Calcutta High Court Validates Section 263 Revision for Non‑Examination of Head Office Expense Allocation in Section 80‑IA Deduction

1. Background of the Dispute

The Calcutta High Court, in a group of appeals involving Shyam Sel and Power Limited and Shyam Metalics and Energy Limited, examined whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act 1961 in relation to deductions claimed under Section 80-IA on profits of captive power plants (CPPs).

Both assessees were engaged in iron and steel manufacturing and had set up CPPs at Mangalpur and Jamuria. These CPPs constituted “eligible business” under Section 80-IA, permitting a 100% deduction of profits for ten consecutive assessment years. The power generated was not sold to third parties but mainly consumed by the assessees’ own manufacturing units. Consequently, the internal transfer of power between CPPs and manufacturing divisions triggered:

Section 80-IA(8) – mandating use of “Market Value” for inter‑unit transfers, and
Chapter X (Transfer Pricing) – as the transactions qualified as Specified Domestic Transactions (SDTs) owing to the monetary thresholds under Section 92BA(iii).

A search and seizure action was conducted on the Shyam group on 17 January 2019, leading to assessments under Section 153A. During the search‑based proceedings, the Assessing Officer (AO) referred the internal power transfer pricing to the Transfer Pricing Officer (TPO) under Section 92CA for determination of Arm’s Length Price (ALP).

The assessees had adopted what they described as the “Direct Nexus” theory for allocating costs to CPPs. Under this approach:

Only those costs having a direct, proximate connection with generation of power were debited to CPPs;
Common corporate/Head Office (HO) expenses – including finance costs, administrative expenditure, and employee‑related costs – were retained and claimed in the non‑eligible units, without loading any part of such overheads onto CPPs.

The TPO accepted the broad methodology of cost allocation but reduced the rate at which power was transferred from CPPs to the manufacturing units, determining a lower ALP of ₹2.48 per unit. Relying on the TPO’s ALP determination as required under Section 92CA(4), the AO completed the assessment on 25 August 2021, resulting in extinction of the computed profit of CPPs and consequential nil deduction under Section 80‑IA.

On appeal, the CIT(Appeals) re‑worked the transfer price / grid rate, which in turn altered the profitability of the CPPs. This led to a fresh computation of eligible profit and direction to grant Section 80-IA deduction of ₹42,18,20,214. The Revenue challenged this aspect before the Tribunal, which remitted the matter to the AO on limited verification of revised grid rates.

While this appellate process on quantum was underway, the PCIT initiated revision proceedings under Section 263, contending that the AO had failed to examine:

Proportionate allocation of common/head office expenses to the CPPs; and
Proper debiting of finance costs, personnel costs, and administrative overheads to the eligible units.

The PCIT held that the non‑examination of HO cost allocation rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The Income Tax Appellate Tribunal, Kolkata Bench “A”, upheld this revisionary order. Aggrieved, the assessees approached the Calcutta High Court under Section 260A.

2. Core Questions Before the High Court

The High Court framed three substantial questions of law, all of which revolved around the legality and scope of the PCIT’s Section 263 powers in this fact situation:

Doctrine of Merger vs. Section 263
Whether PCIT could exercise jurisdiction under Section 263 to revisit the Section 80-IA deduction when that very deduction had already been adjudicated and recomputed by the CIT(Appeals).
Effect of Transfer Pricing Proceedings
Whether, after the TPO had examined the CPP transactions under Section 92CA, including the cost allocation methodology suggested in the Transfer Pricing Study Report, the PCIT could still invoke Section 263 to question the same aspect.
Plausible View Defence
Whether the AO’s and TPO’s acceptance of the “Direct Nexus” theory constituted adoption of a legally tenable “plausible view”, thereby immune from revision under Section 263.

The assessees argued that the assessment order had merged with the appellate order of the CIT(Appeals), that the TPO’s jurisdiction was exclusive in matters of cost allocation in SDTs, and that the AO’s approach was supported by existing judicial precedents. The Revenue, conversely, maintained that there was complete absence of inquiry into HO expense allocation and that neither the CIT(Appeals) nor the TPO had adjudicated that issue.

3. Assessee’s Key Contentions

3.1 Merger Due to CIT(Appeals) Order

The assessees submitted that:

The claim under Section 80-IA is a single, indivisible issue, comprising both income and expense components of the eligible undertaking.
Once the CIT(Appeals) revisited and recomputed the quantum of deduction (₹42,18,20,214), the entire subject matter of the CPP’s profit and thereby all underlying components had merged into the appellate order.
In view of Explanation 1(c) to Section 263(1), the PCIT could not revise any part of the assessment relating to Section 80-IA, as the assessment order had allegedly lost its independent identity on that issue.

3.2 TPO’s Exclusive Domain for SDTs

On transfer pricing, the assessees contended:

Inter‑unit power transfers exceeded ₹20 crore, thereby qualifying as Specified Domestic Transactions under Section 92BA(iii).

Calcutta HC on Section 263: Failure to Scrutinize Head Office Expense Allocation in Section 80-IA Claim Justifies Revision