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.

---

---

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.

---