Taxpublishers.in - Monday Corner Answer to the Quiz for the week (03 Jun 2024)

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Quiz for the week (03 Jun 2024): Worth (P) Ltd is engaged manufacture of textile goods. It commenced manufacture of electricity by installing windmill. The power generated was used for captive consumption. The power if sold to State electricity authority it was eligible to receive Rs 6 per unit and if bought it would cost Rs.8 per unit. The assessee computed sale price of captive power at Rs.8 per unit to compute income eligible for deduction under section 80-IA. The AO substituted the (notional) revenue at Rs. 6 per unit. The difference in absolute terms was Rs.150 lakhs. Decide whether the claim of assessee or AO is tenable in law. Best Answer : The assessee in this case has windmill for generating power which is used for captive consumption. The issue is whether the price at which the power is sold to State electricity authority is to be taken for the purpose of deduction under section 80-IA or the price otherwise payable for power supplied by State electricity authority to be considered. One may gainfully refer to the Supreme Court decision in the case of CIT v. Jindal Steel & Power Ltd (2024) 460 ITR 162 (SC) where it was held that the assessee can claim the cost of power that would have been incurred if it was purchased from State electricity authority instead of the price that would have been realised if it was supplied to such authority. The following principles laid down by the Supreme Court are worth noting: 1. Price at which power was supplied to State electricity authority by the power generating undertaking was not the market value as there was no open market price in such case. 2. Power not captively consumed by its manufacturing unit could not have been sold in the open market to any third party without prior permission of State electricity authority. There was no open market condition, and the assessee had no option but to sell the power to State electricity authority. 3. As State electricity authority was the only buyer and it had virtual monopoly therein, thus the rate so decided in agreement cannot be regarded as market value for the purpose of deduction under section 80-IA. 4. The price at which the power supply was to be made, was not mutually decided but rather imposed by State electricity authority upon the taxpayer under the power purchase agreement. 5. Under prevailing electricity regime, the power could not have been freely supplied to any consumer, also that the tariff for power was subject to statutory restrictions. 6. As per Black’s Law Dictionary, 10th Edition, where ‘open market’ was defined to mean a place where buyer and seller can trade and where prices are determined by free competition. 7. The taxpayer had no room or elbow space for negotiating the price. It observed that taxpayer was compulsorily required to supply the power to State electricity authority. 8. The Supreme Court therefore held that such tariff was not determined in a competitive or free environment but under a compulsive legislative mandate. 9. The market value of power should be the price at which State electricity authority supplied power to the consumers in an open market i.e. Rs.8 per unit in the present case. Thus, it can be concluded that the claim of the assessee is tenable in law. Gaurang Khakhkhar Rajkot

Quiz for the week (03 Jun 2024):

Worth (P) Ltd is engaged manufacture of textile goods. It commenced manufacture of electricity by installing windmill. The power generated was used for captive consumption. The power if sold to State electricity authority it was eligible to receive Rs 6 per unit and if bought it would cost Rs.8 per unit. The assessee computed sale price of captive power at Rs.8 per unit to compute income eligible for deduction under section 80-IA. The AO substituted the (notional) revenue at Rs. 6 per unit. The difference in absolute terms was Rs.150 lakhs. Decide whether the claim of assessee or AO is tenable in law.

Best Answer :

The assessee in this case has windmill for generating power which is used for captive consumption. The issue is whether the price at which the power is sold to State electricity authority is to be taken for the purpose of deduction under section 80-IA or the price otherwise payable for power supplied by State electricity authority to be considered.

One may gainfully refer to the Supreme Court decision in the case of CIT v. Jindal Steel & Power Ltd (2024) 460 ITR 162 (SC) where it was held that the assessee can claim the cost of power that would have been incurred if it was purchased from State electricity authority instead of the price that would have been realised if it was supplied to such authority.

The following principles laid down by the Supreme Court are worth noting:

1. Price at which power was supplied to State electricity authority by the power generating undertaking was not the market value as there was no open market price in such case.

2. Power not captively consumed by its manufacturing unit could not have been sold in the open market to any third party without prior permission of State electricity authority. There was no open market condition, and the assessee had no option but to sell the power to State electricity authority.

3. As State electricity authority was the only buyer and it had virtual monopoly therein, thus the rate so decided in agreement cannot be regarded as market value for the purpose of deduction under section 80-IA.

4. The price at which the power supply was to be made, was not mutually decided but rather imposed by State electricity authority upon the taxpayer under the power purchase agreement.

5. Under prevailing electricity regime, the power could not have been freely supplied to any consumer, also that the tariff for power was subject to statutory restrictions.

6. As per Black’s Law Dictionary, 10th Edition, where ‘open market’ was defined to mean a place where buyer and seller can trade and where prices are determined by free competition.

7. The taxpayer had no room or elbow space for negotiating the price. It observed that taxpayer was compulsorily required to supply the power to State electricity authority.

8. The Supreme Court therefore held that such tariff was not determined in a competitive or free environment but under a compulsive legislative mandate.

9. The market value of power should be the price at which State electricity authority supplied power to the consumers in an open market i.e. Rs.8 per unit in the present case.

Thus, it can be concluded that the claim of the assessee is tenable in law.

Gaurang Khakhkhar
Rajkot