DCIT, KOL. , KOLKATA vs. RUNGTA MINES LIMITED, KOLKATA

आयकर अपील�य अ�धकरण, कोलकाता पीठ ‘सी’, कोलकाता IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH KOLKATA �ी संजय गग�, �या�यक सद�यएवं �ी मनीष बोरडलेखा सद�य के सम� , Before Shri Sanjay Garg, Judicial Member and Dr. Manish Borad, Accountant Member I.T.A No.286/Kol/2023 Assessment year: 2019-20 DCIT, Kolkata.................................................................................Appellant vs. Rungta Mines Ltd.................................................……...…..…..Respondent 8A, Express Tower, 42A, Shakespeare Sarani, Kolkata – 700017. [PAN: AABCR6463N] Appearances by: Shri Raman Garg, CIT-DR, appeared on behalf of the appellant. Shri Siddharth Agarwal, Advocate, appeared on behalf of the Respondent. Date of concluding the hearing :October 18, 2023 Date of pronouncing the order : December 14, 2023 आदेश / ORDER संजय गग�, �या�यकसद�य�वारा/ Per Sanjay Garg, Judicial Member: The present appeal has been preferred by the revenue against the order dated 20.01.2023 of the Commissioner of Income Tax (Appeals)-22, Kolkata (hereinafter referred to as the ‘CIT(A)’) passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’). 2. The revenue in this appeal has taken the following grounds of appeal: “1. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in not appreciating that arm's length price and fair market value are two different concepts and the role of the TPO is limited to determination of Arm's length price

I.T.A No.286/Kol/2023 Assessment year: 2019-20 Rungta Mines Ltd

I.T.A No.286/Kol/2023 Assessment year: 2019-20 Rungta Mines Ltd

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transfer pricing study for the same. In the Transfer Pricing Study Report (TPSR') it was noted that after undertaking Function, Asset, and Risk (FAR) Analysis, it was concluded in the report that these CPPs were electricity providers to the manufacturing units bearing normal risks associated with the said activity. It is also undisputed that the manufacturing units, besides obtaining power from the CPPs in question, also bought power from the State Electricity Boards (SEB) at tariffs at which such power was available to industry in their states. The assessee company, therefore, asserted that the CPPs could be expected to charge the same rate for supply of power by them which the non- eligible/ manufacturing units were paying to unrelated independent third parties/ State Electricity Boards. It was further observed in the TPSR that the power used was for industrial usage which required high voltage of power lines. Accordingly, the per unit charged by the SEB for supply of power for industrial usage which required high voltage of power lines 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

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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 to TPO, the functions performed by the CPPs were those of a manufacturer of power and not those of a distributor. The Ld. TPO was therefore of the view that the appropriate ‘Comparable Uncontrolled Price’ (CUP) method for benchmarking of the said transaction between Associate Enterprises was the average rate at which distribution companies in the State procured power from the generation companies. For obtaining these rates, the Ld. TPO referred to the multi-year tariff order issued by JSERC (Jharkhand State Electricity Regulatory Commission)and OERC (Orissa Electricity Regulatory Commission). The Ld. TPO noted that there was a tariff regulatory commission which arrived at separate power tariffs for both power generators and power distributors. The tariff for power generating companies was generally fixed by the tariff regulatory commission by way of negotiation which was based on an in-built mechanism that ensures permissible profits to the power generators. The TPO thus, held that the benefit u/s 801A of the Act can accordingly be claimed only on the basis of the rates charged for sale of power by the generating companies to the distribution company. The TPO noted that the assessee’s computation of arm's length value of power sold to AE was based on the market value concept, which according to him, was no longer applicable after introduction of transfer pricing provisions laying down arm's length pricing provisions in place

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on market value. The Ld. TPO also noted that a strict degree of comparability was required under the CUP method and in terms of Rule 10B of the Income Tax Rules,1962, the comparison of similar transactions to determine the Arm’s Length Price (ALP) for sale of power was required. The Ld. TPO observed that the assessee operated a CPP which was a manufacturing unit and it was selling power to a consumer viz., the assessee’s manufacturing unit, whereas the State Electricity Board was a marketing and distribution company that would buy power from a manufacturer and further distribute to the customers. The Ld. TPO thus held that the strict comparability was not met, by the assessee’s approach, for determination of the ALP under the CUP Method. The TPO held that the rates at which the power was sold by its Captive Power Plants to the manufacturing units were exorbitant and the assessee thereby has increased its profits of eligible unit and 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.

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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 true market conditions for electricity sales. It was emphasized that captive power plants (CPPs) in manufacturing industries aim to save costs and ensure a stable power supply to assessee’s manufacturing units, differing from independent power producers. The assessee further contended that comparing rates from the notified tariff orders was flawed, as those rates were heavily regulated and influenced by socio-political considerations. It was further contended that the Comparable Uncontrolled Price (CUP) method should consider the actual market conditions of Business to Consumer (B2C) Model, where manufacturing units purchase power from State Electricity Boards (SEBs). Regarding the Most Appropriate Method (MAM), the assessee insisted on using CUP method by taking the manufacturing unit as the tested party. It was contended that TPO's choice of generating units as tested party was wrong as it was highly regulated and did not depict the true picture of market rates as these generation companies were not allowed to sell the power to consumers in the open market. The assessee asserted that the ALP should be taken at the average market value at which the manufacturing units purchase power from unrelated third parties. The assessee, therefore, asserted that the CUP method, with the manufacturing unit as the tested party and the open market rate from SEBs as the Comparable Uncontrolled Price, accurately

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determines the arm's length price for benchmarking the sale of power by CPPs to the non-eligible unit. 4.3 The ld. CIT(A), after considering the submissions made by the assessee, by way of a detailed order, deleted the additions made by the AO on account of transfer pricing adjustments in relation to the price of power sold by the section 80IA eligible CPP units of the assessee to the non eligible manufacturing units of the assessee. 5. We have heard the rival contentions of the parties and have also gone through the record. 6. The ld. DR has strongly relied upon the observation made by the Transfer Pricing Officer and has submitted that for determination of arm’s length price in relation to power supply by the captive power plants of the assessee, the average market rates at which the other power generating units sell the power to distribution companies is required to be taken. He in this respect has relied upon section 80IA(8) of the Income Tax Act r.w.s. 92BA(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:

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“Submissions:

 The rate charged by the Chaliyama CPP was Rs. 6.81/- per unit for supply of power at a high voltage of 132kV. The applicable rate of JBVNL (Jharkhand BijliVitaran Nigam Limited) utility for a similar end-consumer under comparable circumstances (high-tension voltage lines) as per the tariff order of Jharkhand State Electricity Regulatory Commission (JSERC) for F.Y. 2018-19 is Rs. 7.33. As the price benchmarked by the assessee for the sale/ transfer of power by the Chaliyama CPP is lower than the price provided in the tariff order by JSERC for an end- consumer under comparable circumstances, it is reasonable to conclude that the rate is consistent with the ALP standard from an Indian Transfer Pricing Regulations perspective. (The detailed analysis for this is placed in the TPSR of the assessee company for the Chaliyama Unit for the relevant year at Serial No. 3, page 126 of our Paper book for A.Y. 2019-20)  The rate charged by the Kamanda CPP was Rs. 5.78/- per unit for supply of power at a high voltage of 33kV. The applicable rate of WESCO (Western Electricity Supply Company of Odisha) utility for a similar end-consumer under comparable circumstances (high-tension voltage lines) as per the tariff order of Orissa Electricity Regulatory Commission (OERC) for F.Y. 2018-19 is Rs. 6.17.

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As the price benchmarked by the assessee for the sale/ transfer of power by the Kamanda CPP is lower than the price provided in the tariff order by OERC for an end-consumer under comparable circumstances, it is reasonable to conclude that the rate is consistent with the ALP standard from an Indian Transfer Pricing Regulations perspective.

(The detailed analysis for this is placed in the TPSR of the assessee company for the Kamanda Unit for the relevant year at Serial No. 2, page 82 of our Paper book for A.Y. 2019-20) Name of the unit Total units transferred Energy charges per unit

Chaliyama 298,399,832 Rs 6.81/unit (Jharkhand) Kamanda (Orissa) 214,897,739 Rs 5.78/unit

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).

 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 total of 41 million kwh, to the grid of JBVNL (SEB, Jharkhand) – this is a total of around 8.5% of the capacity of Chaliyama CPP and the majority of the power generated

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in the CPP (298,399,832 units in Kwh) was captively consumed by the manufacturing unit, as has been detailed in the TPSR.

In the evaluation made in the TPSR at page 124 of the Paperbook, it is categorically outlined that power cannot be stored for future consumption and that it must be consumed at the time of generation. And that the purpose of setting up the Chaliyama CPP was to address the complete power requirement of the manufacturing unit and in doing the same, it had to generate power which is in excess of the power required by the Manufacturing Unit such that there arises no situation of a shut down. Thus, the sale of this excess power by the Chaliyama CPP to the grid was made in a compelling circumstance and with a view to realise some value for power which otherwise would have gone to waste. Thereby, it can be said that the price realised by the CPP undertaking under compelling circumstances cannot be considered as representative of the market value of power under uncontrolled conditions – which is the method and object of the CUP Method in arriving at the Arm’s Lengths Price (ALP). Since, the sale of excess/ surplus power was made only with a view to ensure that power generated does not go to waste or is lost, the price so realised did not constitute ALP of power.

In this regard, reliance is placed upon the judgment of ITAT, Kolkata in the case of ACIT v. Philips Carbon Black Ltd. (ITA No. 2628/ K/ 19) (A.Y. 2013-14) dated 05.07.2022 (Copy of the order is annexed in the Paper book of Judgments submitted and is marked as Annexure: ‘T’, relevant Page 233 of Paper book), wherein the facts were similar and the CPP has generated surplus power which was sold not just to the Associated Enterprise (Manufacturing Unit) but also to non-AEs. And such price realised by the CPP from the sale of power to non-AEs did not represent the fair market value of the power realised in uncontrolled conditions.

Thereafter, in the TPSR under the heading ‘Evaluation of comparability with external uncontrolled prices’ at page 124-125 of our Paperbook,the TPSR for the Chaliyama Unit goes on to functionally analyse that the only alternative in the absence of the Chaliyama CPP would be for the manufacturing unit to purchase 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

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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 goes on to analyse functionally that the only alternative in the absence of the Kamanda CPP would be for the manufacturing unit to purchase and procure power from the State Electricity Board (i.e. WESCO Facility) at prescribed rates. Thus, the appropriate application of the CUP method as per the regulations and mandate of the statute would require that 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.

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the same is not comparable with the eligible CPP unit. The Ld. TPO computed the quantum of adjustment as under:

For A.Y. 2019-20 (Page 7 of Ld. TPO’s Order):

Name of Rate / unit at Units Market Amount of the Plant which the power is transferred rateado Adjustment transferred by CPP (3) pted by [(2-4)*3] to the non-eligible the Ld. unit for captive TPO 7. I consumption (4) n (2) Chaliyama 6.81 298,399,832 4.18 78,47,91,558 r (Jharkand) e Kamanda 5.78 214,897,739 2.73 65,54,38,104 g (Orissa) a Total Adjustment ought to be made as per TPO 144,02,29,662 r d to theAppeal taken by the department before the Hon’ble ITAT, it is humbly submitted that each and every ground has been elaborately discussed by the Ld. CIT(A) in his order, in context of the facts of the A.Y. and in light of the precedents of Co-ordinate Benches of the ITAT and several High Court pronouncements.

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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 CPP and non-eligible manufacturing unit, the landed rate at which the manufacturing unit is procuring power from SEB is used as the comparable rate under the arm’s length standards.

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as tested party for the purpose of determination of ALP with MAM being CUP, cannot be found fault with.

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paid/charged for the same goods between two unrelated third parties, with the transaction conducted between the AEs.

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which 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.

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(B) CIT Vs Reliance Industries Ltd (421 ITR 686) (Bom HC) 4. Question (c) pertains to the dispute between the department and the assessee regarding the rate at which the electricity generated by one unit of the assessee- company and provided to the another be valued. The assessee contended that such valuation should be at the rate at which the electricity distribution companies are allowed to supply electricity to the consumers. The revenue on the other hand argues that the appropriate rate should be the rate at which the electricity is purchased by the distribution companies from the electricity generating companies. 5. This controversy arose in the background of the fact that the assessee had set up a captive power generating unit and claimed deduction under Section 80IA of the Income Tax Act, 1961 ("the Act" for short) in respect of the profits arising out of such activity. Obviously, therefore the attempt on the part of the assessee was to 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

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in the past and as approved by the ITAT in Assesssee's case. We therefore dismiss ground No.4 of the revenue." 25. As far as the Ld. TPO’s reliance on the judgment of the Hon’ble Calcutta High Court in the case of ITC Ltd (supra) is concerned, it is submitted that it is distinguishable on facts as well as in law and is thus not applicable to the assessee’s case. In the decided case, the relevant year in question was Financial Year 2001-02 i.e. prior to the introduction of Electricity Act, 2003. Until then, the electricity generating companies could only sell or supply power to the State Power Utility or company engaged both in generation & distribution and that too at the tariffs rates prescribed by the Regulatory Commission. Therefore, in absence of any alternate rates, the High Court held that the price at which electricity generating company sold power to SEBs was the only available open market rate. However, subsequent to the enactment of Electricity Act, 2003, the functioning of the power sector was liberalized as the business became de-regulated and it was legally permissible for the private CPPs to supply power to other consumers and the prices could be determined through competitive bidding process or any other mutually agreed terms. Hence, the decision of Calcutta High Court (supra) is not applicable to the relevant FY 2018-19 in question, i.e. post introduction of the Electricity Act, 2003. In our case, it is humbly submitted that both the Energy Regulatory Commissions of Jharkhand & Orissa (JSERC & OERC) vide their respective Notifications have in exercise of the powers conferred under sub-sections (2), (3), and (4) of Section 42 read with Sections 39, 40, 86 and 181 of the Electricity Act, 2003 (36 of 2003) and all other powers enabling them in that behalf, have passed regulations for the introduction of open access to the intra-state transmission and distribution systems and terms and conditions thereof. They have liberalised the erstwhile policies wherein Generating Power Stations were not allowed to sell power to any entity other than a SEB by defining an “Open Access Consumer” to mean any licensee or Consumer or buyer or a person engaged in generation who has been granted Open Access in accordance with such regulations notified under the respective Notifications. Thus, the erstwhile judgment of Hon’ble Calcutta High Court in the case of ITC Ltd. is based on a wholly different set of facts and hence, is distinguishable. 26. It is submitted that 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

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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 generated was entirely supplied and consumed by manufacturing undertakings of the assessee. The A.O. per-se did not dispute the fact that the CPPs constituted separate and distinct undertakings and were eligible for claiming the deduction under section 80IA of the Act. However, on perusal of the working of the profitability, the A.O. found that the transfer price for power was considered by the assessee equal to the price at which the electricity was procured by the manufacturing undertakings from the respective SEBs. Referring to explanation to 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 be 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 only to grid of the SEB in case of excess production. Save and except such monopoly buyer, the CPP was not permitted to sell power to anyone else. According to the A.O., therefore, the market value which the assessee was likely to fetch by sale of excess power to monopoly buyer like SEB 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 price also included the costs towards distribution, storage, transmission losses etc. 22. We note that the sole basis for AO's inference against the assessee was his belief that the CPP or independent power producer was not allowed to sell power to any person other than the SEBs or power distribution companies. According to the A.O., there was monopoly buyer who alone was permitted to purchase the power at the price determined in the sole discretion of the SEBs and therefore, the price at which the SEBs were purchasing power alone represented the market value for the power

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generated by CPPs. We also note that the premise on which the A.O. proceeded was analogous to the premise on which the Hon'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 'wheeling charges' which the transmission companies / authorities could levy. In this regard, the useful reference may also be made to KERC's order dated 27.02.2007. In this order, the commission explained the salient features of the National Electricity Policy issued by the Government of India on 12.02.2005 with regard to captive generation. The said order explains that the Electricity Act 2003, put in place highly liberal frame work for power generation wherein there is no requirement of licensing for generation of power. The requirement 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 issued by Government of India on 06.01.2006 also 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 sell electricity to SEB alone was factually wrong and misplaced and therefore, legally untenable in the changed factual scenario as discussed above.

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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 to sell electricity to consumers and distribution licensees at rates higher than that paid by it to the State Electricity Board, the price charged by the State Electricity Board would be a very good indication of the market value of electricity and the assessee did not commit any error in adopting such price for working out the amount eligible for deduction u/s 80IA of the Act. ......

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consumed by the Assessee for own use and not sold to a third party,.Sec.80IA(8) of the Act prescribes a method of determination of profits derived by the undertaking generating power. In such cases, the profits and gains of such eligible business has to be computed as if the transfer had been made at the market value of such goods or services as on the relevant date. "Market Value" has been defined in Explanation to Sec.80IA(8) of the Act as the "the price that such goods or services would ordinarily fetch in the open market". In India the business of generation of electricity and its distribution is governed by the Indian Electricity Act, 2003. The electrical power system mainly consists of generation, transmission and distribution. For generation of ( electrical power there are many Public Sector Undertakings and private owned generating stations (GS). The Electrical transmission system is mainly carried out by central government body PGCIL (Power grid corporation of" India limited). To facilitate this process, India is divided into 5 regions : Northern, Southern, Eastern, Western and North eastern region. Further within every state we have a SLDC (state load dispatch centre). The distribution system is carried out by many distribution companies (DISCOMS) and SEBs (State electricity board). There are two tariff systems, one for the consumer which they pay to the D1SCOMS and the other one is for the DISCOMS which they pay to the generating stations. The rate at which electricity can be supplied to a consumer by the distribution licensee and the rate at which the generating companies can sell electricity to the distribution licensee are governed respectively by Sections 61 and 62 of the Electricity Act 2003. There is tariff regulatory commission which fixes both the rates for sale and purchase of electricity by the distribution licensee. There is thus an in-built mechanism to ensure permissible profit both to the generating companies and the distribution licensees. 47. The Hon'ble Calcutta High Court in the case ITC Ltd. (supra) had to deal with similar issue of own consumption of power generated by 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

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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 was filed before us. The said order deals with generation of non- conventional energy and it lays down in para-25 of its order that third party sales of power generated by non-conventional means cannot be made. In para-28 power generated by such generators have to be sold in public interest only to APTRANSCO at rates specified in the said paragraph. Our attention was drawn to Paragraph 4 of the West Bengal electricity Regulatory Commission (Open Access) Regulations, 2007, which lays down that a licensee or a generating company Of' a captive generating plant or a consumer or any person engaged in the business of supplying electricity to the public under the Act (Electricity Act, 2003) shall be eligible for open access to the intra-state transmission lines or associated facilities of the STU or any Transmission licensee on payment of charges as may be specified by the Commission, for using the transmission system of the Transmission Licensee. It was submitted that power generators in West Bengal are free to trade in power on exchange or sell excess power to third parties. Therefore, the judgment of the Hon'ble Calcutta High Court in case of ITC Ltd., (supra) will not apply to the case of the Assessee. 49. It is clear from the rival contentions that determination price at which Power generated can be sold is subject to statutory control under the provisions of Sec.61 & 62 of The Electricity Act, 2003. The Hon'ble Calcutta High Court In its decision rendered in the case of ITC Ltd. (supra) has specifically observed that in the case before it electricity generated by the Assessee could not be sold to anyone other than a distribution company or a company which is engaged both in generation and distribution. No arguments were advanced before the Hon 'ble High Court nor did it dea1 with applicability of the proviso to Sec.80IA(8) of the Act. Sec.80IA(8) lays down that when article or thing manufactured is used by the Assessee himself for own consumption the profit of the undertaking manufacturing such article or thing has to be based on the market value in preference to the price as recorded by the Assessee in his books. Market value for the said purpose has been defined to mean the price that such goods or services would ordinarily fetch in the open market when price of power is subject to statutory controls one cannot ascertain the price such goods or 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

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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 & Chemicals Ltd (ITA No.544 of 2016) dismissed the Revenue's appeal on the following specific question:

"(II) Whether the Tribunal was right in law in allowing the assessee’s claim of deduction of Rs. 1954 Crores u/s 80IA(4) of the I.T. Act, 1961, when the assessee had adopted rate of power generation at Rs.4.73 per unit, rate on which the GEB supplied power to its consumers, ignoring the rate of Rs.2.36 per. unit, the rate on ' which power generating company supplied its power to GEB?" The Hon'ble Gujarat High Court, thus, specifically decided the issue in favour of the assessee by holding that the deduction under Section 80IA in respect of CPP shall be computed by taking the per unit selling price of electricity equal to the rate at which the assessee purchased the electricity from SEB. 29. The landed cost payable to the SEB by the non-eligible units represents the rate which is available in open market and determined under uncontrolled conditions and is hence a reliable CUP available in the given facts of the case of the assessee to determine the ALP. Hence, after the detailed discussions and elaborate analysis, the order of the Ld. CIT(A) cannot be found fault with.” 8. We have considered the rival submissions and also gone through the orders of the lower authorities. Before proceeding further, it will be relevant here to reproduce the relevant provisions of section 80IA(8) of the Income Tax Act:

80IA(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business

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carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may 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 benchmark specific domestic

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transaction of transferring power to CPP to non-eligible unit was more appropriate in the relevant market conditions to determine the arm’s length price (ALP). The relevant part of the order of the Coordinate Bench is reproduced as under:

“Now the issue before us whether the CUP method can be applied to bench mark specified domestic transactions of transferring power by CPP to non eligible unit where the CPP sells the similar goods or services to unrelated enterprises. We have also perused the provisions as contained in Rule 10B of the Income Tax Rules which provide as to where the CUP can be and has to be applied. We observe from the said rule 10B that we have to see the price at which the property ,goods or service has been acquired under similar market conditions. It is also settled that choice of tested party is of lesser significance for the purpose of application of CUP method but instead key factor in application of CUP is product comparability and similar market conditions. Further the CUP method can be classified into two categories i.e. internal CUP method and external CUP method. Under internal CUP method the transactions between the AE’s involving buying or selling of goods and services are comparable to the transaction entered into by the AE’s with the unrelated parties for buying and selling similar goods and service under similar circumstances. However when such internal data was not available then one may apply external CUP which involves comparison of price paid/charged between the two unrelated parties in uncontrolled condition for transactions entered into between the AE’s. In the instant case as noted elsewhere hereinabove that the CPP bench marked the transaction with non eligible unit at a rate at which power is supplied by the SEB to the non eligible unit and therefore is the prevailing rate at which the power has been supplied by the SEB to other parties/factories located in the same geographical areas/location. It is also undisputed that both CPP as well as SEB supplied/sold power during the year and thus there is no timing difference as well. Thus we are in agreement with the conclusion of Ld. CIT(A) that transactions of purchase of power by the non eligible unit from SEB fulfill the internal CUP parameters vis product comparability and similar market conditions and thus the ALC paid by the non eligible unit to 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

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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 black manufacturing unit and thus the excess power generated has to be sold in the open market at the lower rate as the power is a highly perishable commodity which cannot be stored for the future. On this reasoning, the Ld. CIT(A) has come to the conclusion that the selling the power by CPP in the open market was under compelling circumstances and was targeted to recover only the cost of power generation and therefore such price cannot be considered as representative of market value of the commodity under uncontrolled conditions. According to Ld. CIT(A), the excess surplus power sold in the open market at a price which was lower than the price at which the manufacturing unit procured electricity from the SEB cannot the arm’s length price of the power. Thus, the Ld. CIT(A) reversed the order of TPO/AO by directing that the price at which the SEB sold power in the open market under uncontrolled conditions is reliable internal CUP and accordingly came to the conclusion that ALC notified by the SEB is a fair, reliable and reasonable basis to bench mark the power procured by non-eligible unit from the eligible unit. The Ld. CIT(A) while allowing the appeal of the assessee has relied on the series of decisions namely PCIT vs. Gujarat Alkalies& Chemicals Ltd. (supra), CIT vs. Godawari Power & Ispat Ltd. (supra) and Reliance Infrastructure Ltd. in ITA No. 2180 of 2011 (Bombay-High Court) and the decision of Co-ordinate Bench of Kolkata in the case of DCIT vs. Birla Corporation Ltd. in ITA No. 971/Kol/2012 for AY 2008-09. We note that in all the above decisions, the AALC at which the power is purchased by the non-eligible unit of the assessee was considered to be the fair market value transfer price of power supplied by the eligible unit to the non-eligible unit. Before us, the Ld. A.R also argued that non-eligible unit has to be held as a tested party and AALC at which the power was purchased by the tested party from SEB/ third party is the most appropriate ALP to bench mark the transfer of power supplied by eligible unit to non-eligible unit. The said view of the assessee is squarely covered by the two decisions of Hon’ble Benches namely Star Paper Mills Ltd. vs. DCIT (supra) and DCIT vs. BalrampurChini Mills Ltd. (supra). Having considered the ratio laid down, we are of the view that there is no infirmity in the order of

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Ld. CIT(A) which is a very reasoned and speaking order passed after following the decision of various Hon’ble High Courts and decision of Co- ordinate 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 rate generation companies sell power to distribution companies. Thus we do not find any force in the contentions of the ld DR that rate at which the power was sold to unrelated parties by the CPP is the ALP. We also note that decision of the Calcutta High court in the case of CIT Vs ITC 236 Taxman 612 which was relied by the TPO/AO and the functional dissimilarity between CPP and SEB have been considered by the coordinate bench of the tribunal in the case of Star Paper Mills Ltd Vs DCIT in ITA No. 127/Kol/2021. Therefore , we are inclined to uphold the order of Ld. CIT(A) by holding that the ALC at which the power is procured by non- eligible unit from SEB is the most appropriate ALP to bench mark the specified domestic transaction and accordingly the order passed by Ld. CIT(A) is upheld by dismissing the ground no. 4 of the revenue’s appeal.”

8.3 It is pertinent to note here that the assessee’s main business is not of generating of power to further sell the same to the distribution companies/State Electricity Boards. The point to be noted here is that the respective captive power plants were established by the assessee for its own needs i.e. for the purpose of supply uninterrupted powers to its manufacturing units as well as to save the cost of power purchased from State Electricity Boards. Here, in the facts and circumstances, in our

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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 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;

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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 licence shall be required under this Act for supply of electricity generated from a captive generating plant to any licencee in accordance with the provisions of this Act and the rules and regulations made thereunder and to any consumer subject to the regulations made under subsection (2) of section 42.] (2) Every person, who has constructed a captive generating plant and maintains and operates such plant, shall have the right to open access for the purposes of carrying electricity from his captive generating plant to the destination of his use: Provided that such open access shall be subject to availability of adequate transmission facility and such availability of transmission facility shall be determined by the Central Transmission Utility or the State Transmission Utility, as the case may be: Provided further that any dispute regarding the availability of transmission facility shall be adjudicated upon by the Appropriate Commission. Section 38. (Central Transmission Utility and functions): (2) The functions of the Central Transmission Utility shall be – (d) to provide non-discriminatory open access to its transmission system for use by- (i) any licensee or generating company on payment of the transmission charges ; or (ii) any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the State Commission: ……..

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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.”

Similar provisions for non-payment of surcharge has been made in case of state transmission utility u/s 39 and in respect of transmission licensees u/s 40 of the Electricity Act 2003. Sections 42 & 49 of the said Act are also relevant which are reproduced as under:

Section 42. (Duties of distribution licensee and open access): --- (1) It shall be the duty of a distribution licensee to develop and maintain an efficient, co-ordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained in this Act. (2) The State Commission shall introduce open access in such phases and subject to such conditions, (including the cross subsidies, and other operational 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 consumers who require a supply of electricity where the maximum power to be made available at any time exceeds one megawatt.]

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(3) Where any person, whose premises are situated within the area of supply of a distribution licensee, (not being a local authority engaged in the business of distribution of electricity before the appointed date) requires a supply of electricity from a generating company or any licensee other than such distribution licensee, such person may, by notice, require the distribution licensee for wheeling such electricity in accordance with regulations made by the State Commission and the duties of the distribution licensee with respect to such supply shall be of a common carrier providing non- discriminatory open access . (4) Where the State Commission permits a consumer or class of consumers to receive supply of electricity from a person other than the distribution licensee of his area of supply, such consumer shall be liable to pay an additional surcharge on the charges of wheeling, as may be specified by the State Commission, to meet the fixed cost of such distribution licensee arising out of his obligation to supply. (5) Every distribution licensee shall, within six months from the appointed date or date of grant of licence, whichever is earlier, establish a forum for redressal of grievances of the consumers in accordance with the guidelines as may be specified by the State Commission. (6) Any consumer, who is aggrieved by non-redressal of his grievances under sub-section (5), may make a representation for the redressal of his grievance to an authority to be known as Ombudsman to be appointed or designated by the State Commission. (7) The Ombudsman shall settle the grievance of the consumer within such time and in such manner as may be specified by the State Commission. (8) The provisions of sub-sections (5),(6) and (7) shall be without prejudice to right which the consumer may have apart from the rights conferred upon him by those sub-sections. Section 49. (Agreement with respect to supply or purchase of electricity): Where the Appropriate Commission has allowed open access to certain consumers under section 42, such consumers, notwithstanding the provisions contained in clause (d) of sub-section (1) of section 62, may enter into an agreement with any person for supply or purchase of electricity on such terms and conditions (including tariff) as may be agreed upon by them.

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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, there is no bar even to other power generating companies at the option of the consumers to directly sell the power to such consumers at the mutually agreed rates. Therefore, the case law relied upon by the ld. DR “CIT vs. ITC Ltd.” (supra) is not applicable in the case in hand. 8.6 We find that the Coordinate Bench of the Tribunal in the case of Kesoram Industries Ltd. vs. ACIT (ITA No.1037/Kol/2012 along with other appeals), after considering the judgment of the Calcutta High Court in the case of CIT vs. ITC Ltd. (supra) along with the provisions of Electricity Act, 2003 has taken note of the fact that in the case of CIT vs. ITC (supra), it was noted that the generation companies could only sell

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the power to the distribution companies. However, in view of the Electricity Act 2003, the said embargo has been lifted in respect of captive power plants which can directly sell the power to its manufacturing units/contracting parties and the rates of the electricity can be determined by them individually by way of contract and the same were not regulated by the Electricity Regulatory Commission. The Coordinate Bench after considering various case laws has decided the issue in favour of the assessee. The relevant part of the order of the Coordinate Bench of the Tribunal is reproduced as under: “21. We have considered the rival submissions and perused the document in the paper book which inter alia contained Electricity Act, 2003, KERC Regulations 2004, copy of the 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 generated was entirely supplied and consumed by manufacturing undertakings of the assessee. The A.O. per-se did not dispute the fact that the CPPs constituted separate and distinct undertakings and were eligible for claiming the deduction under section 80IA of the Act. However, on perusal of the working of the profitability, the A.O. found that the transfer price for power was considered by the assessee equal to the price at which the electricity was procured by the manufacturing 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

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the SEB, such price also included the cost towards distribution, storage, transmission losses etc. 22. We note that the sole basis for AO’s inference against the assessee was his belief that the CPP or independent power was not allowed to sell the power generated to any person other than the SEBs or power distribution companies. According to the A.O., there was monopoly buyer who alone was permitted to purchase the power at the price determined in the sole discretion of the SEBs and therefore, the price at which the SEB were purchasing power alone represented the market value for the power generated by CPPs. We also note that the premise on which the A.O. proceeded was analogous to the premise on which the Hon’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 took note of the fact that the independent power producers or CPPs can only sell the power to the power distribution companies 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 due 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 ‘wheeling charges’ which the transmission companies / authorities could levy. In this regard, the useful reference may also be made to KERC’s order dated 27.02.2007. In this order, the commission has explained the salient features of the Natural Electricity Policy issued by the Government of India on 12.02.2005 with regard to captive generation. The said order explains that the Electricity Act 2003, put in place highly liberal frame work for power generation wherein there is no requirement of licensing for generation of power. The requirement 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

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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 electricity to SEB alone was factually wrong and misplaced and therefore, legally untenable in the changed factual scenario as discussed above. 23. The learned AR drew our attention to the chart published by the Indian Energy Exchange (IEX) for the yearly power price prevailing on the IEX in different regions during the year 2008-09. The said chart we note gave break up of power price at which the power was purchased and sold by power and producers, distribution company etc in different regions of the country. From the said chart it appears that the average power unit price of the Eastern Region in the year 2008 was Rs. 7.53/-. Similarly 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 basis. We note that this specific issue was adjudicated by the Co-ordinate Bench of this Tribunal in the case of DCIT vs Birla Corporation Ltd. to which one of us was signatory. In the said decision of the Co-ordinate Bench of this Tribunal after considering the ratio laid down by the Hon’ble Supreme Court in the case Thiru Arooran 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 ld CITA 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 case of ITC Ltd before us and had duly distinguished the same as not applicable to the facts of the instant case , as admittedly, the Asst Year before Hon’ble Calcutta High Court in ITC Ltd was Asst Year 2002-03. The said decision in ITC Ltd for Asst Year 2002-03 was rendered by taking into account the relevant provisions of Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948. These Acts were repealed and a new Electricity Act 2003 was introduced with effect from 10.6.2003. Hence for the Asst Years 2008-09 and 2009-10 (i.e the years under appeal before us) , 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

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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 to sell electricity to consumers and distribution licensees at rates higher than that paid by it to the State Electricity Board, the price charged by the State Electricity Board would be a very good indication of the market value of electricity and the assessee did not commit any error in adopting such price for working out the amount eligible for deduction u/s 80IA of the Act. 5.6.2. We find that the reliance placed by the ld AR on the decision of the Hon’ble Supreme Court in the case of Thiru Arooran Sugars Ltd. v CIT, (1997) 227 ITR 432 (SC), wherein at page 441, it was held as under:- “In view of the aforesaid, it is very difficult to uphold the contention of Mr. Nariman that in order to find out the market price, there has to be an actual market where there will be “a concourse of buyers and sellers”. This argument was specifically rejected by Lord Pearson L. J., in the case of Building and Civil Engineering Holidays Scheme Management Ltd. v. Post Office [1966] 1 QB 247 (CA), in the following words (page 268): “What is meant by ‘market value’ ? It is not reasonable to suppose that for the purposes of this proviso there is no market value unless there is a concourse of buyers and sellers. There is no need to infer that there must be an open market, or that there must be a price fluctuating according to the pressures of supply and demand.” In that case Lord Denning also explained the concept of market value in the following words (page 264): “What is the ‘market value’ of these stamps ? . . . It does not connote a market where buyers and sellers congregate. The ‘market value’ here means the price at which the goods could be expected to be bought and sold as between willing seller and willing buyer, even though there may be only one seller or one buyer, and even though one or both may be hypothetical rather than real.” These are the principles universally applied to find out the price at which the goods are ordinarily sold in the open market. For determination of market value, there is no pre- requisite that an open market where buyers and sellers congregate to buy and sell goods must exist. In the instant case, the assessee-company actually bought sugarcane from a large number of growers year after year in the ordinary course of business. The price at which it buys sugarcane must be taken to be the market price. If the price is controlled by the Sugarcane Control Order, 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

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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 of supply. The annual weighted average adopted by the ld CITA would result in variations occurring during the year at different times being made applicable uniformly for the whole year. In our considered opinion, the assessee’s method is more appropriate as it factors in variations as and when they take place.” 24. We also note that the identical issue of determination of power tariff rate for allowing deduction under section 80IA in respect of profits of CPPs came up for consideration before the Co-ordinate Bench of this Tribunal in the case of Graphite India Ltd. vs ACIT in ITA No. 304-305/Kol/2008 and DIT vs Kanoria Chemicals and Industries Ltd in ITA NO. 944/Kol/2016, a perusal of the said orders reveals that the Co-ordinate Bench had held that for the purpose of granting the deduction, the profits of the CPP should be determined with reference to the power tariff rate at which the manufacturing undertakings being the captive consumers were provided electricity by the SEBs. 25. We also note that similar issue was also considered by the Hon’ble Madras High Court in the case of Tamil Nadu Petro Products Ltd. vs ACIT 338 ITR 648 wherein the Hon’ble High Court held that there is no difficulty in holding that captive consumption of the power generated by the assessee from its own power plant would enable the assessee to derive profits and gains by working out the cost of such consumption of power in as much as the assessee is able to save to that extent which would certainly by covered by section 80IA(1). The Hon’ble High Court thus upheld the assessee’s claim for deduction under section 80IA by way of deduction by the value of such units of power consumed by its own plant by way of profits and gains for the relevant assessment years. 26. We find that the facts of the assessee’s case are similar to the facts involved in the case of Birla Corporation Ltd. (supra). The basic reason is adopted by the Ld. CIT(A) in assessee’s case was the same as in the case of Birla Corporation Ltd. (supra) and we note that the same appellate authority has passed the order in both case i.e. in assessee’s case and the Birla Corporation Ltd. Therefore, following the Co-ordinate Bench decision Birla Corporation Ltd. (supra), we uphold the impugned of Ld. CIT(A) and direction of the Ld. CIT(A) – VI, Kolkata and dismiss ground no 3 of revenue’s appeal.”

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I.T.A No.286/Kol/2023 Assessment year: 2019-20 Rungta Mines Ltd

uninterrupted power supply and saving of electricity expenses and whatever expenses are saved that certainly would be the profit of the captive unit which, in our view, will be eligible for deduction u/s 80IA of the Income Tax Act.

Considering this aspect, the contention of the Revenue that the rates determined by the Regulatory Commission for generating units for supply of electricity to the distribution companies should be taken as benchmark, in our view, would not be accurate benchmarking of the price.

“27. Another way of looking at the issue is, if the industrial units of the assessee did not have the option of obtaining power from the captive power plants of the assessee, then in that case it would have had to purchase electricity from the State Electricity Board. In such a scenario, the industrial units of the assessee would have had to purchase power from the State Electricity Board at the same rate at which the State Electricity Board supplied to the industrial consumers i.e., Rs. 3.72 per unit.

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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 trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under Section 80 IA of the Act. 30. Thus on a careful consideration, we are of the view that 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.

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I.T.A No.286/Kol/2023 Assessment year: 2019-20 Rungta Mines Ltd

//True copy// By order Assistant Registrar, Kolkata Benches