Market value of captive windmill power for s.80-IA profits: consumer tariff used over lower procurement rate, boosting deduction.

For deduction under s. 80-IA in respect of a windmill undertaking supplying power for captive consumption, the dominant issue was determination of the "market value" of electricity for computing eligible profits. The Tribunal held that where sale to the State electricity board is compulsory at a pre-fixed procurement tariff and direct sale to consumers is prohibited, the board's consumer tariff represents the market rate because electricity pricing is government-regulated rather than demand-driven. Accordingly, the market value was taken at the tariff charged to industrial consumers (Rs. 3.50 per unit) and not the lower procurement rate (Rs. 2.70 per unit), resulting in allowance of the higher s. 80-IA deduction; appeal allowed in favour of the assessee.

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Issues Involved:
1. Jurisdiction of the Assessing Officer.
2. Determination of profits for the eligible undertaking based on the actual consumption price of electricity.
3. Applicability of market rate for power transactions regulated by authorities.
4. Arm's length transactions between distinct undertakings.

Detailed Analysis:

Jurisdiction of the Assessing Officer:
The assessee contested that the order issued by the Assessing Officer was without jurisdiction. However, the Commissioner of Income-tax (Appeals) did not address this contention in detail, focusing instead on the substantive issues regarding the computation of income and market value of electricity.

Determination of Profits for the Eligible Undertaking:
The core issue was whether the profits of the eligible undertaking should be determined based on the actual consumption price (landed cost) of electricity or the market value. The assessee argued that the profits should be calculated based on the rate at which it purchased power from the Tamil Nadu Electricity Board (TNEB), which was Rs. 2.70 per unit. The Commissioner of Income-tax (Appeals) and the Assessing Officer, however, used the market value of Rs. 3.50 per unit, the rate at which TNEB sold electricity to industrial consumers.

Applicability of Market Rate:
The Tribunal observed that the market rate of electricity, regulated by the government, was Rs. 3.50 per unit. This rate was applicable because the TNEB, a state government undertaking, sold electricity at this price to ultimate consumers. The Tribunal's decision was consistent with earlier cases, including Sri Velayudhaswamy Spinning Mills P. Ltd. v. Deputy CIT and Arun Textiles v. Deputy CIT, where the market value for captive consumption was held to be Rs. 3.50 per unit.

Arm's Length Transactions:
The assessee argued that the transactions between its windmill and textile undertakings were at arm's length and should be valued at the rate at which it purchased power from TNEB. However, the Tribunal held that the market value, determined by the price at which TNEB sold power to industrial consumers, should be used. This approach ensures that the profits of the eligible undertaking are not inflated by under-invoicing or over-invoicing of goods transferred between the undertakings.

Conclusion:
The Tribunal concluded that the market rate of Rs. 3.50 per unit should be used for determining the profits of the eligible undertaking. The Tribunal directed the Assessing Officer to recompute the profits and gains of the eligible unit based on this rate. The appeal of the assessee was allowed, and the earlier orders of the lower authorities were set aside. The Tribunal's decision was consistent with its earlier rulings, and no significant error or public interest necessitated a different view.

Result:
The appeal of the assessee was allowed, with the Tribunal directing the Assessing Officer to recompute the profits based on the market rate of Rs. 3.50 per unit for electricity generated by the assessee.

Pronouncement:
The order was pronounced in the open court on November 14, 2012, at Chennai.

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