ASSISTANT COMMISSIONER OF INCOME TAX, TIRUNELVELI vs. LOYAL TEXTILE MILLS LTD, KOVILPATTI
Facts
The assessee filed its return of income for Assessment Year 2020-21 declaring NIL income. The Assessing Officer (AO), after considering the Transfer Pricing Officer's report, made significant additions, including disallowances related to Section 80IA deduction, domestic commission, and professional fees. The assessee appealed these additions to the CIT(A).
Held
The CIT(A) deleted the disallowance on commission payments and partly deleted the disallowance on professional fees. For the Section 80IA deduction, the CIT(A) upheld the assessee's position, relying on Supreme Court decisions regarding the valuation of captive power consumption. Regarding disallowance for commission paid to domestic agents, the CIT(A) directed the AO to verify and allow deductions where TDS was actually deducted.
Key Issues
Whether the deletion of transfer pricing adjustment for captive power valuation under Section 80IA and the deletion of disallowance under Section 40(a)(ia) for domestic commission were justified.
Sections Cited
143(3), 144C(3), 144B, 92CA, 80IA, 40(a)(ia), 40(a)(i), 92F, 10B, 46A(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM:
This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – 16, Chennai [in short, “ld.CIT(A)”] dated 26.06.2025, relating to the assessment years 2020-21 against the order of the Assessing Officer passed u/s.143(3) r.w.s. 144C(3) r.w.s.144B of the Act dated 30.09.2023.
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Facts in brief emanating from the records are that the assessee filed its return of income on 07.01.2021 declaring total income of Rs.NIL. A reference u/s.92CA was made on 02.02.2022 to the Transfer Pricing Officer (TPO) who, vide order dated 10.03.2023, proposed a downward adjustment of Rs.16,70,60,764/– in relation to the claim of deduction u/s.80IA of the Act. The Assessing Officer (AO), in the order passed u/s.143(3) r.w.s. 144C(3) dated 30.09.2023, assessed the income at Rs.22,07,36,266/-, making additions (i)Rs.21,29,06,078/- towards difference in deduction u/s.80IA of the Act; (ii)Rs.42,48,536/- towards disallowance u/s.40(a)(ia) of the Act for non- deduction of tax on domestic commission (iii) Rs.10,56,694/- towards disallowance u/s.40(a)(i) for non-deduction of tax on commission paid to non- resident agents and (iv) Rs.25,24,958/- towards disallowance u/s.40(a)(ia) for non-deduction of tax on professional fees. Aggrieved by the additions and disallowances made the AO the assessee preferred an appeal before the ld.CIT(A).
The ld.CIT(A), after considering the submissions of the assessee, deleted disallowance on both commission payments and partly deleted the disallowance on professional fees. In so far as deduction u/s.80IA of the Act, the ld.CIT(A), by relying on the decisions by Supreme Court reported in 157 taxmann.com 207 and by Tribunal, Hyderabad upheld the determination of ALP of captive consumption of power at the rate at which the assessee purchased power from the distribution company and ruled in favour of the assessee for the A.Y.2020-21.
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.
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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.
The learned Departmental Representative (ld.DR) reiterated the grounds taken by the Revenue, contending that the ld.CIT(A) erred in relying upon the decision of the Hon’ble Supreme Court in Jindal Steel & Power Ltd. [(2022) 460 ITR 162 (SC)] without appreciating that the Explanation to section 80IA(8) of the Act inserted by the Finance Act, 2012 required determination of market value as per the arm’s length price mechanism prescribed u/s.92F read with Rule 10B. He also relied upon the Judgments of the following judgments:
The Hon’ble Supreme Court order in M/s. SAP Labs [TS-225-SC- 2023-TP] 2. ITAT Hyderabad order in the case of M/s. Sanghi Industries Limited
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
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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:
“6. We have considered the rival submissions and perused the material available on record. The short issue for our consideration is whether the rate at 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 under section 80IA(8), 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 Eveready Spinning Mills Ltd. 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. Case relied upon by the revenue is not binding on Chennai Bench. The 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 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 CIT(A)’s conclusion. Respectfully following the binding precedents, we uphold the CIT(A)’s order deleting the adjustment of Rs.4.26 crores.”
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
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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.
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