The Supreme Court affirms the High Court’s ruling, stating that the State Electricity Board’s rate for industrial consumers should be considered the market value when calculating profits from the transfer of power to units ineligible for deduction under section 80-IA of the Act.

Supreme Court in recent ruling in CIT v. M/s. Jindal Steel and Power Limited [Civil Appeal No. 13771 of 2015]  while dealing with the issue of what shall be reckoned as market value of power captively consumed held that market value shall be price that power would fetch in an open market i.e., the rate at which power is supplied by State Electricity Board (‘SEB’) and not price paid by SEB for purchasing the power from the taxpayer.

The assessee is engaged in manufacturing of steel. Due to inadequate power supply from the State Electricity Board (“SEB”), the assessee set up a captive power plant to generate electricity for its business. The surplus electricity generated was sold to the SEB at the rate agreed by the agreement entered into with the SEB. For the relevant year under consideration, the assessee filed return of income showing nil taxable income after claiming deduction under Section 80-IA of the Act for the captive power plant installed. While computing the deduction, the assessee adopted the rated charged by the SEB to the industrial consumers as the “market value” for the purpose transfer of electricity to non-eligible units. During the assessment proceedings, the Assessing Officer (“AO”) disregarded the computation of deduction by the assessee and adopted the rate at which the assessee sold surplus electricity to the SEB. Aggrieved, the assessee approached the CIT(Appeals) which upheld the order of the AO. However, the Tribunal reversed the same on a further appeal which was then confirmed by the High Court. The Revenue then filed an appeal before the Supreme Court. The Supreme Court while deciding the above matter, clubbed various appeal involving the same question of law.

Before the Supreme Court, the assessee argued that as per the Electricity Act, 1948 electricity generated can only be sold to the SEB at the rate fixed by it. Accordingly, the same cannot be said to be the market value as it has not been determined by the market forces of demand and supply. Revenue argued that rate charged by the SEB cannot be adopted as market value as the same has been determined after considering distribution losses, power subsidy, etc. Supreme Court heard the arguments of the Revenue and the assessee as well as analyzed the provisions of Electricity Act, 1948 and Income Tax Act, 1961. The Supreme Court remarked that the determination of tariff for transfer of surplus electricity to SEB cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of business. Accordingly, the Supreme Court held that the rate charged to a supplier i.e., the rate at which the assessee sold power to the SEB, cannot be market rate of power sold to a consumer in the open market. Thus, the appeal filed by the Revenue was dismissed.

This decision by the Supreme Court puts to a rest a long-standing vexed issue regarding valuation of inter-unit transfer of electricity for the purpose of Section 80-IA. The judgement also provides valuable guidance for the purpose of determining market price.