ITAT Chandigarh on Transfer Pricing for Captive Power and Steam: Nectar Lifesciences Limited Vs DCIT

1. Background of the Dispute

The matter before the ITAT Chandigarh in Nectar Lifesciences Limited Vs DCIT (ITA No.1497/Chd/2019, order dated 17/02/2022, AY 2015-16) concerned transfer pricing adjustments on specified domestic transactions relating to:

  • Transfer of power (electricity) from Section 80-IA eligible captive power undertakings to non-eligible manufacturing units, and
  • Transfer of steam generated in the same captive power units to non-eligible units.

The appeal arose out of an assessment completed under Section 144C(13) read with Section 143(3) of the Income Tax Act 1961, following directions of the Dispute Resolution Panel-1 (DRP) issued under Section 144C(5).

Nectar Lifesciences Limited is engaged in manufacturing and supplying pharmaceutical products and in health-related research. Due to intensive power and steam requirements in its production processes, the assessee had installed two captive power plants of 6 MW each at Dera Bassi, Punjab. These plants produced both electricity and steam:

  • Electricity was used partly to run the power plants themselves and partly supplied to the assessee’s manufacturing units.
  • Steam generated in the process was used both for power generation and directly in the manufacturing processes.

The central controversy was whether the internal transfer prices adopted for power and steam between eligible and non-eligible units were at arm’s length for the purposes of Section 80-IA and the transfer pricing regime for specified domestic transactions.

2. Captive Power: Facts and Competing Benchmarks

2.1 Assessee’s approach to electricity transfer pricing

For the relevant year, the assessee computed the transfer price of electricity supplied from its captive power plants to manufacturing units at Rs. 6.72 per unit, using the Comparable Uncontrolled Price (CUP) method. The assessee highlighted that:

  • Punjab State Electricity Regulatory Commission (PSERC) had fixed the purchase rate for biomass-based power at Rs. 6.95 per unit (net applicable tariff for FY 2014-15).
  • Punjab State Power Corporation Limited (PSPCL) charged Rs. 7.15 per unit to industrial consumers.
  • The assessee’s own actual purchase cost of power from PSPCL during the year was Rs. 7.48 per unit.

On this basis, the assessee argued that its internal transfer rate of Rs. 6.72 per unit was conservative and clearly within the market range, and therefore at arm’s length.

2.2 TPO’s method and initial adjustment on power

The Assessing Officer referred the specified domestic transactions to the Transfer Pricing Officer (TPO) under Section 92C. In respect of power, the TPO:

  • Noted that the assessee had applied CUP but, in his view, used an inappropriate internal CUP.
  • Held that the correct comparable should be based on power sale rates, not end-consumer purchase tariffs.
  • Collected data from the Indian Energy Exchange (IEX) under Section 133(6) and found the average power trading rate for Punjab region during FY 2014-15 to be Rs. 3.499 per unit.

The TPO reasoned that:

  • Purchase tariffs to industrial consumers include transmission, distribution, losses, maintenance, HR and other overheads not borne by a generator like the assessee.
  • PSPCL is functionally a trader/distributor of power, whereas the assessee is a producer, and therefore their prices are not directly comparable.
  • The tariff fixed by PSERC at Rs. 6.93 per unit (generic tariff for renewable technologies after accelerated depreciation adjustment) was generic and subject to several project-specific variables such as plant load factor, days of operation, fuel cost and return on equity.

The TPO therefore adopted an external CUP by averaging:

  • PSERC’s generic tariff of Rs. 6.93 per unit, and
  • IEX average trading rate of Rs. 3.499 per unit.

This resulted in an arm’s length rate of Rs. 5.2145 per unit. Applying this rate to captive consumption (46,529,176 units) against the assessee’s notional rate of Rs. 6.72 per unit, the TPO proposed an upward adjustment of:

  • Rs. 7,00,49,674 on account of transfer of power.

2.3 DRP’s directions and revised power adjustment

In the draft assessment order dated 28/12/2018, the proposed transfer pricing adjustment for power (Rs. 7,00,49,674) was clubbed with the proposed steam adjustment (see later) for a total of Rs. 82,35,82,954.

The assessee raised objections before the DRP. Referring to its earlier directions for AY 2014-15, the DRP:

  • Accepted, in principle, the use of external CUP.
  • Upheld reliance on a combination of IEX rates and PSERC tariff.
  • Directed, however, that the rate of Rs. 6.95 per unit for a biomass steam plant be used instead of the rate earlier considered.

Following the DRP’s directions, the TPO recomputed the power adjustment, and the final addition in the assessment order dated 30/09/2019 on account of power transfer pricing was:

  • Rs. 6,95,84,383.

This figure formed part of the revised aggregate transfer pricing adjustment of Rs. 24,22,69,093.