ITAT Delhi Quashes Massive Section 80-IA Transfer Pricing Adjustments on Captive Power and Steam Consumption

The valuation of goods transferred between eligible and non-eligible units for the purpose of claiming profit-linked deductions has historically been a highly litigated domain in Indian corporate taxation. The recent judicial pronouncement by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in the case of K R Pulp & Papers Ltd. Vs DCIT (Order dated 04/07/2025) serves as a critical precedent in this arena.

The Tribunal delivered a comprehensive ruling addressing the arm's length pricing of electricity and steam generated by captive power plants and consumed internally by non-eligible manufacturing units. By striking down massive transfer pricing adjustments, the ITAT reinforced the principle that market value must be determined based on practical commercial realities rather than volatile exchange rates or theoretical by-product assumptions.

This article provides a detailed analytical summary of the factual matrix, the primary legal contentions, and the Tribunal's decisive findings for the Assessment Years (AY) 2017-18 and 2020-21.

Factual Matrix and Assessment Proceedings

The assessee, a corporate entity actively engaged in the manufacturing and trading of Kraft paper and white paper, filed its income tax return for AY 2017-18 on 29.11.2017. The declared total income stood at Rs. 34,49,64,520/-. The assessee's operational infrastructure comprised two distinct categories of units:

  • Non-Eligible Units: Two paper manufacturing facilities established in 1996 and 2008-09.
  • Eligible Units: Two captive power generation plants (Unit-1 with a 2.5 MW capacity installed in 2006, and Unit-2 with a 12 MW capacity installed in 2009).

During the year under consideration, the assessee claimed a substantial deduction under Section 80-IA of the Income Tax Act 1961, amounting to Rs. 16,40,46,786/-. This deduction was predicated on the transfer of electricity and steam generated by the eligible power units to the non-eligible paper manufacturing units for captive consumption.

The Transfer Pricing Officer's Intervention

Upon the case being selected for scrutiny, the Assessing Officer (AO) noted the existence of specified domestic transactions and consequently invoked Section 92CA(1) to refer the matter to the Transfer Pricing Officer (TPO). The objective was to ascertain the Arm's Length Price (ALP) of the inter-unit transfers.

The TPO, via an order under Section 92CA(3), proposed two severe adjustments:

  1. Electricity Adjustment: An addition of Rs. 32,68,31,286/- was recommended. The TPO rejected the assessee's transfer price of Rs. 6.36 per unit and unilaterally substituted it with Rs. 2.58 per unit, relying on the average rates prevailing on the Indian Energy Exchange (IEX) for the state of Uttar Pradesh.
  2. Steam Adjustment: An addition of Rs. 51,63,85,174/- was proposed. The TPO concluded that steam was merely a by-product of the electricity generation process and, therefore, its cost of production should be considered as nil.