ITAT Mumbai rules in favour of Tata Chemicals on captive power pricing and steam valuation under Section 80IA
1. Background and appeal details
The dispute in this case arose from the final assessment order passed by the Assessing Officer, Assessment Unit (AO) under Section 143(3) read with Section 144C(13) of the Income Tax Act 1961 for Assessment Year 2019-20, dated 12.07.2023. The assessee, Tata Chemicals Ltd., challenged this order before the Income Tax Appellate Tribunal, Mumbai Bench (ITAT Mumbai).
The primary controversy related to a transfer pricing adjustment of Rs. 12,99,46,410/- in respect of a specified domestic transaction involving inter-unit transfer of electricity from a Section 80IA eligible captive power undertaking (Power Plant TT-12) to the assessee’s non-eligible manufacturing facility at Mithapur, Gujarat.
In addition, during the appellate stage, the assessee sought to raise an additional legal ground regarding the valuation of steam generated by its Section 80IA eligible unit and transferred to non-eligible units, contending that such steam should be valued at market value rather than cost for the purpose of computing deduction under Section 80IA.
2. Business operations and return of income
Tata Chemicals Ltd. is engaged in the manufacture and sale of inorganic chemicals, fertilizers and bio-fuels. It operates:
- An inorganic chemicals complex at Mithapur, Gujarat
- A fertilizer plant at Babrala, Uttar Pradesh
- A phosphatic fertilizer facility at Haldia, West Bengal
For AY 2019-20, the assessee filed its original return of income on 29.11.2019 declaring total income of Rs. 1040,85,22,356/-. A revised return was subsequently filed on 17.08.2020 declaring total income of Rs. 1004,02,49,100/-.
The case was selected for scrutiny under CASS and statutory notices were issued. One of the key aspects flagged during scrutiny was a specified domestic transaction (SDT) of Rs. 115,22,57,650/- pertaining to transfer of power from the Section 80IA eligible Power Plant TT-12 to the assessee’s own non-eligible manufacturing unit at Mithapur.
Given the SDT and the applicability of domestic transfer pricing provisions, the case was referred to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) under Section 92 read with Section 92C.
3. Nature of the captive power transaction
3.1 Volume and pricing of power transfer
During the relevant financial year, the assessee’s eligible power unit (TT-12) transferred 6,06,46,000 Kwh of electricity to its Mithapur manufacturing unit at a recorded value of Rs. 39,88,16,944/-. This effectively worked out to a rate of about Rs. 6.58–6.90 per unit (depending on the specific calculation used in different parts of the record).
In its transfer pricing documentation, the assessee adopted the Comparable Uncontrolled Price (CUP) Method as the most appropriate method. The assessee’s stance was:
- Its Mithapur manufacturing unit independently procured electricity from Gujarat Electricity Board (
GEB) at an average rate ofRs. 6.90per unit. - The eligible power unit supplied power to the Mithapur unit at the same rate per unit.
- Therefore, the price at which the eligible unit transferred electricity to the non-eligible unit was at arm’s length, being identical to an open market purchase price from an unrelated utility provider.
3.2 TPO’s rejection of assessee’s benchmarking
The TPO declined to accept the assessee’s CUP analysis on several grounds:
- Functional differences: According to the TPO, GEB is a distribution utility incurring significant transmission and distribution expenses, while the assessee’s arrangement involved only inter-unit transfers over a relatively short internal network with no comparable distribution function.
- Lack of adjustments: The TPO observed that the assessee had not made any adjustments for distribution-related costs, risks, or asset profiles of GEB vis-à-vis the captive power unit, thereby rendering the CUP non-comparable.
- Alternative benchmark: The TPO instead relied on the power purchase cost incurred by Gujarat Urja Vikas Nigam Ltd. (
GUVNL) for acquiring power from coal-based thermal power generating stations in Gujarat. On this basis, the TPO adopted a rate ofRs. 4.09 per Kwhas the benchmark external CUP, treating power generators supplying to GUVNL as functionally similar to the assessee’s eligible unit.
Applying this revised benchmark, the TPO proposed a transfer pricing adjustment of Rs. 15,10,08,540/- under Section 92 for the SDT.
4. DRP directions and final adjustment by AO
The assessee objected to the draft assessment and TPO’s order before the Dispute Resolution Panel-2, Mumbai (DRP). The DRP, instead of affirming the GUVNL-based rate, followed its earlier approach adopted in the assessee’s case for AY 2017-18 and directed the TPO to:
- Use the tariff for supply of power by
Torrent Power Ltd. (TPL)as per Gujarat Electricity Regulatory Commission order in Case No. 1696 of 2018 dated 31.03.2018, treating this as a more suitable CUP than the GUVNL rate.
Pursuant to the DRP’s directions, the transfer pricing adjustment was recomputed at Rs. 14,37,31,020/-.
However, in the final assessment order dated 12.07.2023, the AO limited the disallowance to Rs. 12,99,46,410/-, equal to the quantum of deduction actually claimed by the assessee under Section 80IA for the eligible power unit. Effectively, the AO restricted the adjustment to the extent of the 80IA benefit, in line with the approach adopted in some earlier years.
Against this final order, the assessee preferred an appeal before ITAT Mumbai.
5. Assessee’s arguments before ITAT on captive power pricing
5.1 Reliance on earlier ITAT ruling in assessee’s own case
The assessee pointed out that a virtually identical issue had already been adjudicated in its favour by a coordinate bench of ITAT Mumbai in Tata Chemicals Ltd. v. DCIT for AY 2017-18 ([2023] 155 taxmann.com 461). In that year, the Tribunal had held:
- For purposes of
Section 80IA(8), the “market value” of power transferred by an 80IA eligible captive unit to another unit of the same assessee can validly be benchmarked with the rate at which a State Electricity Board (GEB) supplies power to that consumer unit in the open market. - The fact that domestic transfer pricing provisions (
Section 92BA) are attracted does not automatically mean that only Explanation (ii) toSection 80IA(8)(i.e., arm’s length price as defined inSection 92F(ii)) must be followed. Explanation (i), which refers to “the price that such goods or services would ordinarily fetch in the open market”, remains equally applicable even post introduction of SDT. - The rate charged by TPL was not an appropriate external CUP because TPL’s arrangement involved supplying power predominantly (or exclusively) to GEB under conditions influenced by GEB, thereby tainting it as a controlled or influenced transaction rather than a genuinely uncontrolled market price.