1. Fact of the case
Jindal Steel & Power Ltd (JSPL) is a leading conglomerate in India engaged in large steel and power generation units. The company is operating captive power generation plant due to insufficient and inconsistent power supply by State Electricity Board (SEB) to ensure uninterrupted power supply to its manufacturing units, as well as for occasional sale of excess power generated to State Electricity Board (SEB).
JSPL sold excess power produced to the State Electricity Board (SEB) at predetermined prices and used the electricity produced by its captive power plant mostly for internal consumption in the manufacturing facilities. Additionally, under section 80-IA of the Income Tax Act of 1961, which allowed them to claim tax benefits from other eligible operations, such as electricity generation, JSPL claimed a deduction for such relevant Assessment Years. This indicates that JSPL used the price at which it provided the unit to its own manufacturing facility to determine its profit.
The core issue raised from the valuation method used by JSPL to book its internal consumption. They used the rate on which State Electricity Board (SEB) supply power to other industrial customers i.e., ₹ 3.72 per unit considering it to be Market Value.
However, Assessing Officer disagreed with this as JSPL was supplying excess power to State Electricity board on pre-determined rates i.e., ₹ 2.32 per unit which is less than the rates used for internal recognition. The Assessing Officer argued that the rate at with JSPL providing excess units i.e., ₹ 2.32 per unit should be considered as the Market Value
Before the Commissioner of Income Tax (Appeals) and CIT(A) upheld the assessing officer’s opinion, this dispute was examined. The assessee subsequently filed an appeal with the Income Tax Appellate Tribunal (ITAT), which upheld the JSPL’s assessment technique and overturned the lower authority’s ruling. The income tax department then filed an appeal with the High Court, which once more decided in favour of JSPL.
The Revenue Department then appealed the ITAT and High Court’s ruling in a Special Leave Petition (SLP) to the Supreme Court. According to the agency, letting JSPL, the assessee, estimate the market value at higher rates leads to an excessive rise in profits and deductions.
The Supreme Court took up the matter to decide whether the value used by the assessee for the purpose of considering market value is valid or not, or the ITAT had erred in considering the market value.
Additionally, JSPL generated income from sale of carbon credits, which was treated as capital receipts which are non-taxable. But the Assessing Officer (AO) objected that, it should be treated as business income which will be taxable.
Along with this, the supreme court examined whether the assessee had complied with the statutory depreciation method as required under section 32 of Income Tax Act.
2. Issues Raised
- Primary Issue – Electricity Valuation:
- The issue with electricity valuation concerned the recalculation of the deduction for revenue from captive power producing units under section 80-IA of the Income Tax Act of 1961.
- The Assessing Officer (AO) argued that the profits shown in the captive power generation units are inflated by valuing the units supplied to its own industrial unit at ₹3.72 per unit whereas the units supplied to State Electricity Board is at ₹ 2.32 per unit. The Assessing Officer argued that the lower amount i.e., the amount charged from State Electricity Board should be considered as Market Value due to which the deduction claim will get reduced.
- Should Jindal Steel & Power Ltd’s argument or the price at which power is sold to the State Electricity Board (SEB) be used to calculate the internal transfer rate?
- Which of the following should be taken into consideration when determining the Market Value: the value at which units are delivered to the State Electricity Board (SEB) or the price at which units are traded in the free market, also known as the price that the State Electricity Board (SEB) offers to its industrial customers?
- Secondary Issue – Carbon Credit Treatment
- Is the income generated by sale of carbon credit treated as capital receipts (non-taxable) or revenue receipt (taxable)?
- Procedural Issue
- Whether the method of depreciation required to be declared before filling Income Tax Return (ITR)
3. Contention
- Appellant (Income Tax Department/CIT)
- The department of Income Tax argued that the price at which the transection actually occurred with the third party which is State Electricity Board (SEB) i.e., ₹2.32 per unit should be considered as market value.
- Contended that using higher internal price artificially inflated profit of power division, leading to extensive deduction under section 80-IA.
- They also argued that the income generated from sale of carbon credit should be treated as revenue income, hence taxable
- They held that WDV depreciation method must be selected before the due date.
- Respondent (M/S Jindal Steel & Power Ltd)
- Jindal Steel & Power Ltd argued that the rates at which units sold to State Electricity Board does not reflect market value as it is determined by the regulation and not market forces.
- The rate ₹ 3.72 per unit is derived from the rate at which State Electricity Board offered to industrial customers reflect better economic value of electricity.
- JSPL stated that carbon credit arises from environmental compliance and this is not the part of regular business, hence it should be treated as capital receipt.
- Claimed that exercising the depreciation option within the return filing window was sufficient compliance with the Act.
4. Rationale and Decision of the Supreme Court
- Electricity Valuation under Section 80-IA
The Supreme Court upheld the view of the Income Tax Appellate Tribunal and High Court by validating the valuation method of the assessee, clarifying that internal rate of ₹3.72/unit can be used as the market value. The Court reasoned as follows:
- Market value under Explanation to Section 80-IA (8) is derived from the goods or service currently trading in open market. If goods or service is transferred between eligible and non-eligible business of the same assessee, profit must be computed using fair market value and not internal transfer price.
- The price at which JSPL i.e., the assessee sold power to State Electricity Board (SEB) was not through open market negotiation but it was influenced by policy regulations. Thus, it did not reflect genuine market forces.
- The rate at which State Electricity Board (SEB) buy electricity from the assessee was not accurate indicator for the fair market value but the value at which they sell electricity to other industrial customers i.e., ₹ 3.72/unit was more accurate indicator of open market value.
- The Income Tax law allows intercompany transactions to be valued at market rates for the purpose of tax deductions which is reasonable and justifiable.
- This ruling supports JSPL to apply ₹ 3.72/unit as their internal transection rate.
- Income from Carbon Credit
- The Honorable Supreme Court declined to hear this case as the Income Tax Department did not follow the rules of court.
- Since the Income Tax Department had not appealed the Tribunal’s ruling on carbon credit before High Court, they could not raise the issue at the Supreme Court level directly.
- Therefore, Tribunal treated carbon credit as Capital Receipts – remained undisturbed.
- Depreciation Method
- The court ruled in favor of JSPL stating that there is no statutory requirement to make such prior declaration before due date.
- Electing Written Down Value (WDV) method for depreciation within the prescribed return filling window is sufficient to comply with section 32 of the Income Tax Act.
5. Defects of Law
- Ambiguity in definition of “Market Value”: Income Tax Act does not offer a precise definition for Market Value which leaves a room for interpretive disputes.
- Market value at which State Electricity Board sells electricity to its industrial customer include the expenses for marketing, meter setting, administration and other many charges and the profit margins which an assessee being not the distributer of electricity did not have to incur. This all expenses such and transportation of electricity from the assessee to the State Electricity Board will be taken care by the State Electricity Board only.
- Unsettled Carbon credit Taxation: As the Supreme Court declined to decide anything on carbon credit, it still a subjective decision based on various Tribunal. As the Green revolution is expanding worldwide, the market of carbon credit increases along with it, hence clear guidelines for them will be needed.
6. Interference
- Impact on Captive Infrastructure: This decision gives reassurance to the companies investing in captive power generation units, that they can claim tax benefit over it.
- Taking Green Initiatives: Knowing that the income generated from sale of carbon credit is exempt from taxation will inspire the companies to take Green Initiatives.
- Influence on Transfer Pricing: This ruling introduced a pragmatic approach to perform inter-company transfer where the selling price is less than the internal transfer price.
- Investor confidence: The ruling increased the confidence of corporate taxpayers in disputes involving complex infrastructural setups, especially where dual pricing mechanisms exist (internal vs. external).
Name: – Vedansh J Balode
University: – ICAI and SGBAU.