Tribunal allows appeal, deletes transfer pricing adjustment for captive power plant transactions following earlier precedent

The ITAT Kolkata allowed the assessee's appeal regarding transfer pricing adjustment for captive power plant transactions. The tribunal applied its earlier decision in the assessee's case for AY 2016-17, finding the issues identical. The DRP had directed the AO to verify the status of revenue's appeal against the 2016-17 tribunal order. Since the revenue's appeal to the HC remained pending, the tribunal held its earlier favorable decision binding. The tribunal set aside the lower authority's order, upheld the assessee's benchmark analysis, and deleted the downward transfer pricing adjustment.

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The judgment addresses the appeal filed by the assessee against the downward transfer pricing adjustment made by the Assistant Commissioner of Income Tax for the Assessment Year 2018-19. The core issue is the computation of the arm's length price for the transfer of power from the captive power plant (CPP) to the non-eligible unit, which resulted in a transfer pricing adjustment of Rs. 16,18,75,076/-.

1. ISSUES PRESENTED and CONSIDERED

The primary legal issue revolves around the determination of the arm's length price for the intra-company transfer of power from the CPP to the non-eligible unit. The specific questions include:

• Whether the methodology used by the assessee to benchmark the arm's length price using the internal Comparable Uncontrolled Price (CUP) method is appropriate.
• Whether the transfer pricing adjustment proposed by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) is justified.
• Whether the decision of the Tribunal for the Assessment Year 2016-17, which involved similar issues, is applicable to the current case.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The legal framework involves Section 80-IA of the Income Tax Act, which provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development. The arm's length price is determined under Section 92C using methods like the CUP method, which requires comparing the price charged in a controlled transaction with that in an uncontrolled transaction.

The Tribunal's decision for Assessment Year 2016-17, which dealt with similar facts, serves as a precedent. In that case, the Tribunal upheld the assessee's use of the internal CUP method, comparing the rate at which the non-eligible unit procured power from the State Electricity Board (SEB) as the arm's length price.

Court's Interpretation and Reasoning:

The Tribunal noted that the power generated by the CPP was consumed by the non-eligible unit, and the assessee used the internal CUP method to benchmark the transfer price. The Tribunal emphasized that the CUP method requires strict product comparability and that the internal CUP method is preferred when reliable data is available.

The Tribunal found that the rate at which the non-eligible unit procured power from the SEB was a reliable internal comparable, as it represented the market rate at which similar consumers purchased power under similar conditions.

Key Evidence and Findings:

The Tribunal reviewed the assessee's transfer pricing study, which used the rate of Rs. 9.08 per unit, based on the average landed cost of power from the SEB. The TPO, however, proposed a rate of Rs. 3.84 per unit based on the average rate at which distribution companies purchased power from generation companies.

The Tribunal found that the TPO's reliance on the tariff order for distribution companies was misplaced, as it did not reflect the market conditions for consumers like the non-eligible unit.

Application of Law to Facts:

The Tribunal applied the CUP method to the facts, determining that the internal CUP method was appropriate. The rate at which the non-eligible unit purchased power from the SEB was deemed to fulfill the CUP parameters, as it was a transaction under similar market conditions.

Treatment of Competing Arguments:

The Tribunal addressed the Revenue's argument that the rate used by the assessee was regulated and not an uncontrolled transaction. It countered that the tariff rates used by the TPO were also regulated and not representative of the market rate for consumers.

The Tribunal also distinguished the facts from other cases cited by the Revenue, emphasizing the importance of product comparability and market conditions in applying the CUP method.

Conclusions:

The Tribunal concluded that the assessee's methodology for determining the arm's length price was justified and that the transfer pricing adjustment proposed by the TPO was not warranted. The Tribunal upheld the internal CUP method used by the assessee and directed the deletion of the transfer pricing adjustment.

3. SIGNIFICANT HOLDINGS

The Tribunal's decision reaffirms the principles for applying the CUP method, emphasizing product comparability and market conditions. The key principles established include:

• The internal CUP method is preferred when reliable data is available, and it should reflect the market conditions under which the controlled transaction occurs.
• The rate at which a non-eligible unit procures power from an unrelated entity under similar conditions can serve as a reliable internal comparable.
• Regulated rates, such as those in tariff orders for distribution companies, may not reflect the market rate for consumers and should not be used as comparables in the CUP method.

The Tribunal's final determination was to allow the appeal of the assessee, setting aside the lower authority's order and deleting the downward transfer pricing adjustment.

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