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TMI Blog2023 (12) TMI 1331X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased from State Electricity Boards. Here, in the facts and circumstances, in our view, the arm s length price could not be determined by taking the average market rates of power supply units to distribution companies as the assessee is not into the said business of selling of power to distribution companies. The arm s length price in this case, in our view, has to be determined taking into mind the business perspective of the assessee which was to get uninterrupted power and to save cost of electricity paid to the State Electricity Boards. When we look into the facts in this perspective, the relevant factor in this case would be the market price of the power at which the assessee s manufacturing units purchased the power from the market or from the State Electricity Boards. Moreover, as per the Electricity Act, 2003 the captive power plants are kept outside of the regulatory mechanism and are free to supply electricity to its associate enterprises/manufacturing units or to the contracting parties and consumers, at the rates mutually settled between them. The said captive power plants are not mandatorily required to supply the electricity to the distribution companies and even ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein held the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.That being the position Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue. In view of the above observations, we do not find any merit in the appeal of the revenue and the same is hereby dismissed. - SHRI SANJAY GARG, JUDICIAL MEMBER AND DR. MANISH BORAD, ACCOUNTANT MEMBER For the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 and relevant judicial pronouncement of the jurisdictional Hon'ble Calcutta High Court. 6. That on the facts and circumstances of the case, the Ld. CIT (A) has erred in not appreciating that application of CUP method does not require determination of tested party. 7. That on the facts and circumstances of the case, the Ld. CIT (A) has erred in not appreciating that a manufacturer cannot be compensated based on rates meant for distributors. 8. That on the facts and circumstances of the case, the Ld. CIT (A) has erred in not appreciating that tariff orders are regulated but not controlled and therefore rates of sale of power by generating company to distributing company serve as valid CUP. 9. That on the facts and circumstances of the case, the Ld. CIT (A) has erred in not appreciating that there is significant difference between distribution tariff and generation tariff and such cost differences are real and not imaginary. 10. That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or at the time of hearing of this appeal. 3. A perusal of the above reproduced grounds of appeal would reveal that the sole issue raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was compared with the rate at which the CPPs transferred power to the manufacturing units. From the tariff orders of the respective States, it was gathered that the end-consumers under the same market and economic conditions were being charged @ Rs.7.33 per unit in Jharkhand and Rs.6.17 per unit in Orissa, which was reported to be the Arm's Length Price (ALP) in the TPSR. According to the assessee as the transfer rates charged by the CPPs were comparatively lower than the ALP, the specified domestic transactions in question were to be considered to be at arm's length. 4.1 The Ld. AO referred the case of the assessee for transfer pricing scrutiny under Section 92CA(2) of the Act to the Dy. CIT,TP-2, Kolkata (TPO). The Ld. TPO rejected the above benchmarking analysis as according to him this was in contravention to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. ITC Ltd (236 Taxman 612) rendered for the AY 2002-03 and observed that the transfer of power between eligible and non-eligible units cannot be made at the rate at which the SEBs supply power to end consumers as the SEBs were distribution entities and not power generation companies. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd claimed deduction on such profits u/s 80IA. . Based on the above reasoning, the Ld. TPO proceeded to substitute the ALP determined by the assessee s in its TPSR for power transferred from the two eligible units at Chaliyama and Kamanda with the ALP of Rs. 4.18/ unit instead ofRs.6.81/unit, and Rs. 2.73/unit instead of Rs.5.78/unit, respectively. He, therefore, took the lesser rates, as noted above, in respect of power sold by the captive units by making transfer pricing adjustments, and thereby reduced the claim of deduction u/s section 80IA of the Income Tax Act. The assessing officer accordingly made the impugned additions by way of reduction of claim of deduction of income u/s 80IA in respect of Captive Power Plants. 4.2 Being aggrieved by the said transfer pricing adjustments made by the Assessing officer, the assessee preferred appeal before the CIT(A). The assessee vide its detailed submissions before the CIT(A), inter alia contended that the Transfer Pricing Officer's (TPO) assessment, taking average rates from tariff orders of electricity regulatory commissions as the arm's length price was not justified. It was contended that these rates don't reflect the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BA(iii) and section 92F of the Income Tax Act. He has also referred to the decision of the Hon ble Calcutta High Court in the case of CIT vs. ITC Ltd. (2015) 64 taxman.com 2014 and therefore, has submitted that the impugned order of the CIT(A) be set aside and that of the Assessing Officer be restored. 7. On the other hand, the ld. AR of the assessee has submitted that the assessee has adopted internal CUP method in his transfer study report and that the same was appropriate method for determination of arm s length price. He apart from oral submissions has also made the following written submissions: Submissions: 1. With respect to the transactions involving sale/transfer of power for the Chaliyama and Kamanda CPP, the Appellant adopted rates with reference to and slightly lower than the grid tariff rate (applicable to a power distribution company). The said transactions, being in the nature of a Specified Domestic Transaction had been benchmarked by the assessee using the CUP Method at a price slightly lower than the respective notified State Electricity Board s rate for both its units. For this, no adverse inference ought to be drawn in as much as due to such lower benchmarking o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed in the tariff orders for State Electricity Board (SEB) for the respective year, which was at arm s length from the Indian transfer pricing regulations perspective. The details of the per unit price of power supplied from the Chaliyama Unit (@ Rs. 6.81 per unit) is at page 123 of the paperbook (Serial No. 3) and from the Kamanda Unit (@ Rs. 5.78 per unit) is at page 80 of the paperbook (Serial No. 2). 4. It is humbly submitted that the benchmarking of the price of power (which has been based on the rates prescribed in the tariff orders for the respective SEBs) has been done after an in-depth functional analysis of the power supply procurement transactions of the CPPs and manufacturing units along with their characterisations. This is verifiable from a perusal of the TPSRs. An extract of the analysis done in the TPSRs for both units is reproduced below for Your Honour s kind perusal: Chaliyama Unit, Jharkhand: At page 123 of our Paperbook for the relevant year (A.Y. 2019-20), it can be seen in the TPSR for the Chaliyama Unit under the heading Evaluation of comparability with internal uncontrolled prices that the Chaliyama CPP generated surplus power and supplied it, which is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase and procure power from the State Electricity Board (i.e. JBVNL Facility) at prescribed rates. Thus, the appropriate application of the CUP method as per the regulations and mandate of the Statute would require that a comparison ought to be done with the prevailing price in an uncontrolled and comparable circumstance wherein the Non-Eligible Unit (Manufacturing Unit) be taken as the tested party and the benchmarking of the price of power be done based on the SEB rate for power. Kamanda Unit, Orissa: At page 80 of our Paperbook for the relevant year (A.Y. 2019-20), it can be seen in the TPSR under the heading Evaluation of comparability with internal uncontrolled prices that the Kamanda CPP generated surplus power and supplied it, which is a total of 18 million kwh, to the grid of WESCO (SEB, Orissa) this is a total of around 6% of the capacity of Kamanda CPP and the majority of the power generated in the CPP (214,897,739 units in Kwh) was captively consumed by the manufacturing unit, as has been detailed in the TPSR. Thereafter, in the TPSR under the heading Evaluation of comparability with external uncontrolled prices at page 81 of our Paperbook, the TPSR for the Kamanda Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll electricity to any industrial consumer at these rates. The market conditions under which the power generating stations operate are significantly different from that of the captive power units operated by industries. At this juncture, it is first relevant to understand the intent and purpose for setting up of a CPP by any manufacturing industry. The power tariff charged from industrial consumers is different from that of domestic agricultural consumers, as the higher rates of the former subsidize the rates charged from the latter. Further, although India has surplus power generation capacity, it lacks adequate transmission and distribution infrastructure. As a consequence, due to the high-power tariffs and unstable supply of power, there are significant cost overruns in the manufacturing unit. The captive power plant is thus set-up with the dominant intent to save power costs, which the manufacturing unit is otherwise required to incur pay to the SEBs, and at the same time, to ensure stable supply of uninterrupted power for smooth production. This results in opportunity cost savings to the assessee company. Accordingly, while drawing up the stand-alone accounts of the eligible CP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions are similar, this benchmark rate adopted by the assessee ought to be held to be fulfilling the CUP parameters. 12. The purported difference between the concept of open market value and arm s length price of power, if at all a point of contention, is without any basis in the given facts of the present case, in as much as the benchmarking analysis of the assessee has met both the fair valuation standards as well as the transfer pricing guidelines. It is asserted that ordinarily the fair market valuation standards produce arm s length results, and it is only in some instances where the rules and principles of fair valuation standards is inconsistent with the arm s length standards that it may produce a result which may not be same. We humbly submit that the benchmarking analysis performed in the Transfer Pricing Study Report fulfilled the CUP parameters and therefore it was not a case that the assessee had determined the open market value and not the arm s length price . It is important to take due cognizance of the change in law viz., introduction of specified domestic transfer pricing provisions by the Finance Act, 2012. Determination of the open market value also met the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen a captive power plant in an industry supplies electricity to its own manufacturing unit, there is no power distribution cost. The savings of cost of power can be determined only when the rate at which the manufacturing unit of the company purchases power in the open market from the power distribution companies is considered. Imaginary costs which are not incurred cannot guide the decision regarding benchmarking of the price at which power is bought by the non-eligible unit. Thus, while determining the ALP under transfer pricing provisions, we humbly state that the assessee has correctly identified the manufacturing unit as the tested party and CUP as the MAM and the purchase price of electricity in the open market from the State Electricity Board to the manufacturing units in uncontrolled conditions as the ALP. 16. It is humbly submitted that courts have held that from a perusal of Rule 10B of the Income tax Rules, 1962, it is evidently clear that what is required to be seen is the price at whicha property, good or service has been acquired under a comparable uncontrolled transaction under similar market conditions. 17. The application of CUP Method requires strict product comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there are a number of important comparability standards under the CUP method, it is considered the most direct way of determining an arm s length price and even the OECD Guidelines considers the CUP method preferable to all other methods. A transaction is considered comparable only if both - the property/ services and circumstances surrounding the controlled transaction are substantially the same as those of the uncontrolled transaction. The most important factor in determining comparability under this method is property/ services similarity. Similarity of contractual terms and economic conditions, such as geographic markets and the level of market, are also important comparability factors of the open market under this method. In the event that differences in products or terms exist, the Indian Regulations/ OECD Guidelines provide that adjustments would be appropriate to eliminate the effect of the differences on price. The OECD Guidelines state that a flexible approach should be adopted when examining the CUP method, and appropriate adjustments should be applied when reasonable. 20. It is important to note that in the case of the assessee, as the power generated by the both its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h electricity distribution companies were allowed to supply electricity to consumers. 23. We further rely on the decision of the Hon'ble ITAT, Kolkata in the case of Dy. CIT v. Birla Corporation Ltd (ITA Nos. 971/Kol/ 2012 298/Kol/2013) dated 25.08.2017 wherein the Hon'ble ITAT, Kolkata after considering the judgment of the Calcutta High Court in the case of CIT Vs ITC Ltd. [2015] 64 taxmann.com 214 along with the provisions of Electricity Act, 2003 and the decision of Apex Court in the case of ThiruArooran Sugars Ltd (227 ITR 432) upheld the assessee's contention that the open market value of electricity for the purposes of Section 80IA should be the price at which the assessees procures power from SEBs. 24. Relying on the extracts of a few judgments which have considered the similar issue at hand, they are reproduced hereinunder: (A) CIT Vs Godavari Power Ispat Ltd (223 Taxman 234) (Chattisgarh HC) 30. The Steel-Division of the Assessee is a consumer. The CPP of the Assessee supplies electricity to the Steel-Division. Had the Steel-Division not taken power from the CPP then it had to purchase power from the Board. The CPP has charged the same rate from the Steel-Divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim larger profit under the unit which was eligible for such deduction as against this, attempt of the revenue would be see that the ineligible unit shows greater profit. 6. The Tribunal in the impugned judgment extracted extensively from the order of CIT (Appeals) and independent reasons for confirming the same. In such order CIT (Appeals) had placed reliance on an earlier judgment of the Tribunal in case of Reliance Infrastructure Ltd. v. Addl. CIT [2011] 9 taxmann.com 186 (Mum. - Trib.). Learned counsel for the assessee had placed on record a copy of the judgment of the Tribunal in case of Reliance Infrastructure limited. In such judgment an identical issue came up for consideration. The Tribunal by detailed judgment had held and observed as under: 44. In the given facts and circumstances of the case, we are of the view that the profits of the business of generation of power worked out by the Assessee on the basis of the price that it paid to TPC for purchase of power continues to be the best basis even after the order of MERC and therefore the same has to be accepted as was done in the past and as approved by the ITAT in Assesssee's case. We therefore dismiss ground No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of DCIT Vs M/s. Kesoram Industries Limited for AYs 2008-09 2009-10, through its lead order in ITA No. 1722/Kol/2012, after considering the judgment of the Calcutta High Court in the case of CIT Vs ITC Ltd (supra), the provisions of Electricity Act, 2003 and the decision of Hon ble Apex Court in the case of ThiruArooran Sugars Ltd (227 ITR 432) upheld the assessee s contention that the open market value of electricity for the purposes of Section 80IA(8) should be the price at which the assessee procures power from SEBs. The relevant findings are as under: 21. We have considered the rival submissions and perused the documents in the paper book which inter alia contained Electricity Act, 2003, KERC Regulations 2004, copy of KERCs order dated 27.02.2007 approving 'open access' to CPPs for supply of electricity etc. The bone of contention between the parties is the adoption of the most appropriate rate at which sale of electricity would be valued for the purpose of determining the profitability of all the four CPPs. It is not in dispute that during the relevant year, the assessee operated four CPPs in the State of Karnataka, Orissa and West Bengal and the power gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Calcutta High Court decided the Revenue's appeal in the case of ITC Ltd. (supra). In that case also the Hon'ble High Court proceeded on premise that the independent power producers or CPPs could sell the power only to power distribution companies and that too at the rates determined by the State Regulatory Commission. In other words in the opinion of the A.O. and the Hon'ble High Court the power producers were necessarily required to sell the power in the regulated market where prices were fixed at the discretion of the State Electricity Boards and / or Regulatory Commissions and the power generating companies had no option or discretion to determine the selling rate. However, in the case in hand there is a change of scenario before us and the learned AR of the assessee in his detailed presentation (supra) has brought out the salient features of the Electricity Act 2003 by which CPPs were granted 'open access' by law. In terms of the 'open access' granted, the power generating companies were free to sell the power to any third party at the prices mutually agreed and in such case, the regulatory commission was required to determine only the 'whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for the Southern Region of Rs. 7.54 per unit. Similar prices prevailed in 2009 as well. The foregoing documents therefore prove that the A.O.'s presumption that the assessee was legally obliged to sell electricity only to the power distribution companies and SEBs and that too at the controlled prices was devoid of any legal or factual foundation. We note that this specific issue was adjudicated by the Coordinate Bench of this Tribunal in the case of DCIT vs Birla Corporation Ltd. to which one of us was signatory. In the said decision, the Co-ordinate Bench of this Tribunal, after considering the ratio laid down by the Hon'ble Supreme Court in the case ThiruArooran Sugar Ltd. held as follows: 5.6. We have heard the rival submissions and perused the materials available on record including the paper book and the relevant provisions of the Electricity Act, 2003 as detailed supra. We find that the main thrust of order of ldCIT(A) was by placing reliance on the decision of this tribunal in the case of ITC Ltd, which was modified by the Hon'ble Jurisdictional High Court. The ld AR fairly brought to our attention the decision of Hon'ble Jurisdictional High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city at the rates of Rs. 6.35, Rs. 3.72 and Rs. 4.90 in respect of CPPs at Karnataka, Orissa and West Bengal respectively. 27. In the case of Electrosteel Casting Ltd., the Kolkata ITAT took into consideration the judgment of the Hon ble Calcutta High Court in the case of ITC Ltd. and distinguished it by passing a speaking order very recently. Relevant extracts are reproduced below (copy of the order is marked as Sl. No. 19 in the paperbook of judgments at page no. 216): 46. We have given a very careful consideration to the rival submissions. We have already seen that the Assessee manufactures Dr spun pipes, DI fittings, etc., at its factory at Khardah (West Bengal) CI spun pipes at its factory at Elavur (Tamil Nadu) and low ash metallurgical coke at its factory at Haldia (West Bengal). At Khardah and Haldia factory the Assessee also has its own power plant generating electricity from heat emitted from blast furnaces in the process of manufacturing of Dr Pipes at Khardah, where power generated is entirely consumed for own use (i.e., captive consumption), and sponge iron plant and coke oven plant at Haldia where the power generated is consumed for own use (captive consumption and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y an Assessee engaged in the business of paper manufacture. The question that was examined by the Hon'ble Court was as to what would be market value for the purpose of computation of deduction u/s.80IA of the Act in the context of Sec.80IA(8) of the Act. The Hon'bIe Calcutta High court held deduction u/s. 80IA had to be computed in such circumstances not on the basis of rates chargeable by distribution licensee from consumer and that the same can be Claimed only on the basis of rates fixed by tariff regulation commission for sale of electricity by generating companies to distribution licensees. 48. The submission of the learned counsel for the Assessee was that the decision of the Hon'ble Calcutta High Court is not applicable to the case of the Assessee as in the case before the Hon'ble Calcutta High Court, the undertaking that generated power was situate in the State of Andhra Pradesh where electricity generated could not be sold to anyone other than a distribution company or a Company which is engaged both in generation and distribution. In this regard an order of the Andhra Pradesh Electricity Regulatory Commission, Hyderabad in O.P.No.1075/2000 dated 20.6.2001 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services would ordinary fetch in the open market because in such circumstances it cannot be said that there is open market for the goods or services. We are of the view in the given circumstances, there are exceptional difficulties in computing the profits and gains of the eligible business by applying the main provisions of Sec. 80IA(8) of the Act and therefore the proviso to Sec. 80IA(8) of the Act would apply and the AO may compute such profits and gains on such reasonable basis as he may deem fit. In our view, interest of justice would be met by setting aside the order of the AO on this issue and directing the AO to determine the profits and gains of the undertaking generating power on a reasonable basis after affording the Assessee opportunity of being heard. The discretion given to the AO under the proviso to sec. 80IA(8) is not a subjective satisfaction but an objective one and therefore the reasonableness of the action of the AO should be justifiable. With these observations we allow the relevant ground of appeal of the revenue for statistical purposes. 28. The Hon'ble Gujarat High Court in its judgment dated 03.10.2016 in the case of Pr. CIT Vs Gujarat AIkalies Chemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compute such profits and gains on such reasonable basis as he may deem fit. Explanation. For the purposes of this sub-section, market value , in relation to any goods or services, means (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. 8.1 A perusal of the Explanation to Section 80IA(8) would reveal that in case of specified domestic transactions as referred to section 92BA of the Act, the market value will be the arm s length price as in clause (ii) of section 92F of the Act. Now clause (ii) of section 92F reads as under: 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires, (ii) arm's length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions; 8.2 The Coordinate Kolkata Bench of this Tribunal in the case of ACIT v. Philips Carbon Black Ltd. (supra) has observed that the internal CUP method applied by the assessee to benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the SEB represented the internal comparable ALP. 5.7. We note that the Ld. CIT(A) has also dealt with the issue as to how the assessee has come to manufacture the power. We observe from the order of Ld. CIT(A) that the assessee engaged in the business of manufacture of carbon black and in the manufacturing process the principal raw material consumed is carbon black feed stock (CBFS). During the manufacturing of carbon black several gases are produced in the substantial quantity and if such gases, which are by-product of the manufacturing process, if not consumed immediately have to be released in the air which causes atmospheric pollution. At the same time, such gases can be used as source material for generation of power which in turn can be used for operating the manufacturing plant. For this purpose, the assessee had such generation plant in the immediate vicinity of the manufacturing unit. The Ld. CIT(A) also noted that since the manufacturing unit of the assessee was generating huge poisonous gases, therefore the power plant of the assessee has to be set up. The power generated by consuming the waste gases was in surplus and much higher than the power required by carbon blac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed after following the decision of various Hon ble High Courts and decision of Coordinate Benches of the Tribunal. We have also noted the arguments advanced by the ld DR that rate at which the power was supplied to the unrelated parties should be taken as ALP however can not overlook the fact that the said transactions did not take place under similar market conditions and that price cannot be taken as ALP under CUP method. The power supplied by the CPP to non eligible unit was business to consumer (commonly known As B2C) meaning thereby the rate at which the ultimate consumers can purchase the power for their consumption is relevant. In the instant case before us, the B2C market comprises the sale of power by SEB and IEX etc to different categories of consumers. Thus the power sold by the CPP to unrelated parties namely Noida Power Co Ltd, Global Energy , RPG Power Trading Co, and IEX etc was in altogether different market conditions which is business to business commonly known as B2B model and the said rate represented the rate at which the distribution companies purchased power from generation companies. Further no consumer can buy the power in the open market at a rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to supply the electricity to the distribution companies and even are exempt of other charges which the other generating companies/distribution companies has to pay to the Government/ State Electricity Boards. The captive power plants are required only to pay wheeling charges if they use the distribution lines of the State Electricity Boards/distribution companies. 8.4 At this stage, we deem it appropriate to reproduce the relevant provisions of the Indian Electricity Act, 2003: Section 2(8) Captive generating plant means a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association; Section 9. (Captive generation): (1) Notwithstanding anything contained in this Act, a person may construct, maintain or operate a captive generating plant and dedicated transmission lines: Provided that the supply of electricity from the captive generating plant through the grid shall be regulated in the same manner as the generating station of a generating company. 1[Provided further that no li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rational constraints) as may be specified within one year of the appointed date by it and in specifying the extent of open access in successive phases and in determining the charges for wheeling, it shall have due regard to all relevant factors including such cross subsidies, and other operational constraints: Provided that such open access shall be allowed on payment of a surcharge] in addition to the charges for wheeling as may be determined by the State Commission: Provided further that such surcharge shall be utilised to meet the requirements of current level of cross subsidy within the area of supply of the distribution licensee : Provided also that such surcharge and cross subsidies shall be progressively reduced 2[***] in the manner as may be specified by the State Commission: Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use: [Provided also that the State Commission shall, not later than five years from the date of commencement of the Electricity (Amendment) Act, 2003, by regulations, provide such open access to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tariff) as may be agreed upon by them. 8.5 A perusal of the aforesaid provisions of the Electricity Act, 2003 would reveal that notwithstanding anything contained in the said Act, a person may construct, maintain or operate a captive generating plant and dedicated transmission lines. Further, such captive plants will have the right to open access for the purpose of carrying electricity from such captive plants to the destination of its use. Further, no surcharge is leviable in case open access is provided to the captive unit by the Central or State transmission utility or the transmission licensee involved in distribution/transmission of power. The Section 42 provides that a consumer may opt for supply of electricity directly from a generating company or any licensee other than the distribution licensee operating in his area. As per section 49 of the Electricity Act 2003, if such an open access is provided by a generating company/licensee to any consumer, then such a generating company/lisensee and the consumer may enter into an agreement for supply or purchase of electricity on such terms and conditions (including tariff) as may be agreed upon by them. Under the circumstances, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng undertakings from the respective SEBs. Referring to explanation section 80IA, the A.O. held that for the purposes of section 80IA, the term market value means the price that such goods or services would ordinarily fetch in the open market. According to the A.O., such market value was to ascertained from the view point of the power generating undertakings claiming the deduction and not from the perspective of the manufacturing undertaking which was the captive consumer of the CPP. We note that the A.O. proceeded on the premise that the CPP owned by the assessee was not allowed to sell its power to the final consumer but was allowed to sell the same to grid of the SEB in case of excess production. Save and except such monopoly buyer, the assessee being the CPP was not permitted to sell the power to any one else. According to the A.O., therefore, the market value which the assessee was likely to fetch by sale of excess power by SEB alone represented the market value. In the AO s opinion the rates at which the SEBs were selling power to the consumers were much higher than the price at which the power was purchased from the CPPs because in addition to profit margin of the SEB, such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of techno-economic clearance of CEA for thermal generation was no longer there. Captive generation has been freed from all controls. The said policy further clarified that the captive generating plants were permitted to sell electricity to licensees and consumers when they were allowed open access by SERCs under section 42 of the Electricity Act, 2003. The tariff policy also issued by Government of India on 06.01.2006 provided that the sole purpose of freely allowing captive generation was to enable industries to access reliable quality and cost effective power. As per the recommendation made, the SERCs were required to encourage the distribution licensees to procure power from CPPs through competitive bidding on a composite tariff basis. From a conjoint reading of the provisions of the Electricity Act 2003, KERCs open access Regulation notified in 2004 and the order of the KERC dated 27.02.2007, it therefore, appears that there was no statutory bar on the CPPs to sell electricity to any third party and that too at the rate mutually agreed by and between the parties. We, therefore, find that the very foundation on which the A.O. held that the assessee had no option but to sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee would be governed by the provisions of Electricity Act, 2003. 5.6.1. We have already seen that the ITC s case in Hon ble Calcutta High Court, proceeded on the basis that the open market for the captive power plant was only a distribution company or a company engaged both in generation and distribution and that the rate at which electricity could be sold by the captive power plant was the one fixed by the tariff regulatory commission. However, such position has undergone sea change inasmuch as during the relevant previous years it was open to the assessee to sell even to a consumer and the price for sale to a distribution company or to a consumer that could be mutually agreed upon notwithstanding the tariff fixed by the State Regulatory Commission. We find that during the previous year relevant to the Asst Year 2009-10, the assessee infact sold electricity at rates higher than that charged from it by the State Electricity Board. The assessee nevertheless made the computation for the purpose of section 80IA of the Act with reference to the price charged from it by the State Electricity Board. In such circumstances, we hold that, when it was permissible for the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the controlled price will be taken as the market price, because it is at this price that a willing buyer and a willing seller are expected to transact business. As Lord Denning pointed out, it does not make any difference to this position that the assessee was the only buyer in the region where its factory was located. (emphasis added) 5.6.3. The ld AR submitted that as held in the aforesaid judgement of the Hon ble Supreme Court, the price paid by an assessee for purchase of raw material represents the market price of such raw material produced by the assessee. The said judgment was held not to apply in ITC s case because the Hon ble Court was of the view that electricity could not be sold to the consumer because of specific prohibition in the erstwhile Electricity Act and as such the price to the consumer could not be taken into account. We find that that is not the position in the instant case. Hence we are in agreement with the arguments of the ld AR. 5.6.4. We find that the method adopted by the assessee viz. to take the average rate charged by the State Electricity Board for the previous month is quite appropriate and reasonable for determining the market value for the month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of electricity by the generating companies to the distribution company/state electricity board is regulated by the relevant provisions of the Electricity Act and the policy / guidelines framed by the respective Electricity Regulatory Commissions, however, the generation and supply of electricity by the captive power plants primarily to their associated enterprises has been kept outside of the Government control. Under the circumstances, the adoption of market value of the generating units to the distribution companies which are highly regulated and controlled cannot be set up as benchmark, whereas, the supply by the captive units to non-eligible units and other consumers and even by the generating companies directly to the consumers is governed by uncontrolled market conditions. Under such circumstances, in our view, the consumer /contracting parties will certainly want to purchase the electricity at somewhat lesser rate than the rates of the State Electricity Boards, whereas, the captive power plants/generating companies would try to get maximum rate on the sale of power in unregulated and uncontrolled transactions and under the circumstances, both the parties would settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under Section 80 IA of the Act. 29. Section 43A of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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