Captive power transfers between units for s.80-IA: internal tariff-based CUP upheld; no ALP cut, tested party corrected

For benchmarking specified domestic transactions of inter-unit transfer of power for deduction under s. 80-IA, the ITAT held that where electricity is generated for captive consumption, an internal CUP based on the tariff at which the assessee purchases power from the distribution licensee is the appropriate comparator, and the TPO's external CUP was rightly rejected; consequently, no downward ALP adjustment was warranted. The ITAT further held that the power-consuming unit could validly be treated as the tested party, and the TPO's selection of the power-generating unit as the tested party was unsustainable; consequently, the CIT(A)'s order was upheld and the Revenue's appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether a short delay in filing the appeals should be condoned on the showing of "sufficient cause".

(ii) For benchmarking specified domestic transactions involving inter-unit transfer of electricity for captive consumption (impacting deduction under section 80IA), whether the assessee's internal CUP (linked to the rate at which power is purchased for its own consumption) is acceptable and the TPO's external CUP (rates at which distribution companies purchase from generating companies) is to be rejected.

(iii) Whether, for such benchmarking, the consuming unit can be taken as the tested party (as accepted by the first appellate authority) rather than the generating unit (as adopted by the TPO).

2. ISSUE-WISE DETAILED ANALYSIS

(i) Condonation of delay

Legal framework: The Court considered whether the appellant was prevented by "sufficient cause" from filing within time.

Interpretation and reasoning: The delay was only two days. Although the respondent did not support the request, the Court found the delay to be unintentional and supported by bona fide grounds, and that sufficient cause existed.

Conclusion: The delay was condoned; the appeals were admitted.

(ii) ALP for inter-unit transfer of electricity for captive use-internal CUP vs external CUP (and consequent section 80IA claim)

Legal framework (as discussed in the decision): The dispute was examined as a transfer pricing determination for specified domestic transactions affecting the computation of deduction under section 80IA, with CUP as the selected method.

Interpretation and reasoning: The TPO treated the assessee as a power generator (not a distributor) and therefore rejected the assessee's benchmarking that relied on rates reflecting distribution elements, and instead adopted an external CUP based on rates at which state distribution companies purchased power from generators (obtained through section 133(6)). The first appellate authority accepted the assessee's approach and allowed the claim by following earlier year reasoning. The Court held the assessee's facts to be identical to a Third Member decision relied upon by both sides, and applied its categorical reasoning: where electricity is supplied only for captive consumption (and not sold to third parties), the rate at which the assessee purchases power from the distribution licensee/open access market can be applied as a valid CUP for determining the ALP of power supplied by the captive power unit to the consuming unit, and no downward adjustment is warranted on that basis.

Conclusion: The Court upheld the acceptance of the assessee's CUP approach for captive transfers and declined to interfere with the first appellate authority's decision; the revenue's grounds seeking adjustment were dismissed.

(iii) Selection of tested party-consuming unit vs generating unit

Legal framework (as reflected in the decision): Tested party selection was addressed as part of the benchmarking dispute for the specified domestic transaction.

Interpretation and reasoning: Since the Court affirmed the first appellate authority's acceptance of the assessee's benchmarking approach on the identical-facts principle applied from the Third Member decision, it necessarily rejected the revenue's challenge to the tested party selection embedded in the TPO's approach.

Conclusion: The revenue's objection to treating the consuming unit as the tested party did not survive; the first appellate authority's approach stood affirmed.

Applicability to other assessment years

The Court held that the facts for the other years were identical and applied the same conclusions mutatis mutandis; all revenue appeals for all years were dismissed.

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