The Income Tax Appellate Tribunal, Delhi, has delivered a significant ruling reinforcing the binding nature of Dispute Resolution Panel directions and clarifying the tax treatment of Renewable Energy Certificates. The decision underscores that tax authorities cannot ignore settled judicial positions or violate statutory mandates under Section 144C, even when facing complex transfer pricing and capital-receipt issues.
Background & Facts
The Dispute
The appellant, DCM Shri Ram Industries Ltd., is engaged in the manufacture of sugar, industrial fiber, alcohol, power, and organic chemicals. For Assessment Year 2018-19, the company declared a total income of Rs. 13,25,33,541 under normal provisions and book profits of Rs. 68,20,48,545 under Section 115JB. The case was referred to the Transfer Pricing Officer (TPO) under Section 92CA for determination of arm’s length price (ALP) in respect of specified domestic transactions, primarily the intra-group transfer of steam from an eligible captive power unit to non-eligible units.
Key Facts
- The assessee generates power using molasses as renewable fuel and produces steam as a by-product.
- Steam is transferred from the eligible power unit (qualifying for deduction under Section 80-IA) to non-eligible units at cost of production.
- The TPO, relying on the premise that steam has no intrinsic cost, determined its ALP as NIL, resulting in an addition of Rs. 107,01,24,795.
- The assessee received Rs. 20,76,97,397 from sale of Renewable Energy Certificates (RECs) issued by the Central Electricity Regulatory Commission (CERC).
- The assessee had inadvertently treated REC receipts as revenue receipts and offered them to tax, but later claimed they were capital receipts.
- The assessee had made a suo-moto disallowance of Rs. 6,13,402 under Section 14A despite having no exempt income.
- The book profits as per return were Rs. 68,20,48,545, but the AO computed them as Rs. 68,32,26,303.
- The AO raised a demand of Rs. 2,09,68,122 for unpaid Dividend Distribution Tax (DDT), despite Form 26AS showing payment of Rs. 1,41,67,650.
Procedural History
- 31.03.2019: Assessee retired on superannuation (contextual note: irrelevant to tax appeal but part of corporate history).
- 30.06.2020: Return of income filed for A.Y. 2018-19.
- 26.07.2022: Final assessment order passed under Section 143(3) r.w.s. 144C(13), incorporating TPO’s adjustments.
- 10.02.2026: Hearing before ITAT Delhi.
- 18.03.2026: Judgment pronounced.
The litigation trail includes prior favorable orders from the Tribunal in the assessee’s own cases:
- ITA No. 539/Del/2021 (AY 2016-17): ITAT deleted transfer pricing adjustment on steam and restored claim for enhanced Section 80-IA deduction.
- ITA No. 1000/Del/2022 (AY 2017-18): Same issue decided in favor of assessee.
- ITA No. 1841/Del/2020 (AY 2015-16): ITAT held REC receipts as capital receipts.
- CIT(A) Order for AY 2015-16: Allowed steam transfer at cost and disallowance under Section 14A to be deleted.
The Dispute Resolution Panel (DRP) issued binding directions in AY 2018-19:
- DRP Direction (Para 3.3.3): If no appeal was filed by the Revenue against CIT(A)’s order in AY 2015-16, the transfer pricing adjustment on steam must be deleted.
- DRP Direction on REC: Directed AO to consider the claim that REC receipts are capital receipts.
- DRP Direction on Section 14A: Directed AO to verify whether appeal was filed against CIT(A)’s order on disallowance.
The Assessing Officer and TPO ignored these directions and retained the adjustments.
The Parties' Positions
For the Appellant
- Relied on binding precedent from its own cases (AY 2015-16 to 2017-18) where ITAT had consistently held:
- Steam transfer at cost is valid; ALP cannot be NIL.
- REC receipts are capital receipts, not taxable.
- Section 14A disallowance is inapplicable where no exempt income exists.
- Cited My Home Power Ltd. (AP HC) and Ankit Metal & Power Ltd. (Cal HC) to support capital receipt treatment of RECs.
- Argued that DRP directions under Section 144C(10) are binding and non-compliance is illegal.
- Contended that enhanced claim under Section 80-IA is not a fresh claim but a correction based on judicially accepted methodology (equating steam to equivalent electricity units).
- Relied on PCIT v. Oracle (OFSS) and Shree Bhavani Power Projects to argue that correction of a claim already made in the return is permissible.
- Highlighted that Section 115BBG applies only to carbon credits, not RECs, and legislative intent distinguishes the two.
For the Respondent
- Argued that steam has no cost as it is a by-product of power generation.
- Contended that REC receipts are revenue receipts and taxable under Section 115BBG.
- Relied on Pr. CIT v. Wipro Ltd. to argue that additional claims not made in the return cannot be entertained.
- Asserted that the appeal against CIT(A)’s order in AY 2015-16 was filed, thus nullifying the binding effect of that order.
- Claimed that Section 14A disallowance was valid as a matter of prudence.
- Argued that the AO’s computational errors were minor and rectifiable.
Relief Sought
The appellant sought:
- Deletion of transfer pricing adjustment of Rs. 107,01,24,795 on steam transfer.
- Allowance of enhanced deduction under Section 80-IA based on ALP of steam computed as equivalent electricity units.
- Exclusion of REC receipts (Rs. 20,76,97,397) from total income and book profits.
- Reversal of Section 14A disallowance of Rs. 6,13,402.
- Rectification of book profits from Rs. 68,32,26,303 to Rs. 68,20,48,545.
- Rectification of DDT demand of Rs. 2,09,68,122.
- Cancellation of penalty under Section 270A and interest under Section 234B.
The Legal Issue
The central questions were: (1) Whether the Assessing Officer is bound to follow the binding directions of the Dispute Resolution Panel under Section 144C(10) when no appeal has been filed against a prior favorable order? (2) Whether receipts from Renewable Energy Certificates (RECs) constitute capital receipts not chargeable to tax under the Income Tax Act? (3) Whether an enhanced claim under Section 80-IA, based on a judicially accepted methodology, qualifies as a permissible correction of an existing claim?
Arguments Presented
For the Appellant
The appellant relied on multiple binding precedents from its own cases decided by the ITAT for AY 2015-16 to 2017-18, where identical issues were decided in its favor. It emphasized that the DRP, in its directions dated 2022, explicitly instructed the AO to delete the steam adjustment if no appeal was filed against the CIT(A)’s order in AY 2015-16 - a fact the AO admitted in an affidavit. The appellant argued that Section 144C(10) makes DRP directions binding, and non-compliance renders the assessment order void. Regarding RECs, it cited My Home Power Ltd. and Ankit Metal & Power Ltd., distinguishing RECs from carbon credits under Section 115BBG, which applies only to UNFCCC-verified carbon reductions. For the enhanced Section 80-IA claim, it relied on PCIT v. Oracle (OFSS) and Shree Bhavani Power Projects, asserting that correction of a claim already made in the return is not a fresh claim and is legally permissible. It further cited NTPC v. CIT to argue that legal claims can be raised at any stage.
For the Respondent
The Revenue contended that steam, being a by-product, has no cost and its ALP must be NIL. It argued that the CIT(A)’s order in AY 2015-16 was dismissed as infructuous due to negative gross total income, and therefore could not bind subsequent assessments. It relied on Wipro Ltd. to argue that claims not made in the return cannot be entertained, even if they are corrections. It claimed that Section 115BBG applies to RECs as they are akin to carbon credits. It also argued that the AO’s computational errors were minor and could be rectified under Section 154, and that the penalty and interest were justified due to the magnitude of the adjustments.
The Court's Analysis
The Tribunal conducted a rigorous analysis of statutory mandates, binding precedents, and the doctrine of consistency. It began by affirming that Section 144C(10) of the Income Tax Act makes every direction of the DRP binding on the Assessing Officer. The Tribunal noted that the AO had admitted in an affidavit that no appeal was filed against the CIT(A)’s order in AY 2015-16 - a fact corroborated by the Tribunal’s own prior orders in AY 2016-17 and 2017-18. The Tribunal held that ignoring such directions constitutes a clear violation of statutory procedure and undermines the entire dispute resolution framework.
"Inspite of clear directions of DRP, the assessing officer has still made the adjustment contrary to such directions. This is clear transgression of mandate of scheme of dispute resolution provided u/s 144C of the Act."
On the issue of steam transfer, the Tribunal rejected the NIL ALP methodology, citing its own prior rulings and the Delhi High Court’s refusal to admit the Revenue’s appeal in the sister company case (DCM Shriram Ltd.), which held that steam is a commercial product whose cost cannot be NIL. The Tribunal emphasized that consistency in tax administration is not optional but a constitutional imperative.
Regarding RECs, the Tribunal undertook a purposive interpretation of Section 115BBG, noting that the provision explicitly defines "carbon credits" as reductions verified by the UNFCCC. RECs, issued by CERC for renewable energy generation, are structurally and legally distinct. The Tribunal held that taxing RECs as revenue receipts would violate the settled principle that capital receipts are not taxable unless specifically included in Section 2(24). It relied on Ankit Metal & Power Ltd. to affirm that capital receipts cannot be included in book profits under Section 115JB.
"The legislative intent, therefore, is clear and confined to carbon credits as so defined. REC and carbon credits cannot be treated as synonymous and must be considered separately for the purpose of taxation."
On the enhanced Section 80-IA claim, the Tribunal distinguished Wipro Ltd., which concerned mandatory declarations under Section 10B, from the present case where the assessee had already claimed a deduction in its return and sought only an upward revision based on a judicially accepted methodology. It cited Oracle (OFSS) to hold that the Act does not bar correction of claims already made.
The Tribunal also held that Section 14A disallowance is inapplicable where no exempt income exists, and that the AO’s computational errors - including the inflated book profits and DDT demand - must be rectified under Section 154.
The Verdict
The appeal was allowed. The Tribunal:
- Deleted the transfer pricing adjustment of Rs. 107,01,24,795 on steam transfer.
- Restored the enhanced claim for deduction under Section 80-IA to the file of the Assessing Officer for verification and decision, with directions to provide a reasonable opportunity of hearing.
- Held that receipts from Renewable Energy Certificates (RECs) amounting to Rs. 20,76,97,397 are capital receipts and are not taxable in total income or book profits under Section 115JB.
- Deleted the suo-moto disallowance of Rs. 6,13,402 under Section 14A.
- Directed the Assessing Officer to rectify the book profits from Rs. 68,32,26,303 to Rs. 68,20,48,545 and to verify the DDT payment reflected in Form 26AS.
- Dismissed penalty proceedings under Section 270A and interest under Section 234B as premature.
What This Means For Similar Cases
DRP Directions Are Legally Binding and Non-Negotiable
- Practitioners must immediately challenge any assessment order that ignores DRP directions under Section 144C(10).
- Affidavits and tribunal records from prior years can be used to prove non-filing of appeals and enforce binding precedent.
- Non-compliance by AO renders the assessment order void ab initio.
Capital Receipts of RECs Are Exempt from Tax and MAT
- RECs are not carbon credits and cannot be taxed under Section 115BBG.
- Any attempt to include REC receipts in total income or book profits under Section 115JB is legally unsustainable.
- Taxpayers generating renewable energy should proactively classify REC receipts as capital receipts and exclude them from tax computations.
Correction of Claims Is Permissible Under Section 80-IA
- An upward revision of a deduction already claimed in the return is not a fresh claim and is permissible under judicial precedent.
- The Wipro Ltd. doctrine applies only to mandatory declarations under exemption provisions, not to corrections of existing claims.
- Taxpayers may rely on Oracle (OFSS) and Shree Bhavani Power Projects to argue for correction of Section 80-IA claims based on evolving judicial interpretations.
