ITAT Ahmedabad on Section 80IA: Captive Power Tariff to Follow Consumer Electricity Rate, Steam Valuation Upheld

1. Background of the Dispute

The appeal before the Income Tax Appellate Tribunal, Ahmedabad Bench, in DCIT Vs Vishal Fabrics Ltd. (ITAT Ahmedabad) related to Assessment Year 2015-16 and arose from an order of the Commissioner of Income Tax (Appeals)-8, Ahmedabad. The Revenue challenged two core issues:

  1. The manner of determining the value of electricity supplied by the assessee’s Captive Power Plant (CPP) to its own manufacturing/processing unit for computing deduction under Section 80IA of the Income Tax Act 1961; and
  2. The valuation and transfer pricing adjustment on steam supplied by the CPP to the power/processing unit.

The assessee was engaged in manufacturing processed fabrics. It operated a 2.3 MW CPP which generated electricity and steam used entirely for captive consumption in its processing house. The CPP was an eligible undertaking for Section 80IA deduction, whereas the processing house was a non-eligible unit.

For intra-unit transfer pricing and Section 80IA(4) computation, the assessee valued electricity supplied by the CPP to the processing division at Rs. 7.49 per unit, being the rate charged by Torrent Power Ltd. to the processing house. This consumer tariff had been consistently adopted by the assessee as the “market value” for captive power over multiple years.

The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO), who disagreed with this approach and made two separate adjustments:

  • An adjustment of Rs. 4,78,78,842/- on electricity valuation; and
  • An adjustment of Rs. 4,10,81,113/- on steam valuation.

The CIT(A) deleted both adjustments. The Revenue carried the matter to the Tribunal.

2. Facts Relevant to Electricity Valuation and Section 80IA

2.1 Functional Profile of the Units

  • The assessee’s business comprised:

    • A processing house for manufacturing and processing fabrics (non-eligible for Section 80IA); and
    • A 2.3 MW Captive Power Plant (CPP) that generated electricity and steam (eligible undertaking under Section 80IA(4)).

  • Electricity and steam produced by the CPP were supplied exclusively to the processing house; there were no external sales of power.

  • For Section 80IA computation, the assessee treated the CPP as a separate eligible unit and valued power supplied at the rate charged by Torrent Power Ltd. (Rs. 7.49 per unit) to the same processing unit, treating that as the “market rate.”

2.2 TPO’s Approach on Electricity

The Assessing Officer made a domestic transfer pricing reference. The TPO, in his order under Section 92CA(3), rejected the assessee’s benchmarking on the following basis:

  • Torrent Power Ltd. was considered functionally different since it was engaged in generation, transmission and distribution of electricity, whereas the assessee’s CPP was only a generation unit.

  • According to the TPO, the Torrent Power consumer tariff embedded transmission and distribution costs, system losses and related charges that the CPP did not incur.

  • As an alternative comparable, the TPO adopted the cost of generation of electricity by Gujarat State Electricity Corporation Ltd. (GSECL) and took the rate at Rs. 3.08/kWh.

  • On that basis, the TPO recomputed the arm’s length price (ALP) of electricity transferred by the CPP to the manufacturing unit and made a downward adjustment of Rs. 4,78,78,842/- in the hands of the CPP.

The Assessing Officer incorporated this adjustment in the final assessment order under Section 143(3) read with Section 144C.

The CIT(A), however, deleted the adjustment, relying on binding judicial precedents including jurisdictional High Court decisions and coordinate bench rulings.

The Revenue challenged this deletion through multiple grounds (Ground Nos. 1 to 8).

3. Revenue’s Arguments Before the Tribunal on Electricity

The Revenue advanced, inter alia, the following contentions:

  • Tested Party Selection:
    Under transfer pricing principles, the least complex entity should be chosen as the tested party for benchmarking. According to the Revenue, the CPP was functionally less complex than the manufacturing unit, and the TPO was correct in treating the CPP as the tested party.

  • Non-comparability of Torrent Power:
    Torrent Power Ltd. was said to be functionally dissimilar as it handled generation, transmission, and distribution, whereas the CPP only generated power. Hence, functional, asset, and risk (FAR) profiles differed substantially and Torrent Power could not be a valid comparable under the CUP method.

  • Comparable Should Be CPP Sale Price, Not Manufacturing Cost:
    The Revenue argued that the relevant benchmark should be the price at which the CPP sold electricity, not the cost of electricity consumed by the manufacturing unit. Since the CPP was to be treated as an independent business undertaking under Section 80IA, the internal consumer tariff paid by the processing house could not be the proper comparable.

  • Need for Adjustments Under Rule 10B:
    Even if the manufacturing unit’s purchase price from Torrent Power was considered, the Revenue contended that extensive adjustments would be required under Rule 10B of the Income-tax Rules, 1962 to remove components relating to:

    • STU charges,
    • Transmission losses,
    • Distribution losses,
    • Distribution charges,
    • Additional surcharge, and
    • Cross-subsidy surcharge.