2011 (11) TMI 368 - AT - Income Tax

Deduction u/s 80IA in respect of electricity generated by the assessee from its windmills and captively used by it for its yarn manufacturing business - Determination of market price of electricity captively consumed Held that - Sub-section (8) of Section 80-IA provides that where an assessee which is eligible for 80-IA benefits transferred its goods or service to its business other than the eligible business the consideration if any recorded for such transfer in the accounts of the eligible business should correspond to the market value of such goods or services. Price at which assessee sold its power to the Electricity Board cannot be equated with market rate since power tariff between the assessee and the Board is not done in a competitive environment. Thus price at which the 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. See Addl. CIT v. Jindal Steel & Power Ltd. (2006 - TMI - 65524 - ITAT Delhi-H) - Decided in favor of the assessee.

Issues: Claim for deduction under Section 80-IA of Income-tax Act, 1961 in respect of electricity generated by the assessee from its windmills and captively used for yarn manufacturing business.

Detailed Analysis:

1. Issue of Transfer Pricing:
The primary issue in this case revolved around the determination of the transfer price of electricity generated by the assessee's windmills for the purpose of computing profits under Section 80-IA of the Income-tax Act, 1961. The Assessing Officer (A.O.) contended that the price of Rs. 2.70 per unit, at which the electricity was sold by the assessee to the Tamil Nadu Electricity Board, should be adopted for calculating profits, rather than the rate of Rs. 3.50 per unit at which the assessee repurchased the electricity for its yarn manufacturing unit. The A.O. argued that the cost reduction due to electricity production benefited the yarn manufacturing units, enhancing their profitability rather than that of the windmills. This difference in transfer pricing significantly impacted the deduction claim under Section 80-IA.

2. Legal Interpretation of Transfer Pricing:
The contention of the authorities was based on the market value concept under Section 80-IA(8) of the Act, emphasizing the rate at which the electricity was purchased by the Tamil Nadu Electricity Board from the assessee as the appropriate transfer price. However, the Tribunal analyzed the legislative framework governing power generation and supply, highlighting the restrictions and regulations imposed by the Electricity (Supply) Act, 1948. The Tribunal observed that the transfer pricing between the assessee and the Electricity Board did not occur in a competitive market environment, as the tariff was determined based on statutory provisions rather than market forces. Therefore, the price at which the assessee sold power to the Electricity Board could not be equated with the market rate as envisaged under Section 80-IA(8).

3. Decision and Precedents:
Upon considering the arguments and legal provisions, the Tribunal held in favor of the assessee, concluding that the transfer price of electricity for computing profits under Section 80-IA should be based on the annual landing cost of electricity purchased from the Tamil Nadu Electricity Board. The Tribunal relied on precedents from the Delhi Bench and Mumbai Bench of the Tribunal to support its decision, emphasizing that the consideration recorded by the assessee for purchasing power at Rs. 3.50 per unit corresponded to the market value under the given circumstances. The Tribunal's decision overturned the orders of the lower authorities and allowed the appeal filed by the assessee, thereby impacting the computation of profits and the deduction claim under Section 80-IA.

4. Final Outcome:
In conclusion, the Tribunal's detailed analysis and interpretation of transfer pricing principles in the context of electricity generation and supply underscored the importance of considering statutory regulations and market conditions while determining the appropriate transfer price for computing profits under Section 80-IA of the Income-tax Act, 1961. The decision in this case clarified the application of transfer pricing rules in a regulated industry setting, providing guidance on assessing market value and transfer pricing considerations for eligible deductions under the Act.

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