Court’s Decision
The Calcutta High Court dismissed revenue’s appeals challenging the Income Tax Appellate Tribunal’s order upholding Rungta Mines’ method of benchmarking power transfer rates from captive power plants (CPPs) to manufacturing units using the internal CUP method at rates charged by state electricity boards (SEBs) to industrial consumers for computing the “market value” under Section 80-IA of the Income Tax Act, 1961. The Court held the Tribunal was correct in applying the Supreme Court’s Jindal Steel and Power ratio and confirmed that the SEB’s industrial consumer rate should be taken as the market value for captive power supply, thereby upholding the deletion of transfer pricing adjustments made by the assessing officer and TPO.
Facts
Rungta Mines, engaged in iron ore and manganese ore mining and producing sponge iron, billets, and power, operated CPPs to supply uninterrupted power to its manufacturing units while also purchasing from SEBs. During assessments for AY 2017-18, 2018-19, and 2019-20, it benchmarked power transfers from its CPPs to manufacturing units using the internal CUP method, comparing rates with SEBs’ industrial consumer tariffs, to determine the arm’s length price (ALP) under Section 80-IA(8) and related transfer pricing rules. The TPO and AO rejected this benchmarking, substituting lower rates using an external CUP method based on rates at which SEBs purchased power from generators. The CIT(A) allowed the taxpayer’s appeal, which was affirmed by the Tribunal, leading to the revenue’s appeal before the High Court.
Issues
- Whether the transfer pricing ALP for captive power supplied from CPPs to manufacturing units should be determined using SEB industrial consumer rates (internal CUP) or SEB purchase rates from generators (external CUP).
- Whether the ITAT erred in relying on Jindal Steel and Power to uphold the assessee’s benchmarking method under Section 80-IA.
- Whether the CPP’s supply rates to the manufacturing units were to be adjusted as per the TPO’s determination to compute deductions under Section 80-IA.
Petitioner’s Arguments
The revenue argued that the Tribunal erred by applying Jindal Steel and Power, contending that the facts differed, and that under Section 80-IA(8) read with Section 92F, the “market value” should be determined using SEB purchase rates, not consumer tariffs, as CPPs are generators, not distributors. It asserted that the TPO correctly applied the external CUP method, arguing that SEB consumer rates included distribution costs irrelevant to the CPP-manufacturing unit transactions, and that these transactions could not claim benefit under Section 80-IA on distribution rates.
Respondent’s Arguments
The assessee argued that the CPPs were set up to ensure uninterrupted power for manufacturing and cost efficiency, not to sell power commercially to SEBs, making the SEB industrial consumer rate the appropriate benchmark for market value under Section 80-IA. It submitted that the Supreme Court’s Jindal Steel and Power decision conclusively held that the SEB’s industrial consumer rate represents the market value, aligning with Section 80-IA’s intent and the CPP’s functional profile, validating the use of the internal CUP method for benchmarking.
Analysis of the Law
The Court analysed Section 80-IA(8), the definitions under Section 92F, and the Electricity Act, 2003, which permits captive generation primarily for self-consumption. It reiterated that under Jindal Steel and Power, the “market value” for power supplied from CPPs to manufacturing units should align with SEB industrial consumer rates, not SEB purchase rates from generators. It distinguished pre-Electricity Act 2003 cases, noting that the liberalised regime allowed direct captive supply to units, making SEB industrial consumer tariffs the appropriate comparable.
Precedent Analysis
- Jindal Steel and Power Ltd. (2024) 460 ITR 162 (SC): Held SEB rates to industrial consumers represent market value for captive supply under Section 80-IA.
- Star Paper Mills Ltd.: Upheld internal CUP benchmarking for captive power based on SEB industrial rates, affirmed by Calcutta High Court.
- Reliance Industries Ltd.: Confirmed the use of SEB consumer tariffs for benchmarking under Section 80-IA in a post-Electricity Act 2003 context.
The Court found these precedents binding, rejecting revenue’s arguments to the contrary.
Court’s Reasoning
The Court held that CPPs are primarily set up for captive use, not for commercial sale to SEBs, making SEB’s industrial consumer rate the correct benchmark for ALP under Section 80-IA. It noted the post-2003 Electricity Act framework permitted direct supply without intermediaries, supporting the appropriateness of the internal CUP method. It found the TPO’s rejection of internal CUP flawed, as it failed to account for comparable product identity (electricity) and market conditions between CPP and manufacturing units versus SEB consumer supply.
Conclusion
The Calcutta High Court dismissed the revenue’s appeals, upholding the Tribunal’s order in favour of the assessee. It confirmed that for computing deductions under Section 80-IA, the supply of power from CPPs to manufacturing units should be valued at SEB industrial consumer rates using the internal CUP method, aligning with the Supreme Court’s Jindal Steel and Power judgment.
Implications
- Reaffirms that captive power supply should be benchmarked using SEB industrial consumer rates under Section 80-IA.
- Validates the internal CUP method over external CUP for captive power transfer pricing.
- Clarifies that the post-Electricity Act, 2003 framework supports direct captive supply pricing alignment with open market consumer rates.
Referred Cases and Their Relevance
- Jindal Steel and Power Ltd.: Market value for captive power is the SEB’s industrial consumer rate.
- Star Paper Mills Ltd.: Endorsed internal CUP using SEB rates for captive supply.
- Reliance Industries Ltd.: Approved use of SEB consumer tariffs for Section 80-IA deductions post-Electricity Act 2003.
FAQs
Q1: How should captive power supply to manufacturing units be valued under Section 80-IA?
It should be valued using SEB industrial consumer rates, not SEB purchase rates, following the internal CUP method.
Q2: Is the internal CUP method acceptable for benchmarking captive power transfers?
Yes, where reliable internal data exists, the internal CUP method is appropriate for determining ALP for captive power transfers.
Q3: Does a price fixed for power purchases by SEBs represent market value for captive supply?
No, the SEB’s industrial consumer tariff represents the market value, not SEB purchase rates from generators.