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ITAT examines ALP and market price and carbon credit

4 February, 2014

Dealing with an interesting basket of disputes, the ITAT, Jaipur, on 27th January, 2014, decided two important questions. One related to the ‘market price’ of power purchased (consumed) calculated at ‘arm’s length’ by the assessee, and other relating to carbon credits.

The facts in Shree Cement v. ACIT

Power produced by the assessee in its power undertaking was consumed by the assessee’s cement unit. For such transfer of goods from a unit eligible under Section 80IA for deduction of profits, the assessee had to adopt market value. The department contended that the average landed cost at which power was supplied by the State Electricity Grid to assesse’s cement unit (grid value) would constitute market value. The assessee computed market value to be the price at which power was supplied by independent suppliers to distribution companies in its revised return. Earlier it had adopted the grid value.

Statute does not provide for substituting of market value

The ITAT found force in the argument that once a value had been adopted by the assessee, the department can check whether it is the market value. The Act does not call for adoption of the best market value out of many possible values. In the instance case, many values under independent transactions were available in public domain and the assessee was the best judge of which value was most comparable to his transactions. The tribunal was of the view that what constitutes market price is a matter of principle and not quantum and once the assessee adopted a market value, the department cannot substitute the same merely because other values are available.

Carbon credits are not revenue receipts

Under Clean Development Mechanism (CDM), the assessee undertook a project for optimum utilization of clinker and earned carbon credit of Rs. 16,02,32,595/-. The department sought to tax the same reasoning that cost of acquisition of such credits was nil and included the same under business income. Relying on decision of coordinate benches of the tribunal it held that carbon credits are capital receipts. It also observed that the Direct Taxes code (DTC) is a guide to determine taxability of an item and that DTC specifically provides for taxing carbon credits as business income.

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