D.C I.T CIR - 2,KOLKATA, KOLKATA vs. M/S WEST BENGAL STATE ELECTRICITY TRANSMISSION CO LTD., KOLKATA

Ground No.1 raised by the revenue reads as follows :- “1. Whether on the facts and the circumstances of the case the Ld. CIT(A)- I, Kolkata has erred in giving relief to the assessee in respect of depreciation on 'temporary building' @ 100% although it's parent company claimed it @ 100%?”

The Government of Wet Bengal vide its Notification No.12-PO/O/III/3R-29/2006 dated 25-01-07 framed a Scheme for providing and giving effect of the transfer and vesting of all the properties and interests, rights and liabilities of the West Bengal State Electricity Board (WBSEB) in the State Government and revesting thereof, to two separate companies, viz. West Bengal State Electricity Development Co.Ltd. (WBSEDCL) and West Bengal State Electricity Transmission Co. Ltd. (WBSETCL)- Assessee). In pursuance of the above mentioned Notification providing a Scheme for 2 M/s. West Bengal State Electricity Transmission Co.Ltd. A.Yr.2008-09 giving effect to the West Bengal Government’s decision, WBSEDCL and WBSETCL (Assessee) were incorporated on 16-02-07. By a further Notification No.313/PO/O/III/3R-29/2006 dated 19-09-2008, the terms and conditions of the Transfer Scheme in regard to the transfer of properties, interests, rights and liabilities including portions of the accumulated loss of erstwhile WBSEB were modified/finalized. The Assessee, viz. WBSETCL became the authorized licensee u/s 12 of the Electricity Act, 2003 for transmission of electricity. The Assessee was notified as the “State Transmission Utility” u/s 39(1) of the Electricity Act, 2003 on the strength of the Notification No.89-PO/O/III/3R 5/2007 dated 26-02-07 issued by the Govt. of West Bengal.

The erstwhile WBSEWB was a regular Income-tax assessee and after the above bifurcation, both WBSEDCL and WBSETCL (Assessee) became Income-tax assessees. The Assessee, viz., WBSETCL, on the basis of the Provisional Accounts filed its return of income for the assessment Year 2008-09, electronically on 26-09-08 showing the loss of Rs.1,53,66,06,036. Subsequently, Accounts were finalised and Tax Audit was carried out and the Assessee filed a Revised Return for the Assessment Year 2008-09, showing the Revised loss at Rs.55,62,63,705.

The Assessee was revested with “Temporary Building” having the Written Drawn Value of rs.8,18,47,690 from the erstwhile WBSEB. Since as per the Income-tax Rules, Temporary Erections were to be charged depreciaiton @100% , the Assessee claimed depreciation @100% in respect of the Temporary Buildings, transferred to it by the erstwhile WBSEB. During the assessment proceedings the Assessing Officer called upon the Assessee to explain its claim for depreciation @100% and the Assessee explained that as the concerned asset had been revested by the WBSEB through the Government of west Bengal, under the nomenclature of “Temporary Building the rate for depreciation was considered @100% in accordance with the Income-tax Rules, 1962. However, the Assessing Officer did not accept the Assessee’s submission and 2

Before CIT(A) the Assessee pointed out that as per the Tax Audit Report of WBSEB for the Assessment Year 2007-08, the Closing WDV as on 31-03-2007 of “Temporary Building” was Rs.12,59,19,523. On the bifurcation, as mentioned hereinabove, the above mentioned WDV as on 31-03-2007 of “Temporary Building “ was divided as under : Sl.No. Name of Bifurcated Body Share of WDV as on 01- 04-2007 of “Temporary Building Rs. 1. WBSEDCL 4,40,71,833 2. WBSETCL (Appellant) 8,18,47,690 12,59,19,523 The "Temporary Buildings" which had been revested to the Assessee comprised of Temporary Structures being Sheds of wooden structures with Asbestos Roofs constructed for facilitating the transmission works of the Assessee. Since the class or the particular Fixed Assets had been "Temporary Structures". as per the Income-tax Rules, the applicable Rate of Depreciation was 100% . Accordingly, on the basis of the Temporary Buildings being Temporary Structures having the Income-tax WDV of Rs.8,18,47,690 allotted to the Assessee, for the purposes of Income-tax the prescribed Rate of Depreciation of 100% was charged by the Assessee for the Assessment Year 2008-09. The Assessee submitted that the Income-tax Rules as regards the charging of Depreciation by the erstwhile organization, viz. WBSEB and the other bifurcated part, viz., WBSEDCL, had in their own Income tax computations, might have applied certain rate of Depreciation which may not be in accordance with the Income-tax Rules, 1962.

The Assessee thus claimed that its charging of Depreciation @100% on the "Temporary Building “ was in accordance with the Income-tax Rules, 1962 and so the Assessing Officer’s action in reducing the applicable Rate from 100% to 10%, was as unjustified. Accordingly, the Assessee prayed that the disallowance of Rs.7,36,62,921 out of Depreciation made by the Assessing Officer should be deleted.

The CIT(A) agreed with the contentions of the assessee and held as follows : “After careful consideration of the assessment order and written submission it is noticed that WBSEB was bifurcated into two separate companies (i) WBSEDCL & (ii) WBSETCL on 16.02.2007 and the appellant WBSETCL became authorized licencee u/s 12 of the Electricity Act, 2003 for transmission of electricity and was notified as ‘state transmission utility’ u/s 39(1) of Electricity Act, 2003 on 26.02.2007 as per order issued by Govt. of West Bengal. The AO restricted the claim of depreciation on ‘temporary building’ to 10% as against 100% claimed by the assessee and the disallowance amount was determined at Rs.7,36,62,921/-. As per accounts of WBSEB the WDV as on 31.03.2007 of temporary building was Rs.12,59,19,523/-. On bifurcation the appellant had shown WDV as on 01.04.2007 of temporary building as Rs.8,18,47,690/- and the balance was shown in the hands of WBSEDCL. These temporary structures comprised of sheds of wooden structure with Asbestos roofs constructed for facilitating the transmission works of the appellant. The assessee-company claimed 100% depreciation in accordance with as per Rule-5(new Appendix- 1) as purely temporary erections such as wooden structure.whe claim of assessee is allowable u/s 32 of the Income-tax Act. Therefore ground no. 2 and 3 are allowed.”

The ld. DR placed reliance on the order of AO. The ld. Counsel for the assessee reiterated the submissions made before CIT(A) and relied on the order of CIT(A).

We have considered the rival submissions. A perusal of the order of AO shows that he has made the disallowance for the following reasons :- “ Under the circumstances the depreciation schedule as per annexure-c of WBSEB was referred to and ‘temporary building row’ is reproduced as below :- Depreciation Gross Depreciation WDV as Addition & put to Total Full Total of assets value of upto on use with the period rate Half assets as 31/3/2006 31/3/2006 rate on 31/03/2006 Prior to After 180 days 180 days Temporary 345600934 208702042 136898892 3011689 0 139910581 0 Building As obvious, the parent company claimed depreciation @10% on ‘temporary building’, which was subsequently revested with the assessee company. Consequent to the split :- Reference is also invited to Annexure-C (depreciation chart) to TAR for WBSEDCL for F.Y.2007-08 ( the other company formed out of the split) and its seen that depreciation has been claimed @10% on ‘temporary buildings’(sl.No.3). Under the above stated situation, summarized as follows and brought to the notice of the A/R on 26/11/2010 (i)No details as regards site address, nature or use could be submitted (ii)Depreciation was claimed @10% by the parent co. WBSEB (iii)Depreciation has been claimed @10% by the other split to WBSEDCL.

It is clear from the aforesaid observations of the AO that he has placed reliance on the depreciation chart of the erstwhile WBSEB and WBSEDCL entity which was formed consequent to the splitting up of WBSEB. The AO has gone by the fact that 5

Ground Nos. 2 and 3 raised by the revenue read as follows :- “2. Whether on the facts and the circumstances of the case the Ld. CIT(A)- I, Kolkata has erred in deciding that section 194C is not applicable to the payment of Rs.35,30,68,000/- to WPDCL although the same is nothing but a contractual payment? 3. Whether on the facts and the circumstances of the case the Ld. CIT(A)-I, Kolkata has erred in deleting the addition u/s 40(a)(ia) of Rs.35,30,68,000/- although no TDS had been on such payment ? “

During the assessment proceedings the Assessing Officer called upon the Assessee to explain as to why it had not deducted tax at source while- paying Rs,35,30,68,000 towards "Transmission Charges" to WBPDCL. The Assessee submitted before the Assessing Officer that since the Transmission Charges had been paid for availing of the facility of transmission of electricity through WBPDCL, there had not been any requirement of deduction of tax at source u/s 194C of the Act. It was submitted by the Assessee that since the transmission of electricity, could not be considered as any carrying out of work in pursuance of any contract, there should not be applicability of section 194C . However, the Assessing Officer after making a 7 M/s. West Bengal State Electricity Transmission Co.Ltd. A.Yr.2008-09 reference to the earlier assessment proceedings in respect of the erstwhile WBSEB disallowed the entire Transmission Charges of Rs.35,30,68,0000 allegedly u/s 40(a)(ia) of the Act.

Before CIT(A), the Assessee submitted that the attention of the Assessing Officer was drawn by the Assessee to the fact that the Transmission Charges of Rs.35,25,30,000 out of Rs.35,30,68,000 paid to the West Bengal Power Development Corporation Ltd. (WBPDCL), had been in accordance with the Tariff Order of the West Bengal Electricity Regulatory Commission (WBERC) which the Assessee was bound to follow. It was explained that WBERC had held that the Assessee would have to pay Rs.35,25,30,000 to WBPDCL towards Annual Carrying Charges of Assets belonging to WBPDCL. The Assessee submitted that one of the main functions of WBERC was determination of Tariff for Generation, Supply, Transmission and Wheeling of electricity, whole sale, bulk or retail as the case may be within a State. The Electricity Act, 2003 also requires the WBERC to determine the Tariff in accordance with the provisions of the said Act, for supply of electricity by Generating Company to a Distribution Licensee, for transmission, for wheeling as also for retail sale of electricity. The WBERC after considering all the relevant aspects had determined the Annual Carrying Charges of the Assets utilised by WBPDCL in relation to the Power Generated through it and the said Annual Carrying Charges was actually a sharing of the cost of the Transmission System. The Assessee submitted that these Transmission Charges paid by the Assessee, cannot be treated as any alleged work carried out in pursuance of any contract. It was contended that the AO failed to appreciate that the payment of Transmission Charges had not been in pursuance of any contract, but it was only the determined share worked out by the WBERC in accordance with the provisions of the Electricity Act, 2003. The Assessee also submitted before the Assessing Officer that expenses aggregating to Rs.5,38,000 had been incurred towards various charges in relation ot appellant’s business of transmitting electricity and such 7

The CIT(A) agreed with the submissions and he held as follows :- “Next ground relates to disallowance of transmission charges of Rs. 35,30,68,000/- paid to WBPDCL u/s 40(a)(ia) for violation of section194C. It was contended by the appellant's A/R that these charges were paid in accordance with the tariff order dated 26.07.2007 of West Bengal Electricity Regulator Commission in accordance with the provision of Electricity Act,2003. The WBERC after considering all the aspects had determined the annual carrying charges of the assets utilised by WBPDCL in relation to power generated through it and the annual carrying charges were actually a sharing of cost of the transmission system as distinct and different from work carried-out in pursuance of any contract. After careful consideration of the above submissions and the facts and circumstances of the case section 194C is not applicable to such annual carrying charges as per tariff order dated 26.07.2007 of WBERC and accordingly addition made u/s 40(a)(ia) is deleted. Therefore ground no.4 and 5 are allowed.”

Aggrieved by the order of CIT(A) revenue has raised ground nos. 2 and 3 before the Tribunal. We have heard the submissions of the ld. DR, who brought to our notice that the AO in making the impugned disallowance has placed reliance on the order of the assessment order u/s 143(3) of the Act for A.Y.2007-08 and in that order the admitted position was that the transmission charges were liable to TDS u/s 194C of the Act. He therefore submitted that order of the AO should be restored. The ld. Counsel for the assessee, on the other hand, drew our attention to the Tariff order of West Bengal Electricity Regulatory Commission dated 26.07.2007 wherein payment in question was clearly explained as not transmission charges but cost of capital payable by the assessee to other agencies namely West Bengal Power Development Corporation Ltd. (WBPDCL). The following were the relevant observations of the Tariff Regulatory Commission :-

The basis of determination of the aforesaid sum has also been explained by the Tariff Regulatory Commission in Chapter-II of this order in para 7.1. According to him therefore it is clear that the amount in question was not in the nature of transmission charges but the cost of capital payable to WBPDCL which was only carrying charges of assets owned by the latter for use by the former. According to him therefore the conclusions of CIT(A) should be upheld.

We have given a very careful consideration to the rival submissions. It is clear from the order of Tariff Regulatory Commission that the amount in question is not in the nature of transmission charges. Therefore the very basis on which the AO proceeded to make the disallowance by holding that the payment in question was liable to TDS u/s ,194C of the Act was erroneous. Once it is held that the provision of section 194C of the Act are not attracted as an natural corollary no disallowance can be made u/s 40(a)(ia) of the Act. Apart from the above the order of the Tariff Regulatory Commission clearly spells out the nature of the charges as one of sharing of cost of the transmission system and not the cost paid for carrying out any work. In the given facts and circumstances of 9

In the result the appeal by the revenue is dismissed.