TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 1587
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....the facts are, the assessee, a resident corporate entity, is stated to be engaged in the business of manufacturing of sugar, industrial fiber, alcohol, power and organic and fine chemicals. In course of proceedings before him the Transfer Pricing Officer (TPO) noticed that in the year under consideration, the assessee had generated power in an unit eligible to avail deduction under section 80IA of the Act and transferred part of the power generated to other units, which are not eligible for deduction under section 80IA of the Act. He noticed that the assessee has benchmarked the transaction by applying the rate at which it has transferred power to Uttar Pradesh Power Corporation Ltd. (UPPCL). Since, according to the TPO, 95-96% of power is traded through Indian Energy Exchange (IEX), he issued notice under section 133(6) of the Act to IEX to ascertain the average rate of power trade in UP, Rajasthan and Gujarat region. From the information received he found that the average sale price for UP region in the year under consideration was Rs. 2.77 per KWH. Applying the aforesaid rate as external CUP (Comparable Uncontrolled Price), the TPO suggested the disputed TP adjustment. Whil....
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....ed steam from any non AE, hence, data for purchase cost is not available. Based on aforesaid reasoning, the TPO determined the ALP of transfer of steam as nil. This resulted in TP adjustments. While deciding the issue, learned DRP took note of the fact that in assessee's own case in assessment year 2015-16, learned Commissioner (Appeals) has decided the issue in favour of the assessee. Accordingly, learned DRP directed the Assessing Officer to verify the fact whether any appeal against the decision of Commissioner (Appeals) has been preferred before the higher forum and in case it is found not to be so, delete the adjustment. While completing the final assessment, the Assessing Officer incorporated the adjustment again. 7. We have considered rival submissions and perused the materials on record. As could be seen from the materials on record, the TP adjustments have been made in the final assessment orders by stating that against the decision of Commissioner (Appeals) in assessment year 2015-16 the department has preferred appeal. However, in the affidavit filed before us, the Assessing Officer has admitted that no appeal has been filed by the department against the order of Commis....
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....allowed the deduction claimed following the view taken by him in earlier assessment years. While deciding assessee's objections on the issue, learned DRP directed the Assessing Officer to verify whether any appeal has been filed by the department against the order of Commissioner (Appeals), who decided the issue in favour of the assessee in assessment year 2015-16 and in case no such appeal was filed, to allow the deduction. However, in the final assessment order, the Assessing Officer retained the addition by stating that department has challenged the order of Commissioner (Appeals) in assessment year 2015-16. 13. Before us, learned CIT(DR) has furnished an affidavit of the Assessing Officer admitting that against the decision of learned Commissioner (Appeals) for assessment year 2015-16 no appeal has been preferred by the department in any higher forum. Considering the aforesaid factual position, we delete the additions in both the assessment years under dispute. These grounds are allowed. 14. The next issue relates to disallowance under section 14A of the Act read with rule 8D while computing income both under the normal provisions as well as under section 115JB of the Act. Th....
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....essing Officer noticed that though the assessee had substantial receipts from sale of RECs issued by Central Electricity Regulatory Commission (CERC), however, he has not offered them to tax in the respective assessment years under consideration. When the assessee was called upon to explain the reason for not doing so, he replied that the income received from sale of RECs is for fulfillment of its mandate to promote renewable source of energy, hence, not in regular course of business. It was submitted that RECs were not issued to the assessee on account of any business but is a credit given for reducing emissions. Thus, it was submitted, the sale proceeds of RECs are in the nature of capital receipts. In support of such contention, the assessee relied upon a decision of the Hon'ble Andhra Pradesh High Court in case of CIT Vs. My Home Power Ltd. (2014) 46 taxmann.com 314 (AP). 20. The Assessing Officer, however, did not accept assessee's claim. While doing so, he observed that against the decision of the Hon'ble Andhra Pradesh High Court in case of CIT Vs. My Home Power Ltd. (supra), the department has filed a Special Leave Petition (SLP) in the Hon'ble Supreme Court, which has bee....
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....is a fact on record that the assessee has received RECs issued by CERC. Before we proceed to decide the issue, whether sale proceeds from RECs are in the nature of capital or revenue, it is necessary to briefly deal with the nature and character of RECs. 24. As per the Electricity Act, 2003, the State Electricity Regulatory Commission is to provide a percentage of consumption of power, which should be procured from renewable energy sources referred as Renewable Purchase Obligation (RPO). The Electricity Act/Policies of the National Action Plan of Climate Change (NAPCC) has provided a road map for increasing share of renewable energy in the total electricity generation capacity in the country. The renewable energy consists of electricity generated using biomass, hydropower, solar and wind technology. The object is to reduce environmental pollution caused by emissions from fossil fuel and its impact on the climate change. Therefore, to encourage use of renewable energy the Government of India launched RECs. RECs are basically market based instruments that certify that the bearer owns 1 mg/hour (MWh) of electricity generated from renewable energy resource. Once, the power provider ha....
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....ed certain sum on account of sale of certain CERs entitlement to other parties. All such parties are foreign parties and the amount has been received in foreign currency. The question that we are really required to adjudicate upon is whether such money received by the assessee on sale of CERs/ carbon credits is taxable under Income-tax Act or not. The Hyderabad bench of the Tribunal in case of My Home Power Ltd (Supra) while dealing with the similar issue held as under: "24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amou....
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....rbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income." "25. Further, as per guidance note on accounting for Self generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whicheve....
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....TA No. 1114/Hyd/2009 held that carbon credit receipts are capital in nature. This order of ITAT Hyderabad Bench was subsequently upheld by the Hon'ble Andhra Pradesh High Court in 365 ITR 82." "6.2 Accordingly, respectfully following the ratio of the settled judicial precedent as aforementioned, we allow the additional grounds raised by the assessee and hold that the income from sale of carbon credits is capital in nature." 5.3 Coming to the judgments relied upon by the AO and the Ld. CIT (A) and which have been further relied by the Ld. DR, we are of opinion that such cases do not support the case of revenue. As pointed out by the Ld. AR, the order of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd.{[2014] 47 taxmann.com 416 (Cochin Trib.)} had already been analyzed by the Hon'ble Allahabad High Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which held it 'not to be good in law'. The other order of the ITAT Ahmedabad Bench in the case of Kalpataru Power Transmission Ltd.{[2016] 68 taxmann.com 237 (Ahm. Trib.)}has been overruled by the later judgment of same bench of Ahmedabad Bench of the Tribunal in the same case of Kalpataru Power Trans....
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....ssue nor the Ld. DR could point out any contrary judgment on the issue. Therefore, respectfully following the ratio of the Hon'ble High Courts as discussed above as well the orders of the ITAT including the jurisdictional bench of the Tribunal, we are of the view that carbon credits/CERs are in nature entitlement accrued to the assessee on account of its efforts to reduce the emission of harmful greenhouse gases. They have arisen due to environmental concerns and therefore cannot be said to be 'connected with' or 'incidental to' the business activities of assessee. The assessee is engaged in the business of refrigerants, engineering plastics and industrial yarns etc. and is not into the business of trading of carbon credits. All these findings of facts have been given by the coordinate bench in assessee's own case in subsequent years in AY 2007-08 and AY 2010-11 which have been placed before us. We, therefore, hold that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with s....
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....he assessee carried on business of power generation and Carbon Credit was not even directly linked with power generation. It is held that on sale of excess Carbon Credits income was received and the Tribunal correctly held that it is capital receipt and could not be a business receipt or income. As a matter of convenience, the observations of the Hon'ble A.P. High Court in CIT v/s My Home Power Ltd., [2014] 365 ITR 082 (AP) (supra) is reproduced below:- "ITAT have considered the aforesaid submission and ITAT are unable to accept the same, as the learned Tribunal has factually found that "Carbon Credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns". ITAT agree with this factual analysis as the Assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. In the circumstances, we do not find any element of law in this appeal....
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....rticularly, the decisions of the Coordinate Benches discussed hereinabove, clearly support the case of the assessee that the receipts from RECs are not in the nature of revenue receipt. Therefore, we hold that the amounts received by the assessee from sale of RECs, being in the nature of capital receipts, are not taxable at the hands of the assessee. In view of our decision above, the alternative claim of the assessee of allowing deduction under section 80IA of the Act on receipts from RECs, no longer survives. 29. Another off-shoot of this issue is whether the receipts from RECs, being in the nature of capital receipts, will form part of book profit computed under section 115JB of the Act. We find, this issue has also been addressed by the Coordinate Bench in case of SRF Ltd. Vs. ACIT (supra) wherein it has been held as under: 6.4 It is a settled law that a capital receipt is not liable to tax under the Act unless it is specifically included in the definition of income u/s 2(24) of the Act and chargeable under any of the charging provisions of the Act. Once a particular receipt is treated as capital receipt, the same cannot be brought to tax in garb of 'minimum alternative tax'....
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....r of carbon credit. Ld. DR of the Revenue could not point out any difference in facts in the present case and in the case of CIT Vs. My Home Power Ltd. (Supra) and therefore, respectfully following this judgment of Hon'ble Andhra Pradesh High Court, we decline to interfere in the order of Ld. CIT (A) on this issue. Accordingly, Ground No. 1 of the Revenue is rejected." 6.6 We, therefore, respectfully following the aforesaid ratio of Hon'ble High Court hold that Carbon credits being the capital receipts cannot be brought to tax as book profits and are, thus, liable to be excluded from the computation of book profits u/s 115JB. The additional ground of appeal no.4 of the assessee is thus allowed." 30. Thus, respectfully following the ratio laid down by Coordinate Bench, as aforesaid, we hold that the receipts from sale of RECs, being in the nature of capital receipts, should be excluded for the purpose of computing book profit under section 115JB of the Act. Grounds are allowed to the extent indicate above. 31. The last and final issue which survives is the issues raised in ground nos. 4 and 5 in assessment year 2017-18. In these grounds assessee has raised the issue o....