IEX Rates Cannot Be Used as Benchmark for Electricity Transfers Under Section 80IA(8): Delhi High Court

SEB Rates Reflect Market Value for Captive Power Transactions, IEX Rates Lack Reliability - Delhi High Court upheld the Income Tax Appellate Tribunal’s (ITAT) decision to delete transfer pricing (TP) adjustments amounting to ₹26.52 crores. The adjustments had been proposed by the Revenue for electricity transferred from the Assessee's eligible captive power units to its non-eligible units under Section 80IA(8) of the Income Tax Act, 1961. The court ruled that Indian Energy Exchange (IEX) rates were not a reliable benchmark for determining the arm's length price (ALP) under the Comparable Uncontrolled Price (CUP) method due to material differences in the nature of IEX and SEB transactions.

The High Court observed that "IEX is a platform for short-term trading of surplus power, characterized by unpredictable supply and high price volatility," whereas "State Electricity Boards (SEBs) offer regulated, continuous supply agreements, making their rates better suited for benchmarking electricity transfers." The court concluded that SEB rates reflect market value under Section 80IA(8), consistent with the principles laid down by the Supreme Court in CIT v. Jindal Steel and Power Limited (2023).

"IEX Rates Do Not Represent Comparable Transactions for Captive Power Transfers"
The case arose from the Revenue’s challenge to ITAT’s decision regarding the quantum of profits eligible for deduction under Section 80IA(8) of the Income Tax Act. DCM Shriram Ltd., a company engaged in multiple industries, including power generation, transferred electricity from its captive power units to its non-eligible units and benchmarked the transactions using SEB rates under the CUP method.

The Transfer Pricing Officer (TPO), however, proposed adjustments based on lower rates discovered on IEX, a platform for trading surplus electricity. The TPO contended that the average IEX rate for electricity (₹2.55 per kWh) should serve as a benchmark instead of the higher SEB rates used by the Assessee. This led to a TP adjustment of ₹26.52 crores, which was later upheld by the Dispute Resolution Panel (DRP).

Rejecting the TPO's approach, the ITAT ruled in favor of the Assessee, stating that "IEX rates could not serve as a valid benchmark under the CUP method as they did not reflect comparable market conditions for electricity transfers." The High Court affirmed this view.

"Electricity Traded on IEX Lacks Comparable Characteristics with Captive Unit Transfers"
The High Court emphasized that, for the CUP method to apply, there must be a "high degree of similarity between the tested transaction and comparable uncontrolled transactions." In the court’s view, IEX transactions involved short-term purchases of surplus power through a bidding process for immediate delivery, which lacked the stability, reliability, and continuity of SEB transactions.

The court explained: "The CUP method cannot be applied where there is significant dissimilarity between the comparable transactions, and it is not feasible to determine adjustments to eliminate the impact of the said differences on the prices." [Para 53]

IEX, the court noted, operates as a platform for trading surplus electricity in short time slots. "The availability of power on IEX is unpredictable, and the supply is unreliable. Additionally, bidders cannot resile from their bids, and the rates are based on power purchased rather than power consumed," the court observed. It further clarified:
"IEX is not a source for uninterrupted power on which a consumer can rely to operate its unit. The transactions on IEX involve high price volatility and are not comparable to the regular supply of power by SEBs or power distribution companies." [Paras 51, 52]

"Supreme Court’s Guidance on Market Value Under Section 80IA(8) Affirms SEB Rates"
The High Court relied heavily on the Supreme Court’s decision in CIT v. Jindal Steel and Power Limited (2023), where the apex court clarified the meaning of "market value" under Section 80IA(8). The Supreme Court ruled that the price at which SEBs supply electricity to industrial consumers represents market value, as it reflects competitive conditions in the open market.

Citing the Supreme Court, the High Court reiterated: "The rate at which SEBs supply power to industrial consumers must be taken as the market value for computing deductions under Section 80IA. The rates at which power is traded on platforms like IEX do not reflect a competitive environment or conditions of continuous supply and cannot be treated as market value." [Para 58]

The court further observed that SEB rates reflect market conditions that industrial consumers would face if they did not rely on their captive power units. It noted:
"The SEB rates charged to industrial consumers represent the open market value, as they are determined by supply and demand under regulated conditions and are free from the short-term volatility inherent in IEX transactions." [Para 56]

"High Court Affirms ITAT’s Reliance on SEB Rates as Benchmark"
The High Court found the ITAT's reliance on SEB rates to be legally sound. In Uttar Pradesh, the Assessee had sold electricity to the Uttar Pradesh Power Corporation Limited (UPPCL) at ₹4.39 per kWh, which was accepted as an internal CUP. In Gujarat and Rajasthan, where the Assessee purchased electricity from SEBs, the ITAT considered these purchase rates as external CUPs for benchmarking the transactions.

The High Court agreed, stating: "There is a sufficient degree of similarity between SEB supply rates and the transactions involving captive unit electricity transfers. The ITAT correctly determined the ALP by applying the CUP method using SEB rates." [Para 56]

It also noted that IEX rates could not serve as CUP due to material differences in the transactions:
"Rates quoted on IEX are for electricity purchased and not for electricity consumed. This distinction, coupled with the volatility of IEX rates, makes them unsuitable for benchmarking power transferred by captive units to non-eligible units." [Para 52]

"High Court Rejects Revenue’s Arguments, Upholds Deletion of TP Adjustments"
In dismissing the Revenue's appeal, the High Court concluded that the IEX rates lacked comparability under the CUP method. It held that the ITAT rightly deleted the ₹26.52 crore adjustment proposed by the TPO and affirmed the Assessee’s reliance on SEB rates.

The judgment emphasized:"The ITAT was correct in rejecting IEX rates as unreliable for benchmarking electricity transactions under Section 80IA(8). The SEB rates reflect a fair market value, consistent with the principles of the CUP method and the Supreme Court’s decision in Jindal Steel and Power Limited." [Para 60]. 
The appeal was dismissed, and the ITAT’s order was upheld.

Date of Decision: January 21, 2025