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Income Tax Appellate Tribunal, DEHRADUN BENCH, NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 207-18, arises out of the order of the Pr. CIT, Dehradun [hereinafter referred to as „ld. Pr. CIT‟, in short] in Appeal No. ITBA/REV/F/REV-5/2021-22/1040648217(1) dated 12.03.2022 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 23.11.2019 by the Assessing Officer, ACIT, Circle- 1(2)(1), Dehradun (hereinafter referred to as „ld. AO‟).
The assessee has raised the following grounds of appeal:-
“1. That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in assuming jurisdiction u/s 263 of Income Tax Act, 1961 and has erred in holding the assessment order passed u/s 143(3) vide dated 23-11- 2019 was erroneous as well as prejudicial to the interest of revenue and that too by recording incorrect facts and findings and in violation of principles of natural justice.
M/s. UJVN Limited 2. That in any case and in any view of the matter, assumption of jurisdiction u/s 263 by Ld. PCIT, is bad in law and against the facts and circumstances of the case.
3. That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in holding that the capacity charges does not have direct nexus between the profits & gains and industrial undertaking but has only incidental nexus and income by way of capacity charges at Rs.1,32,52,18,572/- does not qualify for deduction under section 80IA of the Income Tax Act, 1961.
4. That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in holding that the appellant has inflated its income eligible for deduction u/s 801A by charging total quantity of energy exported @ 1.029/unit as against the approved rate of Rs. 0.805/unit.
5. That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in cancelling the assessment order with the direction to make necessary enquiries and pass a fresh order.”
The only effective issue to be decided in this appeal is as to whether the ld PCIT was justified in assuming jurisdiction u/s 263 of the Act in the in the facts of the instant case. The inter connected issue involved thereon is that whether the ld PCIT was justified in holding that the capacity charges does not have direct nexus between the profits and gains of industrial undertaking and accordingly does not qualify for deduction u/s 80IA of the Act. Yet another issue that was considered by the ld PCIT was that the Assessee had inflated its income eligible for deduction u/s 80IA of the Act by charging total quantity on energy exported @1.029/ unit as against the rate Rs. 0.805 per unit.
We have heard the rival submissions and perused the materials available on record. The Assessee company had set up a hydro electric project namely Maneribhali-II, in the previous year relevant to AY 2009-10. The initial year of claim of deduction u/s 80IA of the Act was assessment year 2013-14. Accordingly, the Assessee company filed its return of income for the AY 2017-18 on 26.10.2017 declared Nil income after claiming deduction u/s 80IA of the Act. The instant year is the fifth year of claim of deduction u/s 80IA of the Act. The return was selected for complete scrutiny and for verification of claim of deduction u/s 80IA of the Act. The assessment was completed u/s 143(3) of the Act on 23.11.2019 determining the total income of the Assessee at Rs. 2,11,83,360/- wherein, the claim of deduction u/s 80IA of the Act was not disturbed by the ld AO. This assessment was sought to be revised by the ld PCIT by invoking his revisionary jurisdiction u/s 263 Page | 2
M/s. UJVN Limited of the Act. The first show cause notice dated 24.09.2012 was issued by the ld PCIT stating that the Assessee had claimed deduction u/s 80IA of the Act on interest income at Rs. 49.85 crores and the same cannot be treated as amounts derived from business of eligible undertaking. The Assessee clarified before the ld PCIT that it had not claimed deduction 80IA of the Act on the interest income component at all. The ld PCIT on verification of the fact and submissions made by the Assessee accepted the contention of the Assessee. Later another show cause notice was issued by the ld PCIT to the Assessee stating that Assessee had earned capacity charges of Rs. 132,52,18,572/-, which in the opinion of the ld PCIT, would not be eligible for deduction u/s 80IA of the Act. Further, the ld PCIT also noticed that total sale revenue shown by the Assessee include energy charges amounting to Rs. 100,23,09,129/-, which in the opinion of the ld PCIT, would not be eligible for deduction u/s 80IA of the Act. It was observed by the ld PCIT that capacity charges collected by the assessee, which is included in the sale bill, is not directly linked to the sale of energy to UPCL and accordingly, the amount received towards capacity charges would not be considered as profits derived from the eligible business of the Assessee but is only attributable and incidental to it. Further, the ld PCIT also mentioned that sale rate per unit is determined by the tariff of Uttarakhand Electricity Regulatory Commission (UERC) and Assessee is supposed to raise bill only for that amount. He noticed that tariff rate fixed by the UERC for share of electricity to UPCL was at Rs. 0.80 per unit, however, in the invoices raised by the Assessee to UPCL the sale rate has been mentioned @Rs. 1.029 per unit. This amounted to inflation of profits of the eligible undertaking of the Assessee and accordingly deduction should be denied for the excess rate charged thereon. The Assessee gave a written submission before the ld PCIT that capacity charges are entitled to be charged by the Assessee and the same would be having first degree nexus with the profits of the eligible undertaking and has to be construed as derived from profits of the eligible undertaking. Similarly the Assessee gave a reply to PCIT that in case actual total energy generated by a Hydro generating station during the year is less than the design energy for reasons beyond the control of the generating company, the following treatment shall be applied at a rolling basis on an application filed by the generating company as under:-
M/s. UJVN Limited “In case the energy shortfall occurs within ten years from the date of commercial operation of a generating station, the ECR for the year following the year of energy shortfall shall be computed based on the formula specified in sub-Regulation (5) above with the modification that the DE for the year shall be considered as equal to the actual energy generated during the year of the shortfall, till the Energy Charge shortfall of the previous year has been made up, after which normal ECR shall be applicable Provided that in case actual generation from a hydro generating station is less than the design energy for a continuous period of 4 years on account of hydrology factor, the generating station shall approach CEA with relevant hydrology data for revision of design energy of the station". Your assessee has followed the above mentioned regulation of UERC in determining the shortfall to be charged from UPCL. A complete breakup of quantity of energy sale and shortfall including calculation of monthly shortfall charges billed to UPCL by Maneri Bhali II are being attached as Annexure 3. We would like to state that the UERC vide its order dated 5th April 2016 fixed energy charge rate @0.805/KWH to be billed by Maneri Bhali II to Uttarakhand Power Corporation Ltd. A copy of this order has already been attached as Annexure 1 to our previous reply dated 10.02.2022. Your goodself would observe from the breakup attached as per annexure 3 that this rate of Rs. 0.805/KWH has been uniformly used for calculation of energy charge during the year 2016-17. As regards the additional amount charged @0.224/KWH for the months of April to October we would like to state that this relates to shortfall charge calculated as per the regulation of UERC. The total amount charged @ 1.029/ KWH during the months of April to October comprises of regular electricity charge @0.805 plus shortfall electricity charge @0.224/KWH. Apart from this no extra amount has been charged on sale of electricity, thus point no.4, 6 and 7 of your notice regarding disallowance u/s 801A of the extra amount charged on sale of electricity (other than shortfall) is not relevant. Further we would also like to state that the shortfall charges earned by your assessee are in relation to the business of your assessee eligible for deduction u/s 801A of the Income Tax Act i.e generation of power."
It was specifically pointed out by the Assessee that the shortfall charges earned by the Assessee would also be in relation to the business of the Assessee and accordingly to be construed as profits derived from the eligible business undertaking and consequently eligible for deduction u/s 80IA of the Act.
6. Ld PCIT completely ignored the contentions of the Assessee and proceeded to cancel the assessment order passed u/s 143(3) of the Act with a direction to ld AO to make necessary enquiry and pass a fresh assessment order after providing adequate opportunity to the Assessee. Aggrieved, the Assessee is in appeal before us.
7. At the outset, we find that the return filed by the Assessee where claim of deduction u/s 80IA of the Act was duly made and the case of the Assessee was M/s. UJVN Limited selected for scrutiny was only for the purpose of examination of claim of deduction u/s 80IA of the Act. It is not in dispute that Assessee‟s unit is eligible for deduction u/s 80IA of the Act. It is not in dispute that for AY 2013-14 was the initial assessment year in which claim of deduction was made by the Assessee. Let us see whether adequate enquiries were carried out by the ld AO in the original scrutiny assessment proceedings or not:-
(a) A notice u/s 142(1) of the Act dated 09.09.2019 together with a questionnaire was issued by the ld AO seeking explanation for claim of deduction u/s 80IA of the Act with documentary evidence.
(b) Yet another notice u/s 142(1) of the Act was issued on 04.10.2019 asking the same question.
The Assessee furnished a reply before the ld AO giving the necessary workings and also enclosing the audit report in Form 10CCB for claiming of deduction u/s 80IA of the Act. It was specifically pointed out in the said reply, that this is the 5th year of the claim of deduction of claim by the Assessee. It was also brought to the attention of the ld AO that deduction u/s 80IA of the Act was duly allowed to the Assessee for AY 2013-14 (first year of claim) and AY 2014-15 for which order was passed u/s 143(3) of the Act and that there has been no change in the manufacturing activity from AY 2014-15 onwards.
We find that Assessee had derived profits and gains from the undertaking to the tune of Rs. 58,25,01,731/- but had claimed deduction u/s 80IA of the Act only for Rs. 51,94,17,583/-. This fact is also confirmed by the Chartered Accountant in Form NO. 10CCB. This claim of deduction of Rs. 51,94,17,583/- matches with computation of total income enclosed in page 2 of the PB wherein, an identical claim is made. All these facts go to prove that the AO had indeed made adequate enquiries during the course of scrutiny assessment proceedings and since there was no change in the manufacturing activities when compared to AY 2014-15, and in view of the fact that in AY 2014-15 the claim of deduction was accepted by the ld AO, there was no reason for the ld AO to take a divergent stand for the year under consideration as facts are identical. Hence it would be incorrect on the part Page | 5
M/s. UJVN Limited of the ld PCIT to state that adequate enquiries with regard to claim of deduction u/s 80IA of the Act were not made by the ld AO warranting revision u/s 263 of the Act.
With regard to specific allegation leveled by the ld PCIT in the aspect of capacity charges not having first degree nexus with the sale of energy by the Assessee to UPCL. We find that power purchase agreement entered between Assessee and UPCL on 24.07.2012 is placed on record at page No. 560 of the paper book wherein at page 564 under clause No 6, the expression „tariff to be charged‟ by the Assessee is mentioned which reads as under:-
6.1 The tariff to be charged and its associated terms and conditions for the energy to be supplied by UJVN Ltd. from the projects shall be as per the Tariff Notifications/orders/directions issued/to be issued by UERC from time to time under the Electricity Act, 2003 and/or any other Act/Regulations as may be enacted/substituted by the GoU/Gol in place of these provisions. Recovery of Income Tax and Foreign Exchange Rate Variation shall be governed as per orders/directions issued by UERC from time to time.
We find identical issue came up before Hon‟ble Madras High Court in the case of M/s. Neyveli Lignite Corporation Ltd Vs. ACIT, Tax Case (Appeal) No. 1317 of 2005 dated 16.07.2012. The questions raised before the Hon‟ble Madras High Court are as under:-
1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that components of price for 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 801A/80IB? 2. If the answer to the question No. 1 is in favour of appellant, whether the notional tax reimbursement in the case of Unit VII of Thermal Power Station II whose entire income is deductible u/s 80IA should also be taken into account for computing relief u/s 80IA?
It would be relevant to reproduce operating paragraphs of the said judgment as under:-
“5. It is a matter of relevance to point out herein that in the notification issued on 19.01.2009, Chapter 3 deals with Computation of tariff, wherein clause 13, provided that the components of tariff for the supply of electricity shall comprise of two parts, namely, capacity charge (for recovery of annual fixed cost consisting of the components specified to in regulation 14) and energy charge (for recovery of primary fuel cost and limestone cost where applicable). The tariff for supply of Page | 6 electricity from a hydro generating station shall comprise capacity charge and energy charge to be derived in the manner specified in regulation 22, for recovery of annual fixed cost (consisting of the components referred to in regulation 14) through the two charges. Clause 14 defines Annual Fixed Cost.
A reading of the agreement dated 18.02.1999 entered into between the assessee and the various State Electricity Boards thus show the modalities of arriving at the tariff which includes the tax liability of Neyveli Lignite Corporation. Thus, it is evident that the tariff that was arrived at between the parties consisted of various components including tax liability on the income streams from the core activity of NLC and the quantification was to be done on the basis of the methods given in Clause 6.2 of the agreement. A reading of the same thus makes it clear that in strict sense, there was no reimbursement of the tax liability by the recipient, but was treated as part of the tariff and whatever was done on the receipt of the statement of the tax payable by the assessee was that the tariff price payable on the electricity sold was finally reckoned with reference to the above said tax payment. In the circumstances, it is clear that by "reimbursement", it does not mean that the tax paid by the assessee was very much part of the tariff and hence, part of the sale price.
It is seen from the proceedings of the Commissioner of Income Tax under Section 263 of the Act that the assessment was sought to be revised on the ground that the deduction claimed under Section 801A was not properly considered by the Assessing Officer. The Commissioner further pointed out that on a perusal of the agreement the income tax liability of the assessee had been paid by the Electricity Boards and the amount received by the assessee was shown as receipt of the income and included for claiming deduction under Section 801A. The Commissioner of Income Tax viewed that the receipt of the income tax by way of reimbursement was not an income from the manufacturing or production activity. Consequently, no deduction under Section 801A or 801B is to be allowed. Thus, the Commissioner of Income Tax issued the notice under Section 263. ######################## 15. We agree with the submissions made by the learned counsel for the assessee. As rightly pointed out by learned counsel for the assessee, the Revenue does not dispute the genuineness of the Bulk Power Supply Agreement between NLC and the State Electricity Board dated 18.2.1999. The Revenue also does not dispute the fact that the Notification issued by Ministry of Power dated 30.3.1992 provides for the various components of the tariff to be charged for the sale of electricity by the Generating companies to the Board and the same is relevant for understanding the clauses in the agreement. As already seen, the Notification dated 30.3.1992 provides the basis for working of the tariff for sale of electricity. Clause 1.5(d) of the Notification dated 30.3.1992 refers to the manner of what could be the components that could be included in the tariff to be charged on various income streams. Keeping these guidelines in the background, when we look at the agreement entered into betweenthe various State Electricity Boards and the assessee, we find that the computation of the generation tariff is done on the lines indicated in the notification.
It is no doubt true that clause 6 of the agreement separately deals with tax liability of the assessee which would form part of the tariff as per the Notification.
Equally, it is true that Annexure A to the agreement gives the norms and parameters for working out the generation power tariff for the 5 year period 1996- 97 to 2000-01. The said Annexure however has to be read in the context of clause 4.1. Hence, going by this, we do not find any income tax payable by the assessee or paid by the assessee figuring in Annexure A. The reason is that in clause 6 of the agreement specifies the tax liability of NLC in respect of the income on generation of power from Power Station II (Stage I) and Power Station II (Stage 1), mining of lignite from Mine II for the purpose of generation of power from Power Station II (Stage I) and Power Station 11 (stage II), the amount of grossed up tax that is payable by NLC on the income streams mentioned at items (i) and (ii) were to be borne by the recipients. viz, the State Electricity Boards. Clause 6.2 clarifies that either the grossed up or the actual tax assessed, whichever is less alone would be the liability for the Recipients to bear.
17. In the context of the direction issued in the notification dated 30.3.1992 and Clause 6 in the agreement, it is clear that tax liability is part of the tariff charged for sale of electricity from Thermal Power Generating Stations and it does not stand independent of the tariff charge. If the contemplation is otherwise, there is absolutely no need at all for anyone to enter into an agreement to make the tax liability of one party viz., the assessee as a liability to be borne by another party to the agreement. When the agreement between the parties is guided by the Notifications issued by the Ministry of Power, Government of India and the deliberations between the parties also pointed out the guidelines, under which the agreement themselves were entered into, we do not think there exists any justification in the contention of the Revenue to treat the tax payment shown under clause 6 of the agreement as payment not connected with the tariff charged on the supply an independent of energy. At the risk of repetition, we would say that 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 801A/80IB. In the circumstances, we hold that there is no such reimbursement of tax paid by NLC from the State Electricity Board. On the other hand the tariff component is quantified in terms of the liability met by the NLC which by no stretch of imagination could convert such a payment by the recipient as a tax liability of the recipient.
In the circumstances, we have no hesitation in accepting the plea of the assessee that 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 assesseee and hence it would not form part of the income. As already pointed out, when the Revenue had not questioned the genuineness of the agreement between the parties and liberty is thus available for the parties to arrive at the cost of the energy to be supplied by the assessee as guided by the notifications of the Ministry of Power in this regard, we find no ground to sustain the plea of the Revenue that the relief to be granted under Section SOLA calls for exclusion of the tax component in the sale price of electricity. Consequently, the first question raised in the tax case is answered in favour of the assessee and the order of the Tribunal is set aside.”
Ld PCIT in the Assessee‟s case had sought to disturb the claim of deduction on similar lines by holding that energy charges and capacity charges which are part Page | 8
M/s. UJVN Limited of the energy sales bill are not eligible for deduction u/s 80IA of the Act. In this regard, it would be relevant to refer the UERC regulation which are enclosed at page 723 of PB, wherein, the term „tariff‟ is defined as under:-
Regulation- Definition 3(72) 72 “Tariff” means the schedule of charges for either generation or transmission or wheeling and supply of electricity together with terms and conditions for application thereof. 13. The said regulation also defined “tariff income” as under:-
Regulation3(36) Definition 36 “Tariff Income” states that the income of the generating company, transmission, licensee, distribution licensee and SLDC arising out of all the charges determined by the commission for generation, transmission, wheeling and retails supply of electricity, SLDC charges, as the case may be, shall be considered as tariff income.
As per regulation 3(16), „Commission‟ means the Uttrarakhand Electricity regularity commission constituted u/s 82 of the Electricity Act, 2003.
Further, the „component of tariff ‟ is also defined in the said regulation as under:- i. The tariff for sale of electricity from a thermal power generating station shall comprise of two parts namely, the recovery of annual fixed charges and energy (variable) charges (for recovery of primary fuel cost). ii. The tariff for sale of electricity from hydro generating station was comprised of two parts namely recovery of annual capacity charges and energy charges. iii. Recovery of capacity charge and incentive by the generating company shall be based on the adjournment of the operational norms specified for regulation 47. (emphasis supplied by us)
M/s. UJVN Limited 16. The expression „non-tariff income‟ is also defined in the said UERC regulation as under:-
85. Non-Tariff Income The amount of non-tariff income relating to the Distribution Business and/or the Retail Supply Business as approved by the Commission shall be deducted from the Aggregate Revenue Requirement in calculating the revenue requirement from retail sale of electricity of the Distribution Licensee: Provided that the Distribution Licensee shall submit full details of his forecast of non-tariff income to the Commission along with his application for determination of tariff The indicative list of various heads to be considered for Non-Tariff Income shall be as under: (a) Income from rent of land or buildings: (b) Income from sale of scrap: (c) Delayed Payment Surcharge, (d) Rebates for timely payment of bills: (e) Income from statutory investments; (f) Interest on delayed or deferred payment on bills; (g) Interest on advances to suppliers/contractors; (h) Rental from staff quarters, (i) Rental from contractors; (j) Income from hire charges from contactors and others; k) Income from advertisements, etc.; (l) Miscellaneous receipts; (m) Interest on advances to suppliers; (n) Excess found on physical verification: (0) Prior period income.
Hence, the entire allegation of the ld PCIT is addressed as from the above regulations, it could be seen that Assessee is duly entitled to charge energy charges, capacity charges and shortfall charges. Hence, we hold that the Assessee had rightly collected the sale price which is directly in accordance with the UERC regulations and the tariff prescribed by the UERC. In any case, we find that the charges raised by the assessee company had been duly settled by UPCL. The person to dispute with regard to the pricing would be UPCL and not the Ld. PCIT. Hence, these disputed receipts would form part of tariff to be charged by the Assessee to UPCL. Accordingly, they would have first degree nexus with the business of generation of power and consequentially, the assessee would be eligible for deduction u/s 80IA of the Act on merits.
M/s. UJVN Limited 18. In view of the aforesaid observations, we hold that the ld PCIT grossly erred in invoking the jurisdiction u/s 263 of the Act in the facts of the instant case both on law as well as on merits. Accordingly, the revision order passed by the ld PCIT u/s 263 of the Act is hereby quashed. Grounds raised by the Assessee are allowed.
In the result, the appeal of the Assessee is allowed.