Reliance Infrastructure Ltd vs. ACIT (ITAT Mumbai)

For s. 80-IA (8), tariff fixed by MERC for sale of power does not reflect “market value”

The assessee was engaged in the business of distribution of electricity by purchasing it from Tata Power. The assessee set up a plant for generation of electricity, 100% of whose profits were eligible for deduction u/s 80IA (4). The said electricity was transferred by the assessee to its other business of distribution of electricity {which was not eligible for deduction u/s 80IA (4)}. The AO held that as the eligible business had transferred goods to the non-eligible business, the “market value” of the same had to be determined u/s 80IA (8) and he did that by adopting the purchase price paid by the assessee to Tata Power. In AY 2005-06, the Maharashtra Electricity Regulatory Authority (MERC) for the first time fixed a tariff for the assessee to charge its customers and determined the profits of generation and distribution business in Mumbai suburb at Rs.210 Crores. The AO held that pursuant to the MERC order, the old basis of determining the “market value” of the electricity was not valid and that the profits relatable to the generation activity had to be determined on the basis of the MERC tariff at Rs. 110 crores and not at Rs. 489 crores as claimed. This was reversed by the CIT (A) on the ground that the tariff fixed by MERC for the purpose of determining the price to be charged by the assessee to its customers could not change the method of calculation of profits for the purpose of deduction u/s 80IA and that the price paid by the assessee for purchase of electricity from outside party was the appropriate yardstick for computing “market value” u/s 80-IA (8). On appeal by the department, HELD dismissing the appeal:

(i) U/s 80-IA (8), the transfer of goods from an eligible business to a non-eligible business is required to be taken at “market value”. The tariff determined by MERC is based on the concepts of ‘clear profits’ and ‘reasonable return’ and does not reflect the “market value” of the electricity. While the ‘clear profits’ are determined by considering the streams of income, the ‘reasonable return’ is determined on the capital base. If the ‘clear profits’ are more than the ‘reasonable return’, the excess is considered while fixing tariffs for the subsequent year and the exercise of adjusting the gap between the reasonable return and clear profits is an on-going process. The tariff is either increased or reduced to adjust the gap between the two. Further, the tariff is fixed for both activities of generation and distribution of power and may not reflect the true rates with regard to only the activity of generation;

(ii) Accordingly, even after the fixation of tariff by MERC, the profits from the business of generation of power has to be worked out on the basis of the price paid to the outside party for purchase of power.