ITAT Kolkata Validates Internal CUP Method for Valuing Captive Power Transfers Under Section 80-IA

The intersection of transfer pricing regulations and profit-linked deductions often creates complex legal battles, particularly concerning the valuation of goods transferred internally between eligible and non-eligible units of the same business entity. A prominent example of this complexity is the valuation of electricity generated by a Captive Power Plant (CPP) and consumed by a manufacturing unit.

In a comprehensive ruling, the Income Tax Appellate Tribunal (ITAT), Kolkata, in the case of Star Paper Mills Limited Vs DCIT, delivered a significant verdict for the Assessment Year 2016-17. The Tribunal addressed the intricacies of benchmarking specified domestic transactions under Section 80-IA(8) read with Section 92BA of the Income Tax Act 1961. The judgment provides critical clarity on the application of the Comparable Uncontrolled Price (CUP) Method, the relevance of the "tested party" concept, and the distinction between wholesale and retail power markets for benchmarking purposes.

Factual Matrix of the Dispute

The assessee, engaged in the manufacturing and selling of paper, operates a factory situated in Saharanpur, Uttar Pradesh. To fulfill the energy requirements of this paper manufacturing unit (the non-eligible unit), the assessee established a Captive Power Plant (CPP), which commenced operations on 06.11.2006. This CPP qualified as an eligible unit for profit-linked deductions under Section 80-IA(4)(iv) of the Income Tax Act 1961.

In compliance with statutory requirements, the assessee maintained separate, stand-alone financial accounts for the CPP as mandated by Section 80-IA(5) and Section 80-IA(7). Because the electricity generated by the CPP was entirely consumed by the assessee's own paper manufacturing unit, the transaction fell within the ambit of a specified domestic transaction under Section 80-IA(8) read with Section 92BA.

The Assessee's Benchmarking Approach

To benchmark this inter-unit transfer of electricity, the assessee utilized the Comparable Uncontrolled Price (CUP) Method in its Transfer Pricing Study Report and Form 3CEB. The assessee selected the non-eligible unit (the paper manufacturing plant) as the tested party. Since this non-eligible unit purchased electricity both internally from the CPP and externally from the State Electricity Board (SEB) — specifically, the Paschimanchal Vidyut Vitran Nigam Ltd — the assessee possessed reliable internal data.

The assessee adopted the annual average landed cost of electricity purchased from the SEB, which stood at Rs. 8.41 per unit, as the arm's length price for the power supplied by the CPP. Based on this transfer price, the stand-alone profit of the CPP was calculated at Rs. 19,03,49,419/-. However, despite this eligible profit, the assessee did not claim any deduction under Section 80-IA in its income tax return because its Gross Total Income, after the set-off of brought-forward losses, was NIL.