ASSISTANT COMMISSIONER OF INCOME TAX, TIRUNELVELI vs. LOYAL TEXTILE MILLS LTD, KOVILPATTI

In respect of disallowance u/s.40(a)(ia) of the Act, the First Appellate Authority, by placing reliance on the decisions by the Madras High Court reported in 48 taxmann.com 48, directed the AO to delete the additions on expenses incurred towards sales commission outside India. Aggrieved, the Revenue is in appeal before us.

The Revenue has challenged two issues: a. The deletion of transfer pricing adjustment in respect of captive power valuation for the purpose of deduction u/s.80IA of the Act. b. The deletion of disallowance u/s.40(a)(ia) of the Act on domestic commission.

Per contra, the ld. AR submitted as under: In respect of deduction u/s.801A of the Act, Grounds 2 to 6 by the Revenue, the Assessee submitted that the order of the First Appellate Authority, while allowing the deduction claimed by the Assessee, is justified, as the decision was based on the binding nature of the decision by the Supreme Court reported in 297 Taxman 253 (or) 157 taxmann.com 207 and also relied on the decision by jurisdictional Chennai Tribunal. In respect of disallowance of commission to domestic Agents - Ground No.7 by the Revenue, the First Appellate Authority has only directed the AO to verify and allow the deduction wherever the Assessee has actually done the TDS.

We have considered the rival submissions and perused the material available on record and gone through the orders of the authorities along with judicial precedents. The short issue for our consideration is whether the rate at :-4-: ITA No: 2308/Chny/2025 which the assessee valued power generated and captively consumed should be the rate at which the State Electricity Board sells power to consumers or any other arm’s length price determined under transfer pricing provisions. We find that an identical issue has been considered by the Hon’ble Supreme Court in CIT vs. Jindal Steel & Power Ltd. [(2022) 460 ITR 162 (SC)] wherein it was held that for the purpose of computing deduction u/s.80IA(8) of the Act, the “market value” of power captively consumed shall be taken as the rate at which the assessee purchases electricity from the distribution company. The coordinate Bench of the Chennai Tribunal in Assessee’s own case in ITA.Nos.192 & 193/Chny/2025 dated 30.10.2025 has followed the above decision and held that the transfer pricing provisions do not override the computation mechanism of section 80IA(8) in the absence of any international transaction. The relevant extract of the said decision is as under:

We find that the ld.CIT(A) has rightly followed the binding precedent of the Hon’ble Supreme Court and the jurisdictional Tribunal. The mere insertion of Explanation to section 80IA(8) by the Finance Act, 2012 does not alter the :-5-: ITA No: 2308/Chny/2025 settled position insofar as captive generation of power for self-consumption is concerned, where there is no real income element involved and the pricing is internal. The Revenue has not demonstrated any factual or legal error in the ld.CIT(A)’s conclusion. Therefore, respectfully following the binding precedents, we uphold the ld.CIT(A)’s order deleting the adjustment and dismiss the grounds raised by the revenue.

With regard to the second issue, the AO made a disallowance of Rs.42,48,536/- u/s.40(a)(ia) of the Act on the ground that tax was not deducted on commission paid to domestic agents. The revenue has raised grounds on violation of Rule 46A(3) of the Rules. The ld.CIT(A) has upheld the disallowance u/s.40(a)(ia) of the Act. However, in respect of certain balance payment the ld.CIT(A) has issued direction to the AO to verify and allow the deduction wherever tax has been actually deducted. Since the ld.CIT(A) has only given direction to AO, we do not interfere with the order of the ld.CIT(A) on this ground.

In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 04th March, 2026 at Chennai.