2025 (6) TMI 983 - HC - Income Tax

Adjustment for transaction in respect of transfer of power/electricity - HELD THAT - The issue is squarely covered by the decision of this Court in PCIT vs. Star Paper Mills Ltd. 2025 (2) TMI 766 - CALCUTTA HIGH COURT wherein the Court followed the decision of Jindal Steel Power Ltd. 2023 (12) TMI 417 - SUPREME COURT as decided against the appellant/Department. Additional depreciation u/s 32 (1) (iia) - HELD THAT - The said issue is covered by the decisions of this Court in Ramkrishna Forging Ltd. 2022 (7) TMI 1312 - CALCUTTA HIGH COURT and PCIT vs. Deepak Industries Ltd. 2023 (5) TMI 1411 - CALCUTTA HIGH COURT and also the decision in CIT vs. Century Enka Ltd. 2023 (3) TMI 675 - CALCUTTA HIGH COURT That apart the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 to 2014-15. However the Department has not filed any appeal against the said order and the order has attained the finality. In the light of the above the substantial question of law (k) is decided against the appellant/revenue. Nature of receipt - whether the industrial promotion assistance is capital receipt? - HELD THAT - This issue is covered in favour of the assessee in the light of the decision of this Court in PCIT vs. Budge Budge Refineries Ltd. 2022 (2) TMI 533 - CALCUTTA HIGH COURT . That apart the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 and 2012-13 and the Department did not prefer any appeal before this Court and the order passed by the Tribunal on the very same issue with regard to the aforementioned assessment years has attained finality. MAT computation - whether capital receipt to be excluded for computation of book profit under Section 115JB? - This issue is covered in favour of the assessee in the light of the decision of this Court in Ankit Metal Power Ltd. 2019 (7) TMI 878 - CALCUTTA HIGH COURT That apart for the assessment year 2013-14 the very same issue was decided by the learned Tribunal in favour of the assessee by the learned Tribunal. Therefore substantial question of law (n) is answered against the revenue. Nature of receipt - interest subsidy from the State Government - capital or revenue receipt - HELD THAT - This issue had arisen for consideration in the assessee s own case for the assessment years 2008-09 and 2009-10 as well as 2010-11 and those orders were challenged by the Department before this Court 2020 (3) TMI 1431 - CALCUTTA HIGH COURT and 2019 (9) TMI 1688 - CALCUTTA HIGH COURT respectively and the said substantial question of law has been admitted for consideration. That apart the very same substantial question of law was raised by the Department in ITAT/226/2023 and ITAT/227/2023 for the assessment years 2013-14 and 2014-15 respectively and these appeals have been admitted on the said substantial question of law. Hence this appeal is admitted only on the following substantial question of law. m) Whether on the facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal was justified in law by holding the Interest Subsidy from the State Government to be capital in nature as against revenue receipt as treated in the assessment order? List this appeal after twelve weeks.

Summary

The core legal questions considered by the Court primarily relate to the determination of arm's length price (ALP) in transfer pricing adjustments concerning transactions involving the transfer of power/electricity by a captive power plant (CPP) to the assessee, as well as the characterization of various receipts and benefits for income tax purposes under the Income Tax Act, 1961 (the Act). These questions are enumerated in the substantial questions of law (a) to (n) raised by the revenue, with a particular focus on the validity of the Income Tax Appellate Tribunal's (Tribunal) deletions of adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO), and the nature of certain receipts such as interest subsidies and industrial promotion assistance.

Issues (a) to (j) revolve around the correctness of the Tribunal's deletion of transfer pricing adjustments related to the sale and transfer of power/electricity by the CPP to the assessee. These include whether the Tribunal erred in not accepting the TPO's conclusion that the transaction was not at arm's length, the adequacy of adjustments made for costs related to transmission and distribution, the applicability of electricity board tariff rates, the rationale for selecting the tested party in transfer pricing analysis, and the distinction between generation and distribution tariffs.

Issues (k) to (n) concern the tax treatment of various receipts and benefits: (k) relates to additional depreciation under Section 32(1)(iia); (l) and (n) concern the characterization of industrial promotion assistance and capital receipts for computation of book profits under Section 115JB; and (m) addresses whether interest subsidy from the State Government is capital or revenue in nature.

Regarding issues (a) to (j), the Court relied heavily on precedent, particularly the decision in the case of PCIT vs. Star Paper Mills Ltd., which itself followed the Supreme Court's ruling in CIT vs. Jindal Steel & Power Ltd. These authorities establish the principles for determining arm's length price in transactions involving captive power plants and related entities. The Court noted that the Tribunal's findings in the assessee's favor for earlier assessment years on identical issues had not been challenged by the revenue, thereby lending further weight to the Tribunal's approach.

The Court emphasized that the Tribunal correctly appreciated the TPO's analysis but ultimately found the adjustments unjustified based on the factual matrix and the applicable legal standards. It was noted that the electricity board tariff rates, which the assessee relied upon, were appropriate benchmarks for ALP determination, provided proper adjustments were made for transmission and distribution costs. The Court upheld the Tribunal's rejection of the AO/TPO's downward adjustments related to the captive power generating unit's profits, recognizing that the tariff order rates for independent power generating units were not directly applicable to the CPP's transactions.

Further, the Court agreed with the Tribunal's reasoning that market value determination is not relevant for ALP under transfer pricing provisions, which focus on the price that would have been charged between independent enterprises under comparable circumstances. The Tribunal's selection of the least complex entity as the tested party was also affirmed as a sound methodological choice consistent with transfer pricing principles. The Court rejected the revenue's contention that the manufacturer (the CPP) should be compensated based on distribution rates, underscoring the fundamental distinction between generation and distribution tariffs and the real cost differences involved.

In respect of issues (k) to (n), the Court found that the relevant questions had been conclusively decided in favor of the assessee in prior decisions of the same Court and the Tribunal, with no successful appeals by the revenue challenging those findings. Specifically, additional depreciation under Section 32(1)(iia) was held to be allowable as per established precedents. Industrial promotion assistance was classified as capital receipt, consistent with the Court's earlier ruling in PCIT vs. Budge Budge Refineries Ltd. The exclusion of capital receipts for computation of book profits under Section 115JB was also confirmed, following the decision in PCIT vs. Ankit Metal & Power Ltd.

The only substantial question of law reserved for further consideration was issue (m), concerning the characterization of interest subsidy from the State Government. The Tribunal had held the interest subsidy to be capital in nature, contrary to the assessment order treating it as revenue receipt. This question had been admitted for consideration in multiple related appeals and was directed to be heard alongside those matters, indicating its complexity and significance.

In conclusion, the Court upheld the Tribunal's deletion of transfer pricing adjustments related to the captive power plant transactions, affirming the methodology and reasoning adopted by the Tribunal and rejecting the revenue's technical and factual contentions. It also affirmed the favorable tax treatment accorded to the assessee regarding additional depreciation, industrial promotion assistance, and capital receipts, based on binding precedents and the finality of earlier unchallenged orders. The only issue left unresolved relates to the nature of the interest subsidy, which remains pending adjudication in connected appeals.

The Court's reasoning preserves the principle that transfer pricing adjustments must be grounded in sound economic and legal analysis consistent with arm's length standards, and that tax benefits and receipts must be classified in accordance with established legal principles and judicial precedents. The decision underscores the importance of consistency in judicial treatment across assessment years and the binding effect of prior adjudications on identical issues.