2026 (1) TMI 123 - AT - Income Tax

Power purchase agreement fixed capacity charges in power generation receipts held eligible for s.80IA deduction; appeal dismissed

Deduction under s.80IA was denied by the AO to the extent receipts comprised fixed cost charges under a power purchase agreement (PPA), on the premise ... Deduction u/s.80IA - assessee is engaged in the business of generation of electricity - SDT undertaken by the assessee for claiming deduction u/s.80IA has been found to be at ALP - As per AO deduction is available on the income derived from generation of power and it cannot be extended to the entire income of power generating company, thus deduction is to be restricted to profits emanating from actual generation and supply of power to the customer companies - whether the income received by the assessee by way of fixed cost charges under the PPA could be said to be income derived from the business of undertaking set up for generation and supply of electricity which would be eligible for deduction u/s.80IA? HELD THAT:- In the case of the assessee, it is indisputably set up for the generation of power. Further, it has been generating power over the years as its sole business; it is not engaged in any other business. As such, its entire income is divided from the eligible business of power generation. Based on these facts, there can be no dispute that its entire income is eligible for deduction under section 80IA. In this connection, the fact that the revenues earned do not correspond with the actual power generated cannot be a basis for restricting such deduction. As explained hereinabove, an industrial customer enters into an agreement for committed supply of power based on requirements over a period of time, and not as and when required. He does so for his own benefit, viz. to hedge against potential shortage and higher costs when taken on spot basis. If during that period, there are phases when the customer does not need to off-take power due to business reasons, which does not in any way make the power tariff paid to the supplier as anything but profits derived by the supplier undertaking which is set up for the generation of power. We take note of the decision in the case of ACIT vs. Maxcare Laboratories Ltd. [2004 (6) TMI 259 - ITAT CUTTACK] which dealt with the phraseology used in section 80IA vis-à-vis section 80I to observe that the word 'business' is a word of wide amplitude so as to cover any trade, industry or any act of adventure in the nature of trade. It noted that words used in section 80IA 'income derived from business of industrial undertaking' are intended by legislature to give more extended benefit. According to it, legislature certainly wants to give benefit of deduction not only to the income derived from industrial undertaking, but to all sorts of income which is derived from the business of the industrial undertaking, meaning thereby, all sort of income which is inextricably related to the carrying on of the business of industrial undertaking, is to be considered for computing deduction u/s.80IA. It was thus concluded that, an activity undertaken essentially for carrying of business in industrial undertaking, results into generation of income out of such activity, the same is to be considered for computing the deduction u/s.80IA. We also refer to the decision of Meghalaya Steels Ltd. [2016 (3) TMI 375 - SUPREME COURT] whereby power subsidy, interest subsidy and transport subsidy were held to have direct nexus with the business of the undertaking and were held to be income derived from the undertaking as it goes to reduce the cost of production and deduction u/s.80IB was held to be held allowable. Power tariff pricing mechanism followed by the assessee is in line with the general industry practice and is in conformity with the CERC regulations. The variable charge under the PPA arise only when the customer is unable to supply the fuel required for generation of electricity to the assessee. This variable charge is levied by the assessee in such a case for recovery of cost of fuel incurred by the assessee on behalf of the customer. From the PPA, it is noted that it does not merely provide for supply of power but also provide for assured supply of power to the extent of power generation capacity allocated to each of the customer. In the given set of facts, we find that entire receipts of the assessee towards annual fixed charges emanating from the PPA are derived from the business of the generation and supply of electricity eligible for deduction u/s.80IA. Power Purchase Agreement entered into by the assessee is a colourable device to which provisions of section 80IA(10) are attracted, dis-entitling the assessee from deduction claimed by it - The terms and conditions under the PPA agreed between the parties are to meet the requirements of power industry wherein substantial investment is required by the power generating company, so that investor has an assurance of the cost incurred for operating the power plant including the finance cost along with a reasonable return on the investment made. Also, claim of assessee in the year under consideration is arising from the same PPA which has been held to be not a colourable device as it has been accepted in the preceding assessment years whereby the Co-ordinate Bench has held in favour of the assessee. Sub-section (10) to section 80IA talks about assessee producing more than ordinary profits which might be expected to arise by way of an arrangement in the course of business transacted between the assessee and others, while carrying on the eligible business. For the quantification of this excess profit over and above ordinary profit is taken care of by way of introduction of SDT by Finance Act, 2012, w.e.f. Assessment Year 2013-14. A proviso was added w.e.f. Assessment Year 2013-14 to sub-section (10) to section 80IA, so as to determine this excess profit having regards to ALP as defined in section 92F(ii). In this regard, the most clinching and undisputed fact has been reiterated several times in this order relating to the order passed by ld. TPO u/s.92CA(3), dated 28.10.2016, whereby SDT undertaken by the assessee for claiming deduction u/s.80IA has been found to be at ALP. Accordingly, AO resorting to provisions of section 80IA(10) to dislodge the claim u/s.80IA(4) made by the assessee is hit by the provisions to the sub-section and has no legs to stand. Grounds raised by the Revenue by referring to section 80IA(10) are dismissed. Appeal of the Revenue is dismissed. Issues: Whether receipts in the form of annual fixed (capacity) charges under long-term PPAs with related parties are profits 'derived from' the eligible business of generation and supply of electricity and therefore eligible for deduction under section 80IA(4), and whether subsection (10) of section 80IA can be invoked to restrict such deduction where specified domestic transactions are subject to transfer pricing rules.Analysis: Relevant provisions include section 80IA(4) (eligibility of undertakings set up for generation of power) and section 80IA(10) (power to restrict excess profits arising from arrangements with closely connected persons), together with transfer pricing provisions introduced by section 92BA and ALP concepts in section 92F(ii); also, the transfer pricing reference under section 92CA(1) and order under section 92CA(3) are material. The receipts characterised as annual fixed (capacity) charges represent recovery of annual fixed cost components (return on equity, interest, depreciation, operation & maintenance) in accordance with industry practice and CERC tariff constructs; such receipts have a direct and proximate nexus with the business of generation and supply. The specified domestic transactions element created by Finance Act, 2012 was addressed by the Transfer Pricing Officer who held the SDTs at arm's length by an order under section 92CA(3); consequently, the proviso to section 80IA(10) (as amended) requires any adjustment for excess profit to have regard to ALP. Earlier assessment years on identical terms had accepted the 80IA claim. Consideration of commercial exigencies of long-term PPAs, regulatory tariff structure, the absence of a new or different PPA in the year under consideration, acceptance of ALP by the TPO, and absence of tax-avoidance advantage to counterparties supports treating the fixed charges as income 'derived from' the eligible business.Conclusion: Deduction under section 80IA(4) is allowable in respect of the receipts in issue; subsection (10) does not operate to deny the deduction because the SDTs have been found at arm's length by the transfer pricing process and no excess profit adjustment arises. The Revenue's appeal is dismissed and the assessment authority's disallowance is set aside.