Electricity pricing from captive power plants benchmarked using state board rates upheld over TPO's methodology

The ITAT Jaipur ruled in favor of the assessee regarding transfer pricing of electricity supplied from captive power plants to its cement unit. The assessee used the Comparable Uncontrolled Price method based on state electricity board rates (Rs. 7.40 per unit), while the TPO benchmarked against transactions between power producers and state boards (Rs. 4.57 per unit). The ITAT held that electricity pricing is regulated under the Electricity Act, 2003, making transactions between power producers and state boards controlled conditions, thus unsuitable for benchmarking. Following Supreme Court precedent in Jindal Steel and Power Ltd., the tribunal accepted the assessee's methodology using state electricity board rates as arm's length price, directing deletion of TPO's additions.

---

---

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this appeal were:

1. Whether the Transfer Pricing Officer (TPO) can adopt a different methodology for determining the arm's length price (ALP) of electricity supplied by the assessee's captive power plants to its cement unit, contrary to the method used by the assessee.

2. Whether the market value adopted by the assessee for the electricity supplied is correct, and whether the revenue is justified in substituting this value with another, especially considering the amendments to section 80A(6) of the Income Tax Act.

3. Whether the assessee has the discretion to choose any market value from a basket of market values for claiming deductions under section 80IA(8), and the implications of this choice on the determination of the ALP.

ISSUE-WISE DETAILED ANALYSIS

1. Methodology for Determining ALP

The relevant legal framework involves sections 92CA and 80IA of the Income Tax Act, which pertain to transfer pricing and deductions for certain undertakings, respectively. The court examined whether the TPO's methodology, which differed from the assessee's, was justified. The assessee used the Comparable Uncontrolled Price (CUP) method based on the rate charged by the state electricity department, while the TPO used rates from third-party suppliers to state distribution companies.

The court referenced precedents, including the Supreme Court's decision in CIT vs. Jindal Steel and Power Ltd., which emphasized that the market value should reflect the price in a competitive, open market. The court found that the TPO's approach did not align with this principle, as it compared the rate of electricity supplied to state boards rather than the rate charged to industrial consumers.

2. Market Value Adoption and Revenue Substitution

The court considered whether the revenue could substitute the market value adopted by the assessee with another value. The legal framework involved section 80A(6) and its amendment, which introduced the concept of arm's length pricing for specified domestic transactions.

The court analyzed the definition of "market value" as per the amendment, which aligns with the arm's length price defined in section 92F(ii). The court concluded that the market value should reflect the price at which electricity is supplied to industrial consumers, not the rate at which surplus electricity is sold to the state board, as the latter is a controlled transaction.

3. Discretion in Choosing Market Value for Deductions

The issue revolved around the discretion granted to the assessee under section 80IA(8) to choose a market value from available options. The court examined whether this discretion was exercised appropriately, considering the factors that affect the determination of the ALP, such as assets employed and risks assumed.

The court referred to precedents that supported the assessee's discretion in choosing a market value that reflects the price charged to industrial consumers. The court found that the assessee's choice was consistent with the principles established in these precedents, which emphasize a market value determined in an open market environment.

SIGNIFICANT HOLDINGS

The court upheld the CIT(A)'s decision, affirming the assessee's methodology and market value adoption. The court referenced the Supreme Court's ruling in CIT vs. Jindal Steel and Power Ltd., which established that the market value for electricity should be the rate charged to industrial consumers, not the rate at which surplus electricity is sold to the state board.

"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."

The court concluded that the assessee's adoption of the state electricity department's rate as the market value was appropriate and aligned with the legal principles governing the determination of ALP and market value for section 80IA deductions.

In conclusion, the court dismissed the revenue's appeal, affirming the CIT(A)'s order and supporting the assessee's methodology and market value determination as consistent with the legal framework and precedents.

---