ITAT Kolkata Upholds Section 80IA Deduction for Captive Power Plant Electricity Transfer — DCIT Vs Balarampur Chini Mills Ltd

Case Background and Core Dispute

Case: DCIT Vs Balarampur Chini Mills Ltd
Forum: Income Tax Appellate Tribunal, Kolkata
Appeal Number: ITA No. 1672/Kol/2019
Assessment Year: 2016-17
Order Date: 05/05/2021

The Income Tax Appellate Tribunal, Kolkata, was called upon to adjudicate a Revenue appeal arising from an order passed by the Commissioner of Income Tax (Appeals)-22, Kolkata under Section 250 of the Income Tax Act, 1961. The fundamental question before the Tribunal was: at what per-unit rate should electricity transferred from the assessee's Captive Power Plant (CPP) to its own manufacturing units be valued, for the purpose of computing the deduction admissible under Section 80IA of the Income Tax Act, 1961?

The assessee, Balarampur Chini Mills Ltd., operates in the manufacturing and sale of sugar, molasses, industrial alcohol, ethanol, and organic manure, along with generation and distribution of steam and electricity. Its factories, power undertakings, and distilleries are spread across multiple locations in Uttar Pradesh, with the corporate head office situated in Kolkata.

Facts of the Case

For Assessment Year 2016-17, the assessee filed its return of income electronically on 26.11.2016, declaring total income of Rs. 65,88,72,120/- under the normal provisions of the Income Tax Act, 1961, while its book profits stood at Rs. 1,02,89,54,675/-. The assessee claimed a deduction under Section 80IA amounting to Rs. 2,43,24,28,803/- on account of profits derived from the generation and distribution of power.

For the purpose of this deduction, the assessee valued the electricity transferred from its CPP to its other manufacturing units at Rs. 8.30 per KWh. This rate was sourced from tariff orders issued by the Uttar Pradesh Electricity Regulatory Commission, pursuant to which the Uttar Pradesh Power Corporation Limited (UPPCL) had notified applicable tariff rates for electricity supply in that area. The assessee's position was grounded in the provisions of Section 80A(6) and Section 80IA(8) of the Income Tax Act, 1961.

The case was taken up for scrutiny assessment, and notices were issued under Section 143(2) and Section 142(1). Since the assessee had entered into specified domestic transactions with associated enterprises, the matter was referred to the Transfer Pricing Officer (TPO) for determination of the arm's length price.

Transfer Pricing Officer's Determination

The TPO-1, Kolkata, passed an order under Section 92CA(3) on 08.03.2019, determining the arm's length price of electricity at Rs. 4.90 per KWh and consequently computing a transfer pricing adjustment of Rs. 41,65,23,644/-. The TPO arrived at this rate by reference to:

  • The average rate at which the assessee's generating unit had sold electricity to unrelated distribution companies under a Power Purchase Agreement (PPA); and
  • The regulatory framework governing electricity tariffs under Sections 61 and 62 of the Electricity Act, 2003.

The TPO heavily relied upon the judgment of the Calcutta High Court in CIT Vs ITC Ltd., reported in 236 Taxman 612, in support of his position.

The Assessing Officer subsequently gave effect to the TPO's order under Section 143(3) of the Income Tax Act, 1961, completing the assessment on 26.03.2019. The effect of the TPO's adjustment was a reduction in the Section 80IA deduction by Rs. 40,82,45,314/-, restricting the allowable deduction to Rs. 2,02,41,83,489/- as against the claimed amount of Rs. 2,43,24,28,803/-.

CIT(A)'s Order — Relief Granted to the Assessee

The assessee challenged the Assessing Officer's order before CIT(A), who accepted the assessee's contentions and directed deletion of the transfer pricing adjustment. The CIT(A) held that:

  1. The rate at which electricity was transferred from the CPP to the non-eligible manufacturing units should be benchmarked at the rate charged by the State Electricity Board/UPPCL to manufacturing consumers, rather than the rate at which the CPP sold power to distribution licensees under a regulated PPA.

  2. The PPA between the CPP and the distribution company was a long-term, regulated arrangement subject to statutory clearances and approvals — it could not be treated as a transaction conducted under uncontrolled conditions, and thus did not constitute a reliable Comparable Uncontrolled Price (CUP).

  3. The non-eligible manufacturing units had, during the year, procured substantial quantities of electricity from unrelated enterprises (the State Electricity Board) at a market rate of Rs. 11.22/unit under uncontrolled conditions. Against this backdrop, the transfer price of Rs. 8.30/unit adopted by the assessee was fair and reasonable.