Rates On Which Power Is Available Through Indian Energy Exchange Can’t Be Applied As It Is Not Rates To Consumers But Rates To DISCOM: ITAT Deletes TP Adjustment

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the Transfer Pricing (TP) Adjustment as rates on which power is available through the Indian Energy Exchange cannot be applied because these are not the rates to the consumers but rates to the DISCOMs.

In the Tata Steel Ltd case, the bench of Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) eliminated the TP-adjustment for the specified domestic transaction (SDT) of power transfer from eligible undertakings under Section 80IA to other manufacturing (non-eligible) undertakings for AY 2019–20.

The appellant/assessee is a company engaged in the business of manufacturing iron and steel, bearings, ferroalloys, and the sale of power and water. In so far as the transfer pricing adjustment of Specified Domestic Transactions made under Section 80(A(8), the facts are that the assessee has three captive power plants on which a claim of deduction under Section 80IA has been made.

The assessments considered the price at which non-eligible units purchased power from third-party power distribution companies (DISCOMS) to be the market value of electricity. The TPO took the view that w.r.t. transactions covered under Section 80IA(8), the same principles have to be applied for determining ALP as provided under Section 92F r.w.r. 10B(2). The TPO then held that DISCOM cannot be compared to captive power units and accordingly determined ALP by making certain adjustments (reducing employee costs to 20% of those incurred by DISCOMs, denying inclusion of a provision for doubtful debts, and denying inclusion of transmission costs).

The department agreed with the AO and TPO that DISCOM cannot be compared to captive power units, and therefore, the purchase price of electricity is adjusted by certain costs of DISCOM, which had to be considered an ALP.

The tribunal relied on the decision of the coordinate bench in the case of Tata Chemicals Ltd. It was held that transactions under Section 80IA(8) are not compulsorily governed by ALP principles. If the price of the transfer of goods and services is in consonance with the price available in the open market, then the profit of the eligible business shown as per this price is eligible for deduction. If the assessee is not able to establish the price available in the open market, then the price of goods and services has to be established through the ALP principle.

Counsel For Appellant: Nishant Thakkar

Counsel For Respondent: Pravin Salunkhe

Case Title: M/s. Tata Steel Ltd. Versus DCIT

Case No.: ITA No.509/Mum/2023

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