the Calcutta High Court has ruled in favor of Rungta Mines Limited by upholding the use of the Internal Comparable Uncontrolled Price (CUP) method to determine the Arm's Length Price (ALP) for captive power transactions under Section 80IA of the Income Tax Act, 1961.
The decision was delivered by Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das), who carefully examined the merits of multiple appeals filed by the Revenue under Section 260A, challenging the Income Tax Appellate Tribunal’s (ITAT) earlier decision in favor of the assessee.
Read Also:- Calcutta High Court Quashes Salary Recovery Order Issued After 18 Years Due to Administrative Error
Background of the Case
Rungta Mines Limited, engaged in mining and manufacturing, operates Captive Power Plants (CPPs) to supply electricity to its own manufacturing units (non-eligible units). The core issue involved the appropriate method for determining ALP for the supply of power between eligible and non-eligible units — a specified domestic transaction under Section 92BA read with Section 80IA(8).
The assessee had used the Internal CUP method, citing that their manufacturing units also sourced power from State Electricity Boards (SEBs), making the SEB rate an appropriate internal benchmark for comparison.
Dispute Over ALP Methodology
The Transfer Pricing Officer (TPO) rejected the Internal CUP method used by Rungta Mines. The TPO argued that SEBs are power distributors and not generators, and hence their pricing includes several additional costs such as technical losses, cross-subsidies, and service charges. The TPO determined that External CUP, based on rates at which distribution companies procure power from generating companies, was more appropriate.
Read Also:- Calcutta High Court Restrains Coercive Action Against Padma Shri Monk Kartik Maharaj in Rape Allegations
Consequently, the TPO substituted the ALP computed by the assessee with lower values — Rs. 4.18 and Rs. 4.80 per unit — and disallowed the excess deduction under Section 80IA.
CIT(A) and ITAT’s Observations
The Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, holding that:
“Internal CUP method is more robust and reliable, especially when reliable internal data is available.”
The CIT(A) emphasized the importance of product comparability, highlighting that electricity is a uniform product and the rate at which SEBs supplied power to the assessee’s manufacturing units was a valid internal benchmark. The internal CUP was accepted as it compared the exact same product (electricity) under similar market conditions.
The ITAT upheld the CIT(A)'s ruling and dismissed the Revenue’s appeal.
The High Court began by recognizing the fundamental intent behind CPPs — not for profit, but to ensure uninterrupted power supply and cost savings. The bench noted:
“The Arm’s Length Price cannot be determined by taking the average market rates of power supply units to distribution companies as the assessee is not in the business of selling power to distribution companies.”
Further, the Court examined the Electricity Act, 2003, especially Section 2(8) and Section 9, which define and govern captive generating plants. The Court emphasized that the tariff orders used by the TPO are influenced by socio-political factors and do not reflect market-driven conditions.
Referring to the Supreme Court’s decision in CIT v. Jindal Steel and Power Limited (2024) 460 ITR 162 (SC), the High Court reiterated:
“The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity.”
The Court concluded that Rungta Mines had rightly used the Internal CUP method, comparing the CPP rate with the actual landed cost of power sourced from SEBs, which matched the purpose of captive power use. The previous ruling in CIT v. ITC Limited, which had favored external CUP, was deemed inapplicable as it was delivered before the deregulation of the electricity market under the Electricity Act, 2003.
Case Title: Principal Commissioner of Income Tax Central-1, Kolkata vs. Rungta Mines Limited