ITAT Affirms Arm's Length Price for Power Sale, Remands Steam Valuation for Re-Evaluation in 2016-17, 2017-18 Cases.

The ITAT allowed the appeals for the assessment years 2016-17 and 2017-18 for statistical purposes. For the sale of power, the tribunal held the assessee correctly computed the Arm's Length Price at Rs. 6.5 per unit. Regarding the sale of steam, the tribunal disagreed with the "nil" valuation and remanded the matter to the AO for re-evaluation, directing the assessee to provide supporting documents. The tribunal's decisions for 2016-17 were applied to 2017-18, with Ground No. 2 allowed and Ground No. 3 restored to the AO for de-novo consideration.

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Issues Involved:

1. Adjustment of specified domestic transaction of sale of power.
2. Determination of arm's length value for the sale of steam.

Issue 1: Adjustment of Specified Domestic Transaction of Sale of Power

The assessee, engaged in manufacturing chemicals in India, operates two coal-based captive power plants and claimed deduction under section 80IA for one of these plants. The Transfer Pricing Officer (TPO) adjusted Rs. 24,42,67,731 for the sale of power by comparing the rate charged by Dakshin Gujarat Vij Company Ltd. (DGVCL), a power distribution company, with the cost of electricity generation. The TPO benchmarked the transaction using a cost of Rs. 3.06 per KWH approved by the Gujarat Electricity Regulatory Commission (GERC). The assessee argued that the price should reflect the consumer's perspective, relying on judicial precedents that define "market value" as the price in the open market. The Dispute Resolution Panel (DRP) rejected the assessee's contention, noting that the rate charged by DGVCL includes various costs not relevant to the assessee's situation. The DRP directed the Assessing Officer to determine the price per unit by adding a 15.50% return on equity to the total cost. The tribunal, following precedents from Gujarat Fluro Chemicals and Vishal Fabrics, held that the assessee correctly computed the Arm's Length Price (ALP) at Rs. 6.5 per unit and allowed the appeal.

Issue 2: Determination of Arm's Length Value for the Sale of Steam

The assessee's captive power plant generates steam, which is used in manufacturing chemicals and further power generation. The TPO rejected the assessee's benchmarking method, which used a quotation from an independent supplier, Shree Sulphurics Pvt. Ltd. (SSPL), deeming it invalid. The DRP upheld the TPO's decision, citing multiple defects, including the non-saleable nature of steam, lack of reliable measurement, and absence of separate accounts for the steam unit. The DRP concluded that the value of steam should be "nil." The tribunal disagreed with the "nil" valuation but also found the SSPL quotation unreliable. It restored the issue to the Assessing Officer for re-evaluation, directing the assessee to provide supporting documents to justify the ALP.

Assessment Year 2017-18

The issues and grounds of appeal for the assessment year 2017-18 were similar to those of 2016-17. The tribunal's observations and decisions for 2016-17 were applied to 2017-18. Ground No. 2 was allowed, and Ground No. 3 was restored to the Assessing Officer for de-novo consideration.

Conclusion

In the combined result, both appeals for the assessment years 2016-17 and 2017-18 were allowed for statistical purposes. The order was pronounced in the open court on 16-05-2023.

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