Income Tax Appellate Tribunal - Chennai
Eastman Spinning Mills Private ... vs Assessee on 2 August, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' Bench Chennai
Before Dr. O. K. Narayanan, Vice President
and Shri V. Durga Rao, Judicial Member
.....
ITA Nos. 183/Mds/2012
Assessment year : 2007-08
M/s. Eastman Spinning Mills v. The Deputy Commissioner
Private Ltd., No. 16-17, of Income Tax,
Kumar Nagar South, Company Circle,
nd
2 Street, Tirupur-641 603. Tirupur.
(PAN : AAACE4595R)
(Appellant) (Respondent)
Appellant by : Shri N. Vijayakumar, CA
Respondent by : Dr. S. Moharana
Date of Hearing : 02.08.2012
Date of Pronouncement : 30.08.2012
ORDER
PER V. DURGA RAO, JUDICIAL MEMBER
This appeal by the assessee is directed against the order of the CIT(Appeals)-II, Coimbatore dated 25-10-2011 for the assessment year 2007-08.
2. The facts in brief are that the assessee is a textile manufacturing company. It is having a windmill undertaking as an independent division. The assessee filed return of income for the 2 ITA No. 183/Mds/2012 year under consideration declaring a total income of ` 1,48,51,100/-
under the regular computation and ` 2,07,44,158/- under the book profit u/s 115JB of the Income Tax Act, 1961 ('the Act' for short).
The return was processed u/s 143(1) of the Act. Subsequently after issuing notice u/s 143(2), the Assessing Officer completed the assessment by disallowing 80IA deduction of ` 28,99,916/- claimed by the assessee in respect of wind mill. During the course of the assessment proceedings, the Assessing Officer observed that the power generated by the windmill has to be either consumed by the assessee or sold to the Tamilnadu Electricity Board ('TNEB' for short), the statutory authority existing by virtue of Tamilnadu Electricity Act at the price determined by it. The same cannot be sold to any third party as per the agreement reached between the assessee and TNEB while installing the windmill. In such a situation the price determined by TNEB in respect of the power purchased by it from the windmill is to be adopted, i.e. at ` 2.70 per unit of power generated and supplied to TNEB.
3. Proviso to sub-section (8) makes it clear that if in the opinion of the Assessing Officer the computation of profit and gains of the eligible business in the manner specified in sub-section presents exceptional difficulties, the Assessing Officer may compute such 3 ITA No. 183/Mds/2012 profits and gains on such reasonable basis as he may deem fit. The contention of the assessee that it should be permitted to adopt the same price at which it purchases power from TNEB, if accepted, it would tantamount to allowing the assessee to inflate its profit eligible for deduction. On the contrary, if market value were to be adopted, there is no open market for purchase and sale of power other than with TNEB. It is a restricted market and at the same time the TNEB is a statutory authority. It has fixed the price for purchase of power.
It is the price fixed by a statutory authority. Whether the price at which it purchases or sells power to the assessee is to be adopted, presents a real difficulty in adopting the open market value. The Assessing Officer was therefore of the view that the assessee should not be permitted to inflate its profit and by virtue of proviso to sub-
section (8) he was constrained to adopt the purchase price of power by TNEB from the assessee as the market value for the value of power consumed by the assessee in respect of the power generated by the windmill installed by it. Hence the assessee's claim u/s 80IA of ` 28,99,916/- was disallowed.
4. The assessee carried the matter before the learned CIT(Appeals). It was submitted before the learned CIT(Appeals) that the sale price adopted by TNEB for supply of power to the spinning 4 ITA No. 183/Mds/2012 mill @ ` 3.50 has to be taken into consideration for the purpose of deduction u/s 80IA of the Act. The learned CIT(Appeals) by considering the submissions of the assessee has observed as under:
"5.3. Issue (c):
Regarding the assessee's claim that the market value should be the price at which the TNEB charges its customers, I am unable to agree with the arguments for the following reasons :
a) In the case of M/s. Thiagarajar Mills Ltd., the High Court of Madras has unambiguously held that captive consumption of power generated "would enable the respondent/assessee to derive profit and gains by working out the cost of consumption of the power". In other words, the profit has to be worked with reference to the cost and not necessarily to any market price as held by the ITAT, Chennai in the case of M/s. Sri Velayudhaswamy Spinning Mills (P) Ltd. The reference to savings in the order is in the context whether notional savings in cost effected by utilizing self generated power would be eligible for claim u/s 80IA(1). The observation cannot be interpreted as referring to re-computation of the benefit adopting market price.
b) The entire transaction is governed by Power purchase Agreement between the assessee and Tamil Nadu Electricity Board. No extraneous factors will affect the terms of contract as per which the tariff for the power 5 ITA No. 183/Mds/2012 consumed by the assessee will be charged at same rate it was purchased by the Tamil Nadu Electricity Board from the assessee.
(c) Sub section 8 of section 80IA speaks of market value only when the goods of the industrial undertaking "are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking." In the instant case there is no such transfer within the business of the assessee.
Rather the power generated by the assessee is sold to the third party and similarly the power generated by the third party is bought by the assessee. As this is a sale and buy back transaction, 80IA(8) has no applicability to this case.
(d) The tariff of the third party to these transactions is fixed by the Govt. of Tamil Nadu and not by market forces. To put it differently, sale of electricity is governed by Statutory Law. In the absence of open market, the question of applicability of the explanation to sub section 8 to sec. 80IA does not arise.
(e) The action of the Assessing Officer in re- computing the sale price of the self generated power and consumed 'in-house' cannot be attributed to the invoking of the provisions of sub section 8 to section 80IA but to exercising his inherent powers to correct a mistake.
6 ITA No. 183/Mds/2012(f) In the case of Jindal Steel & Power Ltd., the Delhi Tribunal has not considered the issues dealt in Para © to (f) above. Even assuming that market rates are to be applied, the Delhi Tribunal has overlooked the fact that there areu9 two different markets operating in these transactions affecting the status of the contracting parties. First is the buyer's market, in which the Tamil Nadu Electricity Board is the purchaser and the second is the seller's market, where the status of the Tamil Nadu Electricity Board is reversed. There is no provision either in the IT Act or general law to support a claim that the price in the buyer's market be extended to seller's market or vice versa."
The learned CIT(Appeals) accordingly dismissed the appeal filed by the assessee.
5. On being aggrieved, the assessee carried the matter before the Tribunal. At the time of hearing the learned counsel for the assessee has filed a paper book and submitted that the issue involved in this appeal is covered by the following decisions :
1. CIT v. Thiagarajar Mills Ltd. in Tax Case (Appeal) Nos. 68 to 70 of 2010
2. Sri Velayudhaswamy Spinning Mills (P) Ltd. v.
DCIT in ITA No. 850/Mds/2011
3. Arun Textiles Pvt. Ltd. v. DCIT in ITA No 569/Mds/2011 7 ITA No. 183/Mds/2012
4. Viking Textiles (P) Ltd. v. DCIT in ITA No. 1570/Mds/2011
5. Eveready Spinning Mills Pvt. Ltd. v. ACIT in ITA No. 1571/Mds/2011
6. Excel Cotspin (India) (P) Ltd. v. DCIT In ITA No. 1790/Mds/2011
7. Prabhu Spinning Mills Pvt. Ltd. & Anr. V. DCIT in ITA No. 1847/Mds/2011 dated 20-01-2012.
6. On the other hand, the learned DR strongly supported the orders passed by the authorities below. However, he fairly accepted that the issue has been considered in favour of the assessee by the various decisions as relied on by the learned counsel for the assessee. In one of the cases cited by the learned counsel for the assessee in ITA No. 850/Mds/2011, the Tribunal considered the issue elaborately and allowed the appeal of the assessee. The relevant portion of the order of the Tribunal is extracted as under :
8. The assessing authority has adopted the price of power at `. 2.70 per unit in the light of the provisions of law stated in section 80IA(8). Sub-section (8) of section 80IA provides that where any goods are transferred to any other business carried on by the assessee or any goods are transferred to the eligible business, in either case the consideration for the transfer recorded in the books of accounts if not corresponds to the market value of such goods, the assessing authority shall compute the eligible profit on 8 ITA No. 183/Mds/2012 the basis of the market value of such goods. It means that sub-section(8) of section 80IA does not allow an assessee to inflate the profit of its eligible unit by over invoicing the goods transferred or under-invoicing of goods bought in. It is a safeguard against misuse of the existing provision. The Assessing Officer took the market value of the power generated by the assessee at `.2.70 per unit and not `. 3.50 per unit as claimed by the assessee and thereby the assessee has overstated the price of the goods sold by it so as to boost the profit of its eligible unit, which in this case is windmill unit.
9. The rule applicable in determining the market value in a similar context has been discussed by the Hon'ble jurisdictional High Court in the case of Commissioner of Income-tax, Madurai vs. Thiagarajar Mills Ltd., Kappalur, Madurai. While delivering the judgment in Tax Case(Appeal) Nos.68 to 70 of 2010 dated 7-6-2010 their Lordships have held as under:-
"9. Therefore, there is no difficulty in holding that captive consumption of the power generated by the assessee from its own power plant would enable the respondent/assessee to derive profit and gains by working out the cost of such consumption of power inasmuch as the assessee is able to save to that extent which would certainly be covered by section 80IA(1). When such will be the outcome out of own consumption of the power generated and gained by the assessee by setting up its own power plant, we do not find any lack of meri in the claim of the respondent/assessee 9 ITA No. 183/Mds/2012 when it claimed by relying upon section 80IA(1) of the Income-tax Act by way of deduction of the value of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years."
10. A careful reading of the above paragraph brings home the point that the Hon'ble High Court has looked into the point of savings made by the assessee by using its own power and the valuation of that savings made on the basis of the price otherwise the assessee should have paid. The ratio is very clear. The value of the power generated and consumed by the assessee will be that value that should have been paid by the assessee if the power was bought from open market. When the above case is applied to the present case, the case of the assessee has to be accepted that the market value should be treated as `.3.50 per unit of electricity.
11. Exactly this issue was considered by the Delhi Bench-I of the Tribunal in the case of Additional Commissioner of Income-tax vs. Jindal Steel & Power Ltd., 16 SOT 509. In that case also one of the issues raised was valuation of the power generated by the eligible unit. In that case the power generated by the assessee was used by it for own consumption as well as for sale to the State Electricity Board. The Tribunal held that the rate at which the State Electricity Board supplies power to its consumers is to be considered to be the market value for transfer of power by the assessee's electricity generating undertaking for captive 10 ITA No. 183/Mds/2012 consumption for the purposes of section 80IA(8) and not the price at which power is supplied by the assessee to the Board.
12. Further, as far as captive consumption of power is concerned, the assessee is neither selling nor buying electricity. The quantum of power contributed by the assessee to the Tamil Nadu Electricity Board can be availed as such by the assessee for which no additional payment is to be made. If the assessee has received `. 2.70 per unit, the assessee has to pay only `. 2.70 per unit. It is a kind of commodity banking, or in economic term, barter exchange of same good. Therefore, defacto speaking, there is no sale and purchase. In such circumstances there is no market price at all.
13. Market price comes into play only when the assessee is buying power from the Tamil Nadu Electricity Board just like any other consumer. Tamil Nadu Electricity Board is the supplier and the assessee is the consumer and there is no question of commodity banking or barter exchange. Tamil Nadu Electricity Board sells power to the assessee in the usual course of its business and the assessee buys the power like any other consumer in the market. It is in that context that the question of market price arises. In such a scenario what is the price collected by the Tamil Nadu Electricity Board? The price is `.3.50 per unit. Therefore it is obvious that the market price of the power generated by the assessee 11 ITA No. 183/Mds/2012 is `.3.50 per unit. The expression used in section 80IA(8) is "market value". Market value means the value determined by market forces. In the captive consumption of power generated by the assessee company no market force is operating. Market forces come into picture only when the assessee buys power from Tamil Nadu Electricity Board like any other consumer. The value paid for such consumption is the market value. In the present case that is `. 3.50 per unit.
14. Therefore we accept the contention of the assessee and set aside the orders of the lower authorities on this issue. The assessing authority is directed to recompute the profit and gains of the eligible unit for the purpose of section 80IA on the basis of the unit price of electricity generated by the assessee company at `. 3.50 per unit.
15. In result, this appeal filed by the assessee is allowed."
7. We find that the issue involved in this appeal is squarely covered by the decision of the Tribunal in the case of Sri Velayudhaswamy Spinning Mills (P) Ltd. v. DCIT in ITA No. 850/Mds/2011 dated 13-07-2011. The remaining case laws cited by the assessee, supra, also considered the very same issue and 12 ITA No. 183/Mds/2012 decided in favour of the assessee. In view of the above, respectfully following the decision of the Tribunal in the case of Sri Velayudhaswamy Spinning Mills (P) Ltd., this ground of appeal raised by the assessee is allowed.
8. In the result, the appeal filed by the assessee is allowed.
Order pronounced on Thursday, the 30th day of August, 2012 at Chennai.
Sd/- Sd/-
(Dr. O. K. Narayanan) ( V.Durga Rao )
VICE PRESIDENT JUDICIAL MEMBER
Chennai,
Dated the 30th August, 2012.
H.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file