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Aditya Birla Real Estate's Captive Power Pricing Upheld by as Valid Internal CUP
The has delivered a significant ruling on of , holding that electricity rates actually paid by a taxpayer's manufacturing units to state distribution companies can serve as valid for benchmarking power supplied by captive generating plants. In a decision that will resonate with industrial groups operating captive power facilities, the tribunal dismissed the 's appeals against transfer-pricing adjustments totaling ₹1.07 crore for two assessment years, affirming that consumer-side rates—not generator-side procurement rates—are the appropriate benchmark when the captive generator supplies power to the same entity's own units.
The Dispute: Generator vs. Consumer Rates
The case involved (formerly ), which operates two captive thermal power plants—Century Cement Thermal Power Plant at Raipur and Maihar Cement Thermal Power Plant at Maihar. These plants supplied electricity to the company's cement manufacturing units at Baikunth/Raipur and Satna/Maihar. Since captive generation did not meet the full requirement, the cement units also purchased electricity from ) and ).
For the assessment years and , the company used the monthly rates actually paid by its cement units to these two distribution companies as internal CUPs to benchmark the captive power transfers. For , the average rates were ₹5.74 per unit for the Raipur plant and ₹6.44 per unit for the Maihar plant. For , the consumer-side rates stood at ₹7.20 and ₹6.62 per unit, respectively.
The rejected these rates, opting instead to rely on the electricity procurement rates at the generator or procurement stage—i.e., the rates at which the distribution companies themselves purchased power from generators. Those rates were significantly lower: ₹2.27 per unit for and ₹3.05 per unit for in , and ₹3.09 and ₹3.74 per unit in . This led to adjustments of ₹63.89 crore for and ₹43.10 crore for .
The deleted both adjustments, holding that the rates actually paid by the cement units to the distribution companies were the appropriate benchmark. The appealed to the ITAT.
Key Arguments and Tribunal's Reasoning
Before the tribunal, the argued that a captive power plant is a generator and should therefore be compared with generator-side transactions. It further contended that consumer tariffs include transmission, wheeling, distribution, network maintenance, and other costs and risks not undertaken by a captive generator, making such rates unsuitable for comparison.
The tribunal acknowledged that generators and distribution companies perform different functions. However, it held that those differences did not, by themselves, make the consumer-side rates unsuitable. The relevant question was whether the comparison provided a reliable measure of the price at which the receiving manufacturing unit could obtain electricity.
In a crucial observation, the bench comprising Judicial Member Amit Shukla and Accountant Member G.M. Doss stated:
“The amendment brings a transfer falling within within the arm's-length-price framework; it does not prescribe that the generator must be compared only with another generator, or that a rate at which a distribution licensee procures power must invariably be adopted. The selection of the CUP remains governed by the transaction-specific requirements of and .”
The tribunal found that the generator-side procurement rates were not shown to be prices at which the cement units could obtain electricity. The had also not established how the differences between the procurement and distribution stages should be adjusted to make those rates comparable.
For the assessment year, the tribunal noted that the consumer-side rates were actually paid by the very units receiving the captive electricity. The had not demonstrated that those units had access to the lower procurement rates relied upon by the TPO.
Accordingly, the tribunal held that the rates paid to and were valid internal CUPs for benchmarking the captive power transfers. It upheld the deletion of the ₹63.89 crore and ₹43.10 crore adjustments and dismissed both appeals.
Implications for of Captive Power
This decision clarifies a contentious issue in : whether the for intra-group captive power supplies must be benchmarked against generator-side rates or can be benchmarked against the actual cost of alternative power available to the consuming unit. The tribunal's emphasis on the transaction-specific requirement—i.e., the price at which the recipient could obtain electricity from an independent party—provides a practical and economically sound approach.
The ruling is likely to benefit industrial groups that operate captive power plants to supply their own manufacturing units. It confirms that the internal CUP can be derived from the rates actually paid to state distribution companies, provided those rates represent the price at which the consuming unit could independently source electricity. The decision also underscores that the cannot simply substitute a different rate without demonstrating that it reflects a comparable transaction or making appropriate adjustments for .
Impact on Legal Practice
For tax practitioners, the case offers valuable guidance on constructing documentation for captive power arrangements. It reinforces the importance of identifying the most comparable uncontrolled transaction from the perspective of the —in this case, the manufacturing unit receiving the power, not the generator itself. The tribunal's rejection of a rigid "generator-to-generator" comparison signals that the must be applied flexibly, based on the specific facts and circumstances.
The decision also highlights the limited scope for the to reject a taxpayer's chosen CUP without providing a robust comparability analysis. The absence of adjustment for between generator and distribution stages was fatal to the 's case.
Conclusion
The 's ruling in the case of is a welcome clarification on the of . By affirming that consumer-side electricity rates can serve as valid internal CUPs, the tribunal has provided a workable benchmark that aligns with commercial reality. The decision will likely reduce litigation on similar issues and encourage taxpayers to document their policies based on the actual alternative sourcing costs of their captive power consumers.
