Captive power plant electricity transfer pricing: internal CUP using regulated grid tariff accepted; s.80IA deduction restored

The dominant issue was determination of the arm's length/fair market value of electricity transferred by an eligible captive power plant to a non-eligible manufacturing unit for computing deduction under s. 80IA, read with ss. 80IA(8), 80A(6), 92 and 92F, treating the transfer as an SDT under s. 92BA. The ITAT (LB), by majority (JM and Third Member), held that the internal CUP being the tariff actually paid by the assessee to an independent distribution licensee at a regulated rate was a reliable benchmark reflecting market conditions; hence the rate charged (Rs. 6.62/unit) constituted the ALP. Consequently, the downward TP adjustment was deleted and deduction under s. 80IA was allowed without reduction on this ground.

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Issues: (i) Whether additional disallowance under section 14A r.w. Rule 8D(2)(iii) and its addition to book profit u/s 115JB were to be sustained; (ii) Whether CENVAT credit component should be included in input cost for computing deduction u/s 80IA; (iii) Whether corporate advertisement expenditure is capital or revenue; (iv) Whether lease equalisation charges claimed as per AS-19 are allowable; (v) Whether interest on electricity tax falls within section 43B; (vi) Whether corporate and performance guarantees given to overseas AEs are international transactions and the ALP for guarantee fees; (vii) Whether the market value/ALP for captive supply of electricity by eligible unit to non-eligible unit (supply of electricity) should be benchmarked at the rate paid by the manufacturing unit to the State Electricity Board (internal CUP) or re-determined by TPO (SDT/ALP issue); (viii) Whether supply of steam by eligible units to non-eligible units requires ALP determination by AO/TPO; (ix) Admission and remand of additional grounds relating to various subsidies and incentives (FMS/FPS/MLFPS, fertilizer, freight, sales tax) for fresh examination.

Issue (i): Whether the AO's computation of additional disallowance under section 14A r.w. Rule 8D(2)(iii) and its inclusion in book profit u/s 115JB should be sustained.

Analysis: The Tribunal followed co-ordinate bench decisions in the assessee's own case. The AO had invoked Rule 8D without recording satisfaction as to why the assessee's suo-moto disallowance was incorrect; Tribunal remitted recomputation to AO consistent with precedent. On addition to book profit u/s 115JB, the Tribunal applied binding coordinate bench and High Court/Special Bench authorities holding that disallowance under section 14A r.w. Rule 8D need not be added back for computation of book profit under section 115JB.

Conclusion: Disallowance under section 14A remitted to AO for recomputation in line with coordinate bench; inclusion of section 14A disallowance in book profit under section 115JB deleted (in favour of assessee).

Issue (ii): Whether CENVAT credit component must be included in input cost when computing deduction under section 80IA.

Analysis: The Tribunal applied prior co-ordinate bench decisions (including Ambuja Cements et al.) and reasoning that when eligible units are treated on standalone basis the corresponding CENVAT benefit must be accounted for; not including CENVAT does not vitiate profits where credits are availed by other units. On merits the addition by AO was found not sustainable.

Conclusion: Addition on account of CENVAT inclusion in input cost was deleted (in favour of assessee).

Issue (iii): Whether corporate advertisement expenditure (Rs. 1,88,59,786) is capital or revenue.

Analysis: Tribunal followed co-ordinate bench and applicable High Court authority (e.g., Asian Paints precedent) where corporate brand-building expenses were held revenue in nature; facts materially identical.

Conclusion: Corporate advertisement expenditure held to be revenue expenditure; addition deleted (in favour of assessee).

Issue (iv): Whether lease equalisation charges (AS-19) are allowable.

Analysis: On facts and precedent (including Tribunal decisions applying AS-19), lease equalisation recognised as P&L item when AS-19 applicable and notional charge accordingly allowable; co-ordinate bench precedent followed.

Conclusion: Lease equalisation charges allowed (in favour of assessee).

Issue (v): Whether interest on electricity tax is covered by section 43B and disallowable pending payment.

Analysis: Tribunal followed co-ordinate bench decisions and non-jurisdictional High Court authorities favouring assessee where interest on such tax is compensatory and allowable under section 37; in absence of binding contrary jurisdictional decision, the view favourable to assessee adopted.

Conclusion: Disallowance under section 43B qua interest on electricity tax deleted (in favour of assessee).

Issue (vi): Whether corporate and performance guarantees to AEs are international transactions and appropriate ALP (guarantee commission) to be applied.

Analysis: The Tribunal followed co-ordinate bench and jurisdictional High Court authority (Everest Kanto and relevant Tribunal precedent) applying a 0.5% benchmark for guarantee/performance guarantee fees on the facts; TPO/AO's higher rates were not sustained.

Conclusion: TPO/AO additions on guarantee fees restricted to the lower bench-marked rate (0.5%); CIT(A) order upheld (in favour of assessee on this issue, revenue grounds dismissed).

Issue (vii): Whether the ALP/market value for captive supply of electricity by eligible unit to non-eligible unit should be the internal CUP (rate at which manufacturing unit purchased from State Electricity Board Rs. 6.62/unit) or re-determined by TPO using generation-to-SEB comparables (resulting in downward adjustment).

Analysis: The Division Bench recorded conflicting views by Judicial and Accountant Members and referred difference to Third Member. The Third Member analysed statutory framework of section 80IA(8) (both clause (i) open market and clause (ii) ALP for SDT), Rule 10B comparability factors, and Electricity Act regulatory scheme. He followed Supreme Court and subsequent High Court/Tribunal authorities holding that where the manufacturing unit would otherwise buy from State/distributor, the rate paid by such non-eligible unit to the distribution licensee can constitute a valid internal CUP; regulatory fixation of tariffs does not preclude use of such tariffs as market value where they represent the prevalent price available to buyers. Applying precedents and comparability principles, Third Member found that Rs. 6.62/unit is an appropriate CUP and ALP for the captive supply and that TPO/AO's adjustment (using generation-to-SEB rates) was inappropriate on facts.

Conclusion: Majority held that the internal CUP (Rs. 6.62/unit) is the ALP/market value; downward adjustment by AO/TPO set aside and deduction under section 80IA to be computed on that basis (allowed in favour of assessee).

Issue (viii): Whether supply of steam by eligible units to non-eligible units requires re-determination of ALP by AO/TPO.

Analysis: Issue treated as similar to electricity supply; Tribunal remitted the matter to AO for determination of ALP on similar lines (comparability and factual/far analysis required).

Conclusion: Matter restored to AO/TPO for ALP determination consistent with directions (in favour of neither party on present record; remand for fresh determination).

Issue (ix): Whether additional grounds relating to incentives/subsidies (FMS/FPS/MLFPS, fertilizer subsidy, freight subsidy, sales tax subsidy) and related book-profit treatment should be admitted and/or remitted.

Analysis: Tribunal admitted these additional grounds (recognising they arose from later judicial developments) and, following co-ordinate bench practice, remitted them to AO for de novo examination and fresh decision after calling necessary details.

Conclusion: Additional grounds admitted and remitted to AO for fresh adjudication (in favour of admission for assessee; substantive outcome to follow upon remand).

Final Conclusion: The Tribunal affirmed the CIT(A)'s order on multiple contested items by applying co-ordinate-bench precedents, allowed several assessee grounds (including deletion of various disallowances and allowance of expenses), admitted and remitted certain additional grounds for de novo factual examination, and by majority held that the internal CUP (the rate at which the non-eligible manufacturing unit purchased power from the State/distribution licensee) constitutes the correct market value/ALP for captive electricity supplied by the eligible unit under section 80IA(8); consequently Ground No. 7 is allowed in favour of the assessee and the Assessing Officer/TPO adjustment is set aside.

Ratio Decidendi: For the purpose of section 80IA(8) where a captive eligible unit supplies goods or services to a non-eligible unit, if the non-eligible unit purchases the same from the open market (e.g., State/distribution licensee) at an ascertainable prevailing rate, that prevailing purchase rate can constitute a valid internal CUP and therefore a proper measure of market value/ALP; where SDT is involved clause (i) and clause (ii) of the Explanation to section 80IA(8) operate contextually and internal CUP reflecting the open-market price available to the tested party may be accepted as ALP subject to comparability and FAR analysis.

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