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Supreme Court determines the fair market value for the purpose of Section 80-IA in the case of captive power plants
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Published on December 20, 2023
The Supreme Court in its recent ruling in the case of CIT v. Jindal Steel & Power Ltd.1 dealt with the issue being faced by captive power plants in determining the fair market value for the purpose of Section 80-IA. The Court held that the market value for captive power plants shall be the price at which State Electricity Board (‘SEB’) supplied electricity to industrial consumer and not the price at which SEB purchased electricity from captive power plants of assessee.
Facts of the case
The assessee was a public listed company engaged in the business of generation of electricity, manufacture of sponge iron, M.s. Ingots etc. The requirement of electricity by industrial units of the assessee was high as compared to the electricity supplied by SEB. Therefore, assessee set-up captive power plants to generate electricity for consumption in its industrial units. Supply of electricity to assessee’s industrial units was recorded at the rate at which SEB sold electricity to assessee or other consumers (i.e. Rs. 3.72 per unit), being fair market value in terms of section 80-IA(8).
In terms of the Electricity (Supply) Act, 1948, any surplus electricity generated was to be supplied to SEB at the rate of Rs. 2.32 per unit under a power purchase agreement.
During assessment, the AO observed that assessee has computed its profits by adopting rate of Rs. 3.72 per unit for power supply to its own industrial units instead of rate of Rs. 2.32 per unit at which assessee sold electricity to SEB. The AO held that the rate claimed by the assessee was not the true market value and the rate of Rs. 2.32 per unit at which assessee sold electricity to SEB, was the market value of electricity. Therefore, it was held that assessee has inflated its profit and claimed higher deduction under section 80-IA. Pursuant to this, AO recomputed the deduction under section 80-IA by treating Rs. 2.32 per unit and made adjustment of around Rs. 48 Cr. to the returned income.
On appeal by assessee, CIT(A) upheld the order of the AO. In further appeal, ITAT came to the conclusion that the price at which electricity was supplied by the assessee to SEB could not be equated with the market value for the purpose of section 80-IA(8). Thus, revenue’s stand could not be approved. On appeal before the High Court, the Court affirmed the order of the ITAT.
Supreme Court observations
The Supreme Court analysed the provisions of section 80-IA(8) and observed that if any goods held for the purposes of the eligible business (covered under section 80-IA), are transferred to any other business of the assessee but the value of consideration for such transfer does not correspond to the market value of such goods, then the profits and gains of such eligible business shall be computed (for the purpose of section 80-IA) as if the transfer had been made at the market value of such goods.
The Court further observed that the expression "market value" has been defined under section 80-IA(8) to mean the price that such goods or services would ordinarily fetch in the open market. The Black's Law Dictionary, 10th Edition, defines the expression "open market" to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. Therefore, the expression "market value" in relation to any goods as defined by section 80-IA(8) would mean the price of such goods determined in an
environment of free trade or competition.
The Court held that the captive power plants of the assessee could sell or supply the surplus electricity to the SEB only and not to any other person pursuant to the provisions of the Electricity (Supply) Act, 1948.
The price for supply of such electricity by the assessee to the SEB was fixed at Rs. 2.32 per unit which is the contracted price. Being in a dominant position, the SEB fixed this price and there was no room for negotiation on the part of the assessee. Therefore, determination of tariff between the assessee and the SEB cannot be said to be an exercise between a buyer and a seller in a competitive environment or in the ordinary course of trade and business i.e., in the open market.
If the industrial units of the assessee did not have the option of obtaining power from the captive power plants of the assessee, then in that case it would have had to purchase electricity from the SEB. In such a scenario, the industrial units of the assessee would have to purchase power from the SEB at the same rate at which the SEB supplied to the industrial consumers. Therefore, the market value of the power supplied by the SEB to the industrial consumers should be construed to be the market value of electricity.
Decision
The Supreme Court held that the market value of electricity supplied by the captive power plants of the assessee to its industrial units should be computed after comparing it with the rate of power available in the open market i.e., the price charged by the SEB while supplying electricity to the industrial consumers.
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1. [2023] 157 taxmann.com 207 (SC)
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