ITAT rules regulatory transmission losses should benchmark electricity transfer pricing, not actual losses including theft

The ITAT Delhi ruled on transfer pricing adjustments involving electricity and steam transfers between eligible and non-eligible units. The assessee challenged adjustments made for electricity transfer from captive power division to other divisions and sale of power to RPG Industrial. The tribunal held that for electricity transfer pricing, approved/standard transmission losses prescribed by regulatory authorities should be used as benchmark rather than actual losses, which include extraordinary factors like theft and lightning not applicable in closed distribution environments. The 17.49% transmission loss claimed by assessee lacked supporting evidence, requiring verification against regulatory norms. For steam transfer, the tribunal found TPO's conversion methodology from HPS to LPS using kcal as common measurement unit incorrect, directing recalculation considering assessee's submissions. The AO/TPO was directed to rework pricing adjustments accordingly. Appeal was partly allowed for statistical purposes.

---

---

ISSUES:

• Whether the transfer pricing adjustment on transfer of electricity from eligible units to non-eligible units is correctly determined considering transmission/distribution losses.
• Whether the transfer pricing adjustment on transfer and sale of steam from eligible units to non-eligible units is correctly determined, particularly regarding cost of production and valuation methodology.
• Whether steam qualifies as "power" under section 80IA of the Income Tax Act and is eligible for deduction accordingly.
• Whether the Transfer Pricing Officer (TPO) erred in computational methodology by converting steam and electricity into a common unit (kcal) and combining costs.
• Whether the assessment order is barred by limitation and whether interest under sections 234A, 234B, and 234C is correctly charged.

RULINGS / HOLDINGS:

• Regarding transfer of electricity, the Court held that the actual transmission loss of 20.63% taken by the TPO includes extraordinary losses not applicable to the intra-group transfer; therefore, the approved/standard loss as determined by the Regulatory Authority should be applied for arm's length price (ALP) calculation.
• Regarding transfer and sale of steam, the Court held that steam is a valuable source of power with a cost of production, and the TPO erred in treating steam cost as nil; the ALP should be based on the cost certified by cost accountants and other professionals, not nil.
• The Court held that steam qualifies as "power" under section 80IA(4) of the Act, interpreting "power" in common parlance as "energy" in any form, including steam, and thus is eligible for deduction under section 80IA.
• The Court found that the TPO's method of converting high-pressure steam (HPS), low-pressure steam (LPS), and electricity into a single unit (kcal) and combining costs was incorrect; the cost of steam and electricity should be calculated separately, and the TPO is directed to rework the cost accordingly.
• Grounds relating to limitation and interest under sections 234A, 234B, and 234C were either not pressed or dismissed without detailed adjudication.

RATIONALE:

• The Court applied the provisions of the Income Tax Act, 1961, particularly sections 80IA(4), 92C(2), 143(3), and 144C(13), and relied on established Transfer Pricing principles including the Comparable Uncontrolled Price (CUP) method.
• The Court referred to authoritative guidance from the Institute of Cost and Works Accountants' "Guidance Note on Cost Accounting Standard on Cost of Utilities (CAS-8)," which treats utilities such as steam as distinct cost objects with separately ascertainable costs.
• Precedents from coordinate benches and higher courts, including judgments of the Hon'ble Supreme Court and jurisdictional High Courts, were relied upon to affirm that steam has a determinable cost and qualifies as power for deduction purposes under section 80IA.
• The Court distinguished the actual transmission loss from the standard regulatory loss, emphasizing that extraordinary losses (e.g., theft, lightning) affecting public utilities do not apply to intra-group transfers, necessitating use of standard loss norms for ALP determination.
• The Court identified a computational error by the TPO in aggregating steam and electricity costs into a common unit without proper segregation, directing recalculation consistent with professional cost certifications and accepted accounting standards.
• No substantial question of law was admitted by the jurisdictional High Court on the steam transfer issue, reinforcing the Tribunal's view that steam transfer valuation based on cost is appropriate.
• The Court declined to apply adverse precedents that were factually distinguishable, maintaining the principle that the cost of steam must be recognized rather than treated as nil.

---