITAT’s decision for earlier assessment years is premature as the Revenue has challenged the said decision before the Hon’ble High Court.
2) On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition of Rs. 2,30,59,386/- made by the Assessing Officer on account of disallowance of depreciation on goodwill arising from the amalgamation of Saurashtra Chemicals Limited, without appreciating that the amalgamating company was a sick industrial unit referred to BIFR with huge accumulated losses and negative net worth, and therefore could not possess any genuine goodwill capable of depreciation. The so-called goodwill was merely a balancing entry created for accounting convenience and not an asset acquired for any specific payment. Since the amalgamating company had only self-generated goodwill costing nil, the assessee cannot claim depreciation on an artificially created asset.
3) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.20,17,23,105/- by accepting the assessee’s benchmarking for inter-unit sale of electricity instead of adopting the ALP of Rs. 3.58/kWh.
4) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the comparable adopted by TPO without appreciating that the same is identical transaction with the transaction entered by the assessee in view of the FAR(Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 10B(2)(b) of the L.T. Rules, 1962.
5) On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in allowing the comparable adopted by assessee without appreciating that the same has different FAR (Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 108(2)(b) of the Income-tax Rules, 1962 and hence the same is not a comparable transaction under CUP method.
6) On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs. 106,55,75,141/-by accepting the assessee’s benchmarking for sale of steam without appreciating the fact that steam is a by-product and has no cost.
(7) On facts and in the circumstances of the cases and in law, the Ld. CIT(A) has erred in accepting the ALP of the assessee determined by ignoring the guidelines laid down under the IT. Act and Rules and thereby violating the ratio laid down by the Hon’ble Supreme Court in the case of Sap Labs India Pvt. Ltd. us. ITO.
8) The Revenue craves leave to add/alter/armed and/on substitute any or all of the grounds of appeal.”
ITA No. 1569/AHD/2026
4. We would first take up ITA No. 1569/AHD/2026 preferred by the Revenue.
Ground No. 1 read with Ground No. 3:
5. Ground No. 1 read with Ground No. 3 relates to the deletion of additions of Rs. 4,09,94,465/- made by the AO on account of disallowance of depreciation on goodwill arising on amalgamation of Saurashtra Chemicals Ltd. The Ld. CIT(A) deleted the addition relying upon the decision made by the Coordinate Bench of this Tribunal in the case of the Assessee itself for Assessment Years 2012-13, 2013-14, and 2014-15. The observation of the Ld. CIT(A) is as under:
“6.5 I have carefully considered the facts of the case, impugned assessment order, ground of appeal, submission uploaded on the issue and judicial decision relied upon by the appellant. It is pertinent to note that an identical issue in the appellant’s own case has already been decided in its favour by the Hon’ble ITAT, Ahmedabad. The issue was adjudicated vide ITA Nos. 2007 & 2008/Ahd/2017 and ITA No. 516/Ahd/2018 for Assessment Years 2012-13, 2013-14 and 2014-15; ITA Nos. 2224/Ahd/2017 and 791/Ahd/2018 for Assessment Years 2013-14 and 2014-15; and ITA Nos. 1412 & 1413/Ahd/2019 for Assessment Years 2015- 16 and 2016-17…”
6. As the Ld. CIT(A) has relied upon the decision of this Tribunal in the case of the Assessee itself for earlier assessment years, the order of Ld. CIT(A) is upheld and the grounds raised by the Revenue are dismissed.
Ground No. 2 read with Ground No. 3:
7. Ground No. 2 read with Ground No. 3 relates to the deletion of Rs. 1,73,64,613/- being disallowance of depreciation of intangible assets being brand and names transferred from the demerged unit. The observations of the Ld. CIT(A) for Assessment Years 2015-16 and 2016-17 are as under:
“7.4 It is relevant to note that an identical issue in the appellant’s own case has already been adjudicated in its favour by the Hon’ble ITAT, Ahmedabad. The Tribunal decided the matter vide ITA Nos. 2007 & 2008/Ahd/2017 and ITA No. 516/Ahd/2018 for Assessment Years 2012- 13, 2013-14 and 2014-15; ITA Nos. 2224/Ahd/2017 and 791/Ahd/2018 for Assessment Years 2013-14 and 2014-15; and ITA Nos. 1412 & 1413/Ahd/2019 for Assessment Years 2015-16 and 2016-17…”
8. As the Ld. CIT(A) has relied upon the decision of this Tribunal in the case of the Assessee itself for earlier assessment years, the order of Ld. CIT(A) on this issue is upheld and the grounds raised by the Revenue are dismissed.
Ground Nos. 4 to 7:
9. Ground Nos. 4 to 7 relate to the deletion of addition of Rs. 1,17,72,05,188/- on account of acceptance of assessee’s benchmarking for inter-unit sale of electricity. The Ld. CIT(A) on the issue accepted the benchmarking done by the Assessee for inter-unit sale of electricity. The brief facts relating to this addition are that the TPO has made an adjustment of Rs. 1,17,72,05,188/- on account of captive consumption of electricity. The crux of the TPO’s reasoning was that the value of electricity cannot be benchmarked by adopting the rate at which the manufacturing unit of the Assessee has been purchasing the electricity; rather, it should be at the rate at which power generating companies sell electricity to electricity distribution companies.
10. The Ld. CIT(A), taking note of the judgment of the Hon’ble jurisdictional Gujarat High Court in the case of CIT vs. Gujarat Alkalies & Chemicals Ltd. (reported at 395 ITR 247, page 43), held that the market price of electricity supplied by the CPP (Captive Power Plant) will be determined by adopting the rate at which the manufacturing unit has been purchasing the electricity from the open market. The Ld. CIT(A) also relied upon the findings of the coordinate bench of this Tribunal in the case of the Assessee itself for the Assessment Years 2012-13, 2013-14, and 2014-15.
11. As the Ld. CIT(A) has relied upon the decision of this Tribunal in the case of the Assessee itself for earlier assessment years, the order of Ld. CIT(A) on this issue is upheld and the grounds raised by the Revenue are dismissed.
12. In the result, the present Appeal i.e. ITA No. 1569/Ahd/2026 filed by the Revenue is dismissed.
ITA No. 1570/AHD/2026:-
8. We would next take up ITA No. 1570/AHD/2026 preferred by the Revenue.
Ground Nos. 1 to 5:
9. Ground Nos. 1 and 2 of the present appeal correspond to Ground Nos. 1 and 2 of the appeal ITA No. 1569/Ahd/2026 discussed hereinabove, respectively. Ground Nos. 3 to 5 of the present appeal correspond to Ground Nos. 4 to 7 of ITA No. 1569/Ahd/2026, dealt with hereinabove.
9.1 All the above Ground Nos. 1 to 5 are covered by the decision of the coordinate bench of the Tribunal for the earlier Assessment Years in the case of the Assessee itself. Accordingly, these grounds of appeals raised by the Revenue are also dismissed.
Ground Nos. 6 and 7:
10. This leaves us with Ground Nos. 6 and 7 of the present appeal, wherein by way of the impugned order, the Ld. CIT(A) has deleted the addition of Rs. 1,06,55,75,141/- made by the AO/TPO by accepting the benchmarking done by the Assessee for the sale of steam.
10.1 Brief facts relating to Ground Nos. 6 and 7 are that the AO made an adjustment of Rs. 1,06,55,75,141/- holding that the steam is generated by the power generating unit as a by-product. While working out the cost of power, the cost incurred by the Assessee is taken into consideration and, therefore, steam being a by-product has got no cost. The AO accordingly held the arm’s length price for this transaction to be nil. The Ld. CIT(A) deleted the addition by observing as under:
“6.5 I have carefully perused the facts of the case, ground of appeal, impugned assessment order, submission uploaded and judicial decisions relied upon by the appellant on the issue. In this case it is seen that the appellant company has determined the inter-unit sales price of steam at price whereas the TPO proposed the adjustment in respect of calculation of Deduction u/s 801A based on difference of approach/assumption that steam is generated by power generating unit as a by-product at the time of generation of power and being a by-product, it has no cost. Hence, it should be valued at Zero. Admittedly there is no dispute as regards the proposition that the steam is a form of power and the dispute in the ground of appeal present before me is regarding the value of steam supplied to inter non-eligible unit should be taken at Nil or as per cost as determined by the appellant.
6.6 It is an admitted position that in the case of inter-unit transactions between eligible and non-eligible units, the provisions of Chapter X and the principles of transfer pricing mandate the adoption of arm’s length price (ALP) for such transactions. The mere fact that steam is generated as a by- product from the captive power plant does not ipso facto render its value nil for the purposes of determining the ALP. Hon’ble Jurisdictional ITAT, Ahmedabad in the case of Vishal Fabrics Ltd. (ITA No. 1820/Ahd/2019, order dated 07-01-2022) has held that where an internal product/energy is transferred to group entities, the price paid by independent buyers in an external market can be a valid benchmark for ALP under the relevant provisions of the Act, including for the purposes of Section 801A(8) where applicable.
6.7 Further, in Star Paper Mill Ltd. v. DCIT (Kolkata-Trb.), 134 Taxmann.com 177 (2022), the Kolkata Tribunal after detailed analysis affirmed the benchmarking undertaken by the assessee to ascertain the arm’s length transfer price of power supplied by the eligible unit to the non-eligible unit. It was held that adoption of an external comparable price, adjusted appropriately, was justified and in consonance with the legislative intent of ensuring that intra-group pricing reflects market conditions. Additionally, the Ahmedabad Tribunal in Nandan Denim Ltd. (156 Taxmann.com 287 (2023)) has followed the consistent line of judicial reasoning that where power/steam generated by eligible units is transferred to other units, the adoption of arm’s length price based on external market comparables is permissible. Hon’ble ITAT has upheld that cost is only one component and external market data cannot be ignored when such data is reliable and appropriately adjusted. Hon’ble Gujarat High Court in the case of Gujarat Alkalies and Chemicals Ltd. (395 ITR 247 (Guj) (2017)), on somewhat analogous facts, held that for the purposes of deduction under Section 80-1A(4) of the Act, the meaningful comparables are not restricted to internal cost; instead, the prevailing market rate at which power is sold to independent customers/distribution companies constitutes the appropriate yardstick for valuation. This judicial approach underscores that internal transfer pricing must reflect market realities.
6.8 In the present case, the appellant has adopted the price at which electricity companies supply power (after making reliable and acceptable adjustments), as the benchmark for the inter-unit price of steam. There is no infirmity in relying on such external market data where the methodology adopted is consistent with the principles of transfer pricing and the facts of the case. Adoption of nil value solely because steam is a by- product, ignores the commercial reality that such steam/energy has an intrinsic market value at which it is bought and sold in open market. Therefore, the AO/TPO’s contention that the cost of steam is nil and accordingly ALP should be taken at nil is unsustainable in the light of the judicial pronouncements cited supra.
6.9 In view of the consistent judicial precedents and having due regard to the facts and circumstances of the case, I am of the view that the steam being a form of power supplied to inter non-eligible unit by the appellant cannot be valued at Nil. It has to be valued as per cost as determined by the appellant as TPO has not disputed the method adopted by the appellant while calculating the value of steam supplied to inter non- eligible unit by the appellant. The contention of the TPO is based on hypothetical proposition without any scientific basis. The judicial decisions cited(supra) on the issue also support the contention of the appellant. Therefore, I am of the view that inter-unit transfer price of steam adopted by the appellant is in consonance with the arm’s length principle. The addition of Rs.1,06,55,75,141/-made by the Assessing Officer/TPO by valuing steam at nil is accordingly deleted. Hence, Ground No.3 raised by the appellant is allowed.”
10.2 The transactions involved in this case are inter-unit transactions between eligible and non-eligible units of the Assessee. The fact that steam is generated as a by-product from the captive power plant does not imply that it has got no cost, nor does the said fact render the value of steam to be nil. The Ld. CIT(A) has relied upon the decision dated 07.01.2022 of the coordinate bench of the Tribunal in the case of Vishal Fabrics Ltd., ITA No. 1802/Ahd/2019, wherein it was held that where an internal product is to be transferred to other entities, the price paid by independent buyers in an external market can be a valid benchmark for ALP. The Ld. CIT(A) also relied upon the judgment of the jurisdictional Gujarat High Court in the case of Gujarat Alkalies & Chemicals Ltd. (supra), wherein the Hon’ble High Court has held that for the purpose of adjudication u/s 80-IA(4) of the Act, meaningful comparables are not restricted to internal cost; instead, the prevailing market rate at which power is sold to independent customers constitutes an appropriate yardstick for valuation. The view of the AO/TPO that steam being a by-product does not command any value and the determination of its ALP at nil cannot be sustained; hence, we do not find any infirmity in the reasons assigned by the Ld. CIT(A). Hence, Ground Nos. 6 to 7 of the present appeal raised by the Revenue are dismissed accordingly.
11. In the result, the present Appeal i.e. ITA No. 1567/Ahd/2026 filed by the Revenue is dismissed.
