2025 (7) TMI 1369 - AT - Income Tax

TP adjustment - reducing the deduction u/s 80IA with this amount on transfer of electricity from eligible unit to non-eligible unit - price on which the electricity generated from steam is transferred from eligible unit to non-eligible unit - HELD THAT - In the instant case the appellant had installed the 1boilers for the generation of steam only meant for captive consumption and not otherwise. The appellant did not sell any steam to the outsiders. The generation of electricity and its supply are controlled by the Electricity Act 2003 and the Electricity (Supply) Act 1948. As per the Act no person without a license can trade in the electricity. The generation companies are different from the distribution companies. The generation companies as per the statutory mandate are bound to sell electricity to the distribution companies and the price thereof is determined as per the formula given in the Electricity Act and the contracts as executed in between the generation companies and distribution companies. In the open market none of the generation companies can supply the electricity. So the end consumers always remain served by the electricity supplied by the distribution companies. The eligible units of the appellant are also involved in supply of steam converted into electric units to the non-eligible units for the consumption. The non-eligible units are the end user of the supplies made by the eligible units. What rate it should be charged/ priced when transferred to other unit? - For the purposes of determination of the market value of the transfer of steam from eligible unit to non- eligible unit is to be taken at the market value at which the electricity company charges from consumers as has been requested by Ld.AR. Accordingly we direct directed the AO to re-compute eligible profits in reference to Section 80IA(8) of the Act with reference to rates at which the respective State Electricity Boards/distribution companies wherever eligible units were located supplied electricity to the end consumers in open market. With these direction Ground of appeal No.1 raised by the assessee is accordingly partly allowed for statistical purposes.

Summary

ISSUES:

Whether the transfer pricing adjustment reducing the deduction claimed under section 80IA of the Income Tax Act, 1961, on account of inter-unit transfer of steam/electricity from eligible to non-eligible units, was correctly made by the Transfer Pricing Officer (TPO) and Assessing Officer (AO).What is the appropriate method and comparable price for determining the arm's length price (ALP) of electricity transferred from captive power units to non-eligible units within the same enterprise under section 80IA(6) and 80IA(8) of the Act.Whether the market value for such inter-unit transfer should be based on the price charged by power generating companies to State Electricity Boards (SEBs) or the price at which SEBs/distribution companies supply electricity to end consumers in the open market.Whether penalty under sections 234B and 234C of the Act should be levied consequential to the adjustment in income.

RULINGS / HOLDINGS:

The adjustment made by the TPO/AO reducing the deduction under section 80IA by INR 33,59,64,275/- on the basis of benchmarking the transfer price with the average rate charged by power generating companies to SEBs was not upheld; the market value must be determined with reference to the rates at which SEBs/distribution companies supply electricity to end consumers in the open market.The arm's length price for transfer of electricity generated from captive power units to non-eligible units is to be computed by applying the Comparable Uncontrolled Price (CUP) method using the market value defined under section 80IA(6) and 80IA(8), which aligns with the price charged by SEBs/distribution companies to industrial consumers, not the regulated or contracted prices between power generators and SEBs.The Supreme Court's interpretation in CIT v. Jindal Steel & Power Ltd. (2023) clarifies that "market value" means the price determined in an environment of free trade or competition ("open market"), and prices fixed under statutory or monopoly conditions (such as contracts between power generators and SEBs) do not constitute market value for this purpose.Penalties under sections 234B and 234C are consequential and must be recomputed after giving effect to the revised income assessment following the correct determination of ALP.

RATIONALE:

The legal framework applied includes sections 80IA(6), 80IA(8), 92CA, 92BA, and 92F of the Income Tax Act, 1961, which govern the computation of eligible profits and determination of arm's length price for specified domestic transactions.The Explanation clauses to sections 80IA(6) and 80IA(8), introduced by the Finance Act, 2012, clarify that where inter-unit transfers are specified domestic transactions under section 92BA, the market value is to be determined as the arm's length price defined under section 92F.The court relied heavily on the Supreme Court's decision in CIT v. Jindal Steel & Power Ltd., which held that prices fixed under monopoly or statutory contracts (such as between captive power plants and SEBs) do not represent "open market" prices, as such prices lack the element of free competition and negotiation.Regulated tariffs charged by SEBs/distribution companies to end consumers represent the market value for electricity supply in the open market, as these prices reflect the competitive environment in which industrial consumers purchase electricity.Prior decisions of coordinate benches of the Tribunal and High Courts were followed, which consistently held that the CUP method is appropriate only when there is sufficient similarity between tested and comparable transactions, and that regulated or contracted prices between generators and SEBs are not comparable uncontrolled prices.The court noted that power traded on platforms like IEX is not comparable due to its short-term, volatile, and unpredictable nature, further supporting reliance on SEB/distribution company consumer tariffs as the benchmark.The decision partially reversed the TPO/AO adjustment and remanded the matter for recomputation of eligible profits and consequential tax liabilities, including interest and penalties.