Captive Power Transfers: ITAT Mumbai Allows Consumer-Side Electricity Rates As Internal CUPs For Transfer Pricing

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that electricity rates actually paid by an assessee's cement manufacturing units to state power distribution companies can be used as internal comparable uncontrolled prices for benchmarking electricity supplied by its captive power plants.

The dispute turned on whether the 2013 amendment bringing specified domestic transactions within the arm's-length pricing framework required captive power plants to be benchmarked against rates at which electricity generators supplied power to distribution companies. The tribunal held that it did not.

“The amendment brings a transfer falling within section 92BA within the arm'slength-price framework; it does not prescribe that the generator must be compared only with another generator, or that a rate at which a distribution licensee procures power must invariably be adopted. The selection of the CUP remains governed by the transaction-specific requirements of section 92C and Rule 10B.” it observed.

A bench comprising Judicial Member Amit Shukla and Accountant Member G.M. Doss dismissed the Revenue's appeals against transfer-pricing adjustments of ₹63.89 crore for assessment year 2013-14 and ₹43.10 crore for assessment year 2016-17 in the case of Aditya Birla Real Estate Ltd., formerly known as Century Textiles and Industries Ltd.

The case concerned electricity generated by the company's Century Cement Thermal Power Plant at Raipur and Maihar Cement Thermal Power Plant at Maihar. The plants supplied power to the company's cement manufacturing units at Baikunth/Raipur and Satna/Maihar. Since captive generation did not meet their entire requirements, the units also purchased electricity from Chhattisgarh State Power Distribution Company Ltd. (CSPDCL) and Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Ltd. (MPPKVVCL).

The company used the monthly rates actually paid by its cement units to the two distribution companies to benchmark the captive power transfers. For 2013-14, the average rates were ₹5.74 per unit for the Raipur plant and ₹6.44 per unit for the Maihar plant.

The transfer-pricing officer rejected those rates and instead relied on electricity procurement rates at the generator or procurement stage. For 2013-14, those rates were ₹2.27 per unit for CSPDCL and ₹3.05 per unit for MPPKVVCL, resulting in an adjustment of ₹63.89 crore. For 2016-17, the company's consumer-side rates were ₹7.20 and ₹6.62 per unit, while the rates relied on by the transfer-pricing officer were ₹3.09 and ₹3.74 per unit. The resulting adjustment was ₹43.10 crore.

The commissioner of income tax (appeals) deleted both adjustments, holding that the rates actually paid by the cement units to the distribution companies were the appropriate benchmark.

Before the tribunal, the Revenue argued that a captive power plant is a generator and should therefore be compared with generator-side transactions. It also contended that consumer tariffs include transmission, wheeling, distribution, network maintenance, and other costs and risks not undertaken by a captive generator.

The tribunal acknowledged that generators and distribution companies perform different functions. But it held that those differences did not, by themselves, make the consumer-side rates unsuitable. The relevant question was whether the comparison provided a reliable measure of the price at which the receiving manufacturing unit could obtain electricity.

The tribunal found that the generator-side procurement rates were not shown to be prices at which the cement units could obtain electricity. The Revenue had also not established how the differences between the procurement and distribution stages should be adjusted to make those rates comparable.

For 2016-17, the tribunal noted that the consumer-side rates were contemporaneous prices actually paid by the very units receiving the captive electricity. The Revenue had not shown that those units had access to the lower procurement rates relied upon by the transfer-pricing officer.

The tribunal accordingly held that the rates paid to CSPDCL and MPPKVVCL were valid internal CUPs for benchmarking the captive power transfers. It upheld the deletion of the ₹63.89 crore and ₹43.10 crore adjustments and dismissed both Revenue appeals.

For Assessee: Chaitanya Joshi, CA and Vinayak Bhat, CA

For Revenue: Ajay Chandra, CIT-DR