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Issues: (i) Whether the internal CUP based on the electricity tariff paid by consuming units to State distribution companies was the appropriate benchmark for captive inter-unit power transfers; (ii) Whether disallowance under section 14A and Rule 8D, including the MAT adjustment, was sustainable; (iii) Whether pre-operative expansion expenditure and intra-group technical-services payments were allowable; (iv) Whether deductions under section 80-IA were available for rail systems and the TG-3 power plant, and how common expenses and CENVAT credit were to be treated; (v) Whether sales-tax incentives, royalty refunds and excise-duty exemption were capital receipts, including for book-profit computation; (vi) Whether investment allowance under section 32AC was available for opening capital work-in-progress installed during the relevant year; (vii) Whether balance additional depreciation was allowable in the succeeding year; (viii) Whether bad debts written off were allowable; (ix) Whether the remaining cross-objection claims concerning head-office allocation, leave encashment, capital gains items and interest on income-tax in book profit were sustainable.
Issue (i): Whether the internal CUP based on the electricity tariff paid by consuming units to State distribution companies was the appropriate benchmark for captive inter-unit power transfers.
Analysis: The consuming units purchased identical electricity from State distribution companies in the same geographical market and period. That consumer tariff was a direct internal comparable, whereas the rate between generation and distribution entities operated at a different stage of the supply chain and was influenced by regulation. No distinguishing facts from the assessee's earlier years were shown.
Conclusion: The internal CUP and selection of the consuming units as tested parties were upheld; the transfer-pricing adjustments were rightly deleted. This issue is in favour of the assessee.
Issue (ii): Whether disallowance under section 14A and Rule 8D, including the MAT adjustment, was sustainable.
Analysis: Where interest-free own funds substantially exceeded investments and no nexus with borrowings was established, no interest disallowance arose. Administrative disallowance under Rule 8D(2)(iii) was confined to investments that actually yielded exempt income. The 2022 Explanation to section 14A did not affect years in which exempt income was admittedly earned. Rule 8D computation could not mechanically be imported into clause (f) of Explanation 1 to section 115JB without independent identification of expenditure debited to the profit and loss account. For A.Y. 2015-16, the voluntary disallowance exceeded the formula-based amount, making an additional disallowance duplicative.
Conclusion: The Revenue's challenge to the restricted normal-provision disallowance and deletion of MAT adjustments failed; the additional disallowance of Rs. 33 lakh for A.Y. 2015-16 was deleted. This issue is in favour of the assessee.
Issue (iii): Whether pre-operative expansion expenditure and intra-group technical-services payments were allowable.
Analysis: The character of expansion expenditure depended on its true nature rather than book capitalisation. Salaries, travelling, maintenance, stores, power, professional charges and similar operating expenses for expansion of an existing business remained revenue expenditure unless directly attributable to acquisition or installation of a capital asset. For technical services, the TPO assigned a positive value to the services but replaced TNMM with unsupported estimated man-hours and rates, without adopting a prescribed transfer-pricing method or comparable transaction.
Conclusion: Pre-operative expenditure was allowable as revenue expenditure, and the technical-services transfer-pricing adjustments were unsustainable. This issue is in favour of the assessee.
Issue (iv): Whether deductions under section 80-IA were available for rail systems and the TG-3 power plant, and how common expenses and CENVAT credit were to be treated.
Analysis: Integrated captive rail systems comprising tracks, sidings, signalling, loading and related facilities qualified as infrastructure facilities despite captive use; freight and handling savings formed the basis for eligible income. Acquisition of the entire TG-3 undertaking as a running concern did not constitute reconstruction or formation through transfer of used machinery, and the tax holiday attached to the eligible undertaking for its unexpired period. Common head-office expenditure having nexus with eligible undertakings could be allocated, but expenditure-based allocation rather than turnover was required; expenses exclusively relating to non-eligible cement business were excluded. Under the standalone fiction, any notional grossing-up of eligible-unit costs for CENVAT credit required corresponding credit for the benefit availed by other units, making net accounting neutral.
Conclusion: Section 80-IA deductions for rail systems and TG-3 were upheld; CENVAT adjustments were deleted; common-expense allocation was restricted to expenditure having nexus and was to follow the directed expenditure-based computation. This issue is in favour of the assessee.
Issue (v): Whether sales-tax incentives, royalty refunds and excise-duty exemption were capital receipts, including for book-profit computation.
Analysis: The governing test was the purpose of the industrial incentive scheme. The incentives were linked to fixed capital investment, establishment, substantial expansion and industrialisation in backward areas. Their post-production availability, quantification by tax or royalty, and absence of an express end-use condition did not alter their capital character. The amendment to section 2(24)(xviii) applied only from A.Y. 2016-17. Capital incentives that did not possess the character of income could not be included in book profit under section 115JB.
Conclusion: Sales-tax incentives, royalty refunds and the excise-duty exemption were capital receipts not chargeable under normal provisions and were excludible from book profit. This issue is in favour of the assessee.
Issue (vi): Whether investment allowance under section 32AC was available for opening capital work-in-progress installed during the relevant year.
Analysis: For an integrated manufacturing plant, procurement of components reflected as capital work-in-progress did not by itself establish acquisition of a completed plant or machinery. The relevant asset came into existence when assembled, installed and capitalised. A purposive construction of the investment incentive provision supported deduction where the integrated plant was installed during the qualifying period; among divergent coordinate-bench views, the view favourable to the assessee was adopted.
Conclusion: Deduction under section 32AC for components forming part of opening capital work-in-progress but installed and capitalised during the relevant year was allowable. This issue is in favour of the assessee.
Issue (vii): Whether balance additional depreciation was allowable in the succeeding year.
Analysis: The third proviso to section 32(1), effective from A.Y. 2016-17, required allowance in the immediately succeeding year of the balance 50% additional depreciation where assets were used for less than 180 days in the acquisition year. The amendment applied to the claim made in A.Y. 2016-17 and could not be deferred to A.Y. 2017-18.
Conclusion: The balance 10% additional depreciation claimed in A.Y. 2016-17 was allowable. This issue is in favour of the assessee.
Issue (viii): Whether bad debts written off were allowable.
Analysis: The assessee had actually written off identified trade debts, furnished party-wise details, ledgers and invoices, and established that the underlying sales had been recognised as income. A provision initially created had been added back, and deduction was claimed only upon actual write-off. After the 1989 amendment, continued existence of a debtor did not require the assessee to prove factual irrecoverability.
Conclusion: The requirements of sections 36(1)(vii) and 36(2) were met and the bad-debt disallowance was deleted. This issue is in favour of the assessee.
Issue (ix): Whether the remaining cross-objection claims concerning head-office allocation, leave encashment, capital gains items and interest on income-tax in book profit were sustainable.
Analysis: No specific nexus was shown between the impugned head-office expenses and eligible power plants or rail systems, warranting deletion of the allocation sustained for A.Y. 2015-16. Leave-encashment provision was deductible only on actual payment under section 43B(f). Profit on sale of investments and loss on sale of fixed assets were not non-income capital receipts and remained governed by the section 115JB computation, subject to indexed-cost benefit. Provision for interest under the Income-tax Act fell within the extended meaning of income-tax under Explanation 2 to section 115JB.
Conclusion: The head-office allocation ground was allowed; the leave-encashment, capital-items and interest-on-income-tax grounds were rejected. This issue is partly in favour of the assessee.
Final Conclusion: The assessee retained the substantive relief granted on transfer pricing, exempt-income expenditure, revenue expenditure, eligible-unit deductions, industrial incentives, investment allowance, additional depreciation and bad debts, with limited further relief on the cross-objection concerning unsupported head-office allocation.
Captive power benchmarking and industrial incentive treatment support tax relief across transfer pricing, deductions, depreciation and book-profit computation.
Internal CUP based on electricity tariffs paid by consuming units to State distribution companies is presented as the appropriate benchmark for captive power transfers. The notes also state that section 14A disallowance requires a borrowing nexus for interest expenditure and confines administrative expenditure to investments yielding exempt income, while MAT adjustments require independently identified expenditure. Expansion-related operating costs are treated as revenue expenditure, and unsupported technical-services pricing adjustments are rejected. Captive rail systems and an acquired running power undertaking qualify for section 80-IA relief, subject to nexus-based common-cost allocation. Industrial incentives linked to investment and expansion are characterised as capital receipts and excluded from book profit where not income. The notes further address investment allowance, additional depreciation, actual bad-debt write-offs, and limits on leave-encashment and income-tax-interest deductions.
TP Adjustment - Internal CUP for captive power transfers - Section 14A disallowance and MAT computation - Revenue expenditure on expansion of existing business - Arm's length pricing of intra-group technical services - Section 80-IA deduction for captive rail infrastructure - Allocation of common head-office expenditure - CENVAT credit in eligible-unit profits - Capital incentives and book profit - Investment allowance on capital work-in-progress - Additional depreciation for assets used for less than 180 days - Bad debts written off Internal CUP for captive power transfers - Tested party selection - Arm's length price of electricity transferred from captive power plants to cement-manufacturing units - HELD THAT: - The price paid by the same consuming units to State distribution companies constituted a direct internal comparable, since the commodity, consuming units, geographical market and period of supply were substantially the same. It was more reliable than the regulated rate between generating and distribution companies, which operated at a different level of the supply chain. In the absence of any distinguishing feature from the assessee's earlier years, consistency required acceptance of the internal CUP and the consuming units as tested parties. [Paras 40, 41, 42] The deletion of transfer-pricing adjustments for inter-unit power transfers was upheld. Disallowance of expenditure relating to exempt income u/s 14A - MAT adjustment for exempt-income expenditure - Disallowance relating to exempt dividend income under the normal provisions and its treatment in computing book profit - HELD THAT: - Where interest-free own funds substantially exceeded investments and no nexus of borrowings with investments was established, investments were presumed to be from own funds. Under Rule 8D(2)(iii), only investments that actually yielded exempt income during the relevant year could be considered. The Finance Act, 2022 Explanation to section 14A did not affect this quantification dispute where exempt income had in fact been earned. Further, the Rule 8D computation could not mechanically be imported into book profit; expenditure relatable to exempt income for MAT purposes had to be independently determined from the profit and loss account. For 2015-16, the additional disallowance was deleted because the assessee's voluntary disallowance already exceeded the administrative expenditure computed with reference to dividend-yielding investments, and a further disallowance would duplicate the same expenditure. [Paras 93, 94, 104, 105, 106] The Revenue's challenges to the restricted disallowance and deletion of MAT adjustments were dismissed; the assessee's cross-objection for 2015-16 was allowed to the extent that no further disallowance beyond its voluntary disallowance survived. Nature of expenditure - expansion of existing business - Accounting treatment and tax deductibility - Allowability of pre-operative expenditure incurred for expansion, modernisation and setting up of units in the existing cement business - HELD THAT: - Deductibility depends on the true nature and purpose of expenditure, not its accounting classification. Operating expenses such as employee costs, travelling, maintenance, stores, power and professional charges do not become capital merely because they were incurred during expansion or were capitalised in the books; unless directly attributable to acquisition or installation of a capital asset, they remain revenue expenditure. [Paras 112, 113, 114, 115, 116] The allowance of the claimed pre-operative expenditure as revenue expenditure was upheld. Arm's length pricing of intra-group technical services - Prescribed transfer-pricing methods - TP adjustment for technical and business-support services received from an associated enterprise - HELD THAT: - The determination of a positive arm's length price itself proceeded on the basis that services had been rendered. Having rejected TNMM, the TPO could not substitute it with an unsupported estimate of man-hours and hourly rates, without a comparable uncontrolled transaction or application of a prescribed method. In the absence of a material change from the earlier years, the earlier acceptance of the assessee's benchmarking governed the issue. [Paras 132, 133, 134, 135, 136] The deletion of the transfer-pricing adjustment was upheld. Section 80IA deduction for captive rail infrastructure - Captive use of infrastructure facility - Eligibility of integrated rail systems at cement units for deduction as infrastructure facilities and computation of their eligible profits - HELD THAT: - A rail system comprising sidings, tracks, signalling and related loading, unloading and operating facilities does not cease to be an infrastructure facility merely because it is used captively for transport of the assessee's goods. The agreements with the Railway Administration and the integrated facilities established that the assessee developed, operated and maintained the rail systems. Savings in road freight and handling costs were the accepted basis for computing the eligible income. Common expenses were to be dealt with under the separate allocation directions. [Paras 156, 157, 158, 159, 160] Deduction under section 80IA for the rail systems was upheld, subject to computation in accordance with the directions on common expenses and CENVAT credit. Allocation of common head-office expenditure - Eligible undertaking profits - Apportionment of indirect head-office expenditure in computing deductions for eligible power plants, rail systems and other eligible undertakings - HELD THAT: - The statutory fiction requires eligible undertakings to be treated as stand-alone businesses; therefore, centrally incurred expenditure having a direct or proximate connection with an eligible undertaking cannot be ignored. However, turnover is not a reasonable allocation basis because its relationship with indirect expenditure is not necessarily linear. Allocation must be based on unit expenditure vis-a -vis overall expenditure, and expenses specifically attributable to non-eligible cement operations cannot be allocated. In the assessee's cross-objection for 2015-16, no nexus was established for the allocation sustained against captive power plants and rail systems. [Paras 184, 185, 186, 407, 408] The Revenue's challenge to allocation on the expenditure basis was dismissed; for 2015-16, the allocation challenged in the assessee's cross-objection was directed to be deleted for want of nexus. CENVAT credit in eligible-unit profits - Standalone computation under section 80IA - Whether CENVAT credit availed by other manufacturing units had to be added to the cost of captive power plants for computing deduction under section 80-IA? - HELD THAT: - The standalone fiction cannot be applied only to increase the eligible unit's expenditure by the duty component while ignoring the corresponding credit or reimbursement attributable to that unit. Where expenditure is debited net of CENVAT credit and the credit is fully availed by the other units, the net accounting treatment produces the same economic result and does not inflate eligible profits. [Paras 201, 202, 203, 204, 205] The deletion of CENVAT-related adjustments was upheld. Capital subsidy purpose test - Royalty refund under industrial incentive scheme - Excise-duty exemption for substantial expansion - Character of sales-tax incentives, royalty refunds and excise-duty exemption received under industrial incentive schemes - HELD THAT: - The character of an incentive depends on the purpose of the scheme, not the timing, source, form or mechanism of disbursement. The incentives were linked to capital investment, establishment, expansion or modernisation of units in specified areas, with ceilings tied to fixed-capital investment; quantification by reference to sales tax, VAT, royalty or excise duty did not convert them into operational subsidies. The excise-duty exemption for substantially expanded units in specified backward areas was likewise a capital receipt: its post-production availability and absence of a particular end-use restriction were not determinative. The subsequent statutory inclusion of specified Government assistance from 2016-17 did not govern 2014-15 or 2015-16. [Paras 343, 344, 346, 347, 348] Sales-tax incentives, royalty refunds and the excise-duty exemption in question were held to be capital receipts not chargeable under the normal provisions. Capital receipts in book profit - MAT computation - Exclusion of sales-tax incentives, excise-duty exemption and royalty refunds from book profit - HELD THAT: - The receipts retained their capital character under the industrial incentive schemes and did not constitute income or profit merely because they were credited to the statement of profit and loss. The restriction on recasting accounts under the MAT provisions did not answer the anterior question whether such non-income capital receipts could form part of book profit. In the absence of changed facts or law, the earlier decision in the assessee's case was followed. [Paras 281, 282, 283, 284, 285] The direction to exclude the capital incentives and royalty refunds from book profit was upheld. Investment allowance on capital work-in-progress - Purposive interpretation of acquired and installed - Eligibility for investment allowance on components forming opening capital work-in-progress but comprised in plant and machinery installed and capitalised during the qualifying years - HELD THAT: - For an integrated manufacturing plant, purchase of individual components does not necessarily amount to acquisition of the completed plant or machinery. Such components assume the character of the intended plant only when assembled, integrated and installed. Since the Assessing Officer did not find that the integrated plant had been installed, capitalised or made operational before the qualifying period, the mere existence of opening capital work-in-progress could not defeat the investment incentive. Between divergent coordinate-bench views, the purposive construction advancing the object of encouraging investment was adopted. [Paras 262, 263, 264, 265, 266] Deduction u/s 32AC was allowed for the relevant plant and machinery capitalised and installed during 2014-15 and 2015-16. Section 80-IA deduction on transferred undertaking - Change in ownership of eligible undertaking - Deduction for the TG-3 power plant acquired as a running undertaking - HELD THAT: - Acquisition of an entire running undertaking differs from formation of a new undertaking through transfer of individual used assets. A mere change of ownership neither amounts to reconstruction nor destroys the identity of the eligible undertaking; the tax holiday attaches to the undertaking, and its successor may claim the deduction for the balance eligible period, subject to the statutory conditions. The plant was not repurchased by the assessee, and the previous owner's failure to claim the deduction did not establish ineligibility. [Paras 298, 299, 300, 301, 302] The allowance of deduction for the TG-3 power plant was upheld. Employee perquisite tax and book profit - Addition of tax borne by the employer on non-monetary employee perquisites in computing book profit - HELD THAT: - Tax borne on non-monetary perquisites is an employee-benefit cost and not income-tax paid or payable on the assessee's income for the MAT adjustment. Its disallowance under the normal provisions did not authorise its automatic addition to book profit. [Paras 308, 309, 310, 311, 312] The deletion of the MAT adjustment was upheld. Balance additional depreciation - Assets used for less than 180 days - Allowance in 2016-17 of the balance additional depreciation on assets put to use for less than 180 days in 2015-16 - HELD THAT: - The third proviso to section 32(1), effective from 2016-17, mandates allowance in the immediately succeeding year of the balance additional depreciation that was restricted to 50 per cent in the initial year because the asset was used for less than 180 days. Construing the amendment to apply only to assets acquired in the relevant year would postpone its operation contrary to its stated effective date. The claim was confined to the unallowed balance, so total additional depreciation remained restricted to the prescribed percentage. [Paras 368, 369, 370, 371, 372] The balance additional depreciation claimed for 2016-17 was allowed. Bad debts written off - Conditions for bad-debt deduction - Deduction for trade debts written off in 2018-19 - HELD THAT: - After the statutory amendment, actual irrecoverability need not be proved once the debt is written off, but the debt must also satisfy the condition that it was taken into account in computing income. The assessee's provision had been added back when created; deduction was claimed only on actual write-off of identified trade receivables. Party-wise details, ledgers and invoices established that the debts arose from sales already offered to tax, and the continued existence of debtors was immaterial. AO did not identify any defect in that evidence. [Paras 398, 399, 400, 401, 402] The deletion of the bad-debt disallowance was upheld. Leave encashment provision - Actual-payment condition - Deductibility of provision for leave encashment determined by actuarial valuation - HELD THAT: - Even an actuarially ascertained leave-encashment liability is subject to the overriding actual-payment condition. The accrual principle cannot override the express statutory requirement, and deduction for actual payments had already been allowed. [Paras 414, 415, 416, 417] The assessee's claim for deduction of the unpaid leave-encashment provision was rejected. Capital gains and book profit - Indexed cost of acquisition - Exclusion of profit on sale of investments and loss on sale of fixed assets from book profit - HELD THAT: - A profit arising on transfer of a capital asset is not outside the ambit of income merely because the underlying asset is capital. The MAT computation begins with audited net profit and permits only specified adjustments; no exclusion is available merely because an item is non-operational or connected with a capital asset. The assessee-specific earlier decision required recomputation after allowing indexed cost of acquisition. [Paras 430, 431, 432, 433, 434] The claimed exclusion was rejected, subject to giving full effect to indexed cost of acquisition. Interest on income-tax and book profit - Addition of provision for interest on income-tax in computing book profit - HELD THAT: - The MAT adjustment expressly covers income-tax paid or payable and provisions therefor, while the statutory definition includes interest charged under the Act. Whether the provision was prudently made or represented an ascertained liability was therefore immaterial. [Paras 438, 439, 440, 441, 442] The addition of the provision for interest on income-tax to book profit was upheld. Final Conclusion: The Revenue's appeals for 2014-15, 2015-16, 2016-17 and 2018-19 were dismissed subject to the stated computational directions. The assessee's cross-objection for 2015-16 was partly allowed, while its cross-objection for 2018-19 was dismissed as not pressed.
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