Facts of the Case

The appeal was filed by the Revenue before the Income Tax Appellate Tribunal, Delhi Bench against the order passed by the Commissioner of Income Tax (Appeals) for Assessment Year 2014-15 in the case of ACIT vs ACB India Ltd.

The assessee company was engaged in the business of coal beneficiation, coal trading, power generation, and sale of electricity. The assessee had two eligible units for deduction under Section 80IA – a 15 MW windmill unit and a 30 MW thermal power plant.

During the year, the assessee transferred electricity generated by its thermal power plant to its washeries division at a rate of ₹4 per unit.

The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) for benchmarking domestic transactions. The TPO determined that the Arm’s Length Price (ALP) should be ₹2.868 per unit, which resulted in a transfer pricing adjustment of ₹2,74,40,110.

Aggrieved by the adjustment, the assessee filed an appeal before the CIT(A), who granted relief to the assessee. The Revenue thereafter preferred an appeal before the ITAT.

 

Issues Involved

  1. Whether the transfer price of electricity supplied by the assessee from its thermal unit to its washeries division was at Arm’s Length Price (ALP).
  2. Whether the rate charged by the State Electricity Board to industrial consumers should be considered as the benchmark for determining market value of electricity.
  3. Whether the transfer pricing adjustment made by the TPO was justified in law.

 

Petitioner’s Arguments (Revenue)

The Revenue contended that the Transfer Pricing Officer had correctly determined the ALP of electricity supplied by the assessee.

The TPO benchmarked the price using an average of the Chhattisgarh State Electricity Board rate and the IEX electricity trading rate, after making certain adjustments, and determined the ALP at ₹2.868 per unit.

Accordingly, the difference between the ALP determined and the transfer price adopted by the assessee resulted in a transfer pricing adjustment, which was incorporated in the assessment order.

The Revenue therefore argued that the CIT(A) erred in granting relief to the assessee.

 

Respondent’s Arguments (Assessee)

The assessee submitted that electricity was transferred from its thermal power unit to its washeries division at ₹4 per unit, which was consistent with the market rate.

The assessee pointed out that the Chhattisgarh State Electricity Board charged ₹4.05 per unit to industrial consumers, and therefore the transfer price adopted by the assessee was within the prevailing market price.

It was argued that the transfer price should be considered as Arm’s Length Price, and hence no transfer pricing adjustment was warranted.

The assessee also relied on judicial precedents relating to determination of market value of electricity supplied by captive power plants.

 

Court Findings / Tribunal Observations

The Tribunal observed that the rate charged by the State Electricity Board to industrial consumers (₹4.05 per unit) represents the prevailing market rate for electricity.

The Tribunal relied on the judgment of the Supreme Court in CIT vs Jindal Steel & Power Ltd., which held that the market value of electricity supplied by captive power plants should be determined based on the rate charged by the electricity board to industrial consumers in the open market.

  • The assessee transferred electricity at ₹4 per unit.
  • The market rate charged by the State Electricity Board was ₹4.05 per unit.
  • Therefore, the price adopted by the assessee was within the market value.

 

Court Order

  • The transfer price of ₹4 per unit charged by the assessee for electricity supplied between its units was within the market rate.
  • Therefore, no transfer pricing adjustment was warranted.

The appeal of the Revenue was dismissed, and the cross-objections of the assessee were partly allowed for statistical purposes.

 

Important Clarification

The Tribunal clarified that for determining market value of electricity for internal transfer between units, the appropriate benchmark is:

The rate at which electricity is supplied by the State Electricity Board to industrial consumers in the open market.

The rate at which electricity is sold to the electricity board cannot be treated as the market value because such rates are determined under statutory or contractual frameworks and not in a competitive market.

Link to download the order - https://itat.gov.in/public/files/upload/1735630105-449Kmk-1-TO.pdf

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