Calcutta High Court
Principal Commissioner Of Income Tax 2 vs M/S Dhunseri Ventures Ltd on 20 August, 2025
Author: T.S. Sivagnanam
Bench: T.S Sivagnanam
OD-1
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION [INCOME TAX]
ORIGINAL SIDE
ITA/25/2024
PRINCIPAL COMMISSIONER OF INCOME TAX 2, KOLKATA
VS
M/S DHUNSERI VENTURES LTD.
BEFORE :
THE HON'BLE THE CHIEF JUSTICE T.S SIVAGNANAM
-A N D-
HON'BLE JUSTICE CHAITALI CHATTERJEE (DAS)
DATE : 20th August, 2025.
Appearance :
Mr. Tilak Mitra, Adv.
Mr. Prithu Dudhorea, Adv. ...for appellant.
Mr. J. P. Khaitan, Sr. Adv.
Mr. Pratyush Jhunjhunwalla, Adv.,
Ms. Akshara Shukla, Adv.
Mr. Aritra Nag, Adv....for respondent
The Court :- This appeal filed by the revenue under section 260A of the
Income Tax Act, 1961 [the Act] is directed against the order dated 29.8.2022 passed
by the Income Tax Appellate Tribunal, "C" Bench, Kolkata [Tribunal] in
ITA/1989/Kol/2019 for the assessment year 2015-2016.
The appeal was admitted on 31.1.2024 on the substantial questions of law.
We have elaborately heard Mr. Tilak Mitra, learned advocate for the appellant
and Mr. J. P. Khaitan, learned senior counsel assisted by Mr. Pratyush
Jhunjhunwalla, learned advocate for the respondent.
It cannot be disputed by the revenue that the substantial questions of law
no.(iii), (iv), (v), (vi), (vii) and (viii) are covered by the decision of this Court in the case
of Principal Commissioner of Income Tax Vs. Star Paper Mills Ltd., [2025] 172
taxmann.com 391 as well as the decision in Principal Commissioner of Income Tax,
Central-I vs. Rungta Mines Ltd., [2025] 176 taxmann.com 410 [Cal]. The ratio of the
said decision being that where assessee transferred power from its Captive Power
Plants [CPPs] to non-eligible units and benchmarked transaction using internal CUP
method adopting average annual landed cost of electricity paid by its manufacturing
units to State Electricity Boards [SEBs], since CPPs were established for captive use
and not for sale to SEB's, internal CUP was most appropriate method in determining
the arm's length price. The relevant paragraphs of the judgment are quoted
hereinbelow :
"14. It is not in dispute that the main business of the assessee is not generating power
to sell the same to distribution companies/SEBs. It is also not in dispute that the
Captive Power Plants (CPPs) were established by the assessee for its own need, i.e. for
supply of uninterrupted power to its manufacturing units as well as to save the cost of
power purchased from SEBs. If such be the factual position the Arm's Length Price
cannot be determined by taking the average market rates of power supply units to
distribution companies as the assessee is not in the business of selling power to
distribution companies. Therefore, the Arm's Length Price has to be determined
bearing in mind the reason behind establishment of the CPPs namely to ensure
uninterrupted power and to save on cost of electricity which otherwise has to be paid
to the State Electricity Board.
15. At this juncture, it would be relevant to take note of the Electricity Act, 2003.
Section 2(8) of the Act defines "Captive Generating Plant" to mean a power plant set
up by any person to generate electricity primarily for its own use and includes its
power plant set up by any cooperative society or association of persons for
generating electricity primarily for use of members of such cooperative society or
association. Section 9 of the Act deals with Captive Generation. Subsection 1 of
Section 9 commences with a non obstante clause and states that notwithstanding
anything contained in the Electricity Act, 2003, a person may construct, maintain or
operate a Captive Generating Plant and dedicated transmission lines.
16. The first proviso states that the supply of electricity from Captive Generating Plant
through grid can be regulated in the same manner as the generating station of a
generating company.
17. The second proviso states that no license shall be required under the Electricity
Act for supply of electricity generated from Captive generating plant to any licensee in
accordance with the provisions of the Act and the Rules and Regulations made
thereunder and to any consumer subject to Regulations made under Sub Section 2 of
Section 42. Sub Section 2 of Section 9 states that every person, who has constructed a
Captive Generating Plant and maintains and operates such plant shall have the right
to open access for the purpose of carrying electricity from his Captive Generating
Plant to the destination of his use. Section 42 of the Act deals with duties of the
distribution licensees and open access. Thus, the scheme of the Act is that a person
may construct, maintain or operate a Captive Generating Plant and dedicated
transmission lines and captive plants will have the right to open access for the
purpose of carrying electricity from captive plants to the destination of its use and no
surcharge is leviable in case open access is provided to captive units by the central or
state transmission utility or the transmission licensee involved in the
distribution/transmission of power. Further the provision make it clear that there is
no embargo to other power generating companies to directly sell the power to such
consumer at mutually agreed rate. This being not the legal position when the decision
in ITC Limited was rendered, the said decision could not have been relied upon by the
TPO/assessing officer.
18. We concur with the views expressed by the learned tribunal that the
consumer/contracting parties will certainly desire to purchase electricity at lesser rate
than the rates offered by State Electricity Board whereas the Captive Power
Plants/generating companies would desire to get maximum rate on the sale of power
in unregulated and uncontrolled transaction and both the parties would settle at
mutually agreed rates irrespective of the rates at which the State Electricity purchases
power from other generating units.
19. The learned tribunal in the case of Star Paper Mills Limited Versus DCIT Circle 4
Kolkata held that where the assessee company, engaged in business of
manufacturing and sale of paper, had set up Captive Power Plant (CPP) to meet its
requirements of its paper manufacturing units which also availed power from State
Electricity Board, the said transaction being in nature of specified domestic
transaction, transfer price of power supplied by CPP was to be bench marked at
annual average of landed cost at which power was being purchased by
manufacturing units from State Electricity Board. The revenue carried the matter on
appeal before this court and the appeal filed by the revenue was dismissed and the
said decision is reported in (2025) 172 taxman.com 391 (Kolkata). In the said appeal,
the following two substantial questions of law were taken up for consideration:-
"(a) WHETHER in facts of the case and in law, the Hon'ble ITAT is
justified upholding the internal CUP applied by the assessee to
benchmark the transaction (sale of power) to its AE, as well as
computation of deduction under section 80-IA of the Act, whereas
as per explanation to section 80-IA(8) of the Act, "market value" in
relation to any goods or services, means (a) the price that such
goods or services would ordinarily fetch in the open market; or (b)
the arm's length price as defined in clause (ii) of section 92F,
where the transfer of such goods or services is a specified domestic
transaction referred to in section 92BA?
b) WHETHER in facts of the case and in law, the Hon'ble ITAT is
justified in not appreciating the finding of the TPO that the
assessee's generating unit cannot as such claim any benefit under
section 80IA of the Income Tax Act computed on the basis of rates
charged by the distribution licensee from the consumer. The
benefit can only be claimed on the basis of the rates fixed by the
tariff regulation commission for sale of electricity by the
generating companies to the distribution company?
20. The Court took note of the decision of the Hon'ble Supreme Court in CIT Versus
Jindal Steel and Power Limited. In the said case, the assessee having found that the
electricity supplied by the State Electricity Board was inadequate and to meet the
requirements of its industrial units, set up captive power generating units to supply
electricity to its industrial units which was done at a particular rate. The surplus
power if any, generated was to be wheeled out to the electricity board grid pursuant
to an agreement between the State Electricity Board and the assessee at a rate fixed
by the State Electricity Board. The question which arose of consideration is as to the
quantum of deduction which the assessee would be entitled to claim under Section
80IA of the Act. The assessing officer held that the market value of the electricity
should be computed based on the rate fixed by the State Electricity Board for the
electricity which is purchased by the assessee. The Dispute Resolution Panel (DRP)
affirmed the view taken by the assessing officer and the matter was challenged
before the tribunal. The tribunal followed the decision in the assessee's own case for
an earlier assessment year which order had become final as the department did not
prefer any appeal under Section 260A of the Act. In the batch of cases, in Jindal Steel
and Power one of the appeals was an appeal filed by the assessee namely ITC Limited
against the judgment of the Division Bench of this court in Commissioner of Income
Tax Versus ITC Limited (supra) in CA No. 9920 of 2016 and this appeal was allowed by
the Hon'ble Supreme Court by order dated 07.12.2023 and the Hon'ble Supreme Court
held as follows:-
"28. Thus, the market value of the power supplied by the assessee to its industrial
units should be computed by considering the rate at which the State Electricity Board
supplied power to the consumers in the open market and not comparing it with the
rate of power when sold to a supplier, i.e., sold by the assessee to the State Electricity
Board as this was not the rate at which an industrial consumer could have purchased
power in the open market. It is clear that the rate at which power was supplied to a
supplier could not be the market rate of electricity purchased by a consumer in the
open market. On the contrary, the rate at which the State Electricity Board supplied
power to the industrial consumers has to be taken as the market value for computing
deduction under section 80-IA of the Act.
30. Thus on a careful consideration, we are of the view that the market value of the
power supplied by the State Electricity Board to the industrial consumers should be
construed to be the market value of electricity. It should not be compared with the
rate of power sold to or supplied to the State Electricity Board since the rate of power
to a supplier cannot be the market rate of power sold to a consumer in the open
market. The State Electricity Board's rate when it supplies power to the consumers
have to be taken as the market value for computing the deduction under section 80-
IA of the Act.
31. That being the position, we hold that the Tribunal had rightly computed the
market value of electricity supplied by the captive power plants of the assessee to its
industrial units after comparing it with the rate of power available in the open
market, i.e., the price charged by the State Electricity Board while supplying electricity
to the industrial consumers. Therefore, the High Court was fully justified in deciding
the appeal against the Revenue."
21. The Hon'ble Supreme Court after taking note of the relevant provisions of the
Income Tax Act, and in particular Section 80IA held that the market value of the
power supplied by State Electricity Board to the Industrial consumers should be
construed to be the market value of electricity and it should not be compared with
the rate of power sold to or supply to the State Electricity Board since the rate of
power to a supplier cannot be the market rate of power sold to a consumer in the
open market. It was further held that the State Electricity Boards rate when it
supplies power to the consumer have to be taken as market value for computing
the deduction under Section 80IA of the Act. Thus, applying the decision of the
Hon'ble Supreme Court in Jindal Steel and Power and in the light of the
reasoning given in the preceding paragraphs, we hold that the learned tribunal
rightly dismissed the appeals filed by the revenue."
In the light of the above decision, the substantial question nos.(iii) to (viii) are
answered against the revenue.
This leaves us with the first two substantial questions of law, i.e. (i) and (ii),
which relate to restricting the corporate guarantee fee @ 0.5% as has been done by the
learned Tribunal in the impugned order. To test the correctness of the decision of the
learned Tribunal we have carefully gone through the findings recorded from paragraph
6 of the impugned order and we find that the revenue had placed reliance on a
decision of a Coordinate Bench of the Mumbai Tribunal in the case of Rose India Pvt.
Ltd. vs. DCIT, [2021] 127 taxmann.com 591 [Mumbai Tribunal], wherein the Tribunal
held that where a corporate guarantee to benchmark was issued by and on behalf of
the Associate Enterprise, the arm's length guarantee fee would be 0.5%. The Tribunal
took note of the facts of the case and also the submissions made on either side and
held that it would be reasonable if the corporate guarantee fee of 0.5% is applied to
benchmark the international transaction and, accordingly, partly allowed the
revenue's appeal setting aside the order passed by the CIT[A] and directed the
assessing officer to benchmark the transactions by applying 0.5%. We are at a loss to
understand as to why the revenue is on appeal as against the said finding, more
particularly when it was the revenue's case before the learned Tribunal that the arm's
length guarantee fee should be 0.5% by placing reliance on the decision of the
Tribunal in the case of Rose India Pvt. Ltd. Apart from that, we find that the
substantial question nos.(i) and (ii), as suggested by the revenue, also involve the
factual adjudication which has been done by the learned Tribunal and, therefore, we
find that no substantial questions of law no.(i) and (ii) as suggested by the revenue
arise for consideration. Accordingly, the appeal fails and the same is dismissed.
(T.S. SIVAGNANAM, CJ)
(CHAITALI CHATTERJEE (DAS), J.)
SM/pkd
