SEB Rates Preferred Over IEX Rates for Captive Power Benchmarking: ITAT Holds SEB Tariff Reflects True Consumer Purchase Price [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, set aside transfer pricing adjustments made in respect of inter-unit transfer of electricity after holding that State Electricity Boards tariff rates reflected the actual market price at which industrial consumers purchase electricity.

The assessee, SRF Limited, had benchmarked transfer of electricity from its captive power plants and wind power units to other units by adopting rates charged by State Electricity Boards as the comparable uncontrolled price (CUP).

During the transfer pricing proceedings, the Transfer Pricing Officer (TPO) rejected the internal CUP adopted by the assessee and instead relied on Indian Energy Exchange (IEX) rates and other external price data for benchmarking the transactions, resulting in transfer pricing adjustments relating to captive power and wind power units.

The DRP upheld the approach adopted by the TPO.

Aggrieved, the assessee filed an appeal before the Tribunal contending that rates charged by SEBs to industrial consumers represented the correct benchmark for determining the arm’s length price of electricity transferred by captive units.

The Tribunal, comprising Ramit Kochar (Accountant Member) and Vimal Kumar (Judicial Member), noted that the issue was covered by the decision of the Delhi High Court in Pr. Commissioner of Income Tax v. DCM Shriram Ltd. and the decision of the Supreme Court of India in Commissioner of Income Tax v. Jindal Steel and Power Ltd.

The Tribunal observed that electricity supplied through IEX could not be treated as comparable with regular supply of electricity by SEBs due to material differences in pricing mechanism and supply conditions.

It further observed that the rate at which SEBs supply electricity to industrial consumers reflects the actual consumer purchase price in the open market and therefore constitutes the appropriate benchmark for determining the arm’s length price of captive power transfers.

Accordingly, the Tribunal set aside the additions and restored the matter to the file of the AssessingOfficer for fresh verification and adjudication in accordance with law.

The ground raised by the assessee was allowed for statistical purposes.

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