DCIT, MADURAI vs. THE RAMCO CEMENTS LIMITED, RAJAPALAYAM

The assessee as well as revenue is in further appeal before us for various assessment years as captioned above. The facts as well as issues are stated to be substantially the same. First, we take up assessee’s appeal for AY 2014-15 wherein the grounds raised

The learned CIT(A) committed factual errors in failing to note that the West Bengal Govt. abolished all sales tax related incentives with effect from 1st Jan 2000 and in holding that the subsidy was given "without any specified purpose", while in fact it was given to the Appellant for the sole purpose of establishment of the new industrial unit in Kolaghat in the State of West Bengal.

The learned CIT(A) erred in his understanding that the Tribunal in Appellant's own case for AY 2011-12 had held the expenses to be capital in nature, while in fact the ITAT, without overruling its earlier decisions in favour of the Appellant has remitted back to the AO only for the reason that the railway siding agreement was not available with the Hon'ble ITAT while deciding the Appeal for the AY 2011-12.

The learned Commission of Income Tax (Appeals) failed to note that in terms of the Railway Sidings Agreement your Appellant was not entitled to transfer or assign or sublet or permit to be used by any other persons the railway sidings and that the railway sidings were not for the exclusive use of the Appellant and therefore, the Appellant could neither be regarded as the owner of the property nor was he entitled for exclusive right of use.

The learned CIT(A) failed to consider the provisions of the relevant Accounting Standards that prescribe that expenses incurred on construction of enabling assets such as the roads, culverts, bridges, railway sidings, electricity transmission lines etc., of which the assessee is not the owner are not in the nature of tangible or intangible assets and are to be regarded as revenue in nature.

The order of the CIT(A) is contrary to the settled legal principle that where the expenditure incurred by the assessee results in creation of asset for a third party and of which the assessee is not the owner, the said expenditure shall be regarded as revenue expenditure. Disallowance of Power Transmission expenses-Rs.6,51,55,269/- 10. The learned CIT(A) erred in holding that the power transmission charges paid to TANGEDCO amounting to Rs.6,51,55,269/- is capital in nature on an incorrect reasoning that the power transmission system is for the exclusive use of the Appellant company which is contrary to facts and documents on record. The Appellant submits that since the facts on record expressly prohibit any rights of ownership or exclusive right of use to the Appellant, the conclusion of the CIT(A) is contrary to facts and law.

The learned CIT(A) failed to note that the aforesaid expenditure were incurred by your Appellant to strengthen TANGEDCO's Singapuram and Thullukapatti sub-stations, both of which are property belonging to TANGEDCO, located in TANGEDCO's premises, and not meant for the exclusive use of your Appellant.

The learned CIT(A) failed to consider the provisions of the relevant Accounting Standards that prescribe that expenses incurred on construction of enabling assets (such as the roads, culverts, bridges, railway sidings, electricity transmission lines etc.), of which the assessee is not the owner, are not in the nature of assets and are to be regarded as revenue in nature. The order of the CIT(A) is contrary to the settled legal principle that where the 13. expenditure incurred by the assessee results in creation of asset for a third party of which the assessee is not the owner shall be regarded as revenue expenditure. Disallowance u/s 14A_r.w Rule 8D-Rs 91,54,895 14. The Hon'ble Commissioner of Income Tax (Appeals) erred in sustaining the addition of Rs.91,54,895/- under section 14A since all the investments held by the appellant were funded entirely by company's own funds and no borrowed funds were used for making , investments, as is evident from the facts already submitted to the Commissioner of Income Tax (Appeals)with respect to source and deployment of funds, 15. The Commissioner of Income Tax (Appeals) erred in applying the decisions in cases where the facts are fully different from those that apply in appellant's case.

The Hon'ble Commissioner of Income Tax (Appeals) erred in sustaining the disallowance on an erroneous interpretation that the disallowance under Section 14A is to be made automatically regardless of whether or not any expenses were incurred, as this is contrary to judicial precedents in this regard. Enhancement in book profits u/s 115JB without giving opportunity to the Appellant 17. The Hon'ble CIT(A) erred, in facts and law, in adjudicating on the issue of applying the disallowance u/s 14A for re-computation of Book Profits since no such re-computation of Book profits was made by the AO and consequently no such ground was raised by the Appellant. The Appellant submits that such adjudication by the Hon'ble CIT(A) resulting in enhancement of assessment without giving opportunity to the Appellant is contrary to law, rendering the Order of the CIT(A) a nullity. It is also submitted that, in any case and without prejudice to the above, the CIT(A) erred in not following the specific decision of the Hon'ble ITAT that Section 14A has no application for computing the book profits, since Section 115JB is a complete code in itself. Failure to give credit for claim of additional TDS- Rs 14,76,039/- 18. The learned CIT(A) is not justified in omitting to give credit for additional TDS amounting to Rs 14,76,039 validly claimed by your Appellant vide revised return dated 29/03/2016.

The Ld. AR advanced arguments along with case laws to support the case of the assessee. The Ld. CIT-DR also made arguments and supported the stand of lower authorities. The written submissions have also been filed by both the sides which have duly been considered while adjudicating the appeals. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing and sale of cement.

Disallowance of railway sidings expenses 4.1 The assessee incurred expenditure of Rs.129.09 Lacs for extension of railway tracks, Rs.169.43 Lacs for replacement of railway sleepers at Jayanthipuram and Rs.796.45 Lacs for construction of track for clinker wagon loading at Ariyalur. The expenditure aggregated to Rs.1094.98 Lacs. Such expenditure, though capitalized in the books, was claimed in the computation of income as revenue expenditure. In support, the assessee submitted that the aforesaid asset does not belong to the assessee but it was the property of railways which is clear from clause-21 of Railway siding agreement which provide that the assessee has no right to assign or transfer or sublet or permit to be used or enjoyed by any other person in any manner whatsoever any of the rights of benefits conferred upon the assessee. Such assignment, transfer or subletting or permission shall be void and of no effect. The assessee relied on the decision of Tribunal in own case for AYs 2003-04 and 2011-12. The assessee also referred to the decision of Hon’ble Supreme Court in the case of L.H. Sugar factory and Oil Mills P. Ltd. (125 ITR 293) as well as the decision of Hon’ble Gouhati High Court in the case of Bongaigaon Ref. & Petrochemicals Ltd. (222 ITR 208) to support the claim. However, Ld. AO held that enduring benefit would accrue to the assessee and therefore, the expenditure was capital in nature. Further, this matter was restored by Tribunal in AY 2011-12 holding that the assessee was enjoying intangible asset. The assessee disclosed the same as an asset in the Balance Sheet. It was essential to comply with matching concept in order to arrive at correct profit earned by the assessee. Accordingly, Ld. AO disallowed the claim. The Ld. CIT(A) upheld the stand of Ld. AO against which the assessee is in further appeal before us. 4.2 The Ld. AR has submitted that this issue has been decided by Tribunal in assessee’s favor for AYs 1994-95, 1996-97 and 2003-04. However, the issue has been restored back by Tribunal for AY 2011-12. In AY 2003-04, Tribunal approved reliance placed by Ld. CIT(A) on the decision of Hon’ble Supreme Court in the case of Madras Auto Service (233 ITR 468). The Ld. AR also submitted that though expenditure was capitalized in the books of account and depreciation was charged in the books, however, for Income Tax purpose, no depreciation was claimed on the same. The Ld. AR also placed on record relevant railway siding agreements and submitted that the terms of the agreements remain the same as they were in AY 2003-04. As per relevant clauses, the assessee is not the owner of railway siding. There being no change in the same, Tribunal order for AY 2003-04 would apply. The Ld. AR also submitted that the matter in AY 2011-12 was restored back only for the reason that railway siding agreement was not available before Tribunal while deciding the appeal for AY 2011-12. The Ld. AR also submitted that similar treatment was given to such expenditure during AYs 1994- 95, 1996-97 and 2003-04. 4.3 After considering the submissions of the assessee as well as upon perusal of relevant documents, in this regard, we concur with the aforesaid plea raised by the assessee. The issue in earlier years stand covered in assessee’s favor. The issue in AY 2011-12 was restored back since relevant agreements were not available on record. Therefore, concurring with aforesaid submissions, we direct Ld. AO to allow the expenditure as revenue expenditure after verifying the fact that the assessee has not claimed depreciation on the same in Income Tax Computations in any of the years. The assessee is directed to demonstrate the same. The corresponding ground stand allowed accordingly.

Disallowance of Power Transmission expenses 5.1 The assessee spent an amount of Rs.651.55 Lacs as power transmission expenses. Though the same was capitalized in the books, it was claimed as revenue item in the computation of income. The amount of Rs.307.82 Lacs was spent for upgrading cement grinding unit at Vazhapadi wherein existing 22KV feeder was converted into 110KV feeder between Singapuram sub-station and Vazhapadi Plant. The amount of Rs.343.72 Lacs was incurred due to the fact that the assessee proposed to export 10MW power from Thermal Plant to TANGEDCO Grid. For the said purpose, it proposed to convert existing Thulukapatti sub-station from non-grid sub-station to grid sub-station enabling Tangedco to receive exported power from assessee’s thermal plant. The assessee incurred the amount for erection and commissioning charges. The assessee also submitted that it did not have any ownership on the same. However, Ld. AO disallowed the claim of the assessee. The Ld. CIT(A) upheld the stand of Ld. AO against which the assessee is in further appeal before us. 5.2 The Ld. AR has submitted that the assessee made payment of Rs.308.55 Lacs to TANGEDCO for conversion of 22KV feeder line into 110KV between Singapuram sub-station and Vazhapadi Plant in view of increase in power requirement in Vazhapadi Plant from 4500KV to 9000KV. The impugned amount of Rs.307.82 Lacs was paid towards development charges, extension charges etc. and there was no creation of any capital asset. Similarly, at RR Nagar, the amount of Rs.343.72 Lacs was incurred due to the fact that the assessee proposed to export 10MW power from Thermal Plant to TANGEDCO Grid. For the said purpose, it proposed to convert existing Thulukapatti sub-station from non-grid sub-station to grid sub-station enabling TANGEDCO to receive exported power from assessee’s thermal plant. The assessee incurred the amount for erection and commissioning charges. The Ld. AR has submitted that the assessee do not have any ownership right over the same. The Ld. AR has submitted that the cost includes cost of laying supply line, bay extension work, construction of control room, cable duct, meter arrangements at the power plant. Though the expenses resulted in creation of capital asset, however, the same do not belong to the assessee. Most of the work is stated to be done at the premises of TANGEDCO. It has further been submitted that aforesaid expenditure has been capitalized in the books under intangible assets and depreciation has been charged on the same in the books of accounts. However, tno depreciation has been claimed for Income Tax purposes and the expenditure has been claimed in full as revenue expenditure. 5.3 Upon perusal of material facts, so far as the expenditure of Rs.307.82 Lacs is concerned, we are convinced with the argument of Ld. AR that the said expenditure has not resulted into creation of any capital asset. The impugned amount has been paid to TANGEDCO for enhancement of feeder line in view of increase in power requirement at the plant. The expenditure is in the nature of development charges, extension charges etc. and there was no creation of any capital asset. Therefore, this expenditure would be allowable as revenue expenditure subject to verification by Ld. AO that no depreciation has been claimed under Income Tax Act in any of the years. The assessee is directed to demonstrate the same. 5.4 So far as the expenditure of Rs.343.72 Lacs is concerned, it is primarily incurred so as to facilitate the assessee to export power to TANGEDCO grid. For the said purpose, it has converted non-grid sub- station to grid sub-station enabling TANGEDCO to receive exported power from assessee’s thermal plant. The expenditure is on account of erection and commissioning charges which is clearly capital in nature so as to enlarge the profit making apparatus of the assessee. The fact that the assessee does not have ownership right over the same would be immaterial. This cost is in the nature of cost of laying supply line, bay extension work, construction of control room, cable duct, meter arrangements at the power plant which would bring enduring benefit to the assessee. Therefore, this expenditure, in our considered opinion, is capital expenditure. The assessee would be entitled for depreciation on the same. The corresponding grounds raised

The last issue that arises for our consideration is claim of excessive electricity expenditure. The facts are that the assessee made equity investments in Andhra Pradesh Gas Power Corporation Ltd. (APGPCL) which entitled the assessee to source 6MW of power from APGPCL at economical rates. The proportionate shares equivalent to 4.15 MW Power was held jointly by the assessee with related party. Accordingly, APGPCL would supply the power to these related parties also for which the charges would be paid by related parties directly. The assessee was entitled to receive 10 paisa per unit of power consumed by them by virtue of the joint ownership of shares.

However, Ld. AO, upon perusal of relevant data, held that the assessee did not fully utilize the benefit of economical rates for its own business. The assessee transferred 14152679 units to related parties for consideration of Rs.14.15 Lacs from related parties for transfer of the right to draw power at concessional rate from APGPCL. The consideration was reported as income by the assessee. However, as against this, the assessee incurred additional cost of Rs.321.26 Lacs. The Ld. AO alleged that transfer of right in respect of benefit of economical rates compared to the rates charged by Andhra Pradesh State Electricity rates in respect of investment was having he characteristics of shifting of profit and inflation of expenditure. Accordingly, the expenditure of Rs.321.26 Lacs was added to the income of the assessee. 16. The Ld. CIT(A) observed that Ld. AO could not sit on the armchair of the businessmen and direct the assessee to earn more profit by not transferring the power to its group companies. The provisions of Sec.40A(2) would have application only when the payment was to related concerns. However, in the present case, electricity charges were not paid to group companies but paid directly to electricity board. Therefore, the stand of Ld. AO was not correct. Even in merits, it was observed that the assessee had to pay fix charges of Rs.250 per KVA in respect of 14700 KVA. The Ld. AO committed the mistake of including contractual fixed charges. The actual electricity consumed by the assessee was charged at Rs.2.87 per unit. Therefore, Ld. AO was not correct in stating that the assessee did not consider the maximum demand charges levied by the electricity board. Therefore, there was no excess claim of expenditure. Finally, the disallowance was deleted against which the revenue is in further appeal before us.

We are of the considered opinion that Ld. CIT(A) has clinched the issue in correct perspective. The provisions of Sec.40A(2) would have no application to the fact of the case since the payment have been made to electricity board and not to related parties. Even the factual findings, on merits, remain uncontroverted before us. Therefore, we see no reason to interfere in the impugned order, on this issue. The revenue’s appeal for AY 2012-13 stand dismissed.

This issue arises in revenue’s appeal for AY 2013-14 also. In this year, Ld. AO held that the assessee has made investment for related parties since the assessee derived benefit only partially. Applying notional interest rate of 12%, Ld. AO made disallowance of Rs.223.10 Lacs. The Ld. CIT(A) deleted the same on the ground that the investment was made during FY 1999-2000. Further, in the current year, the assessee had surplus fund in the form of equity capital and reserves. It could not be said that the borrowed funds were diverted for non- business purposes. Aggrieved, the revenue is in further appeal before us. Since Ld. CIT(A) has rendered factual finding which is uncontroverted, we confirm the same. The corresponding grounds stand disposed-off on the same lines as in AY 2012-13. Department’s Appeal for AY 2013-14 19.1 The remaining ground in revenue’s appeal is Transfer Pricing (TP) Adjustment of Rs.3334.85 Lacs as proposed by Ld. TPO in its order dated 27-10-2016. The assessee carried out certain specified domestic transactions with its associated enterprises which were subjected to determination of Arm’s Length Price (ALP) before Ld. TPO. One of the transactions was transfer of electricity by Alathiyur Thermal Plant of the assessee for captive consumption. This unit was enjoying exemption u/s 80-IA. The assessee benchmarked the same using CUP method. The electricity generated by the unit was transferred at Rs.6.52 per unit on the basis of which deduction u/s 80IA was claimed by the assessee. The Ld. TPO proposed the determine ALP of the same at Rs.4.43 per unit. The Ld. TPO while accepting the transfer price in respect of sale of electricity to AEs for 24023422 units of electricity @ Rs.6.15 per unit reworked the captive consumption of electricity at Alathiyur by bifurcating the 80.15 % of electricity captively consumed into two categories namely saleable power @ 51 % and non-saleable power @49% on the basis of a letter dated 29-06-2012 issued by TANGEDGO according approval for open access under Electricity Rules. Accordingly, TPO reworked the ALP of 99956976 units being 51% (out of 80.15%) of electricity consumed at Rs.4.43 per unit instead of Rs.6.43 per unit as taken by the assessee and proposed a downward adjustment of Rs.2092.84 Lacs. For the balance 29.15% i.e., (80.15% minus 51%) of captive consumption being 57148782 units, Ld. TPO adopted the same rate of Rs.4.43 per unit on the ground that the ALP of power sold to third parties @7.15 per unit has not factored distribution and wheeling costs which would render the ALP unreliable. Accordingly, Ld. TPO proposed a downward adjustment of Rs.1196.55 Lacs by reducing the ALP by Rs.2.09 per unit as against the claim made by assessee u/s 80IA at Rs.6.52 per unit. 19.2 Similar adjustment was proposed by Ld. TPO for power produced by windmills located at Karnataka which was consumed by Cement Plant located in that state. The ALP of such power was determined at Rs.3.70 per unit for the entire power produced on the ground that no part of power produced was capable of sale to outsiders by assuming conditions laid out in power purchase agreements (PPA) and accordingly, proposed downward adjustment of Rs.45.45 Lacs. 19.3 During appellate proceedings, the assessee submitted that the power sold by Alathiyur plant as well as windmills was not capable of categorization into saleable and non-saleable power as done by Ld. TPO since the power consumed captively did not have an economic value lesser than the electricity produced and sold to third parties. It was further submitted that in the absence of price controls under Electricity Act, 2003 and Rules there-under, there was no basis for valuing power consumed internally at rates which were far less than the Arm's length price determined for sale to outside entities. It was further submitted that Ld. TPO refused to value even the saleable portion being 29.15% of his categorization at ALP offered for assessment at Rs.6.52 per unit for the reason that the price did not exclude transmission and wheeling charges. It was also submitted that average price realization from outsiders at Rs.7.15 per unit excludes transmission and wheeling charges. The assessee further stated that the price fixed by the regulatory commission for purchase of power of TANGEDCO was not comparable uncontrolled price (CUP) in view of the state undertaking being a persistent Loss making unit. It was further submitted that reducing the claim u/s 80IA to a loss by downward· adjustment would not arise when the profit of final product viz., cement was not achieved without substantial contribution from captive units producing electricity. The consumption of electricity, a key input for cement production, result in the cost savings made by not purchasing electricity from electricity Board or from outside parties, which profits (saving) contributes to the ultimate profits of the cement unit. It was also submitted that provisions of Sec.80IA was a self- contained code by itself where principles of valuation are defined as market value, being the price sold or fetched in open market. A grievance was raised that downward adjustment in respect of power produced in the two units for which a claim u/s 80IA was made at Rs.3171.65 Lacs was reduced to NIL and instead an addition of Rs.163.20 Lacs was made towards the taxable income of the assessee. 19.4 The Ld. CIT(A) concurred with assessee’s submissions and held that bifurcation of power produced by two units claiming Sec.80IA benefits into saleable and non-saleable portions was incorrect. There was no justification for treating the electricity produced and used for captive consumption differently from the power sold to outsiders when the quality and nature of the goods (Electricity) remains the same in both cases. The incentive u/s 80IA was with reference to power generated irrespective of the fact that whether it was sold or consumed captively. All that was required was that in respect of captive consumption, the power should be valued at Market price.

Upon perusal of relevant material on record, we concur with the findings of Ld. CIT(A) that the only requirement for the assessee that it should use generated electricity for captive consumption at least to the extent of 51%. The assessee has fulfilled this condition and in fact, it has consumed more than 80% for captive consumption. The working of Ld. TPO would assume that the assessee would consume exactly 51% of power generated by CPP which is clearly erroneous. Accordingly, action of Ld. TPO in artificial bifurcation into saleable units and non-saleable units could not be sustained. All that was required was that in respect of captive consumption, the power should be valued at Market price and nothing more. Considering the ratio of decision of Hon’ble High Court of Madras in the case of Tamil Nadu Petro Products (supra), we would concur with the finding that Sec.80IA relief for captive power could not be different from the relief for power sold in the open market.

We further find that the impugned issue stand covered in assessee’s favor by the decision of Hon’ble Supreme Court in the case of Jindal Steel & Power Ltd. (157 Taxmann.com 207) as under: - 28. Thus, market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial 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. 31. That being the position, we hold that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.

Revenue has relied upon the decision of the Calcutta High Court in ITC Ltd. (supra). In that case, the High Court rejected the first contention of the revenue that the assessee therein was not entitled to the benefit under section 80-IA of the Act because the power generated was consumed at home or by other business of the assessee. After holding so, the High Court however, answered the question on the point of computation of profits and gains of the eligible business against the assessee. On going through the judgment, we find that facts of that case are clearly distinguishable from the facts of the present batch of appeals. It is noticeable that though an opportunity was granted by the assessing officer to the assessee to adduce evidence to justify the price of electricity sold by it to its paper unit, the same could not be availed of by the assessee. The electricity generated was sold by the assessee entirely to its paper unit. There was no surplus electricity to be supplied to the State Electricity Board and consequently, there was no contract between the assessee and the State Electricity Board determining the rate of tariff for the electricity supplied by the assessee to the State Electricity Board. On the other hand, it was noticed that the Electricity Act, 2003 had come into force whereby and whereunder, the rate at which electricity could be supplied is determined, notably by Sections 21 and 22 thereof. That apart, there is the tariff regulatory commission which has the mandate for fixing the rates for sale and purchase of electricity by the distribution licensee. Thus it was noted that there is an inbuilt mechanism to ensure permissible profit both to the generating companies and to the distribution licensees. Therefore, it was held by the High Court that the assessee's generating unit could not claim any benefit under section 80-IA of the Act computing the profits and gains on the basis of the rate chargeable by the distribution licensee from the consumer and that the benefit could only be claimed on the basis of the rates fixed by the tariff regulatory commission for sale of electricity by the generating company. Facts being clearly distinguishable, this decision can be of no assistance to the revenue.