The Calcutta High Court has asserted that for the purposes of Section 80-IA(8), where electricity generated by a captive power unit is transferred for captive consumption, the “market value” is to be determined with reference to the rate at which the State Electricity Board supplies electricity to industrial consumers in the open market, and such SEB tariff cannot be artificially reduced by excluding the electricity duty component embedded in it.
The Court clarified that Section 80-IA(9) operates only to prevent double deduction in respect of the same profits. Where Section 80-IA deduction arises from profits of an independent power undertaking and Section 80HHC deduction arises from distinct export profits, the deduction under Section 80-IA cannot be reduced while computing deduction under Section 80HHC.
Accordingly, the Court held that a sales tax remission subsidy granted under a scheme intended to promote expansion, modernization, and capital investment in backward areas is capital in nature under the purpose test, and is therefore not chargeable as revenue receipt. A subsidy which is capital in nature does not form part of book profit under Section 115JB, and its inclusion is not justified merely because it is credited through the profit and loss account.
The Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar observed that the controversy regarding valuation of captively consumed electricity under Section 80-IA was no longer res integra and stood settled by binding precedents. It noted that the assessee had adopted the SEB industrial consumer tariff as the market value under Section 80-IA(8).
On the electricity duty issue, the Bench observed that the tariff payable to the State Electricity Boards is a composite price which includes statutory levies such as electricity duty, and once the statute requires adoption of the price that electricity would ordinarily fetch in the open market, it is impermissible to artificially exclude components forming an integral part of such price.
On the interaction of Sections 80-IA and 80HHC, the Bench observed that the assessee’s power undertakings were separate units maintaining independent accounts and were not engaged in export activity, while the export division had not claimed deduction under Section 80-IA. On that basis, the Court held that there was no overlap of profits and therefore no question of double deduction.
On the subsidy issue, the Bench applied the “purpose test” and observed that the West Bengal Incentive Scheme, 1993 was intended to encourage expansion and modernization of industrial units in backward areas and was directly linked to investment in fixed capital. It specifically observed that the remission was intended to induce fresh capital investment and expansion of industrial capacity and was not a subsidy to assist the assessee in carrying on its trade more profitably.
On Section 115JB, the Bench observed that once the subsidy is held to be capital in nature, it does not form part of book profit. It further noted that under Apollo Tyres, the Assessing Officer cannot make adjustments other than those specifically provided in the MAT provisions, and that the character of the receipt does not change merely because it is routed through the profit and loss account.
Briefly, the appellant/ assessee is a company engaged in manufacture and sale of graphite electrodes and calcined petroleum coke, and also generates power through three units at Bangalore and Nashik, largely for captive consumption by its electrode division. For AY 2002–03, the assessee claimed deduction of Rs. 35.65 crores under Section 80-IA on profits from power generation, computing the transfer price of captively consumed power by adopting the rates at which electricity was purchased from KSEB/MSEB under Section 80-IA(8). It also claimed deduction under Section 80HHC on export profits without reducing the Section 80-IA profits, treated sales tax remission subsidy of Rs. 70.45 lakhs as a capital receipt, excluded 100% export profits from MAT book profits under Section 115JB, and also excluded capital profits arising from sale of fixed assets/investments.
The Assessing Officer disallowed the computation of transfer price at full KSEB/MSEB purchase rates and instead declined to adopt the full tariff where it included electricity duty; reduced the profits eligible under Section 80HHC by the amount of Section 80-IA profits by invoking Section 80-IA(9); treated the sales tax remission subsidy as revenue receipt; allowed exclusion of only 70% of export profits from book profits under Section 115JB; and included capital profits from sale of fixed assets and investments in book profits. On first appeal, the CIT(A) partly allowed the assessee’s claim on transfer pricing by permitting KSEB/MSEB rates minus electricity duty, but upheld the other adjustments. The ITAT affirmed the exclusion of electricity duty and the other adverse findings.
Appearances:
Senior Advocate J. P. Khaitan, along with Advocates Somak Basu, and Swagato Kabiraj, for the Appellant
Advocates Aryak Datt and Madhu Jana, for the Respondent
