TPO's use of captive power plant rates rejected for benchmarking arm's length price in transfer pricing dispute

ITAT Raipur ruled against revenue in a transfer pricing dispute involving power purchase from associated enterprise. TPO adopted Rs.3.07 per unit rate paid by State Electricity Board to captive power plants as comparable for benchmarking arm's length price. CIT(A) rejected this comparison. ITAT upheld CIT(A)'s decision, following precedent from Mahendra Sponge and Power Ltd case and Chhattisgarh HC ruling in Godavari Power case, which established that market rates from State Electricity Board should be used for comparison rather than rates paid to captive power plants.

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Issues Involved:
1. Deletion of the addition of Rs.5,41,09,614/- on account of upward adjustment.
2. Determination of whether the rate at which CSPDCL purchases power from captive power plants constitutes an uncontrolled transaction.
3. Consideration of external comparable uncontrolled price (CUP) for determining the purchase price by CSPDCL.
4. General errors in the order of CIT(A).
5. Any other grounds raised during the appeal.

Summary:

Issue 1: Deletion of the Addition of Rs.5,41,09,614/- on Account of Upward Adjustment
The revenue challenged the deletion of an upward adjustment of Rs.5,41,09,614/- made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) findings. The TPO observed that the price paid by the assessee to its Associated Enterprise (AE) for power was higher than the rate paid by the State Electricity Board. The TPO proposed an upward adjustment by adopting the rate at which CSPDCL purchased power from Captive Power plants. However, the CIT(A) found that the rate of Rs.3.07 per unit could not be used as a comparable transaction for benchmarking the Arm's Length Price (ALP) of the electricity purchased by the assessee from its AE. The CIT(A) relied on various judicial precedents, including decisions from the Income Tax Appellate Tribunal (ITAT) and the jurisdictional High Court, to conclude that the rate adopted by the assessee was justified.

Issue 2: Determination of Whether the Rate at Which CSPDCL Purchases Power from Captive Power Plants Constitutes an Uncontrolled Transaction
The CIT(A) observed that the rate at which CSPDCL purchases power from Captive Power plants is not an uncontrolled transaction due to the monopoly of CSPDCL and the regulatory environment. The CIT(A) emphasized that the Comparable Uncontrolled Price (CUP) should be derived from transactions in an uncontrolled environment, and the internal CUP (rate at which the assessee purchased power from CSEB) is preferable to the external CUP.

Issue 3: Consideration of External Comparable Uncontrolled Price (CUP) for Determining the Purchase Price by CSPDCL
The CIT(A) noted that the TPO erred in applying the external CUP instead of the internal CUP. The CIT(A) highlighted that the rate at which CSPDCL purchases power from Captive Power Producers (CPP) cannot be considered as a comparable transaction due to the controlled nature of such transactions and the monopoly of CSPDCL. The CIT(A) relied on the decision of the ITAT in the case of Nalwa Steel Power Limited vs. ACIT, which recognized that generating stations are obligated to sell extra power at the lowest price, which cannot be equated to the market price.

Issue 4: General Errors in the Order of CIT(A)
The revenue contended that the order of the CIT(A) was erroneous both in law and on facts. However, the CIT(A) provided a detailed analysis and justification for its decision, relying on judicial precedents and the specific facts of the case.

Issue 5: Any Other Grounds Raised During the Appeal
No additional grounds were raised during the appeal.

Conclusion:
The ITAT upheld the decision of the CIT(A), finding that the issue was squarely covered by previous decisions of the Tribunal and the jurisdictional High Court. The Tribunal noted that the CIT(A) had correctly applied the principles and judicial precedents in determining the ALP and deleting the addition made by the AO. Consequently, the appeal of the revenue was dismissed.

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