2017 (8) TMI 1588 - HC - Income Tax

Deduction u/s 80IA - claim of the assessee for the value of the goods or services - HELD THAT - The value adopted by the Assessee be it value as per independent third party trading transactions or as per Power Exchange (IEX etc.) or any other independent transaction (for the relevant period and which has taken place in the relevant area where the eligible unit is located) constitute market value in terms of explanation to Section 80IA(8); The value at which State Grid has sold power to the Cement Unit of the Assessee (average annual landed cost) also constitute market value in terms of explanation to Section 80IA(8) but the value at which State Grid or third party has purchased power from the Power Unit of the Assessee, which represents its power which is sold when not required by the Cement Unit, does not constitute market value in terms of 16 explanation to Section 80IA(8). It is the principle and not the quantum which is deciding factor; Where a basket of market values are available for the relevant period and relevant geographical area where the eligible unit is situated, the assessee has discretion to adopt any one of them as market value; and If the value adopted by the assessee is market value as explained above, it is not permissible for Revenue to recompute the profits gains of the eligible unit by substituting the said value (as adopted by the Assesse) by any other market value . - Decided in favour of the assessee. Sale proceeds received by the company from the sale of Certified Emission Reduction (CER) pertaining to Carbon Credit - revenue or capital receipts - HELD THAT - In view of the decision rendered by the Supreme Court in Vodafone International 2012 (1) TMI 52 - SUPREME COURT it has to be taken as capital account and it cannot be taxed under the Income Tax Act since it was taxable under direct tax

Summary

Issues Involved:
1. Classification of sales tax subsidy as capital or revenue receipt.
2. Adoption of different market value of goods/services for Section 80IA(8).
3. Taxability of sale proceeds from Certified Emission Reduction (CER) pertaining to Carbon credits.

Detailed Analysis:

1. Classification of Sales Tax Subsidy:
The primary issue was whether the sales tax subsidy received by the assessee should be classified as a capital receipt or a revenue receipt. The Tribunal held that the sales tax subsidy received by the assessee in the form of sales tax exemption was a capital receipt and not a revenue receipt. This classification implies that the subsidy should not be included in book profit under Section 115JB. The Tribunal's decision was based on the purpose of the subsidy, which was to enhance production, employment, and sales in the State of Rajasthan—activities considered post-operational. The court confirmed this position, referencing a prior decision in Tax Appeal No.204/2010, and ruled in favor of the assessee.

2. Adoption of Different Market Value for Section 80IA(8):
The second issue involved the assessee's adoption of a different market value of goods or services for the purpose of Section 80IA(8) based on a revised return, against the value adopted in the original return. The Tribunal reversed the findings of the CIT(A) and allowed the assessee to adopt a different market value. The Tribunal noted that the revised return, once accepted by the AO, substitutes the original return. The Tribunal emphasized that the law does not restrict the assessee to a single market value when multiple market values are available. The Tribunal concluded that the assessee's discretion in adopting any market value, as long as it corresponds to the open market value, is sufficient compliance with the law. This decision was supported by judicial precedents, including the Special Bench of the Bangalore Tribunal in Aztec Software & Technology Services Ltd. and the Mumbai Tribunal in ACIT Vs. Maersk Global Service Centre (I) Pvt. Ltd. The court upheld this view and ruled in favor of the assessee.

3. Taxability of Sale Proceeds from CER:
The third issue was whether the sale proceeds from Certified Emission Reduction (CER) pertaining to Carbon credits should be treated as capital receipts or business income. The Tribunal concluded that the receipts from Carbon credits are capital in nature and neither chargeable to tax under the head "business income" nor under "capital gains." This decision was influenced by the Supreme Court's ruling in Vodafone International Holdings, which highlighted that the treatment of items in the Income Tax Act and the Direct Tax Code (DTC) serves as a guide for determining taxability. Since the DTC specifically provides for the taxability of carbon credits as business receipts and the Income Tax Act does not, the Tribunal's view was fortified. The court agreed with this interpretation and ruled in favor of the assessee.

Conclusion:
The High Court dismissed the appeals, ruling in favor of the assessee on all issues. The sales tax subsidy was classified as a capital receipt, the adoption of different market values for Section 80IA(8) was permitted, and the sale proceeds from CERs were treated as capital receipts, not subject to tax under business income or capital gains.