TMI Blog2006 (4) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... siness carried on by the assessee and the consideration, if any, for such transfer is recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of transfer, then for the purpose of deduction under that section, the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. In other words, the provisions of section 80-IA themselves provide an answer and give a solution were there is a captive consumption of the finished goods of the eligible units. Thus, the order of the CIT(A) granting 80-IA relief in respect of DG Units I, II, III and IV cannot be found fault with. The other consideration that the assessee has not operated these Units by itself but got them operated through outsiders and therefore the assessee is not entitled for 80-IA relief, in our view, is not a right approach. Such consideration, in our opinion, is not a relevant consideration. Keeping in view the purpose and intent of relief u/s 80-IA, such consideration, in our opinion, is not germane from the provision of section 80-IA of the Act. We have considered the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. We therefore, do not find any infirmity in the order of the CIT(A) on this issue and confirm the same. In the result, both the appeals are dismissed. - HON'BLE G.E. VEERABHADRAPPA, VICE PRESIDENT AND R.S. PADVEKAR, JUDICIAL MEMBER For the Appellant : S.E. Dastur, D.B. Desai and Souman Adak, Advs. For the Respondent : Ajoy Kumar Singh, C.S. Kaahlon, Bharat Bhushan and Vijaya Shankar, Advs ORDER G.E. Veerabhadrappa, Vice President. 1. These two cross appeals arising out of the order dated 20-2-2002, (there seem to be a typographical error) of the CIT(A)-XXIII, Mumbai for the assessment year 1999-2000 were heard together and are being disposed of by this consolidated order for the sake of convenience. 2. The major dispute in these appeals relate to the assessee's claim for deduction under section 80-IA of the Income-tax Act, 1961 ('the Act') in respect of the Power Unit Nos. I, II, III and IV. The relevant facts are that the assessee is a limited company engaged in the manufacture and sale of paper and paperboards, multi layer boards, etc. During the assessment year 1996-97, the assessee installed three windmills for power generation in the d State of Tamil N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer's specific reasons for same are brought out here for the purpose of completeness of the issue: (I) The deduction under section 80-IA is allowable on profit and gain derived from any business of an industrial undertaking. In the instant case the assessee is generating the electricity through the power of plant unit Nos. 1, 2, 3 and 4 and the same is supplied to their paper division thus the assessee is not doing the business of power generation as it is not sold to any outside parties. Thus, no revenue is brought to the unit. (II) Secondly, the power plant is only a captive power plant installed in order to have continuous supply of power to the main plants in case of power cut. Thus, the captive power of plants are part parcel of the main plants and therefore are the integral part of the main plant i.e., Paper plant. Assessee has not sold this power to any outside party and even to Karnataka State Electricity Board. In fact, there is no agreement with the Karnataka State Electricity Board for purchase of power by it from the assessee. Nor any rate has been fixed. Therefore, the assessee's adoption of rate of which K.S.E.B. supply power to industrial users is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy. It was not a licencee under the Electrical Act for generating electricity. The installation of generators was necessitated not because the assessee, instead of buying the energy from the State electricity board would generate such electricity itself for its consumption. The change of mechanical power into electrical energy might have a bearing on the running of the industries but it was not an integral part or a component or ancillary of the product, manufactured by the assessee. The assessee was not engaged in the business of generating electricity and accordingly it was not entitled to initial depreciation under section 32(1)(vi).' (IV) The Hon'ble Supreme Court in the case of CIT v. Distributors (Baroda) Pvt. Ltd. 83 ITR 377 has held that the Business means some real, substantial and systematic or organized course of activity of conduct with a set purpose. In the instant case the set purpose of the assessee-company is to get continuous supply of power and not to generate income. Business activity or transaction necessarily implies the activity with an object to earn profit. To regard an activity as business there must be course of dealings either actually contained o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of profit in a case where any goods of an eligible industrial undertaking is transferred to any other business carried on by the assessee. The sub-section provides that for the purpose of computing the profits of the eligible units the market value of the goods should be adopted. In this connection, reference was placed on the decision of the Supreme Court in the case of CIT v. Orient Paper Mills Ltd. [1989] 176 ITR 110 and also the decision of the Calcutta High Court in CIT v. Hindusthan Motors Ltd. [1981] 127 ITR 210 and also the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195. The learned CIT(A) went on to discuss the technical details of the Unit Nos. I, II, III and IV. He considered the investment involved in the installation of these Units and also took opinion of technical people and also considered the units of power generated in each of these undertakings. The CIT(A) came to the view that each of the Units is an industrial undertaking engaged in the generation of power with the aid of power and, according to him, whether a capital unit is entitled for such relief was settled by the Apex Court in Orient Paper Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icity bill. The Assessing Officer was, therefore, directed to examine the electricity bills on which the assessee has based its working of the transfer price and recalculate the price to be adopted after excluding elements of tax or levy which may form part of the total amount billed. After excluding such amount, the price per unit of power would be determined and the same should be adopted as the transfer price of the power generated by the assessee's power DG Units. Another important issue which the learned CIT(A) has addressed himself was with regard to the computation of the profits of the industrial undertaking. According to him, an industrial undertaking has to be regarded as an independent business. Therefore, the profit and loss account of the unit has to include all indirect costs such as management remuneration, administrative overheads, etc., in proportion to the turnover or business of the Unit. It was admitted by the assessee that while interest costs and other direct expenses have been debited, certain administrative overheads have not been so included. According to the profit and loss account of the assessee, the following expenses have to be proportionately debi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not considering the Written submissions dated 17-2-2003 made by the Addl. CIT, Range 1(3), Mumbai on the basis of the survey action carried out at the factory premises of the assessee on 6-2-2003. III. The Ld. CIT(A) erred in allowing more deductions under section 80-IA than claimed by the assessee in the return without referring the matter to the Assessing Officer for his comments. The assessee is also aggrieved against certain directions of the CIT(A) and its grievances is in the following grounds, so far as they relate to the determination of the income eligible for deduction under section 80-IA of the Act: (2a) That on the facts and in the circumstances of the case, Ld. CIT (Appeals) was not justified in holding that tax or levy is not be included in the computation of Transfer Price of power for computation of deduction under section 80-IA in respect of power generating unit. (2b) That on the facts and in the circumstances of the case, Ld. CIT (Appeals) failed to appreciate the fact that the Transfer Price of power adopted by the appellant for computation of deduction under section 80-IA in respect of power generating unit was in accordance with the provisions of the- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkers in respect of these units. In other words, unit Nos. III and IV, apart from being taken on lease, have not been operated by the assessee but they are operated by outsiders. The learned Departmental Representative disputed the findings of the learned CIT(A). The learned Departmental Representative further pointed out that the CIT(A) erred in directing the allowance of deduction under section 80-IA on the basis of average consumption of electricity from KSEB without appreciating the fact that the assessee itself has sold electricity to TNSEB at the rate of Rs. 2.62 per unit. According to him, without prejudice to the main contention, deduction under section 80-IA of the Act is directed to be allowed at a higher Transfer Price. The learned counsel for the assessee pointed out that unit No. I was owned and operated by the assessee in assessment year 1996-97 and in that year no claim under section 80-I of the Act was made because of the loss. In assessment year 1997-98, unit No. II was installed. The said unit was taken on lease, but operated by the assessee. In assessment year 1997-98 the assessee acquired unit No. II by taking the same on lease and operated both unit Nos. I and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased units, the Tribunal orders in the earlier years have already extended the relief to such units so, the learned counsel for the assessee pointed out, in a way the main grievance of the revenue in its appeal has already been decided in favour of the assessee by the earlier orders of the Tribunal cited supra. The learned counsel for the assessee drew our attention to the several DG sets installed by the assessee to meet its increasing power demand for the paper unit, which shows that each of the unit is clearly identifiable. As already found by the learned CIT(A) they are separately outsourced and there is no dispute as regards the identity of each of these separate units. They are different in the matter of capacity and in the matter of fuel consumption required for generation of power. There is no interlacing or interlinking of these units. Just because a common water pump or water storage is used to draw the water required for the units it does not loose the identity of the unit. Each of the unit stands on its own and produces the power required for captive consumption. There is no splitting up of the business already in existence. Atleast, this was not the line on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere catering to the captive power requirement. As the Assessing Officer puts it, if the assessee has not realized any revenue by selling the power to outsiders, can the assessee be held to be entitled for deduction under section 80-IA of the Act? The Assessing Officer was of the view that it is only an inter-division transfer and there was no revenue realized by it and consequently there was no derivation of profit or income in the business of industrial undertaking. The question raised by the Assessing Officer have all been answered by the Supreme Court in the case of Orient Paper Mills Ltd. This decision of the Supreme Court does not bring out the facts. It has only affirmed the decision of the Calcutta High Court in CIT v. Orient Paper Mills Ltd. [1974] 94 ITR 73. The facts could only be found in this judgment of the Calcutta High Court. The assessee in that case owned a paper mill. It set up a plant for the manufacture of caustic soda, an essential chemical for use in the process of manufacture of paper. The assessee obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. The Income-tax Officer in that case held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may be stated that the Tribunal in the assessment years 1997-98 and 1998-99 has already granted relief in respect of Unit Nos. I and II which were established for the purpose captive consumption. Moreover, the provision of section 80-IA(8) itself says that where any goods or service of the eligible business are transferred to any other business carried on by the assessee and the consideration, if any, for such transfer is recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of transfer, then for the purpose of deduction under that section, the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. In other words, the provisions of section 80-IA themselves provide an answer and give a solution were there is a captive consumption of the finished goods of the eligible units. In the light of these discussion the order of the CIT(A) granting 80-IA relief in respect of DG Units I, II, III and IV cannot be found fault with. The other consideration that the assessee has not operated these Units by itself but got them operated through out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction under section 80-IA should not be on the average rate of actual consumption of the electricity from KSEB when the assessee itself has sold electricity to TNSEB at the rate of Rs. 2.62 per unit. The assessee's grievance is that the CIT(A) was not justified in holding that the element of tax should not be included in the computation of transfer price and he also erred, according to the assessee, in directing to give a pro rata allocation of indirect expenses of the company for the purpose of computation of the profit of the power generating Units. We have considered the submissions of the parties on this issue and are unable to find any merit in them. The Assessing Officer's adoption of the rate at which it sold the power to TNSEB cannot be accepted since the Units themselves are working at Dandeli in the State of Karnataka and the cost of generation of power in Tamil Nadu and Karnataka are different. Apart from that, the assessee has paid to KSEB for purchase of the power and the CIT(A) has correctly come to a reasonable conclusion that the transfer price should be on the basis of average price paid by the assessee during the whole year to KSEB minus certain e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise duty only to the closing stock of paper division and OFC division and computed the effect of section 145A by claiming a deduction of Rs. 26,16,724. It appears that the assessee filed revised return wherein effect to section 145A was given by including excise duty element on the opening stock of finished goods and modified its claim to Rs. 2,62,55,170. The assessee vide its letter dated 23-3-2002 to the Assessing Officer justified the aforesaid working which is given at pages 130 to 135 of the paper-book. The Assessing Officer disallowed the assessee's claim on the ground that the assessee shall confine the addition on account of excise duty only in respect of the stock disclosed for the assessment year under consideration without making corresponding adjustment in opening stock of the same assessment 23 year. The necessary disallowance was made by the Assessing Officer and the CIT(A) discussed elaborately the amendment to section 145A of the Act and was of the opinion that the contentions of the assessee are not acceptable. According to him even when a legal fiction is created it has to be interpreted in a manner practicable. If the contentions that the opening stock also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force. As already explained, the provisions of section 145A were introduced by the Finance (No. 2) Act, 1998 with a view to end the litigation which existed prior to that. In order to ensure that the values of the opening stock and closing stock are correct value an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the Legislature proposed to introduce section 145A right from the assessment year 1986-87. The aforesaid provision in a way seeks to recognize and make it compulsory to value the stock in an inclusive method as against the prevailing practice of valuing the same by exclusive method. When the said retrospective amendment was objected very strongly by the taxpayer, the amendment was made prospective in nature and was made applicable from the assessment year 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, whereas in the subsequent year wha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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