The officer has valued the power my captive plant supplies to my own factory at the rate the distribution company pays me for surplus instead of the tariff it charges industrial consumers - what does s.80-IA(8) actually require, and does it matter that the transfer is a specified domestic transaction?
The client is a private limited company manufacturing writing paper at Raigarh in Chhattisgarh, assessed at a circle in Raipur, its turnover in FY 2019-20 having been Rs 6,12,00,00,000. It runs a 12 MW coal-fired captive power plant commissioned on 12 September 2014, carried as a separate undertaking with its own books. In FY 2021-22 the plant generated 6,40,00,000 units. It transferred 6,00,00,000 units to the company's own paper machines and sold 40,00,000 surplus units to the State distribution company under the power purchase agreement at Rs 3.60 a unit, Rs 1,44,00,000. The inter-unit transfer was recorded at Rs 6.95 a unit - the high-tension industrial tariff the distribution company charges its consumers - Rs 41,70,00,000. Cost of generation was Rs 2.90 a unit, Rs 18,56,00,000. The power unit's profit was therefore Rs 24,58,00,000, the whole of it claimed under s.80-IA. The AY 2022-23 return was filed on 31 October 2022 with Form 10CCB, Form 3CEB reporting the transfer. The assessment under s.143(3) read with s.144B dated 22 March 2025 revalues the transfer at Rs 3.60 a unit, Rs 21,60,00,000, leaves the deduction at Rs 4,48,00,000 and disallows Rs 20,10,00,000 - tax of Rs 7,02,37,440 at 34.944 per cent, with s.234B interest. The same order puts the initial assessment year at AY 2015-16 and notionally brings back Rs 31,60,00,000 of absorbed losses and depreciation. For AY 2020-21 a claim of Rs 9,40,00,000 made only in a revised return stands disallowed under s.80A(5). The appeal was filed on 18 April 2025.
Pull the power purchase agreement and the distribution company's tariff order for FY 2021-22, and separate two rates that everyone conflates: the rate at which the company sells surplus to the distribution company, and the tariff at which the distribution company supplies its own industrial consumers. Then open the Form 3CEB. If the aggregate of specified domestic transactions crossed twenty crore rupees, the measure under s.80-IA(8) is not market value at large but the arm's length price, and the officer has fixed a price without the machinery that requires. That is a different ground from the one everybody files.
The deduction runs for ten consecutive assessment years out of fifteen beginning with the year in which the undertaking begins to generate power, at the assessee's option. The plant began on 12 September 2014, so the window is AY 2015-16 to AY 2029-30 and the company's choice of AY 2019-20 as the initial year sits inside it. That choice decides the whole of the officer's second ground. One High Court has held that the assessee may choose its initial assessment year within the window, and that once the choice is made the depreciation and losses of the eligible undertaking already absorbed against other income in earlier years are not notionally revived. The Board itself accepted the assessee's choice of initial assessment year in its circular of 2016, which binds the officer. Against that stands an Ahmedabad Special Bench which answered the reference for the Revenue and required the notional brought-forward set-off - the order on which the officer's Rs 31,60,00,000 rests, and which this library marks overruled. Say so in the ground, by date.
Section 80-IA(8) requires the transfer between the eligible undertaking and the rest of the business to be recorded at market value, and the Explanation to that sub-section defines market value: by clause (ii) it is the arm's length price as defined in s.92F(ii) where the transfer is a specified domestic transaction referred to in s.92BA, and otherwise the open-market price in clause (i). Section 92BA reaches a transfer of goods or services referred to in s.80-IA(8) and business transacted as referred to in s.80-IA(10), where the aggregate of such transactions in the year exceeds twenty crore rupees. The library's page records that threshold, and that what survives in s.92BA after clause (i) was omitted in 2017 is the inter-unit and tax-holiday transactions. At Rs 41,70,00,000, or even the officer's Rs 21,60,00,000, this transfer is over the line. The price then falls to be determined under s.92C, and the officer's route to it is a reference under s.92CA, which he may make with the previous approval of the Principal Commissioner - not by picking a rate from the power purchase agreement.
The Supreme Court has held that the rate at which a generator sells surplus power to a State Electricity Board is a rate fixed by contract under a statutory monopoly and is not a price fetched in the open market, and that the market value for s.80-IA(8) is the tariff at which the Board supplies electricity to its consumers. That is this file exactly: Rs 3.60 is what the distribution company pays the company under the power purchase agreement for 40,00,000 surplus units, Rs 6.95 is what it charges its own high-tension industrial consumers. Over 6,00,00,000 units the difference is Rs 20,10,00,000, and the deduction moves from Rs 4,48,00,000 to Rs 24,58,00,000. File both computations as a single annexure with the tariff order and the agreement attached, so the appellate authority is not doing the arithmetic out of the assessment order.
The deduction runs on the profits of an undertaking, so the officer's alternative line is that a plant feeding only the company's own factory is not an undertaking at all but part of the paper business. The Supreme Court has held otherwise in principle: a new division set up inside an existing works, supplying mainly the assessee's own divisions, was a new industrial undertaking and not a reconstruction of the old business, where there was new plant, separate buildings, separate licences, separate books and substantial fresh capital. Each of those is a document to file. On the other side of the same question, 'derived from' is narrower than 'attributable to' and the Supreme Court has confined eligible profits to sources not beyond the first degree, so anything the power unit earns that is not generation must be justified separately. One High Court has allowed interest on deposits the eligible business was obliged to make, on the footing that placing the funds was imperative for carrying it on rather than a way of parking idle surplus.
Three provisions govern and they do not point the same way. Section 80AC asks only whether a return of income was furnished by the s.139(1) due date; s.80A(5) refuses the deduction where no claim was made in the return of income; s.139(5) lets a person who filed in time revise. This library's own page says in terms that no source it holds answers whether a claim first made in a revised return survives, and its two decisions point opposite ways. A Mumbai Bench held that s.80AC requires only that the return be furnished by the due date and does not say the deduction must itself be claimed in that return. The Madras High Court held that where s.80AC applies the deduction cannot be allowed unless the return was filed by the due date and the claim was made in it. Where a claim was made before the first appellate authority and in no return at all, one Bench has held the bar on a fresh claim without a revised return operates against the Assessing Officer, not against an appellate authority.
Since AY 2018-19 s.80AC denies the whole of a deduction under the heading of deductions in respect of certain incomes, which includes s.80-IA, unless the return was furnished on or before the s.139(1) due date. It is not proportionate and it is not curable by producing the audit report later. Two High Courts have held that condonation under s.119(2)(b) restores the claim: one reasoned that s.80AC does not say in express terms that the deduction becomes inadmissible where the delay in filing is condoned, and the other set aside a refusal to condone and directed that the return be treated as filed within time. A return filed only in answer to a notice under s.148 does not cure the default.
Section 80-IA(9) is a provision about the stage of allowance, not about computation. The Supreme Court has held that where a deduction has been allowed under s.80-IA another deduction under the same heading is still computed on the profits of the business without first reducing them, and that what the sub-section prevents is the aggregate of the heading's deductions exceeding the profits and gains of the undertaking. There are also hard bars to check before any claim is filed for the later years: where a deduction has been claimed and allowed under s.35AD for a specified business, no deduction is allowed under that heading of Chapter VI-A for the same business in that or any other year, and the bar is wider than it is usually taken to be. Section 80A caps the aggregate of the Chapter VI-A deductions at the gross total income, so the deduction can never create or increase a loss.
Take the initial assessment year and the notional set-off first, because if Rs 31,60,00,000 comes back there is no deduction left to value. Then the specified-domestic-transaction ground, because it goes to whether the officer could fix a price at all without the s.92C machinery. Then market value on the Supreme Court decision, which is the strongest ground on the face of the order and the one to lead the stay application with. Then eligibility of the undertaking, which nobody has yet disputed and which should not be conceded by silence. On the demand of Rs 7,02,37,440 and the s.234B interest, one High Court has held interest not chargeable where a claim was made before a retrospective amendment that later took it away, because the assessee could not have known on the relevant date - that is not this file, where no provision was amended, and pleading it invites the answer that the deduction was always at risk.
On market value this file is now usually won: the Supreme Court decision is directly on the point and appellate authorities apply it without much argument, so the tariff charged to consumers stands more often than not. The initial assessment year point is won more often than it is lost since the Special Bench view was displaced, but it is fought hard, and it is the ground on which a file most often goes back for verification of which year was claimed when. The specified-domestic-transaction ground is rarely taken and, where it is, it produces a remand to the Transfer Pricing Officer far more often than a deletion - a win on the order rather than on the tax. The year where the claim went in only on a revised return is more often lost than won.
