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Attorney(S)
  • Darshan Singh
Judges
  • SHAILENDRA KUMAR YADAVD. KARUNAKARA RAO
Acts
  • provisions of sub-section (8) of the section 80-IA
  • u/s 80-IA of the Income-tax Act (hereinafter
  • provisions of sub-section (8)
  • section 80-IA(8)
  • section 80-IB
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Darshan Singh
Judges
  • SHAILENDRA KUMAR YADAVD. KARUNAKARA RAO
Acts
  • provisions of sub-section (8) of the section 80-IA
  • u/s 80-IA of the Income-tax Act (hereinafter
  • provisions of sub-section (8)
  • section 80-IA(8)
  • section 80-IB
See more information ...
Smart Summary

Structured Summary of the Tribunal Opinion (Consolidated Order)

Factual and Procedural Background

This consolidated opinion arises from six appeals decided together by the Tribunal (Accountant Member: D. Karunakara Rao). The appeals comprise three appeals by the revenue and three appeals by the assessee, all filed against the common order of the CIT(A) dated 19.1.2010. The issues common to the appeals were (a) whether the sale price of electricity sold to the State Electricity Board ("SEB" or "CSEB") constitutes the market value for the purposes of section 80-IA(8) of the Income-tax Act (revenue appeals), and (b) whether profits on sale of Fly Ash Bricks manufactured by the assessee are eligible for deduction under section 80-IA of the Act (assessee appeals).

The representative assessment year primarily considered for adjudication was AY 2004-05 (grounds for other years 2005-06 and 2006-07 were identical). The revenue challenged the CIT(A)'s conclusion on market value of electricity transfers, while the assessee challenged the CIT(A)'s confirmation of an addition denying deduction under section 80-IA for profits on sale of Fly Ash Bricks (the specific contested amount for AY 2004-05 was Rs. 83,691).

Relevant factual matrix: the assessee operated two undertakings — an electricity generation/distribution undertaking (claimed eligible under s.80-IA) and a steel division (non-eligible). Electricity was sold to the SEB at a rate of Rs.1 per unit and sold to other persons (including sister concerns) and to the assessee's power division at Rs.3.30 per unit. The assessee accounted captive consumption by transferring electricity internally at Rs.3.30 per unit; the AO did not accept this internal transfer rate and invoked s.80-IA(8) to substitute market value. Separately, the power unit produced fly ash which the assessee used as raw material in an in-house brick-making unit; the AO treated profits from brick sales as not eligible under s.80-IA.

Legal Issues Presented

  1. Whether the tariff rate at which the assessee sold electricity to the State Electricity Board (SEB) constitutes the "market value" for the purpose of section 80-IA(8) of the Income-tax Act, or whether the market value must be taken as the rate at which electricity is available to/charged from SEB's consumers (i.e., whether the consumer tariff is the appropriate market price for captive consumption valuation).
  2. Whether profits derived from sale of Fly Ash Bricks (manufactured using fly ash generated as a by-product of the assessee's power generation) are "profits and gains derived from" the eligible undertaking (power generation) and therefore eligible for deduction under section 80-IA, or whether those profits belong to a separate brick-manufacturing undertaking and are ineligible.

Arguments of the Parties

Assessee's Arguments

  • On electricity market value: Counsel argued that the revenue misapplied section 80-IA(8). The tariff at which electricity is sold to the SEB should not be treated as the market rate because the contract between the assessee and SEB is not arrived at in a competitive environment; instead the rates at which the assessee sold electricity to other parties (e.g., M/s R.R. Ispat Ltd., M/s Hira Steels Ltd.) reflect the market price for the purposes of the subsection.
  • On Fly Ash Bricks: The brick-making unit is an integral part of the power plant operation because fly ash generation is a functional requirement and disposal is mandatory under environmental regulations (CECB). The assessee maintained that fly ash is transferred (not sold) to the brick unit and that profit arises only on sale of bricks; consequently, profits on brick sales represent operational income of the power-generating undertaking and hence are eligible for deduction under section 80-IA. Counsel relied on (or distinguished) precedents including Liberty India Ltd. to support the contention that such profits can be operational income of the generating unit.

Revenue's Arguments

  • On electricity market value: The revenue contended that the CIT(A)'s reliance on Jindal Steel & Power Ltd. (and similar decisions) was inapplicable on facts. The written submissions pointed to differences such as the existence of wheeling/power agreements, recognition of two sister concerns as wheel consumers, the mutual agreement on pricing between CPP and WPC (rather than CSEB-determined), and the nature of the infirm purchase contract — arguing these factual distinctions make Jindal inapposite.
  • On Fly Ash Bricks: Revenue argued that the profits are not derived from power generation but from an independent brick-making activity. The impugned profits are operational income of the brick-manufacturing unit (non-eligible) and not ancillary or derived income of the power undertaking; the assessee had an option to sell fly ash to third parties but instead established a separate unit — therefore profits from the brick unit cannot qualify under section 80-IA.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
Addl. CIT v. Jindal Steel & Power Ltd. [2007] 16 SOT 509 (Delhi) Interpreted on market value in s.80-IA(8): treated price at which SEB supplies power to its consumers as market value for captive consumption valuation (not the price at which the assessee supplies to the Board). The Tribunal relied on this ratio (as applied by the CIT(A)) to hold that the tariff at which CSEB consumers procure power reflects market value for the purposes of s.80-IA(8), and thus found no reason to interfere with CIT(A)'s relief to the assessee on this point.
Dy. CIT v. BSES Ltd. [2008] 13 TTJ 227 (Mum.) / DCIT v. B.S.E.S. Ltd. 113 TTJ (Mum) 227 Held that the price charged by the Electricity Board to its consumers constitutes the market price for relevant valuation purposes. Relied upon (along with Jindal) by the CIT(A) and accepted by the Tribunal to support the conclusion that SEB consumer tariff is the market value for s.80-IA(8).
DCIT v. ITC Ltd. ITA No. 18(Kol) of 2006 Referenced among decisions supporting the proposition about market value in electricity/context of transfers under s.80-IA(8). Cited as part of the jurisprudence the CIT(A) relied upon; Tribunal treated these authorities as directly applicable on principle to the present facts in confirming CIT(A)'s view on market value.
Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 / 104 Taxman 204 (SC) Interpretation of the expression "profits and gains derived from" (distinguishing direct/operative nexus required to claim deductions under sections in pari materia). Used (with other Apex Court authorities) to explain that only profits with a direct nexus to the essential business activity qualify for deduction; informed the Tribunal's analysis on whether brick-sale profits are "derived from" the power undertaking.
Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 / 129 Taxman 529 (SC) Further explanation of scope of "derived from" and the need for direct nexus to qualify for incentives/deductions. Relied on for the principle that the burden is on the assessee to show immediate and direct nexus between the claimed income and the eligible undertaking.
Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) Earlier Apex Court authority interpreting similar language concerning "derived from" in incentive/deduction provisions. Referenced to establish the settled approach that direct nexus is required; formed part of the legal foundation for distinguishing operational and ancillary profits.
Liberty India Ltd. v. CIT [2009] 183 Taxman 349 Distinguished operational profits from ancillary or incentive profits (held incentive profits are not "profits derived from" eligible business under s.80-IB). The Tribunal considered Liberty India's ratio in the context of the assessee's contention; the decision was used to emphasize that not all receipts are eligible and to support the requirement of direct nexus for operational income.
Dy. CIT v. Rajesh Kr Drolia [2011] 12 ITR(Trib) 1 / 132 ITD 23 / 12 taxmann.com 410 (Kol.) (Special Bench) Special Bench holding that mere commercial connection is insufficient; there must be a direct yield (direct nexus) from the industrial undertaking for receipts to qualify as "derived from" the undertaking under s.80-IB. Directly applied by the Tribunal to hold that fly ash linkage by itself is only a commercial connection and does not satisfy the requirement of direct nexus; used to reject the assessee's claim that brick-sale profits are derived from the power unit.
Fenner (India) Ltd. v. CIT [2000] 241 TTR 803 / [2002] 125 Taxman 386 Held that profit on sale of scrap material with a direct link to the industrial undertaking may be eligible under the "derived from" formulation (context: s.80HH). The Tribunal imported this proposition by analogy to indicate that if fly ash transferred by the power unit had commercial value, the notional profit attributable to that transfer could be assessed and considered for s.80-IA deduction; consequentially, the matter was remanded to the AO to determine market value of fly ash transferred and compute any deductible profit.

Court's Reasoning and Analysis

The Tribunal divided its reasoning between the two issues and proceeded as follows:

  1. Electricity market-value issue (Revenue appeals):
    • The Tribunal accepted the factual premise that tariffs between the assessee and the CSEB are determined outside a competitive open market and often by statutory or non-competitive processes.
    • It considered the statutory text of section 80-IA(8) and the explanation that "market value" means the price goods or services would ordinarily fetch in the open market — i.e., a price arrived at in normal course of trading between buyer and seller in a competitive environment.
    • Relying on earlier Tribunal decisions (for example Jindal Steel & Power Ltd., Dy. CIT v. BSES Ltd., and others cited by the CIT(A)), the Tribunal agreed that the appropriate market value for captive consumption valuation is the tariff at which SEB supplies power to its consumers (i.e., the consumer tariff), not the lower price at which the assessee might sell power to the SEB under its specific contract.
    • Finding the facts of the present case to be in principle the same as those earlier decisions, the Tribunal saw no basis to interfere with the CIT(A)'s conclusion and therefore dismissed the revenue's ground on this issue for all three assessment years.
  2. Fly Ash Bricks / s.80-IA deduction issue (Assessee appeals):
    • Framework: The Tribunal began by analysing the meaning of "integral" and the statutory test of "profits and gains derived from" an undertaking under s.80-IA(1). It noted the settled approach that to qualify, the profits must have an immediate and direct nexus to the eligible undertaking (operational income), distinguishing them from ancillary or incidental receipts.
    • On whether the brick unit is "integral" to the power unit, the Tribunal examined operational and functional connections and the dictionary meaning of "integral." It concluded that the brick-making unit was connected to the power unit only because fly ash (a by-product) was the raw material; the brick unit was not essential to the completeness of the power generating unit, nor inherently required for generation of electricity.
    • The Tribunal addressed the assessee's environmental/regulatory argument (that disposal was mandatory) and observed that the assessee had an option to sell fly ash to other industries; construction of an in-house brick unit was a choice and therefore did not make the brick unit an intrinsic component of the power undertaking.
    • Applying the line of authority from the Apex Court (Sterling Foods, Pandian Chemicals, Cambay) and the Special Bench in Rajesh Kr Drolia, the Tribunal emphasised that a mere commercial or raw-material connection is insufficient: the receipts must have their source directly in the eligible undertaking to be "derived from" it for s.80-IA purposes.
    • On the specific point of profits from bricks, the Tribunal found the immediate source of profits to be the separate brick-making unit (with separate setup, process, technology and manpower). Therefore, profits from manufacture and sale of bricks do not constitute operational income of the power unit and are not deductible under s.80-IA.
    • However, the Tribunal distinguished the transfer of fly ash itself: if the fly ash transferred by the power unit had commercial value, the notional profit attributable to that transfer (i.e., a notional sale of fly ash from power unit to brick unit) could have a direct nexus to the power unit. Relying by analogy on Fenner (India) Ltd., the Tribunal directed that the AO should determine the market value of fly ash transferred and compute any profits attributable to such transfer; deduction under s.80-IA could be allowed on such computed profits after opportunity to be heard.
    • Consequently, while rejecting the assessee's claim that brick-sale profits are operational income of the power undertaking, the Tribunal remanded the limited factual question of market value/ notional profit on the fly ash transfer to the AO for fresh adjudication.

Holding and Implications

Core Holdings

  • Revenue appeals (ITA Nos. 60, 61 & 62/BLPR/2010): The Tribunal affirmed the CIT(A)'s conclusion that the tariff at which SEB supplies power to its consumers constitutes the market value for the purpose of section 80-IA(8); the revenue's appeals were dismissed.
  • Assessee appeals (ITA Nos. 66, 67 & 68/BLPR/2010): The Tribunal held that profits arising from manufacture and sale of Fly Ash Bricks by a separate brick-making unit are not "profits and gains derived from" the power generating undertaking and therefore are not eligible for deduction under section 80-IA; the assessee's appeals were dismissed insofar as they sought deduction for such brick-sale profits.

Implications / Consequential Directions:

  • Direct effect: The CIT(A)'s relief on the market value question was upheld (favouring the assessee on that specific issue), and the revenue appeals were dismissed accordingly. The assessee's broader claim to deduct brick-sale profits under s.80-IA was rejected and those appeals were dismissed.
  • Limited remand: The Tribunal directed the Assessing Officer to determine whether the fly ash transferred by the power unit to the brick unit had a commercial/market value and, if so, to compute the notional profits attributable to such transfer. The AO is to obtain relevant quantitative, qualitative and commercial data from the assessee, grant reasonable opportunity of hearing, compute profits relatable to the fly ash transfer, and allow s.80-IA deduction to the extent of such computed profits (if any).
  • Precedential posture: The Tribunal's decision primarily applies the existing line of authorities (including Apex Court and Special Bench decisions) to the facts before it. The opinion does not purport to create a new legal principle beyond applying the established distinction between operational (directly derived) and ancillary (non-derived) profits and the established approach to market-value assessment under s.80-IA(8).

Result as recorded in the order: All three revenue appeals dismissed; all three assessee appeals dismissed subject to the limited remand/direction on valuation of the fly ash transfer.

Show full summary ...

    Assistant Commissioner of Income-tax- 1(2), Raipur v. Godavari Power & Ispat Ltd.

    D. Karunakara Rao, Accountant Member - These are six appeals consisting of three appeals by the revenue and three appeals by the assessee. These appeals are filed against the common order of the CIT(A) dated 19.1.2010. The issues are common in all these six appeals and the issue in the three appeals of the revenue relates to the decision of the CIT(A) who held the 'sale price of the electricity sold to S.E.B. does not constitute market value of the electricity generated by the assessee'. Similarly, issue is common in all the three appeals of the revenue and it relates to deduction u/s 80-IA of the Income-tax Act (hereinafter called as an 'Act') in respect of the income on sale of fly ash bricks. Considering the commonality of the grounds in these two sets of appeals, we have consolidated them and adjudicated them in this composite order. Grounds for the AY 2004-05 are considered as representative grounds in both these sets of appeals for adjudication and the same are reproduced as under.

    2. The grounds raised in the revenue's appeal for the year 2004-05 read as follows:

    "On the facts and in the circumstances of the case, Ld. CIT(A) has erred in considering the sale price to be at the rate at which State Electricity Board's sale electricity to its consumers without properly appreciating facts of the case."

    3. The ground in the assessee's appeal for the year 2004-05 read as under:

    "On the fact and in the circumstances of the case, the Ld. CIT(A) grossly erred in confirming the addition of Rs. 83,691/- being the profit earned on sales of Fly Ash Bricks, made by the Ld. A.O. denying the eligibility of deduction u/s 80-IA which is arbitrary, unwarranted and not according to law."

    ITA Nos. 60, 61 & 62/BLPR/2010 -Revenue's Appeal

    4. We shall take up the revenue's appeal i.e. ITA Nos. 60, 61 & 62/BLPR/2010 first. In the opinion of the revenue, the Ld. CIT(A) has erred in considering the sale price to be at the rate at which State Electricity Board's sale electricity to its consumers without properly appreciating facts of the case."

    5. Relevant facts of this issue are described in para-4 of the CIT(A)'s order and they are as follows. The assessee two undertakings i.e (i) the undertaking engaged in the business of generation and distribution of electricity; and (ii) steel division. The steel division requires electricity and draws the same form the other undertaking which generates the electricity. Thus, the assessee accounted captive consumption of electricity. Electricity division is exempt undertaking u/s 80-IA of the Act and the Steel Division is not an exempt undertaking. During the assessment proceedings, the AO found that the electricity for captive consumption is accounted at the tariff higher than the sale price recorded for sale to SEB. In the process, AO interpreted that the Inflated the profits of the eligible undertaking and deflated the taxable profits of the steel making undertaking. Factually, the assessees sold the electricity not only to the SEB but also to other persons at the market rate. The sale price of the electricity sold to the SEB is @ Rs. 1/- per unit. On the other hand, the sale price at which the electricity sold to other persons i.e. M/s. R.R. Ispat Limited, M/s. Hira Steels Ltd. and to its power division @ Rs.3.30 per unit. Assessee accounted per unit rate transferred to the steel division for capital consumption adopting Rs.3.30 per unit. This rate was not accepted by the A.O. The A.O. is of the opinion that the assessee inflated the profits of the exempt unit u/s 80IA(4) and deflated the profit of the steel division which is a non-exempt unit. In the effect the A.O. invoked the provisions of sub-section (8) of the section 80-IA of the Act,

    6. During the first appellate proceedings, the assessee relied on various judgments mentioned in para 4.2.7 of the CIT(A)'s order such as Addl. CIT v. Jindal Steel & Power Ltd. [2007] 16 SOT 509 (Delhi) which is said to have been subsequently affirmed by the Hon'ble High Court of Delhi for the proposition that the rates at which electricity is sold to the SEBs does not constitute market rate where the provisions of sub-section (8) of section 80-IA of the Act are invoked by the A.O and instead market rates consist of the rates at which assessee sold the electricity to the other parties. The CIT(A) explained the said provisions of sub-section (8) and stated that the price tariff reached between the assessee and the SEB is not arrived at in a competitive environment. Therefore, the price determined in such a scenario cannot be equated with the situation where price is determined in normal business environment. He relied on the ratio of the decision of the Tribunal in the case of Jindal Steel & Power Ltd. (supra) Delhi and also Bombay Bench decision in the case of Dy. CIT v. BSES Ltd. [2008] 13 TTJ 227 (Mum.) for the proposition that the price charged by the electricity board to its customers constitutes a market price. He accordingly gave the relief to the assessee.

    7. Aggrieved with the same, the revenue is in appeal on this issue for all the three assessment years i.e. 2004-05, 2005-06 & 2006-07 with an identical ground.

    8. During the proceedings before us and at the very outset, the Ld. Counsel for the assessee explained the issue and mentioned that the revenue authorities have erroneously applied the provisions of section 80IA(8) of the Act. Referring to the 'market value' the expressions used in the said subsection, Ld counsel for the assessee mentioned that the electricity tariff rate applicable to the sale made to the SEB does not constitute referred to s 'market rate' as the contract between the assessee and the SEB is not done in a competitive environment. On the other hand, he mentioned that the tariff rate applicable to the sale to other parties must constitute the 'market price'. If the same is considered, there is no addition warranted on this issue. Ld counsel referred to the paper book and read out relevant portions from the decision of the Delhi Bench Jindal Steel & Power Ltd. (supra). The relevant conclusion reads as under:

    "Price at which the State Electricity Board supplies power to its consumers is to be considered to be the market value for transfer of power by the assessee's electricity generating undertaking for captive consumption for the purposes of s. 80-IA(8), and not the price at which power is supplied by the assessee to the Board."

    9. On the other hand, Ld DR for the revenue mentioned that the said judgment in the case of Jindal Steel & Power Ltd. (supra) is inapplicable to the case of the assessee and filed the following written submission in this regard which is as under:

    1. The original name of the assessee was Ispat Godavari Ltd. Which was later on changed as Godavari Power and Ispat Ltd. is the matter of fact.

    2. Wheeling power agreement dated 22.4.2003 is placed in the II volume of paper book of the assessee.

    3. On page 10 of the agreement two sister concerns i.e. R.R. Ispat Ltd. Urla and Hira Steel Ltd. have been recognized as wheel power consumers. In the Jindal Steel and Power Ltd, the ITAT has decided as only one unit of the same assessee i.e. JSPL is enjoying the captive power facility whereas in this case two different assessees are claiming to be equal to the units, which is not allowable, even though different units are recognized as the only source of income for the purpose of 80-IA of the IT. Act, so the facts are different and Jindal Steel and Power Ltd. case is not comparable case.

    4. In the para 9 of the above agreement the CSEB clearly mentioned that the cost per unit between the assessee and the WPC's shall be decided not by the CSEB but by mutual agreement between CPP and WPC and in case of dispute CSEB shall not be the party. Intimation to the CSEB is required for the HT line to the sister concerns and transmission of power to them.

    5. The contract for the infirm purchase is placed on the page 36 of the paper book IInd volume. On the first page of the agreement the contract speaks that the assessee requested the CSEB for the infirm purchase. It is not the CSEB or the Govt., who insisted on the assessee for the infirm purchase hence this contract cannot be construed as "Govt. imposed infirm purchase contract".........."

    10. We have heard both the parties and perused the orders of the revenue and the papers filed before us. There is no dispute on the basic facts. On hearing the parties, we find the issue for adjudication is if the tariff rate applicable to the sales made to the SEB reflect the market rate for the purpose of section 80IA(8) of the Act. In this regard, we have also perused the para 4.3.1 of the impugned order for facts and line approach of the CIT(A) and in view of its importance, the same is reproduced as under:

    "Section 80-IA (8) provides that wherein goods or services held for the purpose of eligible business are transferred to any other business carried on by the appellant, the price charged for such transfer should correspond to the market value of such goods or services on the date of transfer. If the price of goods transferred is overstated in comparison to market value, the A.O. has power to re-compute the profit by substituting market value of such goods. In the explanation below section 80IA(8), it is provided that the expression "market value" for the purpose of the sub-section means the price that such goods or services would ordinarily fetch in the open market. Market value is an expression which denotes a price arrived at between the buyer and the seller in the open market wherein the transaction take place in the normal course of trading. In present case, the CSEB is purchasing power from power plants at the rate different from its selling price. The private person can set up a power generation unit having restriction on the use of power generated and at the same time the tariff at which a power generating unit can supply power to Electricity Board is also liable to determined in accordance with the statutory requirements. In this context it can be safely deduced that determination of tariff between the assessee and the Electricity Board can be said to be an exercise between a buyer and seller neither in a competitive environment and or in the ordinary course of trade in business. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in normal course of trade and competition. The price at which the steel division is purchasing power from CSEB can be considered to be the market value for the purpose of section 80IA(8) for the reason that the other industrial consumers are also buying power from electricity Board at that rate. Thus, the price at which the consumers are able to procure the power from Electricity Board is the market price. This view also gets support from decision of various Income-tax Appellate Tribunal. In case of Addl. CIT v. Jindal Steel & Power Ltd. 16 SOT 509 (Del), DCIT v. ITC Ltd. ITA No. 18(Kol) of 2006, DCIT v. B.S.E.S. Ltd. 113 TTJ (Mum) 227, it has been held that price charged by Electricity Board to its consumer is the market price. In present case the steel division has procured the electricity at higher rate than charged by power division to steel division. It is, therefore, the A.O. is directed to allow relief to the appellant u/s 80-IA as claimed. This ground of appeal is hereby allowed."

    11. Further, it is evident from the judicial pronouncements cited above that the price at which State Electricity Board supplies power to its consumers is to be considered to be the market price in respect of the electricity drawn for captive consumption of the assessee's steel division for the purpose of section 80-IA(8) and not the price at which electricity is sold by the assessee to the State Electricity Board. It is for the reason that the power tariff between the assessee and the SEB is not done in a competitive environment. Facts of the assessee's case are exactly same in principle. Therefore, the said decisions of the Tribunal have direct application to the said facts of this case. In view of the above said decision, we are of the opinion that the CIT(A) does not call for any interference on this issue. Accordingly, the relief granted by the CIT(A) is confirmed and therefore, the solitary and common ground raised by the revenue in all the three appeals is dismissed.

    12. In the result, the three appeals of the revenue are dismissed.

    ITA Nos.66, 67 & 68/BLPR/2010 - Assessee's Appeals

    13. These are the appeals of the assessee against the order of the CIT(A) cited above and the common issue raised in all of them relates to whether the profits derived on sale of the Fly Ash Bricks is eligible for deduction u/s 80-IA of the Act.

    14. Briefly stated relevant facts of the issue are assessee is engaged in the business of generation and sale of electricity. The Fly Ash is a by-product generated out of the said generation activity of Electricity. During the assessment proceedings, the A.O. examined the sales account of power division and found that the sale proceeds on sale of the said bricks was found credited and the relevant profits earned on sale of the Fly Ash Bricks are considered by the assessee as eligible profits for the purpose of claiming of deduction u/s 80-IA of the Act. At the end of the assessment proceedings, the A.O. held that the said sale proceeds of fly ash bricks is not eligible for deduction u/s 80-IA as these profits are not derived from the generation and distribution of power and accordingly, he denied the benefit of deduction. Aggrieved with the same, the assessee filed an appeal before the CIT(A). Before him, the assessee contended that the fly ash brick plant is an integral part of the power plant. It is a functional requirement of the power plant to make a suitable arrangement for disposal of fly ash without which the assessee company could not have run the power plant. This is the mandatory requirement of Chhattisgarh Environment Conservation Board (CECB) to have such facility. The assessee company has to adopt dry ash extraction system and dry ash disposal system as an integral part of the project. The ash generated is to be collected in dry areas and closed storage silos as a temporary storage and it shall be made available to cement manufacturing industry or used for other beneficial uses like fly ash bricks. The CIT(A) considered the above submission of the assessee and rejected the same and finally, he held that activity of manufacturing fly ash bricks is an activity of value addition to the waste generated in course of generation of power. Any profit earned by this method cannot be said to be the profit and gains derived from generation of power. It may be a case of mandate for proper disposal of waste but such an activity consists of an independent activity not eligible for deduction u/s 80-IA of the Act. Thus the CIT(A) held that such income earned on sale of such bricks does not constitute income derived from generation of power. Accordingly, he dismissed the appeal of the assessee on this ground. Aggrieved with the same, the assessee is in appeal before us for all the three assessment years with the common ground.

    15. During the proceedings before us, Ld counsel made elaborate arguments and mentioned that the Fly Ash generation is part of the manufacturing process of the Electricity Generation, Assessee has an option either to sell the said by-product i.e. Fly Ash to the Cement Manufacturing entities or to use the same as the raw material for manufacturing of Bricks. Assessee opted for the later one. Ld Counsel mentioned that the assessee has a zero tolerance towards the 'waste disposal' of the industrial waste. Therefore, the assessee established a Brick making unit with the said Fly Ash as the raw material and proceeded to manufacture the Fly Ash Bricks. In the books of the assessee the said fly ash was shown as transfer to the Brick making unit and not as sale and hence there is no generation of profits at this point of transfer to Brick making unit Income generation accrued only at the point of sale of the Bricks made out of the said fly ash. The said sales for the AY 2004-05 is Rs. 83,691/-. The figures are different for AY 2005-06 and AY 2006-07. In the factual matrix of the above, Ld Counsel for the assessee argued that the Fly Ash disposal is mandatory and therefore, as a part of the compliance to the contract and other Acts relating to Environment and pollution etc. in force, the Brick making unit is established and the said unit forms part of the Undertaking of Electricity Generation. As per the assessee, solid waste like FLY ASH are completely utilized in company's FLY ASH BRICK manufacturing unit, which is one of largest capacity in ASIA. Therefore, profits earned on sale of the said Bricks constitutes an eligible Income for the purpose of the deduction u/s 80IA(8) of the Act. Referring to the ratio decidendi of the judgment of the Supreme Courts Judgment in the case of the Liberty India Ltd. v. CIT [2009] 183 Taxman 349 Ld Counsel mentioned that the said judgment is inapplicable to the facts of this case. As per the Counsel, the profits derived out of the sale of the said Bricks constitute an 'operational income' of the power generating unit within the meaning of the said Apex Court's judgment. Ld counsel is critical of the views of the CIT(A) who stated that the brick manufacturing activity is not an integral part of the generation of power undertaken by the assessee as he did not opt for the other option of selling the said fly ash to the Cement or Brick Industries.

    16. On the other hand, Ld DR for the revenue heavily relied on the said judgment of the Supreme Court and others and mentioned that it is not case of sale of fly ash per se and earning of profits on sale of the said solid waste i.e. fly ash, the by-product. As per the Ld DR, the impugned profits are derived from the Brick Making unit and not from the power generating unit and therefore, it is the 'operational income' of the Brick making unit and not the 'ancillary profits' of the power generating unit, which is eligible business for the purpose of deduction u/s 80-IA of the Act. As per Sri Dr Darshan Sing Ld DR, the operational income' of the Brick making unit, the non eligible business, is not eligible for deduction u/s 80-IA of the Act. On fact, it is the case of transferring the said fly ash to other undertaking, which is set up for the purpose of making of Bricks. The impugned profits are earned on sale of the said Bricks generated out of an independent undertaking. Therefore, such profits cannot be considered as the profits earned out of the 'Power Generating' Undertaking of the Assessee and therefore, such profits are not 'operational income' of the 'Electricity/Power Generating' Undertaking. It constitutes an 'operational income' of the Brick Manufacturing Division, which is not entitled for deduction u/s 80-IA of the Act.

    17. We have heard the parties and perused the orders of the revenue and the paper book filed before us. In the light of the above facts relating to the issue of fly ash generation by the Power generating unit and its use for making of the 'fly ash brick' and earning of income on sale of such bricks as narrated by the parties, we pictorially present the said facts in the following manner.

    Diagram showing Power Generation Unit producing Electricity and Fly Ash (Solid Waste) - Profits Generation

    18. The above diagrammatic representation depicts that the assessee's power unit, the eligible business generating the Coal Based Power Unit and supplying the same for profits to SEB and others after utilizing the power for captive consumption. In the process, the Fly Ash, the solid waste, is yielded. The said solid waste is transferred to Brick Manufacturing unit for use as raw material for manufacturing of the Fly Ash Bricks which are sold and the profits are earned. The picture also traces the genesis of the profits at two points (i) at the point of sale of the Electricity so generated and (ii) at the point of sale of the Fly Ash Bricks. We have to decide if the profits earned at (ii) above should be construed as 'derived' from the Power generating unit of the assessee. Unless the any profits are derived from such unit, the benefit of deduction u/s 80-IA is not available to the assessee on such profits.

    19. We find that there is no dispute on facts. But there is dispute on interpretational front of the law and the ratios of the cited judgment. The essential objections of the assessee revolve around the following namely, (i) brick making is an integral part and not an independent activity, (ii) profits earned on sale of the brick made out of the fly ash, the raw material constitutes an operational income; (iii) fly ash based brick industry is a mandatory requirement legally as a fly ash disposal system. From the revenue point of view, the assessee is not entitled to the benefits of deduction u/s 80-IA in respect of the profits earned from the sale of the 'Fly Ash Bricks manufactured out of the Fly Ash produced as by-product out of the unit manufacturing power. As per the revenue, the assessee has got an option to sell the impugned 'fly ash' i.e. the byproduct to the Cement Industry or made use of the same as raw material for manufacture of Fly Ash Bricks and the assessee preferred the later. As per the CIT-DR, the Fly-Ash-Brick making unit does not constitute an integral part of the 'power generating unit' of the assessee. As per revenue, Fly-Ash-Brick making unit constitutes a separate and independent unit operationally. Therefore, the profits earned out of manufacture and sale of the Bricks constitutes the 'operational income' of the Bricks unit and not of the 'power generating unit' of the assessee.

    20. We have considered the diverse stands of the parties in the dispute. We have perused various judgments discussed in the open court during the hearing proceedings.

    21. Whether Fly Ash Brick Unit is integral part of the Power Unit? On this issue, we have examined the manufacturing unit of power generation and the fly ash brick manufacturing unit and the operational structure of both power and brick units. Further, we have also examined the meaning of the 'integral' to decide the impugned issue. The dictionary meaning of the expression integral includes the following and they are: essential to completeness, built-in, constitutional, constitutive, essential, hardwired, immanent, inborn, inbred, indigenous, ingrain, ingrained, innate, inherent, intrinsic, native, natural etc. In the instant case, the connectivity of the bricks making unit with the power generating unit is only because of the 'fly ash' produced out of the power generating unit Generally, the Fly ash is generated out of the fuel used for electricity generation. Therefore, brick making unit cannot be said be essential for the completeness of the 'power generating unit'. Construction of this brick making unit is neither ingrained nor inherently required too. Regarding the assessee's argument that the said brick making unit is since constructed for meeting the anti-pollution and environment friendly Acts, we find that disposal of fly ash is a pollutant and its disposal is the problem area for the assessee and in this regard, we find that the assessee has option to sell the said pollutant (fly ash) to the other cement or brick making industries. It is not the case that the assessee has to install the 'Brick Making Unit' and thus, the concerned argument of the assessee's counsel is dismissed.

    22. Whether the profits earned out of sale of the Bricks constitutes an operational income? The provisions of section 80-IA of the Act reads that '(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4)…" Thus, we need to examine if the profits on sale of the Bricks manufactured out of the fly ash generated out of the power generating unit constitutes 'derived' from the said undertaking or enterprise relating to infrastructure development. From the above diagrammatic presentation, it is clear that the 'Power Generating unit' is an eligible business and the fly ash is generated out of the 'Power Generating unit'. It is fact that the assessee has not sold the said 'fly ash', the by-product, which is merely used as a one of the raw materials for making of the bricks. What is sold in this regard is the brick made out of the said fly ash. Thus, the assessee earned profits out of the sale of the bricks. Therefore the immediate source of the impugned profit is the sale of bricks, which are manufactured by the 'Brick Making Unit. We have already discussed above that the fly ash is the connecting link between the two units under discussion. Thus, we have to decide if the profits earned out of the sale of Bricks, which are made out of the 'fly ash', which is produced out of the 'Power generating unit' as a product, can be construed as 'derived' from the 'Power generating unit', in this regard, we have to examine the scope of the provisions of section 80-IB of the Act. In fact, these provisions are adequately analysed by various Courts, we find that the provision of section 80-IB of the Act is in pari materia with the provision of sections 80HH and 80-I of the Act, the Hon'ble Apex Court in Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579/ 104 Taxman 204 (SC), Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 /129 Taxman 529 (SC) and Cambay Electric Supply Industrial Co. Ltd. v. Cit [1978] 113 ITR 84 (SC) explained the said provisions. Liberty India ( supra) also gone into these issues and distinguished the 'operational profits' from the ineligible 'ancillary profits'. The operational portion of the said decision given on page 219 of the reported said ITR which reads as follows:-

    "Incentive profits are not profits derived from eligible business under section 80-IB: they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/ Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profits derived from industrial undertaking" under section 80-IB."

    23. Further, we find that the Special Bench has examined the issue of 'direct nexus'/operational income vs the ancillary income in the context of an appeal in the case of Dy. CIT v. Rajesh Kr Drolia [2011] 12 ITR(Trib) 1/ 132 ITD 23 / 12 taxmann.com 410 (Kol.) (SB) and held that mere 'commercial connection' is not enough and there is need for 'direct yield' of the impugned profits derived from the undertaking is the requirement for any profits to become eligible for deduction u/s 80IB of the Act. The extract of the HELD portion from Special Bench decision in the case of Rajesh Kr Drolia (supra).

    Held, that there might be a commercial connection between the profits earned from repairs and maintenance, i.e., after -sales service, and the industrial undertaking but the industrial undertaking itself was not the source of this profit. This profit from repair and maintenance earned by the assessee was not direct yield from the industrial undertaking as the words used in section 80-IB of the Act are "profits and gains derived from". The assessee would be entitled to deduction under section 80-IB of the Act qua sale of moulds and spare parts of moulds. But in respect of repairs and maintenance charges it was not entitled to deduction in view of the clear provisions of section 80-IB of the Act, because those receipts had not immediate or direct nexus with the industrial undertaking and that was not source of profit of industrial undertaking.

    24. Otherwise, the relevant discussions and conclusions of the Tribunal as narrated in para 35 is reproduced as under.

    "Now we will conclude our decision in terms of the above as under :

    (ii) The assessee is earning job work charges as well as repairs and maintenance, which are included in job work charges, no doubt it is established that there is commercial connection between profits earned on account of repairs and maintenance and the industrial undertaking but for that source of profit is not directly from industrial undertaking. The business of industrial undertaking had directly to yield that profit to claim deduction under section 80IB....

    (iii) We have considered the case law relied on by both sides noted and discussed, but we find that the provision of section 80-IB of the Act is in pari materia with the provision of sections 80HH and 80-I of the Act, wherein the Hon'ble Apex Court in Sterling Foods [1999] 237 ITR 579 (SC), Pandian Chemicals Ltd.[2003] 262 ITR 278 (SC) and Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC) has discussed the expression in the context of these sections that the use of expression profits and gains derived from an industrial undertaking, there is distinction between the expressions "derived from" "attributable to". The Hon'ble Apex Court held that only such business profits that have a direct nexus to the essential business activity of the assessee can qualify for deduction under section 80HH of the Act. Inasmuch as both sections 80HH and 80-I use the expression "profits and gains derived from an industrial undertaking", the burden is on the assessee to show that the Income earned from an activity, the profits from which are claimed to qualify for deduction, has an immediate and direct nexus to the essential activity of the industrial undertaking. Hence, our answer to the first question referred to is that the assessee is entitled for deduction under section 80-IB on income earned from job work charges but excluding repairs and maintenance charges. Our answer to the second question referred is that the income from repair and maintenance cannot be treated at par with the income from manufacturing for the purposes of deduction under section 80-IB of the Act. "

    The above extracts distinguishes the eligible operational profits from the non eligible ancillary profits and further postulates that the mere commercial nexus of the activities is not enough and there is need for direct nexus of the profits to the undertaking as its source for becoming eligible for deduction u/s 80-IA of Act.

    25. Flyash (Solid Waste) Connection of units v Profits connection: It is a fact that the power unit has generated 'flyash', which is the substrate for the Brick making unit. Such substrates are available open market too and therefore, such substrate oriented nexus only underlines the 'commercial connection' to the power unit. But what is required of the law is the profit connection to the power unit to come within the meaning of the 'derived from'. In other words, the impugned profits must have genesis or connection or nexus in the power unit an eligible unit, to become the beneficiary of the provisions of section 80-IA of the Act. In the instant case, if the ashfly is directly sold without any value addition and profits are earned, such profits are defined to have genesis in the 'power unit' Thus, the profits earned must be innate to the power unit undertaking.

    26. Whereas in the instant case, the Impugned profits are earned by the Brick unit, which is a separate unit with a distinct set up and process, separate technology & manpower etc. Such profit being the income of the upstream industries does not constitute an operation income of the power unit. Therefore, any profits of the non-eligible for the purpose of section 80-IA of the Act downstream or upstream units (Fly Ash Brick Units) of the Electricity Generating Units, an eligible unit, are not to be construed as 'derived' from the eligible undertaking and therefore, it does not form part of an 'operational income' of the assessee. Mere flyash or raw material oriented connectivity between the Units for generating Power and manufacturing the Flyash Bricks does not establish direct nexus at the level of sources of the 'profits' of the undertakings, which is the requirement of the law. Such far related connectivity of the sources of profits does not make the Brick Unit as an integral part of the Power Unit. Thus in our opinion, the immediate source or genesis of the impugned profit decides the direct nexus to an eligible undertaking rather than the commercial connectivity of the undertakings through the flyash, the by product of power unit.

    27. Treatment of the notional profits relatable to the Value of Fly Ash transferred by the Power Unit to the Brick Unit? It is a fact that the Power unit transferred the flyash to the Brick Unit it is not known if it has a commercial or scrap or wastage value. Notwithstanding the same, as mentioned in the preceding paragraphs, we have held that the profits earned by the assesse on sale of the impugned solid waste i.e. flyash without any value additions constitutes 'operational income' of the eligible undertaking u/s 80-IA of the Act. We have taken strength from the judgment of the Hon'ble High Court of Madras in the case of Fenner (India) Ltd. v. CIT [2000] 241 TTR 803/[2002] 125 Taxman 386 for the proposition that the profit, which is earned on sale of scrap material since had direct link or nexus with the industrial undertaking, is eligible for deduction u/s 80HH as the same falls in the ambit of the expression 'derived' used in the statute. Considering the homology of expression used in sections 80HH, 80IB and 80-IA of the Act, the said proposition can be imported for deciding the present issue i.e. allowing of the deduction on the profits earned on notional sale of the flyash.

    In the instant case, the flyash was not actually sold to the 'brick making unit' and flyash was merely transferred to it. In case the flyash generated by the eligible power unit has a commercial value, in our opinion, the such value has to be determined and profits have to be arrived at. This exercise has to be done by the assessing authority after granting reasonable opportunity of being heard to the assessee. Thus, the AO shall gather relevant Information on the market value of the said 'flyash' and compute the profits relatable to such flyash transferred to the Brick unit and allow the benefits of the deduction u/s 80IA of the Act on such profits. In the absence basic facts on this issue, we are of the opinion, this limited issue should be set aside to the files of the AO for fresh adjudication. Assessee is directed to supply relevant quantitative, qualitative, commercial data if any pertaining to the flyash generated and transferred by the eligible power unit to the non-eligible Brick unit. AO shall grant deduction u/s 80-IA on profits so computed.

    28. To sum up, it is the case of the assessee that the profits earned on manufacturing and sale of the 'fly ash brick', which are manufactured out of 'brick making unit' using the 'fly ash' the by-product generated out of the 'power generating unit, the eligible business, constitutes an 'operational income' as fly ash (i.e the pollutant) disposal is an integral part or a part and parcel of the said business of 'power generating unit'. As per the discussion above, we find, that considering the option available to the assessee either to sell the said byproduct, the option the assessee did not prefer in this case, the assessee's decision to opt for the other option to use the said byproduct as raw material for the newly installed brick making unit for producing the bricks and earn the profits thereof, does not make the brick making unit as the integral part of the 'power generating unit'.

    29. From the scope of the expression 'derived' used in the said section 80IA(1) of the Act, we find that it is the settled that that to be an eligible profits for deduction u/s 80-IA of the Act, the same has to be derived from an eligible undertaking i.e. power generating unit in this case. It is also settled proposition at the level of the Apex Court that only operation income is an eligible profits and not all ancillary income. Mere existence of some commercial connection by way of raw material i.e. fly ash in the instant case to the impugned profits does not make it an eligible income. It is also a settled proposition that each and every receipt of the industrial undertaking constitutes a derived and an eligible profits of the said undertaking. With the categorization done by the Supreme Court based on a logic i.e eligible profits and ineligible ancillary profits, the said distinction has to be drawn carefully. Further, it is also relevant to understand that the profits earned on sale of the 'fly ash' is different from the profits earned on sale of the bricks made out of the said 'fly ash'. Therefore, the profits earned on sale of the bricks does not constitutes an operational Income within the meaning of the said Apex Court's judgment. In our opinion, it may or may not be the 'ancillary profits' of the power unit, which is a different issue. But certainly, it is not an 'operational income' of the power unit, an eligible unit for the benefits u/s 80IA of the Act. The impugned 'fly ash' merely establishes the commercial connection which does not make the profits 'derived' from the eligible business of the power generation. The profits derived from the manufacture and trade of bricks, cannot constitutes 'operational income' of the 'power generating unit' of the assessee. Accordingly, the grounds raised by the assessee in all the relevant appeal are dismissed.

    30. In the result, all the three appeals of the assessee are dismissed.

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    Assistant Commissioner of Income-tax- 1(2), Raipur v. Godavari Power & Ispat Ltd.
    (Nov 4, 2011)