ITAT Mumbai Quashes Rs. 12.99 Crore TP Adjustment on Captive Power Transfer for Tata Chemicals, Remands Steam Valuation Issue

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) recently delivered a significant ruling concerning the valuation of electricity and steam transferred between eligible and non-eligible units of the same entity. In the case of Tata Chemicals Ltd. Vs DCIT, the Tribunal deleted a substantial transfer pricing adjustment amounting to Rs. 12,99,46,410/- for the Assessment Year (AY) 2019-20. The dispute primarily revolved around the determination of the market value of electricity supplied by a captive power plant eligible for deductions under Section 80-IA of the Income Tax Act 1961 to a non-eligible manufacturing unit.

Furthermore, the Tribunal admitted a fresh legal ground raised by the assessee regarding the valuation of steam transferred between the units, directing the Assessing Officer to examine the matter afresh. This comprehensive analysis delves into the factual matrix, the arguments presented by both the Revenue and the assessee, and the judicial precedents that guided the Tribunal's final verdict.

Factual Background of the Dispute

The assessee, Tata Chemicals Ltd., is prominently engaged in the manufacturing and distribution of bio-fuels, fertilizers, and inorganic chemicals. The company operates multiple facilities, including a phosphatic fertilizers complex in Haldia (West Bengal), a fertilizer complex in Babrala (Uttar Pradesh), and an inorganic chemical complex in Mithapur (Gujarat).

For AY 2019-20, the assessee filed its initial return of income on 29.11.2019, declaring a total income of Rs. 1040,85,22,356/-. This return was subsequently revised on 17.08.2020, bringing the declared total income to Rs. 1004,02,49,100/-. The case was picked up for scrutiny, leading to the issuance of statutory notices.

During the financial year in question, the assessee executed inter-unit transfers of electricity. Specifically, 6,06,46,000 kwh of electricity was generated by its captive power unit, Power Plant TT-12 (which qualifies for tax benefits under Section 80-IA), and transferred to its non-eligible manufacturing facility located at Mithapur. The recorded cost of this transfer was Rs. 39,88,16,944/-. The assessee reported Specified Domestic Transactions (SDT) aggregating to Rs. 115,22,57,650/- related to this sale of electricity.

The Transfer Pricing Benchmarking

To justify the pricing of this inter-unit transfer, the assessee submitted a Transfer Pricing (TP) Report utilizing the Comparable Uncontrolled Price (CUP) method. The assessee benchmarked the internal transfer rate against the tariff charged by the Gujarat Electricity Board (GEB) to the Mithapur unit. The assessee highlighted that GEB levied an average rate of Rs. 6.90 per unit, and the eligible unit transferred power to the manufacturing unit at a comparable rate. In its formal grounds, the assessee cited a rate of Rs. 6.58/Kwh, asserting that the transaction was conducted at arm's length.

The Revenue's Stance and Adjustments

The Transfer Pricing Officer (TPO) scrutinized the assessee's benchmarking approach and found it unacceptable. The TPO's primary objection was rooted in a Functions, Assets, and Risks (FAR) analysis. According to the TPO, the operational profile of GEB—a massive distribution entity—differed fundamentally from that of a captive power generation unit.