Determination of market value in an inter-unit transfer in the context of profit-linked incentive deduction - end to disputes or beginning of new one?
As per the Income-tax Act (the Act), eligible taxpayers can claim a deduction under Section 80-IA (8) with respect to power generation subject to fulfilling certain conditions. One such critical criteria is determination of appropriate market value while computing the deduction as per provisions of the Act.
Section 80-IA (8) of the Act
The Act provides tax holiday in respect of profits of eligible businesses by setting up an industrial undertaking in India for the generation and distribution of power.
The profits eligible for tax holiday in case of transfer of goods between taxpayer’s eligible business to any other business of the same taxpayer (interunit transfer) would be computed by considering the transfer to be at the market value of such goods. Market value is defined as the price at which such goods would ordinarily fetch in the open market or the arm’s length price for the specified domestic transaction under Section 92BA of the Act.
Provisions of Electricity (Supply) Act, 1948
The taxpayers are allowed to set up a captive power-generating unit subject to the approval of the State Electricity Board (SEB). For the surplus power generation, the taxpayer can enter into power purchase agreements with SEB. The rate at which the SEB would purchase the surplus power units is determined according to the statutory requirements set by SEB, resulting in no room for negotiation by the taxpayer. Typically, the rate at which SEB purchases power from Power Generating Units (PGUs) is lower than the price at which it sells to industrial customers.
The taxpayers are not allowed to sell surplus power to any other person in the open market except with the prior permission of the SEB and subject to stringent conditions. As a result, it is generally not viable for the third-party consumer to purchase power from such taxpayers.
Definition of Open Market
Market value has been defined under Section 80IA (8) of the Act. However, open market is not defined in the Act, but the reference was drawn to:
- Black’s Law Dictionary, “open market” means a market in which any buyer or seller may trade and where prices and product availability are determined by free competition.
- P. Ramanatha Aiyer’s Advanced Law Lexicon “open market” means a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.
Amended definition of Market Value as per Section 80A (6) of the Act
Section 80A (6) of the Act was inserted with effect from April 1, 2009. Thus, the alternate market value definition in Section 80A (6) is misplaced. It was inserted post the subsequent years and did not exist in the year under dispute.
Supreme Court Verdict
M/s Jindal Steel and Power Ltd (taxpayer),1 engaged in the business of generation of electricity, manufacture of sponge iron, M.S. Ingots, etc., had set up captive PGUs to supply electricity to its manufacturing units during the AY 2001-02, since electricity supplied by the State Electricity Board was inadequate to meet the requirements of its industrial units.
The power was supplied by captive PGUs to its manufacturing units (MU) at the rate of INR 3.72 per unit, being the rate at which the SEB was supplied to the industrial consumers and the taxpayers.
The taxpayer entered into a power purchase agreement (PPA) with SEB to sell surplus power units remaining after the captive use. Such surplus power was sold at the rate of INR 2.32 per unit.
The taxpayer filed its Return of Income (ROI) for the FY 2000-01, declaring its income as NIL after claiming a tax holiday with respect to the profits of PGU’s.
The Revenue Authorities, including the first appellate authorities, allowed the benefit of tax holiday for PGUs but recalculated the benefit by considering the market value of power units supplied to MUs at INR 2.32 per unit, being the rate at which the taxpayer sold the surplus power units to SEB. The tax authorities contended that the price of INR 3.72 per unit had been inflated by the taxpayer, resulting in a reduction of the quantum of tax holiday claimed by the taxpayer for the relevant period. Reliance was placed on the decision of Calcutta HC2, wherein it was held that the deduction can only be claimed based on the rates fixed by the tariff regulatory commission for the sale of electricity by the generating companies.
The SC upheld the stand of Income Tax Appellant Tribunal (ITAT) and High Court. Basis the above detailed analysis and by rejecting the case law reliance/Section 80A (6) of the Act, placed by the Revenue Authorities, the Supreme Court held that such price as fixed by SEB cannot be said to be the price determined in the competitive environment. It was held that the price determined by the SEB was based on statutory regulation and contract and hence cannot be equated with the “market value.”
Also, the Supreme Court held that as an alternate in the absence of PGUs of the taxpayer, the MU were required to obtain power from SEB, which would be at the rate of INR 3.72 per unit. In other words, the price at which electricity is supplied to industrial customers in the open market.
Impact of the Supreme Court’s Decision
The above judgment has settled the position that the market value shall be the value at which goods are available in the open market relating to FY 2000-01. It would be interesting to see the impact of judgment for the years falling under the period when post incorporation amended the definition of market value as per Section 80A (6) of the Act.
1. Jindal Steels & Others [TS-731-SC-2023]
2. CIT vs ITC Ltd, (2015) 64 Taxmann.com 214