K.R. Pulp & Papers Ltd Vs ACIT (ITAT Delhi)
Market Value of electricity supplied to Non-eligible Unit to be benchmarked at State Electricity Distribution Company’s tariff charged to industrial consumers and not IEX rates: ITAT Delhi
Conclusion: Transfer of electricity from eligible captive power units to non-eligible units was to be valued at the tariff charged by State Electricity Distribution Companies to industrial consumers and not at IEX trading rates. Transfer pricing adjustment and consequential denial of deduction under section 80-IA were deleted.
Held: Assessee was engaged in manufacture of kraft paper and writing and printing paper, operated captive power plants eligible for deduction under section 80-IA. Electricity generated by the eligible units was transferred to its manufacturing units for captive consumption. Assessee adopted the tariff charged by Madhyanchal Vidyut Vitran Nigam Ltd. (MVVNL) to industrial consumers as the market value of electricity while computing profits of the eligible undertaking and claimed deduction under section 80-IA. TPO substituted the value by adopting the average rate prevailing on the Indian Energy Exchange (IEX), resulting in transfer pricing adjustment and consequential denial of deduction under section 80-IA. Assessee contended that transfer of electricity was identical to earlier assessment years where the Tribunal had accepted valuation based on tariff charged by State Electricity Distribution Companies; Electricity supplied by State Distribution Companies to industrial consumers represented the true market value for captive consumption; the issue stood concluded in favour of the assessee by the Supreme Court in CIT v. Jindal Steel & Power Ltd. and by the jurisdictional High Court in PCIT v. DCM Shriram Ltd. and IEX rates represent prices for short-term trading of surplus electricity and could not be compared with uninterrupted supply consumed by industrial units. Revenue contended that in view of amended section 80A(6), market value must necessarily be determined in accordance with transfer pricing provisions. IEX represented the proper comparable for determining arm’s length price; assessee had failed to undertake proper FAR analysis and benchmarking under CUP method and MVVNL tariff included distribution and regulatory elements and therefore was not comparable. Tribunal observed that the controversy had already been decided in assessee’s own case for earlier years by following the judgments of the Supreme Court in Jindal Steel & Power Ltd. and the Delhi High Court in DCM Shriram Ltd. It held that electricity purchased by industrial consumers from State Electricity Distribution Companies constitutes the appropriate benchmark because such tariff reflects the price which the consuming unit would have paid in the open market had captive power not been available. Conversely, IEX prices relate to purchase and sale of surplus electricity through short-term trading mechanisms, involve different commercial conditions and do not represent the price of electricity consumed by industrial users. Therefore, IEX rates cannot constitute an appropriate CUP. Accordingly, the tariff charged by MVVNL to industrial consumers represented the correct arm’s length price and market value under section 80-IA.
