TaxTMI 
TaxTMI 
2025 (7) TMI 964
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.... the appeal filed by the assessee in ITA No.755/Del/2022 for AY 2017-18. 4. Brief facts of the case are that the assessee is a company engaged in the business of manufacturing and trading of Kraft paper and white paper and filed its return of income on 29.11.2017 declaring total income of INR 34,49,64,520/-. The case was selected for scrutiny through CASS and notice u/s 143(2) of the Act was issued on 09.08.2018. The AO observed that assessee has entered into certain specified domestic transaction and therefore, the matter was referred for determination of ALP of the specified transaction undertaken by the assessee in terms of reference made u/s 92CA(1) of the Act. In compliance, the TPO passed the order u/s 92CA(3) of the Act dated 31.01.2021 wherein he proposed two adjustments with reference to the claim of deduction u/s 80IA of the Act by the assessee. First TPO reduced the amount of deduction claimed u/s 80IA of the Act by INR 32,68,31,286/- on the transfer of power from eligible unit to non-eligible unit. Similarly, the deduction u/s 80IA with respect to transfer of steam from eligible unit to non-eligible unit was reduced by INR 51,63,85,174/-. Thereafter, the AO passed dr....
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....ive power plants) to non-eligible units by adopting average rates of power charged to industrial customers in Uttar Pradesh by Indian Energy Exchange Ltd. as best external comparable uncontrolled price for the determination of arm's length price in preference to the claim of the appellant that purchase price charged by M/s Madhyanchal Vidyut Vitran Nigam Ltd. ("MVVNL") from industrial users for purchase of power, which is otherwise also in consistence to rates adopted for transfer in previous years duly accepted in assessments u/s 153A of the Act; and in disregard of the decision of Hon'ble Income Tax Appellate Tribunal for AY 2008-09 in ITA No. 1344/Del/2013 and AY 2009-10 in ITA NO. 1920/Del/2013. 3.1. That the justification at the basis that "sale rates of producers cannot equated with the purchase rate of end users since the purchase rate of end user contains many factors which increases the rate" is not only theoretical but overlooks the factual matrix, commercial and market realities and statutory position. 4. That the learned AO/TPO/DRP have also erred both in law and on facts in making an adjustment of Rs. 51,63,85,174/- to the sale price of steam ....
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....dingly, Ground No.1 raised by the assessee is hereby dismissed. 6. Ground No.2 taken by the assessee is with respect to the denial of deduction of INR 16,74,685/- claimed by the assessee u/s 80IA (4) of the Act. On transfer of electricity. Ground Nos. 3 to 3.1 are in relation to the adjustment made at INR 32,68,31,286/- by TPO on the price of power charged by eligible unit to non-eligible unit. Ground Nos. 4 to 4.1 are in relation to the adjustment of INR 51,63,85,174/- made by TPO/AO towards the sale price of steam transferred from eligible unit to non-eligible unit. 7. As all above-mentioned grounds are inter-related and inter-connected therefore, these are taken together for consideration. 8. Brief facts leading to these issues are that the assessee is having Two paper manufacturing units which were set up in the year 1996 and 2008-09 and treated as non-eligible unit whereas the assessee is having Two power generation units, the first wherein unit was installed in the year 2006 with the capacity of 2.5 MW of electricity and second unit was installed in the year 2009 with capacity of production of 12 MW electricity and both are treated as eligible units. The assessee whi....
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....to its industrial unit after comparing with the power available in the open market and the price charged by the State Electricity Boards while supplying electricity to the industrial consumers. 11. Ld. AR submits that the assessee has taken the price of INR 6.63/- per unit being the price of power charged by MVVNL ("Madhyanchal Vidyut Vitran Nigam Ltd") from other industrial users and accordingly, in view of the judgement of Hon'ble Supreme Court in the case of Jindal Steel and Power Ltd. (supra), the price charged by the eligible unit from non-eligible unit on account of transfer of electricity is ALP and thus, required no modification on the same. He also placed reliance on the following judgements passed by Various Hon'ble Supreme Court and High Courts and ITAT:- (i) "PCIT vs Nalwa Steel & Power Ltd. in ITA No.725/Del/2019; (ii) Gujarat Alkalies and Chemicals 395 ITR 247 (Guj.); (iii) CIT vs Godavari Power & Ispat Ltd. 42 Taxmann.com 551 (Chhattisgarh); (iv) ACIT vs ACB India Ltd. in ITA No.5469/Del/2019 dated 31.12.2024; (v) DCIT vs M/s. Balrampur Chini Mills Ltd. in ITA No.1672/Kol/2019 dated 05.05.2021; (vi) ITA Nos. 13....
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....n of electricity. In this regard, the assessee has made a detailed submissions as contained in para 61 to 63 of written submissions which is reproduced as under:- 61 The appellant company had installed boilers in both Unit-I and Unit-II to produce steam which was utilized in the paper manufacturing process. To produce this steam - rice husk and coal is being used to generate heat so that steam is produced for the captive power plant; 62 Steam is generated at boilers using various fuels, coal and fuels are fired at water tube high efficient atmospheric fluidized bed combustion boilers; AFBC boilers are capable to take variable grade of fuels and to heat water in boiler; Unit-I i) As a result of the above procedure, high pressure steam is generated in Unit-I with a pressure of 46 ata and temperature 425 deg centigrade. The steam will have heat value of 779 kcal/kg as per steam table and the steam generated from boiler will be sent to turbine for further process of power generation and process steam application. The high pressure steam will be used to rotate turbo-generator for power generation, the temperature in high pressure steam will be converted to mec....
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....uired by process at a intermediate pressure of 12.67 ata and temperature of 289.9 deg with a heat value of 722 kcal/kg, the above steam will be called as Extraction 1 (Medium Pressure Steam) and used from raw material cooking in pulp mill. The heat value from 815 Kcal/Kg to 722 kcal/kg (for withdrawn amount of steam) is utilized by turbine for power generation. And remaining heat value is provided to process; vii) As a further process in turbine more amount of steam shall be drawn as per process requirement (low pressure steam) from the turbine at a pressure of 5 ata and temperature of 18.79 deg with a heat value of 675 kcal/kg, the above steam will be called as Extraction-2 (Low pressure steam) and used for various process and water heating at a deaerator. The heat value from 815 kcal/kg to 675 kcal/kg (for withdrawn amount of steam) was utilized by turbine for power generation and remaining heat is utilized by process. viii) The balance steam will be processed through turbine and at end of turbine the steam at a presume of 0.5kg/cm2 and temp of 45 to 65 deg and a heat of 615 kcal/kg will be condensed in condenser as further use of steam in turbine is not possibl....
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.... the manufacturing activity therefore, it has no cost remained. He prayed accordingly. 18. We have heard the rival contentions and perused the material available on record. In the instant case, the TPO made the adjustments towards the sale price taken for transfer of electricity as per the average rate at IEX in Uttar Pradesh. Further the cost of production of Steam from eligible unit to non-eligible unit is taken at NIL by holding the same as By-Product. The appellant had generated electricity from two power plants and the electricity produced is only meant for captive consumption and not otherwise. The appellant did not sell any electricity to the outsiders. The generation of electricity and its supply are controlled by the Electricity Act, 2003 and the Electricity (Supply) Act, 1948. As per the Act, no person without a license can trade in the electricity. The generation companies are different from the distribution companies. The generation companies, as per the statutory mandate, are bound to sell electricity to the distribution companies and the price thereof is determined as per the formula given in the Electricity Act and the contracts as executed between the generation ....
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....where the TPO had evaluated and compared the transactions with reference to the average price of IEX. The power generating companies, who did not sell the electricity in the open market on account of the restrictions made in the Electricity Act, and are bound to sell the electricity only to the State Electricity Board as per the contractual terms who in turn supplied the electricity in the open market to end consumers. The Co-ordinate bench of ITAT, Jaipur in the case of Wonder Cement Ltd. (supra) after considering these facts did not accept the TPO's order. The coordinate bench in paragraph 14 of its order has made following observations: "14. Evaluating this in light of the meaning of arm's length price i.e. a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions, it is evident that the transaction of purchase of electricity by State Electricity Boards from independent power producers is a regulated activity, being subject to approval of SERC, and therefore is not a transaction undertaken in uncontrolled conditions. Thus, the transaction between power producers and state elec....
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....controlled transaction, is required to be evaluated by determining whether there are any differences between the specified domestic transaction6 and the uncontrolled transaction of trade on the IEX. 46. The Assessee states - and the same is not controverted - that the availability of power on IEX is unpredictable and the supply of power is unreliable. 47. It is stated that in order for a party to purchase power from IEX, the said party has to participate in the bidding process. The same entails furnishing a bid in advance for supply of fifteen minutes slots. Illustratively, it is stated that if a party requires power supply for a period of four hours, it would be required to submit sixteen bids for fifteen minutes slots. Further, the bidder cannot resile from the bids furnished by it in advance. 48. In view of the above, it is contended that power traded on IEX cannot be compared with the power supplied by a SEB. 49. It is not disputed that IEX is a platform, which is used by power producing units to sell surplus power for short term requirements. IEX is not a platform for sourcing continuous power for power consuming units. It is also pointed ou....
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....g Rs.4.39 per kWh, was rightly accepted as an ALP. 55. As noted above, the learned ITAT also accepted the rates at which electricity was supplied by the SEBs/power distribution companies to the Assessee in Gujarat and Rajasthan regions as the said rates was considered as an external CUP. 56. Undoubtedly, there is a degree of similarity between the transaction of supply of electricity by SEBs to the Assessee and the supply of electricity by the Assessee's eligible units. However, there is a difference between the transactions being benchmarked, which is supply of electricity by captive units, and the transaction of supply of electricity by distribution companies/corporations. The power distribution companies enjoy a near monopoly status. The tariff charged by such companies are regulated tariffs. However, we accept that there is a sufficient degree of similarity between the said transaction for reasonably determining the ALP by using the CUP method. 57. We also consider it apposite to refer to the recent decision of the Supreme Court in Commissioner of Income Tax v. Jindal Steel and Power Limited. The principal issue involved in the said decision was t....
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....ment of free trade or competition. "Market value" is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or regulation; rather, it is determined by the economics of demand and supply. 26. Under the electricity regime in force, an industrial consumer could purchase electricity from the State Electricity Board or avail electricity produced by its own captive power generating unit. No other entity could supply electricity to any consumer. A private person could set up a power generating unit having restrictions on the use of power generated and at the same time, the tariff at which the said power plant could supply surplus power to the State Electricity Board was also liable to be determined in accordance with the statutory requirements. In the present case, as the electricity from the State Electricity Board was inadequate to meet power requirements of the industrial units of the assessee, it set up captive power plants to supply electricity to its industrial units. However, the captive power plants of the a....
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....ld 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." [emphasis added] 59. As is apparent from the above, the Supreme Court had accepted the rates at which electricity was supplied by the SEBs to industrial consumers as being the market value of the said supplies for the purposes of Sub-section (8) of Section 80IA of the Act. 60. In view of the above, the questions of law are answered in favour of the Assessee and against the Revenue." 24. The Co-ordinate Bench of ITAT, Kolkata in the case of DCIT Vs. Philips Cabon Black Ltd. under identical circumstances has dismissed the appeal of the revenue by making following observations: "9. In this regard we have gone through a later judgment of the Hon'ble Calcutta High Court in the case of CIT v. Star Paper Mills Ltd. [2025] 172 taxmann.com 391 filed by the assess....
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....ssessee has taken the price at the rates at which the electricity is supplied by MVVNL to the industrial consumers i.e. Rs. 6.36 per unit thus, the sale value computed by the assessee for transfer of electricity from eligible unit to non-eligible unit is at Arm length price and accordingly the adjustment made by the AO / TPO at Rs. 32,68,31,286/- is hereby deleted. The grounds of appeal No. 3 to 3.1 are allowed. 26. Regarding the adjustment made by the AO/TPO on the transfer of steam from eligible unit to non-eligible unit by taking the cost of production of steam at NIL, in our considered view steam is commercial and viable product and its value cannot be taken at NIL. Since the steam is one of the forms of power and thus can be considered as joint product and not as by-product. Similar issue was came for consideration before the Co-ordinate Bench of the ITAT Delhi bench in the case of DCM Sriram Ltd. in ITA No. 7362/Del/2018 in AY 2014-15 wherein a detailed discussion is made on this issue and thereafter, the Hon'ble Co-ordinate Bench of the Tribunal was of the view that the steam is a valuable source of power and has cost of production. The relevant observations as contained ....
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....g to that guidance note in paragraph number 5.1 it is stated that each type of utility shall be treated as a distinct cost object as Under:- "5.1 Each type of utility shall be treated as a distinct cost object. As each utility is a distinct cost object, cost of each utility is to be collected and measured separately. For example power, steam, water, compressed air, oxygen, nitrogen, coke oven gas and the like are distinct utilities, and the cost is collected and measured for each utility separately. The costs are booked to each utility Page 34 of 55 through initial documents such as supplier 's bill, if directly identifiable with utility, payroll analysis sheet, stores requisition, etc. A separate cost statement is to be prepared for each utility." In paragraph number 5.3.2 it has provided as Under:- "5.3.2 In case of Utilities generated for the purpose of inter unit transfers, the distribution cost incurred for such transfers shall be added to the cost of utilities determined as per paragraph 5.3.1. If utilities generated are transferred to inter units of an entity, the cost of distribution of such utilities will be included in the cost of utili....
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....r should include employee cost, fuel, power, repair and maintenance of tube wells, depreciation, overhead. The total monthly cost of operating this department is divided by the quantity of K Ltr of water pumped during the month to determine the unit cost of water pumped. Cost of Soft Water: Water, if hard, requires treatment. The cost of soft water will include the cost of raw water, chemicals, cost of maintenance of settling tanks, employees cost, depreciation and the like. The cost of demineralised water is also arrived at on the above basis. There is inter-utility transfer cost for a utility. For example water utility may be used in generation of steam and power. Power may be required for pumping water from tubewell. Inter-utility cost is to be determined by the following method: a) repeated distribution method; b) matrix algebra through computer application (a) When Repeated Distribution Method is adopted, the utility costs are repeatedly allocated in the specified percentage until the figures become too small to be significant. Steps to be followed under this method are: I. The proportion at which the cost of a utility is to be distributed to production cost centres a....
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....d by the learned revenue authorities without any basis. 42. Further in the case of the assessee sister concern in case of SRF Ltd the learned dispute resolution panel on the identical facts and circumstances has held that steam has a cost and therefore the arm's length price of steam cannot be determined at nil. It further held that the value of steam can be expressed in terms of equivalent units of electricity that would have been generated and such value is usually higher than the cost of steam. 43. Further in case of the assessee for assessment year 2015 - 16 the learned CIT - capital has rejected the action of the learned transfer pricing officer of determining the arm's-length price of steam at nil and upheld the assessee's approach of benchmarking the transfer price of steam at cost. This order has been accepted by the revenue and no further appeal has been filed. Therefore this issue becomes final with respect to the determination of ALP of transfer of steam at cost by the eligible unit to non eligible unit. 44. Further Honourable Gujarat High court in Principal Commissioner of Income Tax v. Jay Chemical Industries Ltd 2020] 120 taxmann.com 315 (Gu....
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....he exhaust steam is also at certain pressure so that it can utilised for some other purpose. The design of the turbine is done in such a manner so that all energy of the steam is not utilised by the turbine for generation of power but certain part of it is released in the exhaust steam also. Therefore, the design of the turbine used by the appellant is in such a manner that the exhaust steam is at a certain pressure so that it can be utilised for some other work. Accordingly, this steam cannot be consider as a by product but it is intentionally being produced or generated for a specific purpose. Further the intention of the legislature was to provide deduction for generation of electricity and not for generation of steam. The intention is clearly evident from the perusal of the speech of the honourable Finance Minister while introducing the provisions for deduction in the budget. The use of word 'power' is intended for 'electricity' as the other relevant sections clearly mentioned the word 'electricity'. The honourable Bench of ITAT Ahmadabad while deciding the issue in N.R.Agrawal Industries Private Limited has discussed these aspects in detail and accordin....
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.... expenses Boiler maint 1728903 Coal expenses 38733894 Depreciation other than turbine 10522945 Total expenses 52785832 Expenses for steam utilised for 17.66% of 52785832 Generation of electricity 9321977 In addition to above expenses for generation of steam, the expenses of head office of the appellant company which looks after the management or the affairs of-the Company and also the power plant are also to be disallowed on proportionate basis. It is also noted that the appellant has taken loan from financial institutions for installing the power plant. The appellant is also paying huge amount of interest on the loan. Proportionate allocation of the interest expenditure should also be done and added to the cost of generation of steam. Since the details related to the expenses of head office as well as interest expenditures are not available before me, the AO is directed to work out the proportionate allocation of the interest expenditure should also be done and added to the cost of generation of steam. Since the details related to the expenses of head office as well a....
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....an application for rectification before the Tribunal contending that after the judgment was delivered by the Tribunal, the High Court, in the case of Gujarat Alkalines and Chemicals Ltd. v. CIT [2013] 350 ITR 94/[2012] 208 Taxman 31/20 taxmann.com 764 (Guj.) has delivered a judgment which would have a bearing on the issue decided by the Tribunal. The said application was opposed by the Revenue. However, the Tribunal allowed the application for rectification and recalled its earlier judgment. The Revenue came before this Court in appeal. This Court took the view while allowing the appeal of the Revenue that the claim of the assessee for deduction under section 80IA of the Act was not tenable in law. 19. This Court took notice of the fact that the assessee had installed turbine for power generation which relied on the excess steam production capacity of the plant. This Court ultimately took the view that the installation of turbine for power generation could be said to setting up of a new industrial unit and therefore, the assessee would not be entitled for deduction of sum under section 80IA of the Act. 20. In our view, the facts in the case of Atul Ltd. (supra) ar....
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....f law was admitted on this issue by the Hon'ble High Court. The relevant observations as contained in ITA No.566/2023 and CN Application No. 51969/2023 while admitting the substantial question of law in para 5 of the Hon'ble High Court is as follows: 5. Question C pertains to the transfer of steam from the eligible unit to the non-eligible unit of the assessee. The appellant seeks to contend that since steam was a by-product of the business and would have been included in the cost of power generation, it should not have been taken into account. We, however, find that the aforesaid issue and aspect was concerned with the transfer of steam to the non-eligible unit and for the purposes of which the assessee would have been justified in relying on the cost of production. We therefore, are of the opinion that Question C raises no substantial issue. 28. In view of the above facts and by respectfully following the decision of Co-ordinate Bench and of the Hon'ble jurisdictional high court in the case of DCM Shriram Ltd. (supra) and further relying upon the judgement of Hon'ble High court in the case of CIT vs Cushman & Wakefield 367 ITR 730 (Del.), transfer of steam from el....
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....TM) (Agra); xii) Dinesh Mills Ltd. vs. CIT, 2001, ITAT reproted in 254 ITR 673 (Guj); xiii) Goodyear India Ltd v ITO, 2000, ITAT reported in 73 ITD 189 (Del); xiv) Sunder Mal Sat Pal vs. ITO, 2005, ITAT reported in 94 TTJ 423 (Asr); xv) Coco Cola (India) Ltd. v. JCIT, 2005, ITAT reported in 104 TTJ 254 (Pune) 32. He, therefore, requested for the deletion of the disallowance made by the AO. 33. On the other hand, Ld.CIT DR supports the orders of the AO and submits that the expenses stood increased from INR 95.16 lakhs to INR 1.86 crores in the year under appeal and no proper explanation was given for such increase therefore, disallowance was rightly made by the AO which deserves to be upheld. 34. Heard both the parties and perused the material available on record. From the perusal of the order of AO, it is seen that the AO has made the disallowance for the sole reason that the expenses were increased substantially as compared to previous year however, Ld.DRP after considering the aspects in para 5.5 of the order has given following directions:- 5.5. "Keeping in view of the above discussion, the DRP directs the AO to allow the exp....
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....essee in terms of the re-conciliation statement and other evidences stated above as and decide the issue in accordance with law. With these directions, this ground of appeal is partly allowed for statistical purposes. 41. Ground No.7 raised by the assessee is with regard to the levy of interest u/s 234B & 234C of the Act. The levy of interest is mandatory however, the amount charged is consequential to the income finally determined and therefore, the AO is directed to charge the interest u/s 234B on the income finally computed after giving effect to the order of the Tribunal. 42. In the result, appeal of the assessee is partly allowed. ITA No. 4456/Del/2024 [Assessment Year : 2020-21] 43. Ground Nos. 1 to 4 raised by the assessee are in respect of the transfer pricing adjustments of INR 89,64,57,563/- made u/s 80IA of the Act in respect to the transfer of electricity and steam to compute the profit for the purpose of deduction u/s 80IA(4) of the Act. 44. The identical issues have been decided by us in assessee's own case in ITA No.755/Del/2022 (AY 2017-18) herein above. Both the parties agreed that the facts and circumstances are identical to the facts in AY 2017-18.....