Deduction u/s 80IA of Income Tax Act must compute Market Value as per rate supplied by State Electricity Boards to consumer: Calcutta HC [Read Order]

In a recent case, the Calcutta High Court upheld the applicability of the internal CUP method as adopted by the assessee and ruled that deductions under section 80IA of the Income Tax Act, 1961 must compute market value as per the rate supplied by state electricity boards to consumer.

The revenue filed appeal under Section 260A of the Income Tax Act, 1961 (the Act) questioning the correctness of the order passed by the Income Tax Appellate Tribunal, “A” Bench Kolkata in ITA Nos. 801, 802, 286/Kol/2023 for the assessment years 2017-2018, 2018-2019, 2019-2020.

Since the issue which falls for consideration in all the appeals are identical and the substantial questions of law raised are also identical, they were heard together and are disposed of by this common judgement and order.

The respondent assessee, Rungta Mines Limited is engaged in iron ore and manganese ore mining having mines in Orissa and Jharkhand and they also produce sponge iron, billets and power during the years under consideration. For the assessment year 2017-2018, original return of income was filed showing total income of Rs. 934,43,95,510/- and subsequently revised on the identical sum and once again revised at total income of Rs. 934,43,99,430/-.

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The case was selected for scrutiny and notice under Section 143(2) was issued and subsequently notice under Section 142(1) along with questionnaire was served on the assessee. Thereafter another notice under Section 142(1) was issued giving opportunity of hearing to the assessee. It is not in dispute that the assessee responded to the notice and complied with the directions contained therein. The assessee participated in the hearing and was represented by their authorized representatives.

The assessee was called upon to furnish various details and documents on various issues. However, in these appeals the issue which falls for consideration is the correctness of the addition on the Transfer Pricing Adjustment (TPA) made by the assessing officer. The assessment for the year 2017-2018 was completed under Section 143(3) of the Act by order dated 09.02.2021. Aggrieved by the same, the assessee preferred appeal before the Commissioner of Income Tax (Appeals), Kolkata [CIT(A)].

The assessee contested the addition of Transfer Pricing Adjustment (TPA) by contending that the assessing officer/TPO erred in rejecting the economic analysis document as part of the Transfer Pricing Study Report undertaken by the assessee to determine the Arm’s Length Price (ALP) for sale of power by Captive Power Plant (CPP) to non-eligible units in accordance with the provision of the Act read with the Income Tax Rules.

It was contended that the cost of the power generated by CPP and transferred to non-eligible units should be based on average annual landed cost of electricity purchased by the assessee from the respective State Electricity Boards (SEBs). Further that the assessing officer/TPO erred in not appreciating the “comparability analysis” undertaken by the assessee between the transaction price for the purchase of power by non-eligible unit from CPP and the rate of power applied by the respective SEBs to its customers.

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Further the assessing officer/TPO erred in not appreciating the commercial and economic circumstances surrounding the transaction which justified the transaction price paid by the non-eligible units to CPP for supply of power. The assessing officer/TPO erred in considering the purchase price of power by the respective SEBs to be the market rate as per Section 80IA (8), whereas judicial precedences indicate that the market rate would be the selling price of the respective state SEBs.

The CIT(A) examined the facts and found that there is no dispute that both the CPPs qualified as eligible units under Section 80-IA of the Act. The CPPs transfer power to the manufacturing units and the transfer rate was ascertained by the assessee at the rate of Rs. 6.32 and Rs. 5.67 per units respectively.

The CIT(A) took note of the assertion of the assessee that the CPPs could be expected to charge the same rate for supply of power by them which the non-eligible /manufacturing units were paying to unrelated independent third parties. It was further noted that the per unit charge by SEB for supply of power for industrial usage which requires high voltage of power lines was compared with the rates at which the CPPs transfer power to the manufacturing units which was reported to Arm’s Length Price (ALP) in the Transfer Pricing Study Report (TPSR). The assessee had contended that as the transfer rates charged by the CPPs were comparatively lower than the ALP, the Specified Domestic Transactions in question were to be considered to be at Arm’s Length.

According to the TPO, the functions performed by CPPs were those of the manufacturers of power and not those of a distributor. Therefore, the TPO was of the view that the appropriate Comparable Uncontrolled Price (CUP) for bench marking the said transaction is the average rate at which the distribution companies in the state procured power from the generating companies. The TPO found that the bench marking exercise of the assessee unsuitable as in his view, a distribution company incurs several additional costs in terms of aggregate technical and commercial losses like theft, wheeling charges, cross subsidy charges, customer servicing charges etc. which are not incurred by power generators.

Further the fact that the rates at which SEBs supplies power is regulated is of no consequences, as it is not the case of the TPO that this rate has been fixed by SEBs exclusively for the appellant as the SEB supplies power at the same tariff rate to all industrial consumers in the state which according to the assessee represents the prevailing market rate. The assessee also faulted the TPO for relying on the tariff order as it operated in all-together different market which is the business to business commonly known as (B2B) model. That the application of CUP as made by the TPO has to fail as the market condition of the comparable transaction cited by the TPO are not similar to that of the assessee. Therefore, they justified the CUP parameters adopted by them.

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The CIT(A) agreed with the contention raised by the assessee after noting that both non eligible units had also purchased power from the respective State Electricity Boards apart from procuring power from their Captive Power Plants and therefore accepted the applicability of Internal CUP method as adopted by the assessee. The CIT(A) appears to have called for various documents and took note of the sample copies of the bills showing purchase of power by non-eligible units.

The CIT(A) held that the methodology followed and bench marking performed by the assessee was legally justified and that the intent and purpose of setting up of the Captive Power Plant (CPP) is markedly different from that of the power generation units as well as the State Electricity Board to which units supplied electricity and undisputedly the CUP method was of the most appropriate method in the assessee’s case to determine ALP and it was correct and more appropriate to use the Internal CUP method rather than External CUP for the reason that former was more robust and reliable method for determining the Arm’s Length Price (ALP) as well as for the fact that reliable internal data was readily available in the assessee case.

The Supreme Court after taking note of the relevant provisions of the Income Tax Act, and in particular Section 80IA held that the market value of the power supplied by State Electricity Board to the Industrial consumers should be construed to be the market value of electricity and it should not be compared with the rate of power sold to or supply to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market.

The Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) held that the State Electricity Boards rate when it supplies power to the consumer have to be taken as market value for computing the deduction under Section 80IA of the Act.

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