2025 (8) TMI 1750 - AT - Income Tax

Captive power 'market value' u/s80-IA(8): benchmark end-consumer tariff, not Board's regulated purchase price; deduction recomputed.

Whether 'market value' for s.80-IA(8) in respect of electricity captively consumed/surplus supplied should be benchmarked to the tariff paid by the State ... Determination of quantum of deduction u/s.80IA - inclusion of applicability of Arm's Length Price mechanism for determining market value for specified domestic transactions for determining the deduction u/s.80-IA - TPO on the basis of section 80-IA(8) held that the average selling price by an assessee to TANGEDCO should be based on the tariff rates fixed by Tamil Nadu Electricity Regulatory Commission (TNERC) for purchase of electricity generated by a windmill undertaking - HELD THAT:- Where the price at which surplus power supplied by assessee to State Electricity Board was determined entirely by State Electricity Board in terms of statutory regulations and contract, such a price could not be equated with market value as was understood for purpose of section 80-IA(8) and on the contrary, the rate at which State Electricity Board supplied electricity to industrial consumers would have to be taken as market value for computing deduction u/s. 80-IA of the Act. We hold that the decision of the Hon'ble Supreme Court in Jindal Steel & Power Ltd. [2023 (12) TMI 417 - SUPREME COURT] would apply even after the amendment made to Explanation to section 80-IA(8) of the Act. Also, the decision of Rungta Mines Limited [2025 (7) TMI 609 - CALCUTTA HIGH COURT] and Star Paper Mills Ltd [2025 (2) TMI 766 - CALCUTTA HIGH COURT] rendered after considering the decision of the Hon'ble Supreme Court in Jindal Steel & Power Ltd. referred to supra and after taking into account the amendment made to Explanation to section 80-IA(8) of the Act would apply to the facts and circumstances of the instant case. The ALP in the instant case would thus have to be the price at which electricity is supplied by the State Electricity Board (TANGEDCO in the instant case) to end consumers in open market. Therefore, we direct the AO to recompute the ALP considering the rate adopted by the assessee as per the market price. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether, for computing deduction under section 80-IA in respect of captively consumed electricity transferred from an eligible windmill unit to a non-eligible manufacturing unit, the 'market value' under section 80-IA(8) is to be taken as the tariff at which the State Electricity Board supplies electricity to industrial consumers in the open market, rather than the tariff fixed for purchase of electricity from generators. (ii) Whether, after the insertion of the Explanation to section 80-IA(8) (providing two alternatives for 'market value'), the determination of 'market value' for such inter-unit transfer must compulsorily be made only by adopting 'arm's length price' under transfer pricing provisions for specified domestic transactions. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Correct benchmark for 'market value' of captively consumed electricity under section 80-IA(8) Legal framework (as discussed by the Court): The Court examined section 80-IA(8), which requires recomputation of eligible-business profits as if the inter-unit transfer was made at 'market value' where recorded consideration does not correspond to market value. The Court treated the 'market value' inquiry as focusing on the price ordinarily available in the open market for the consumer-side purchase of electricity. Interpretation and reasoning: The Court held that where the assessee does not sell electricity to the State Electricity Board or third parties and instead consumes the entire generation captively, the relevant market benchmark is the price an industrial consumer would ordinarily pay in the open market to obtain electricity. The Court rejected the approach of valuing such transfer at the regulator-fixed purchase tariff for electricity procured from wind generators, because that rate reflects a regulated procurement arrangement and not the open-market price for consumer purchase. The Court also accepted that the presence or absence of third-party sales materially affects comparability: where there are no third-party sales, an internal comparable is unavailable, and the consumer tariff becomes the appropriate proxy for market value in the open market for captive consumption. Conclusion: For captively consumed electricity transferred from the eligible unit to the non-eligible unit, the 'market value'/ALP for section 80-IA(8) purposes is the rate at which the State Electricity Board supplies electricity to end industrial consumers in the open market (i.e., the rate adopted by the assessee), not the purchase tariff fixed for procurement from generators. Issue (ii): Effect of the post-2013 Explanation to section 80-IA(8) and whether ALP under clause (ii) is mandatory for specified domestic transactions Legal framework (as discussed by the Court): The Court considered the Explanation to section 80-IA(8), which defines 'market value' as either (i) the price that goods or services would ordinarily fetch in the open market, or (ii) the arm's length price as defined under section 92F where the transfer is a specified domestic transaction referred to in section 92BA. The Court specifically analysed the significance of the word 'or' separating clauses (i) and (ii). Interpretation and reasoning: The Court rejected the revenue's contention that once the transaction is a specified domestic transaction, clause (ii) must be applied compulsorily and clause (i) becomes inapplicable. The Court reasoned that such an interpretation would make clause (i) redundant despite its continued presence in the statute. The Court accepted the interpretive approach that so long as open-market price is discernible under clause (i), that benchmark can be applied, and only where such open-market price is not available would recourse to clause (ii) be warranted. The Court further held that the Supreme Court's approach to equating 'market value' with the consumer-side open-market rate remains applicable even after the amendment, because the concept and definition of 'arm's length price' did not change; the amendment merely brought specified domestic transactions within the scope of clause (ii) as an available method, not as an exclusive mandate. Conclusion: The amended Explanation to section 80-IA(8) does not compel valuation exclusively under clause (ii) (transfer pricing ALP) merely because the transfer may qualify as a specified domestic transaction. Where an open-market consumer tariff is available and reflects the price ordinarily fetched in the open market, clause (i) may be applied to determine 'market value' for section 80-IA(8). Final determination and operative direction The Court upheld the approach of adopting the State Electricity Board's end-consumer industrial tariff (the rate used by the assessee) as the market value/ALP for the inter-unit transfer for section 80-IA computation, held the contrary procurement-tariff approach inapplicable on these facts, directed recomputation accordingly, and dismissed the revenue's appeals for both assessment years.