Captive power transfer pricing: electricity may be benchmarked to State Board tariff, not regulated PPA rate.

For deduction under section 80IA(8), the market value of electricity transferred from a captive power plant to the manufacturing unit was benchmarked against the tariff the consuming unit would pay to the State Electricity Board in open-market conditions, not against a regulated long-term power purchase agreement rate. The Tribunal treated the Board tariff as a reliable external comparable, accepted the CUP method as the most appropriate method for this limited exercise, and held that the manufacturing unit could be the tested party. The transfer pricing adjustment was deleted and the deduction was to be recomputed on that basis.

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Issues: Whether the electricity transferred by the assessee's captive power plant to its manufacturing unit for the purpose of deduction under section 80IA(8) of the Income-tax Act, 1961 had to be valued at the tariff charged by the State Electricity Board to industrial consumers or at the rate determined by the TPO from the power purchase agreement with unrelated distribution companies.

Analysis: The Explanation to section 80IA(8) permits determination of market value either by the price that the goods or services would ordinarily fetch in the open market or by the arm's length price under section 92F(ii) where the transfer is a specified domestic transaction. The dispute therefore turned on the proper comparable for benchmarking electricity transferred from the captive power plant. The rate under the long-term power purchase agreement was treated as regulated and not a price in uncontrolled conditions, while the tariff paid by the manufacturing unit to the State Electricity Board for power procurement was accepted as a reliable external comparable. The comparable precedents applied the principle that, for electricity used by a captive or eligible unit, the relevant market value is the rate at which the consuming unit would purchase power from the distribution system in the open market. The Tribunal also accepted that CUP remained the most appropriate method and that the manufacturing unit could validly be treated as the tested party for this limited exercise.

Conclusion: The transfer price adopted by the assessee was upheld and the transfer pricing adjustment was deleted, with the deduction under section 80IA to be recomputed on that basis.

Ratio Decidendi: For section 80IA(8), the market value of power transferred from a captive power plant to another unit may be benchmarked by the tariff at which the consuming unit procures electricity from the State Electricity Board in open-market conditions, rather than by a regulated long-term PPA rate.

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