For S. 80IA Rate at which consumers gets electricity is market rate of the same

IN THE ITAT CHENNAI BENCH ‘A’

Sri Matha Spinning Mills (P.) Ltd.

Versus

Deputy Commissioner of Income-tax

IT Appeal No. 1845 (Mds.) of 2011
[ASSESSMENT YEAR 2007-08]

NOVEMBER  14, 2012

ORDER

Vikas Awasthy, Judicial Member

The present appeal has been filed by the assessee impugning the order of the Commissioner of Income-tax (Appeals)-II, Coimbatore dated August 10, 2011.

2. The brief facts of the case are that the assessee is a company engaged in the business of manufacture of yarn and electricity generation. The assessee filed its return of income for the assessment year 2007-08 on October 30, 2007 admitting total income of Rs. 1,70,20,240 under normal computation and Rs. 4,72,52,760 under the provisions of section 115JB. The case of the assessee was selected for scrutiny and notice under section 143(2) was issued to the assessee on September 8, 2008. The Assessing Officer vide assessment order dated December 24, 2009 made certain additions in the income returned by the assessee under the provisions of section 115JB.

3. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) vide impugned order partly allowed the appeal of the assessee. However, the Commissioner of Income-tax (Appeals) upheld the findings of the Assessing Officer with regard to market value of power consumed at the rate at which the Tamil Nadu Electricity Board (hereinafter referred to as “TNEB”) purchased from it in respect of the units of the power generated by the undertaking and consumed captively. Aggrieved against this finding of the Commissioner of Income-tax (Appeals), the assessee has come in the second appeal before the Tribunal.

4. The assessee has assailed the order of the Commissioner of Income-tax (Appeals) on the following grounds :

5. Shri T. Banusekar, appearing on behalf of the assessee submitted that the electricity generated by the assessee can be sold either to Tamil Nadu Electricity Board at Rs. 2.70 per unit or it can be captively consumed by the assessee. The authorised representative pointed out that the electricity sold to the Tamil Nadu Electricity Board is further sold to the industrial consumers at Rs. 3.50 per unit. In case the electricity is consumed captively, the Tamil Nadu Electricity Board gives credit to the number of units produced/ generated and consumed by the assessee. For the units over and above the units generated by the assessee, the Tamil Nadu Electricity Board charges Rs. 3.50 per unit from the assessee. Thus, for all intent and purpose the market rate of the electricity is Rs. 3.50 per unit. The authorised representative in order to support his submissions relied on the earlier orders of the Tribunal in I.T.A. No. 850/Mds/2011 titled Sri Velayudhaswamy Spinning Mills (P.) Ltd. v. Dy. CIT [2012] 50 SOT 54 decided on July 13, 2011, I.T.A. No. 569/Mds/2011 titled Arun Textiles v. Dy. CIT decided on August 11, 2011 and I.T.A. No. 1570/Mds/2011 Viking Textiles (P.) Ltd. v. Dy. CIT decided on November 30, 2011 and various other orders of the Tribunal decided on similar issue. The authorised representative submitted that in all the aforesaid cases, the electricity was generated by the respective assessees and supplied to the State Electricity Board at Rs. 2.70 per unit and subsequently the Electricity Board supplied the same to industrial consumers at Rs. 3.50 per unit. The Tribunal in the aforesaid cases had held that the consideration for transfer of power for captive consumption at Rs. 3.50 per unit corresponding to the market value of such power.

6. On the other hand, the Departmental representative defending the order of the Commissioner of Income-tax (Appeals) submitted that the assessee can sell electricity to the Tamil Nadu Electricity Board at Rs. 2.70 per unit. There can be no other price or higher price at which the assessee can sell electricity to any other third party at a higher price. The Departmental representative submitted that the Tribunal need not follow its earlier order as the same did not lay down proper principle of law. To support his submissions, the Departmental representative relied on the judgment of the hon’ble Madras High Court in the case of CIT v. Hi Tech Arai Ltd. [2010] 321 ITR 477 and the hon’ble Supreme Court of India in the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297 and in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. The Departmental representative submitted that the hon’ble jurisdictional High Court in the case of Hi Tech Arai Ltd. has held that merely because a co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal need not blindly follow the earlier decision even if the earlier decision did not reflect the correct position of law. The Departmental representative relying on the judgment of the hon’ble Supreme Court of India emphasizes that overruling earlier decision is justified when necessitated by public interest or when previous decision is manifestly wrong.

7. We have heard the submissions made by both parties and have gone through the judgments/orders referred to by the respective parties. We observe that the assessee can either captively consume the electricity generated or can sell the same to the Tamil Nadu Electricity Board at Rs. 2.70 per unit. The assessee is refrained from directly selling generated electricity to the consumers. The assessee has no other option but to sell the electricity generated to the Tamil Nadu Electricity Board at the predetermined rates. The assessee cannot charge higher rate from the Tamil Nadu Electricity Board. On the contrary, the Tamil Nadu Electricity Board sells the electricity procured from the assessee and similarly situated power generating units at Rs. 3.50 per unit to the industrial consumers. The market rate of electricity is not determined by the forces of demand and supply, rather the same is regulated by the Government. The Tamil Nadu Electricity Board which is a State Government undertaking is selling the electricity to the ultimate consumers, therefore, the rate at which the consumers get electricity is the market rate. Thus, it can be safely concluded that market rate of the electricity is Rs. 3.50 per unit. Our view is further fortified by the order of the co-ordinate Bench of the Tribunal in the following cases :

8. The Tribunal in I.T.A. No. 850/Mds/2011 Sri Velayudhaswamy Spinning Mills (P.) Ltd. (supra) has held as under (page 356) :

“8. The assessing authority has adopted the price of power at Rs.2.70 per unit in the light of the provisions of law stated in section 80-IA(8). Sub-section (8) of section 80-IA provides that where any goods are transferred to any other business carried on by the assessee or where any goods are transferred to the eligible business, in either case the consideration for the transfer recorded in the books of account if it does not correspond to the market value of such goods, the assessing authority shall compute the eligible profit on the basis of the market value of such goods. It means that sub-section (8) of section 80-IA does not allow an assessee to inflate the profit of its eligible unit by over invoicing the goods transferred or under invoicing of goods bought in. It is a safeguard against misuse of the existing provision. The Assessing Officer took the market value of the power generated by the assessee at Rs. 2.70 per unit and not Rs. 3.50 per unit as claimed by the assessee and thereby the assessee has overstated the price of the goods sold by it so as to boost the profit of its eligible unit, which in this case is windmill unit.

9. The rule applicable in determining the market value in a similar context has been discussed by the hon’ble jurisdictional High Court in the case of CIT v. Thiagarajar Mills Ltd., Kappalur, Madurai. While delivering the judgment in Tax Case (Appeal) Nos. 68 to 70 of 2010 dated June 7, 2010 their Lordships have held as under :

‘9. Therefore, there is no difficulty in holding that captive consumption of the power generated by the assessee from its own power plant would enable the respondent/assessee to derive profit and gains by working out the cost of such consumption of power inasmuch as the assessee is able to save to that extent which would certainly be covered by section 80-IA(1). When such will be the outcome out of own consumption of the power generated and gained by the assessee by setting up its own power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon section 80-IA(1) of the Income-tax Act by way of deduction of the value of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years.’

10. A careful reading of the above paragraph brings home the point that the hon’ble High Court has looked into the point of savings made by the assessee by using its own power and the valuation of that savings made on the basis of the price otherwise the assessee should have paid. The ratio is very clear. The value of the power generated and consumed by the assessee will be that value that should have been paid by the assessee if the power was bought from open market. When the above case is applied to the present case, the case of the assessee has to be accepted that the market value should be treated as Rs. 3.50 per unit of electricity.

11. Exactly this issue was considered by the Delhi Bench-I of the Tribunal in the case of Addl. CIT v. Jindal Steel and Power Ltd. [2007] 16 SOT 509 (Delhi). In that case also one of the issues raised was valuation of the power generated by the eligible unit. In that case the power generated by the assessee was used by it for own consumption as well as for sale to the State Electricity Board. The Tribunal held that the rate at which the State Electricity Board supplies power to its consumers is to be considered to be the market value for transfer of power by the assessee’s electricity generating undertaking for captive consumption for the purposes of section 80-IA(8) and not the price at which power is supplied by the assessee to the Board.

12. Further, as far as captive consumption of power is concerned, the assessee is neither selling nor buying electricity. The quantum of power contributed by the assessee to the Tamil Nadu Electricity Board can be availed of by the assessee for which no additional payment is to be made. If the assessee has received Rs. 2.70 per unit, the assessee has to pay only Rs. 2.70 per unit. It is a kind of commodity banking, or in economic term, barter exchange of same good. Therefore, de facto speaking, there is no sale and purchase. In such circumstances there is no market price at all.

13. Market price comes into play only when the assessee is buying power from the Tamil Nadu Electricity Board just like any other consumer. The Tamil Nadu Electricity Board is the supplier and the assessee is the consumer and there is no question of commodity banking or barter exchange. The Tamil Nadu Electricity Board sells power to the assessee in the usual course of its business and the assessee buys the power like any other consumer in the market. It is in that context that the question of market price arises. In such a scenario what is the price collected by the Tamil Nadu Electricity Board ? The price is Rs. 3.50 per unit. Therefore it is obvious that the market price of the power generated by the assessee is Rs. 3.50 per unit. The expression used in section 80-IA(8) is ‘market value’. Market value means the value determined by market forces. In the captive consumption of power generated by the assessee-company no market force is operating. Market forces come into picture only when the assessee buys power from the Tamil Nadu Electricity Board like any other consumer. The value paid for such consumption is the market value. In the present case that is Rs. 3.50 per unit.

14. Therefore, we accept the contention of the assessee and set aside the orders of the lower authorities on this issue. The assessing authority is directed to recompute the profit and gains of the eligible unit for the purpose of section 80-IA on the basis of the unit price of electricity generated by the assessee company at Rs. 3.50 per unit.”

9. The learned Departmental representative has relied on the judgment of the hon’ble jurisdictional High Court in the case of Hi Tech Arai Ltd. (supra) and the judgment of the hon’ble apex court in Sun Engineering Works (P.) Ltd. (supra) to suggest that earlier order of the Tribunal need not be followed. However, the learned Departmental representative has failed to highlight the error/mistake in the earlier order of the Tribunal or the public interest which would necessitate us to take a different view. Therefore, the ratio laid down by the judgments cited by the learned Departmental representative cannot be applied in the facts and circumstances of the present case.

10. The case of the assessee is squarely covered by the issue which has already been decided by the Tribunal. Respectfully following the earlier order of the Tribunal, we allow this appeal of the assessee and direct the Assessing Officer to recompute the profit and gains of the eligible unit for the purpose of section 80-IA on the basis of the unit price of electricity generated by the assessee at Rs. 3.50 per unit.

11. In the result, the appeal of the assessee is allowed.