2013 (1) TMI 136 - HC - Income Tax

Computation of profit u/s 80IA - Whether reimbursement of tax paid by the assessee could be treated as part of the income for the purpose of deduction u/s 80IA or 80IB - Assessee is engaged in generation of electricity Bulk Power Supply Agreement between assessee and State Electricity Boards - Notification dated 30.3.1992 provides the basis for working of the tariff for sale of electricity - Assessee had received was the price for the sale of energy on the tariff fixed by the Government in its notification and one of the components of the sale price was arrived at based on the grossed up tax or the actual tax assessed whichever is less Held that - Tax reimbursement is nothing but a component of price. The clause 6 of the agreement specifies the tax liability of assessee in respect of the income on generation of power, mining of lignite from Mine II for the purpose of generation of power, the amount of grossed up tax that is payable by assessee on the income streams mentioned at items (i) and (ii) were to be borne by the recipients. viz, the State Electricity Boards The tax component is very much part of the sale of electricity from the Thermal Power Generating Stations and the mere fact that a component of the tariff makes a reference to the tax liability with reference to income streams mentioned in clause 6, it does not make such a component as not income to be excluded in considering the relief under Section 80IA/80IB. Therefore, the Commissioner committed serious error in dissecting the tariff to come to the conclusion that the tax component specified as part of the tariff is reimbursement of the liability of the assessee and hence it would not form part of the income. There will be no ground to sustain the plea of the Revenue that the relief to be granted u/s 80IA calls for exclusion of the tax component in the sale price of electricity. In favour of assessee

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that components of the price for the sale of electricity fixed on the basis of tax liability should not be taken as part of the transfer price of lignite and sale price of electricity in computing relief under Section 80IA/80IB.
2. Whether the notional tax reimbursement in the case of Unit VII of Thermal Power Station II, whose entire income is deductible under Section 80IA, should also be taken into account for computing relief under Section 80IA.

Issue-Wise Detailed Analysis:

1. Components of Price for Sale of Electricity and Tax Liability:
The assessee is engaged in mining and production of lignite and its usage in electricity generation. An agreement dated 18.02.1999 between the assessee and various State Electricity Boards included a clause for the computation of generation tariff and tax liability. The agreement stipulated that the tax liability on income streams from power generation and lignite mining would be borne by the recipients, i.e., the State Electricity Boards. The Central Electricity Regulatory Commission's notification dated 26.03.2001 and subsequent notifications provided guidelines for tariff fixation, including tax components.

The core issue was whether the tax liability component should be considered part of the transfer price for lignite and the sale price of electricity for computing relief under Section 80IA/80IB. The Commissioner of Income Tax argued that the tax reimbursement was not income from manufacturing or production activity, and thus, no deduction under Section 80IA/80IB should be allowed. The assessee contended that the tax liability was a component of the tariff and not a separate reimbursement, making it part of the sale price.

The court agreed with the assessee, noting that the tariff, including tax liability, was determined based on the Ministry of Power's notification and the agreement. The tax component was part of the tariff and sale price, not an independent reimbursement. Thus, it should be included in the computation for relief under Section 80IA/80IB.

2. Notional Tax Reimbursement for Unit VII of Thermal Power Station II:
The second issue concerned whether notional tax reimbursement for Unit VII, whose entire income is deductible under Section 80IA, should be considered for computing relief under Section 80IA. The Commissioner argued that the reimbursement of income tax was not directly linked to the quantum of power sold and should not be included in the sale price.

The court, however, found that since the first issue was resolved in favor of the assessee, recognizing the tax component as part of the sale price, the notional tax reimbursement for Unit VII should also be included in the computation for relief under Section 80IA. The court held that the tax component was part of the tariff and thus part of the sale price, making it eligible for deduction under Section 80IA.

Conclusion:
The court set aside the Tribunal's order, ruling in favor of the assessee on both issues. The tax component included in the tariff for the sale of electricity was considered part of the sale price and eligible for relief under Section 80IA/80IB. The notional tax reimbursement for Unit VII was also included in the computation for relief under Section 80IA. The tax case appeal was allowed, and no costs were imposed.