2011 (11) TMI 107 - AT - Income Tax

Determination of market price of goods or services held for the purpose of eligible business being transferred to any other business carried on by the assessee. Held that -The price charged for such transfer should correspond to the market value of such goods or services on the date of transfer market value for this purpose means the price that such goods or services would ordinarily fetch in the open market. In particular case price 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 and not the price at which power is supplied by the assessee to the Board. It is for the reason that the power tariff between the assessee and the SEB is not done in a competitive environment. See Addl. CIT v. Jindal Steel & Power Ltd. (2006 - TMI - 65524 - ITAT Delhi-H). Decided in favor of the assessee. Sale of the Fly Ash Bricks - Operational profit vs Ancillary profit- eligible profits - power generating units - Held that - Only operational income is an eligible profits and not all ancillary income. Mere existence of some commercial connection by way of raw material to the impugned profits does not make it an eligible income. In said case profits earned on sale of the fly ash (by-product) is different from the profits earned on sale of the bricks made out of the said fly ash . Option is available to the assessee either to sell the said byproduct( resulting in operational income) which the assessee did not prefer in this case the assessee s decision to opt for the other option to use the said byproduct as raw material for the brick making unit for producing the bricks and earn the profits thereof does not make the brick making unit as the integral part of the power generating unit . Therefore the profits earned on sale of the bricks does not constitutes an operational Income of the power unit an eligible unit for the benefits u/s 80IA of the Act. See Liberty India Ltd. v. CIT (2009 - TMI - 34471 Supreme Court). Decided against the assessee.

Summary

Issues Involved:
1. Determination of the market value of electricity for the purpose of Section 80-IA of the Income-tax Act.
2. Eligibility of profits from the sale of Fly Ash Bricks for deduction under Section 80-IA of the Income-tax Act.

Issue 1: Determination of the Market Value of Electricity for Section 80-IA

The revenue contended that the CIT(A) erred by considering the sale price of electricity to be at the rate at which the State Electricity Board (SEB) sells electricity to its consumers. The relevant facts involve the assessee having two undertakings: one generating and distributing electricity and the other being a steel division. The steel division draws electricity from the generating unit, which is an exempt undertaking under Section 80-IA, while the steel division is not.

The AO found that the electricity for captive consumption was accounted for at a higher tariff than the sale price to SEB, inflating the profits of the exempt unit and deflating the profits of the non-exempt steel division. The CIT(A) held that the sale price to SEB does not constitute the market rate, relying on judicial precedents such as the case of Jindal Steel & Power Ltd., which stated that the market rate should be the rate at which electricity is sold to other parties, not the SEB.

The Tribunal upheld the CIT(A)'s decision, agreeing that the tariff rate applicable to sales to SEB does not reflect the market rate for Section 80-IA purposes, as the contract between the assessee and SEB is not competitive. Thus, the price at which electricity is sold to other parties should be considered the market rate. Consequently, the revenue's appeals on this issue were dismissed.

Issue 2: Eligibility of Profits from the Sale of Fly Ash Bricks for Deduction under Section 80-IA

The assessee contended that profits from the sale of Fly Ash Bricks should be eligible for deduction under Section 80-IA. The fly ash is a by-product of the electricity generation process, and the assessee argued that the brick manufacturing unit is an integral part of the power plant, mandated by environmental regulations.

The AO denied the deduction, stating that the profits from the sale of Fly Ash Bricks are not derived from the generation and distribution of power. The CIT(A) upheld this view, concluding that the brick manufacturing activity is an independent activity and not integral to the power generation process.

The Tribunal agreed with the revenue's position, stating that the brick manufacturing unit is a separate and independent unit. The profits from the sale of Fly Ash Bricks are not operational income of the power generating unit but rather of the brick manufacturing unit. The Tribunal emphasized the need for a direct nexus between the profits and the eligible undertaking for Section 80-IA benefits, which was not present in this case. Therefore, the Tribunal dismissed the assessee's appeals on this issue.

Conclusion:

The Tribunal dismissed the revenue's appeals regarding the determination of the market value of electricity, upholding the CIT(A)'s decision that the market rate should be based on sales to other parties, not SEB. The Tribunal also dismissed the assessee's appeals regarding the eligibility of profits from the sale of Fly Ash Bricks for deduction under Section 80-IA, affirming that such profits are not derived from the power generating unit and thus not eligible for the deduction.