Electricity transfer pricing between company divisions upheld using industrial consumer rates not supplier rates

The ITAT Delhi ruled in favor of the assessee regarding transfer pricing adjustment for electricity supply between thermal unit and washeries division. The TPO had applied average rates from CSEB and IEX, arriving at Rs 2.868 per unit as ALP. However, citing SC precedent in Jindal Steel Power Ltd, the Tribunal held that market value should be determined by CSEB's rate to industrial consumers (Rs 4.05 per unit), not supplier rates. Since assessee's transfer price of Rs 4 per unit was within market rate of Rs 4.05, no adjustment was warranted. Issues regarding PF contribution and depreciation disallowance were remanded to AO for fresh adjudication.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal issues addressed in this judgment are:

• Whether the transfer price of electricity from the thermal unit to the washeries division of the assessee was at Arm's Length Price (ALP) under the transfer pricing regulations.
• Whether the market value of electricity should be determined based on the rate charged by the State Electricity Board (CSEB) to industrial consumers or other benchmarks.
• The appropriateness of the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO).
• Resolution of discrepancies in the figures related to Employees' contribution to PF and depreciation disallowance.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Determination of Transfer Price for Electricity

• Relevant legal framework and precedents: The case primarily revolves around Section 92CA(1) and Section 80IA of the Income-tax Act, 1961. The judgment references the Supreme Court decision in CIT vs Jindal Steel & Power Ltd, which discusses the determination of market value for captive consumption.
• Court's interpretation and reasoning: The court emphasized that the market value should be determined based on the rate at which the State Electricity Board supplies electricity to industrial consumers, not the rate at which the electricity is sold to the Board.
• Key evidence and findings: The assessee transferred electricity at Rs 4 per unit, whereas the CSEB rate was Rs 4.05 per unit. The TPO initially determined the ALP at Rs 2.868 per unit, leading to a transfer pricing adjustment.
• Application of law to facts: The court applied the principle that the market value should reflect the price in an open market, as defined in the Jindal Steel case. The transfer price of Rs 4 per unit was deemed to be within the market rate.
• Treatment of competing arguments: The revenue argued for a lower ALP, while the assessee contended that Rs 4 per unit was appropriate. The court sided with the assessee, referencing the Supreme Court's interpretation of market value.
• Conclusions: The court concluded that no transfer pricing adjustment was warranted, as the transfer price was within the acceptable market range.

Issue 2: Discrepancies in PF and Depreciation Figures

• Relevant legal framework and precedents: The issue pertains to the accuracy of figures related to Employees' contribution to PF and depreciation.
• Court's interpretation and reasoning: The court acknowledged the need for accurate figures and accepted the assessee's request for a re-evaluation.
• Key evidence and findings: The figures in question were not clearly attributable to the assessee.
• Application of law to facts: The court decided to remand the issue to the AO for a fresh determination based on correct figures.
• Treatment of competing arguments: The court accepted the assessee's argument for re-evaluation in the interest of fairness.
• Conclusions: The court allowed the grounds for statistical purposes, directing a re-assessment by the AO.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market."
• Core principles established: The market value for transfer pricing should reflect the rate at which goods or services are available in an open market, characterized by free competition and the laws of supply and demand.
• Final determinations on each issue: The court dismissed the revenue's appeal regarding the transfer pricing adjustment and allowed the assessee's cross-objections for statistical purposes, directing a re-evaluation of the PF and depreciation figures.

In conclusion, the judgment underscores the importance of aligning transfer pricing determinations with market realities and acknowledges the necessity for accurate financial reporting in tax assessments.

---