Shree Cement Ltd vs. ACIT (ITAT Jaipur)

DATE: (Date of pronouncement)
DATE: January 31, 2014 (Date of publication)

Click here to download the judgement (shree_cement_carbon_credits_80_IA.pdf)

Carbon Credit receipts are not chargeable to tax as “income”. For s. 80-IA(8) if there are multiple “market values” assessee has the right to choose the suitable one

(i) Carbon credit is in the nature of ‘an entitlement’ received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits is a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to ‘world concern’. It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. My Home Power Ltd 151 TTJ 616 (Hyd), Velayudhaswamy Spinning Mills 40 141 (Chennai) & Ambika Cotton Mills Ltd (Chennai) followed. Also, in Vodafone International Holdings 341 ITR 1 the Supreme Court has held that treatment of any particular item in different manner in the 1961 Act and Direct Tax Code (“DTC”) serves as an important guide in determining the taxability of said item. Since DTC specifically provides for taxability of carbon credit as business receipt and Income Tax Act does not do so, it means that carbon credits are not taxable under the Act.

(ii) S. 80-IA(8) provides that if goods or services held by the eligible unit are transferred to the non-eligible business or vice-versa, the assessee must adopt ‘Market Value’ as the transfer price. In the open market, where a basket of ‘Market Values’ (say like, independent third party transactions, grid price (average annual landed cost at which grid has sold power to the assessee), Power Exchange Price for the relevant period etc.) are available, the law does not put any restriction on the assessee as to which ‘Market Value’ it has to adopt, it is purely assessee’s discretion. So long as the assessee has adopted a ‘Market Value’ as the transfer price, that is sufficient compliance of law. The AO can adopt a different value only where the value adopted by assessee does not correspond to the ‘market value’. Even if assessee’s Cement Unit has purchased power, also from the Grid or that assessee’s Power Unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or permit the Revenue, to adopt ONLY the ‘grid price’ or the price at which the Eligible Unit has partly sold its power to grid or third parties, as the ‘market value’ for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of s. 80IA(8) of the Act. This is supported by Aztec Software & Technology Services 107 ITD 141 (Bang)(SB) & Maersk Global Service Centre 133 ITD 543 (Mum) wherein while interpreting the Transfer Pricing provisions, the courts have held that it is the assessee who is the best judge to know the transactions undertaken & thus finding out the comparable cases from the vast database available in the public domain. Once the assessee has adopted the same, the AO has to examine whether the same is market price or not. AO has the power to adopt the market price only when the price adopted by the assessee does not correspond to market value. In case there are options, the option favorable to the assessee is to be adopted as held in Vegetable Products Ltd 88 ITR 192 (SC).

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