Arm's length pricing for captive power transfers may be benchmarked to the consumer-side State Electricity Board tariff.

For section 80IA(8), the Explanation treats market value in specified domestic transactions as arm's length price, so the correct CUP benchmark depends on comparable goods and comparable market conditions. Where electricity is transferred from a captive power plant to a related manufacturing unit for captive consumption, the relevant uncontrolled price may be the tariff payable by the industrial consumer to the State Electricity Board, because it reflects the price the unit would pay in the open market. The article states that this consumer-side SEB rate was upheld as the proper benchmark, and the transfer pricing adjustment was not sustained.

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Issues: Whether, for computing deduction under section 80IA(8) in respect of captive power plants, the transfer price of electricity supplied to the assessee's non-eligible manufacturing units was to be benchmarked by reference to the rate at which the manufacturing units procured power from the State Electricity Board, or by reference to the rate at which power generating companies sold electricity to distribution companies.

Analysis: The Explanation to section 80IA(8) provides that in specified domestic transactions, "market value" means the arm's length price. The dispute therefore turned on the correct comparable for applying the CUP method. The transfer of power was for captive consumption by the manufacturing units, while the captive power plants were not the assessee's business of selling power to distribution companies. In the post-Electricity Act, 2003 regime, captive generation and open access materially changed the market structure, and the rate paid by industrial consumers to the State Electricity Board was treated as the relevant uncontrolled price. The relevant principle was that CUP requires comparable goods and comparable market conditions, and the consumer-side SEB tariff better reflected the price the non-eligible unit would have paid in the open market.

Conclusion: The assessee's benchmarking based on the State Electricity Board consumer tariff was upheld, and the transfer pricing adjustment was not sustained.

Final Conclusion: The appeal was dismissed, and the deduction under section 80IA was to be worked out on the basis of the price payable by the captive manufacturing units for electricity from the State Electricity Board.

Ratio Decidendi: For section 80IA(8), where power is transferred from a captive power plant to a related manufacturing unit, the arm's length price may be benchmarked by the rate payable by the captive consumer to the State Electricity Board, if that rate reflects the comparable uncontrolled market condition.

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