Income Tax Appellate Tribunal - Delhi
National Thermal Power Corporation ... vs Addl. Commissioner Of Income Tax on 26 May, 2004
ORDER
K.C. Singhal, Judicial Member
1. Since common issues are involved in both these appeals, the same were heard together and are being disposed of by the common order for the sake of convenience. The main issue arising in these appeals relates to the determination of profits derived from the industrial undertaking engaged in the business of generating electricity through gas turbine and steam turbines.
2. Briefly stated, the facts are these: The assessee was engaged in the business of generation of electricity at various places by using coal and gas. We are concerned only with reference to units using gas. Such projects are at places, namely, Anta, Auriya, Kawas and Dadri in the year under consideration. In the course of assessment proceedings, it was noticed by the AO that some units had not shown any fuel cost while the other units had shown expenditure worth crores of rupees as fuel cost. Units where no fuel cost was shown are unit No. 4 and Unit Nos. 3 & 6 each at Auriya, Kawas and Dadri. The assessee was asked to explain the reasons for not showing any fuel cost for these units. 3. The explanation of the assessee vide letter dated 10.1.2001 was as under:
"NTPC has set up Gas Power Station at Anta, Auraiya, Kawas, Dadri, Jhanor, Gandhar and Faridabad as combined cycle gas power stations. These stations have number of gas turbines, which independently generate power, by separately feeding fuel in the form of natural gas/HSD or Naptha. The natural gas after mixing with the air is burnt in the gas combustion chamber to produce gases at a very high temperature. These gases are used to run gas turbines for generation of electricity. The Gas Turbine exhaust hot air gases, which otherwise have no commercial value, are then released into atmosphere. With the advancement in technology the waste heat recovery boilers have been invested to utilize such hot exhaust gases.
The exhaust hot gases from gas turbine are routed through the waste heat recovery boilers to utilize it in heating water and producing steam. The steam produced in waste heat recovery boilers is then run to generate electricity in the steam turbine attached separately with such boilers. The steam turbine can only be run from hot gases released from the gas turbine. In case of any failure of steam turbine the hot gases being released after generation of power in gas turbine has to be discharged in the atmosphere since it has no other commercial value. All gas turbine and steam turbines separately generate electricity and have separate control system, separate turbines, separate gas combustion chambers for gas turbines and boiler for steam turbine for generation.
As explained above the steam turbine does not consume fuel except waste hot gases of gas turbine. In view thereof, no fuel cost has been indicated in steam turbines."
Again vide letter dated 27th February 2001, it was explained as under:
"NTPC has set up Gas Power Station at Anta, Auraiya, Kawas, Dadri, Jhanor, Gandhar and Faridabad. These power stations have two distinct types of prime movers gas turbines and steam turbines. The fuel (Natural Gas/KSD/Naptha) is burnt in the combustion chamber of gas turbine and the product of combustion (hot gases) is expanded in Gas Turbine. The mechanical power thus developed drives an electric generator for generating electricity.
Hot gases are exhausted after their expansion in the gas turbines. As the exhausted gases are no longer required they are known as waste hot gases and are let out in the atmosphere. These waste hot gases do not have any combustion properties. With the availability of technology, steam turbines are installed at a massive cost, which is higher than the cost of the normal gas turbine. These waste hot gases are routed through the waste heat recovery boilers for generation of power. These waste exhaust hot gases from gas turbines can also be let out to the atmosphere directly through a by pass stack. If waste hot gases are exhausted directly to the atmosphere the residual heat contained in its is totally lost. However, when it is passed through a Waste Heat Recovery Boiler, it is possible to partly reclaim the residual heat for generation of power.
No fuel is required to be used for generation of power by the waste heat recovery boiler (WHRB). In other words, the steam turbine uses only the waste exhausted heat of such gases in WHRB for generation of power.
It appears that assessee was asked to furnish details of quantity and cost of hot gases used in the waste heat recovery boiler. The assessee vide letter dated 27th February, 2001 stated as under:
"You have desired us to furnish quantity and cost of exhausted hot gases used in waste heat recovery boiler. On this point we wish to submit that it is not possible to work out actual quantity of exhaust hot gases consumed in WHRB. Depending on grid conditions flow of gases in the waste heat recovery boiler varies from time to time on continuous basis. At times on account of technical reasons the gas station is run in an open cycle and therefore, waste hot gases are being discharged into atmosphere.
In view of above the flow of waste hot gases in waste heat recovery boilers is neither practicable nor being measured on actual basis. We reiterate that since no fuel is being consumed in waste heat recovery boiler there is no fuel cost that can be allocated to generation of power by steam turbine. It may be mentioned here that the waste hot gas is not a commercial commodity and is not brought to the market for sale and purchase.
It is not capable to being transported to a distant place because it would lose its potential heat. Moreover, because of huge requirement of compressor power for transportation and capital cost of equipment like compressor, piping etc., it is uneconomical to transport the gases even to a nearby location as these waste hot gas is of very low pressure and density.
In view of the above, it is submitted that waste hot gases are not marketable nor are being sold or bought in the market. They have not market value at all."
4. After considering the explanation of the assessee, the AO observed as under:
1. That the steam units availed a value added product from the gas unit as its fuel. This product, in the form of hot gas, is admittedly a by-product of the gas unit. This product is also not an ordinary air. With carbon percentage at almost 5%, it is much more combustible than the ordinary air.
2. The gas unit has paid for the natural gas, and thus all its by product, if useful, will have value loaded into it. If the use of hot gas is admitted to the exclusion of any other fuel in generating power, how it can be claimed that such hot gas is without any value at all. The steam has a value and it should take into account the cost of fuel involved in its generation. Reliance was placed on the case of Nestle India Ltd. for asstt. Year 1998-99.
3. That most of the gas and steam unit of the assessee form an integrated project. They are called, in the assessee's own language, as combined cycle gas power station. The assessee had envisaged right from the beginning that the hot gas from the gas units will be put to use in the steam units. According to him, within a span of short time, after setting up of the gas unit, steam units were setup.
4. That the waste hot gas used by the assessee does have commercial utility and, therefore, it cannot be said that it is not a marketable product. The use of such gas in itself shows that it has commercial value.
5. That in view of the provision of Section 80I(6) the profits of each industrial undertaking have to be determined as such unit is the only source of income of the assessee. Hence, the cost of such gas should be taken into consideration for determining the profits of steam units. Since the gas units had not charged any price for the fuel supplied to steam unit, the cost of such gas proportionate to its use should be taken into consideration while determining the profits of steam unit. Similarly, reliance was placed on Sub-section (9) of Section 80I, which provides that where any valuable item is transferred from one unit to another unit then its market value, should be taken into consideration.
On the basis of the above information, the AO proceeded to estimate the value of hot gas used in the steam unit. After examining the relevant cost, he came to the conclusion that the cost per mega watt was Rs. 47.29 lacs. Since the steam unit had the capacity to generate 153.25 Mega watt of power, he determined the cost of fuel at Rs. 7245.44 lacs. Considering these figures, the profits of the steam units were reduced accordingly and resultantly the claim of the assessee Under Section 80I/80I(A) was reduced in respect of steam units.
5. The matter was carried in appeal before the CIT(A) before whom the assessee has reiterated its stand taken before the AO. In addition, it assailed the order of AO by submitting as under:
1. Hot gas, that emerges as waste after generation of electricity from gas turbine cannot be termed as by product because it does not have any commercial value. To term a product as by product, it must have marketability as well as cost assigned to it.
2. That the AO had wrongly assumed 5% carbon percentage in the waste hot gases exhausted from the steam turbine. Such assumption was hypothetical as there is no carbon component in such hot gas. Resultantly, the AO went wrong in holding that such gas is more combustible than the original air. In support of such submission, the assessee filed an analysis report from Research and Development Centre confirming nil combustion value.
3. The case of Nestle India Ltd. relied upon by the learned counsel was distinguishable on facts.
6. The CIT(A) confirmed the order of AO on this issue by observing as under:
"I have carefully considered the submissions made by the ld. AR in this context whereby it has been stated that the market value attributed by the AO to such "exhaust hot gases" had incorrectly been done by the AO for the reason that the hot gases were not good, they were not marketable, they could not be packed, transported and sold etc. I am unable to accept this line of reasoning for it cannot be denied that the said hot gases were a rich source of energy. Besides, I am unable to find any convincing argument advanced by the ld. AR with regard to the specific case of M/s Nestle India Ltd. pointed out by the AO as per the impugned order, which shows that under similar circumstances, a value had been assigned to the steam generated as in the instant appellant's case. The ld. AR has in this context stated that with limited facts, it was difficult to compare the Nestle India's case with the appellant's case. However, in view of the facts narrated by the AO in the impugned order, there is no doubt that in a similar situation, a different and more logical course was adopted by the Nestle India Ltd as compared to the appellant and as such, the AO's conclusion that the value of the hot gases had to be taken into account in order to compute the true and fair cost of the production so as to determine the true and fair profit of the said units to the industrial undertaking appears to be correct. The AO had in this context called for relevant information from the appellant, to work out the eligible profits in view of the provisions of Section 80I(6). In view of the facts mentioned by the AO in the impugned order, I find merit in his conclusion that if the appellant's version were to be accepted a commodity, rich in energy used to produce electricity without any other fuel and earning substantial sale receipts to the appellant would have to be considered as having no value at all. This would lead to absurd conclusions. Keeping in view the provisions of Section 80I(6) and 80IA(7) as also the facts and circumstances of the case, discussed in detail in the assessment order, I find no infirmity in the AO's action as per the impugned order to make the disallowance calculated as per Annexure 'D' of the said order.
The ld. AR has pointed out certain case laws to show that for articles to be goods, these must be known in the market as such and be capable of being sold in the market as goods. It is to be noted that in the instant appellant's case, the appellant did not need to procure the hot gases from the market. The transactions in question cannot be said to be at arms length in view of the fact that the appellant was using energy emanating from its own units for us in other units and, therefore, there appears to be merit in the AO's contention that a cost and value had to be provided to the hot gases used by the other units, which has not been done by the appellant, resulting in claim of higher deductions Under Section 80I/80IA not admissible in accordance with law. Keeping in view the totality of the situation, the disallowance made by the AO worked out as per Annexure 'D' is hereby confirmed."
Aggrieved by the same, the assessee is in appeal before the Tribunal.
7. The learned counsel for the assessee Mr. Dastur has reiterated the stand of the assessee taken before the CIT(A) and the AO and, therefore, need not be repeated. He also took us through the relevant portions of the orders of both the lower authorities to point out that the AO was incorrect in assuming (a) that the steam unit availed a value added product from the gas unit; (b) that hot gas was a by product; (c) that with the carbon percentage at almost 5%, it is much more combustible than the ordinary air. According to him, hot gas was a waste gas, which could neither be transported nor stored nor sold in the market, and, therefore, it had to be exposed to open atmosphere. Further, there is no evidence to show that such waste hot air had carbon percentage of 5% and thus combustible. In support of such contention, he produced a certificate from the department of Mechanical Engineering, Indian Institute of Technology, Delhi dated 9.3.2004 wherein it has been certified that exhaust gases are much low pressure and have no combustible matter and thus are of no utility in any other application. He also drew our attention to the D.O. letter dated 24.9.2002 written by the Secretary (Revenue), Ministry of Finance in support of his contention. Regarding the application of Sub-section (6) of Section 80I and Section 9 of Section 80 IA, it was submitted that such provisions would apply in the following circumstances:
(i) that goods must be held for the purposes of eligible business or goods must be held for the purposes of any other business;
(ii) There must be transfer of goods either by eligible business to another business or by the other business to the eligible business.
(iii) The consideration for the transfer as recorded in the accounts does not correspond to the market value of such goods on the date of transfer.
Proceeding further, it was submitted that the word "goods" if not defined mean something which can ordinarily come to the market to be bought and sold and is known to the market as held by the Hon'ble Supreme Court in the case of South Bihar Sugar Mills Ltd. v. UOI (1978)(2) ELT J-366. He also referred to the judgment of Supreme Court in the case of Collector Central Excise v. Amba Lal Sarabhai Enterprises, 43 ELT 214, wherein it was held "even transient items of articles can be goods, provided they were known in the market as distinct and separate articles having separate uses; there would still become goods if they are capable of being marketed even during said short period. Thus, goods with the unstable character can be theoretically marketable if there was a market of such transient type of articles but One has to take a practical view on the basis of available evidence". Accordingly, it was pleaded that such provisions were not applicable since such waste hot gas is neither transportable nor can be stored or packed nor is available in the market for sale. It was also submitted by him that there is no provision for shifting of cost of one unit to another unit. It is only the market value of the product, being transferred from one unit to another unit, which is to be taken into consideration. Since there is no market value, question of reducing profit by notional value does not arise. Proceeding further, it was submitted that Section 80I(6) states that each unit should be considered on its own as it is the only source of income. In view of such legal position, the cost of gas unit cannot be disturbed by shifting part of the cost to other units. A question was raised by him as to what would happen in the reverse situation that is where gas unit had huge profit and steam units had shown huge losses? In such situation, according to him, the department would not shift the operation of the gas unit to steam unit by invoking such provisions. Accordingly, it was pleaded that the claim of the assessee be allowed. On the other hand, the learned DR has reiterated the stand of the AO and CIT(A).
8. Rival submissions of the parties have been considered carefully in the light of the materials produced as well as case law referred to The question for our consideration is how to compute the profits derived from an industrial undertaking eligible for deduction under the aforesaid sections. There are no provisions in these sections for computing such profits. In the absence of such provisions, the profits of an industrial undertaking must be determined in accordance with the settled legal principles. As per the commercial accounting practice, the businessman would debit the profit and loss account either on the basis of expenditure actually paid or on the basis of liability incurred/accrued as per the mercantile method of accounting. There is no scope of notional expenditure in computing such profits. If no expenditure is incurred for use of any material or services, where is the question of debiting any amount on account of such notional expenses? Admittedly, the hot gas was freely available to the steam unit. If the assessee had not set up the steam unit, such hot gas would have to be exposed to the open atmosphere. There is no evidence that such hot gas can be sold in the open market. It is only because of the advanced technology that such hot gas, which otherwise goes waste, can be utilized for generating electricity. But that requires massive investment. What would happen if the assessee, in the national interest, allows a third party to use such gas free of any charges? Would the department reduces the profits of steam unit by notional expenditure? In our opinion, the answer would be clearly in the negative as no deduction can be allowed unless any expenditure is incurred. Therefore, in our humble opinion, no portion of the expenditure incurred by the gas unit can be allocated to the steam unit.
9. Heavy reliance has been placed by the lower authorities on the provisions of Sub-section (6) of Section 80I, which for the benefit of this order is being reproduced as under:
"Section 80I(6): Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of Sub-section (a) apply shall, for the purposes of determining the quantum of deduction under Sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."
We are afraid how the above provisions help the case of the revenue. On the contrary, it helps the case of the assessee. This provision has been relied upon by the AO for the submission that profits of each unit has to be determined independently as if such unit were only source of income of the assessee. There is no dispute to such submission. According to such submission, profits of gas unit as well as steam unit must be determined independently as the sole source of income of the assessee and consequently, the expenditure incurred for the generation of electricity by gas unit cannot be shifted to any other unit even by the logic of the AO. For the similar reasons, profit of the steam unit has to be determined independently on the basis of the expenditure incurred by such unit. Steam unit has not incurred by expenditure for acquiring hot gas. Therefore, the question of reducing the profits of such unit by any notional figure does not arise. Therefore, we reject the stand of the revenue that Sub-section (6) of Section 80I permits the revenue to shift the expenses of one unit to another unit.
10. Further, heavy reliance has been placed by the revenue on the provisions of Sub-section (8) of Section 80I and Sub-section (9) of Section 80IA which, for the benefit of the this order, are reproduced as under:
"Section 80 I(8):
Where any goods held for the purposes of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft are transferred to any other business carried on by the assessee, or where any goods held for the purposes business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to oceangoing vessels or other powered craft and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel or the operation of the shit or the business of repairs to ocean-going vessels or other powered craft shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date:
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel or the operation of the shit or the business of repairs to ocean-going vessels or other powered craft in the manner herein before specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation. - In this sub-section, "market value", in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market."
Section 80IA(9):
Where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date:
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation. - In this sub-section, "market value", in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market."
After going through the above provisions carefully, we are unable to uphold the stand of the revenue. Such provisions can be applied if it is established by the revenue that the gas unit transferred hot gas to the steam unit and the consideration for the transfer of gas does not correspond to the market value as on the date of transfer. Market value has been defined as the price, which such goods would fetch on sale in the open market. No evidence, whatsoever, has been brought to our notice to show that there is any market for sale of such waste hot gas in India. There is also no evidence that such gas can be packed or transported. Such gas, if not used, has to be exposed to the open atmosphere. May be that in the future such gas may find a market but as per the provisions of Sub-section (8) of Section 80I and Sub-section (9) of Section 80IA, the market value has to be seen as on the date of transfer. Since there is no evidence of any market for sale of such waste hot gas, we are unable to accept the stand of the revenue.
11. In view of the above discussion, it is held that the course adopted by the AO for shifting a portion of expenses incurred by gas unit to the steam unit was not permissible in law and, therefore, cannot be approved. Consequently, the order of the CIT (A) confirming the above action of the AO is set aside and the AO is directed to allow deductions Under Section 80 I and 80 IA without allocating any expenditure of gas unit to steam unit.
12. The next question for our consideration is whether the following receipts can be considered as profits derived from an industrial undertaking for the purpose of claiming deductions Under Section 80I and 80IA:
1. Hire charges received from various contractors against equipments and machineries given to them on hire for repair, maintenance and operation of the assessee's projects.
2. Interest from banks on deposits to meet out the expenditure incurred on salaries to the employees, payment to coal company, Oil Company, contractors etc.
3. Interest from employees on loans given to them.
4. Interest from contractors on advances given for the purpose of timely completion of the work.
5. Liquidity damages received from the contractors.
6. Rent recovered from employees against allotted quarters in the township.
7. Hospital recoveries.
8. Sale of ash
9. Electricity charges recovered from contractors
10. Earnest money forfeited from contractors.
11. Vehicle hire charges recovered from employees for private journeys.
12. Sale of forms
13. Other miscellaneous recoveries from contractors
14. Supervision charges received from Gujarat Electricity Board
15. Written off liabilities
16. Subsidized transport receipts.
The claim of the assessee was rejected by the AO as well as CIT(A) on the ground that such receipts could not be considered as profits derived from an industrial undertaking. Hence, the present appeal before the Tribunal.
13. After hearing both the parties, we find that the legal position is now well settled by various judgments of the apex court. The first judgment is in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT, 113 ITR 84 wherein the Hon'ble Supreme Court made a distinction between two expressions, namely, "attributable to" and "derived from". According to their Lordships the expression "attributable to" had a wider import than the expression "derived from", thereby intending to cover receipts from sources other than the actual conduct of the business of the assessee. From this judgment, it is clear that the receipts, which are incidental to the actual conduct of the business, may fall within the expression "attributable to" but cannot fall within the expression "derived from". The second judgment is in the case of CIT v. Sterling Foods, 237 ITR 579. In that case, the assessee had earned some import entitlements granted by the Central Government under an export promotion scheme. Such import entitlements were sold by the assessee. The question arose whether profits on the sale of such entitlements would fall within the expression "profits derived from an industrial Undertaking" for the purpose of claiming deduction Under Section 80HH. Their Lordships held that for application of the words "derived from", a direct nexus between the profits and gains and industrial undertaking must be there. It was further held that in that case, the nexus was not direct but only incidental and, therefore, the same could not fell within the expression "profits derived from an industrial undertaking". The third judgment is in the case of Pandian Chemicals Ltd. v. CIT, 262 ITR 278. In that case, the assessee had earned interest on deposits made with the Electricity Board. The question arose whether such interest could be said to be profits derived from the industrial undertaking for the purpose of claiming deduction Under Section 80HH. Their Lordships, following the judgment of Privy Council in the case of Raja Bahadur Kamakhya Narain Singh, 16 ITR 325 and the judgment of Supreme Court in the case of Mrs. Bacha F. Guzdar, 27 ITR 1, held that such interest could not be considered as profits derived from the industrial undertaking as the immediate source of earning was the deposits with the Electricity Board and not the industrial undertaking. In view of these decisions, the receipts of the assessee mentioned above, except sale of ash, cannot be considered as profits derived from an industrial undertaking. The reason is that main activity of the business is the generation and distribution of electricity and such receipts are not directly connected with the main activity of the assessee's business. These receipts may be incidental to the carrying on of the business but cannot fall within the restricted meaning of the expression "derived from".
14. However, the learned counsel for the assessee tried to distinguish the above judgments by submitting that there was direct link between such receipts and industrial undertaking in as much as such receipts were earned from the persons directly connected with the assessee. We are unable to accept this submission. What is relevant is the main activity of the assessee, that is, business of generation and distribution of electricity and not the activities, which are incidental to it.
15. Proceeding further, Mr. Dastur argued that there was use of different language by the legislature in Section 80 IA inasmuch as in Section 80 IA, it used the expression "derived from the business of industrial undertaking" in contrast to "derived from industrial undertaking" in Section 80 I. According to him, the scope of the expression used in Section 80IA is much wider than the scope of the expression in Section 80I and, therefore, deduction Under Section 80 IA would be available even in respect of receipts which are incidental to main activity. Reliance was placed on the judgment of Supreme Court in the case of Continental Construction Ltd., 195 ITR 81 and particular attention was drawn to page 122. In our opinion, this judgment does not help the assessee. Page 122 of the judgment records the contention of Mr. Nariman, Senior Advocate for the assessee, wherein submissions were made with reference to the expression "business of execution of a foreign project". However that judgment nowhere reads about the interpretation of the words "derived from the business of.............." Similarly, reliance was placed on Bombay High Court judgment in the case of Jayanand Hira & Co., 170 ITR 312 wherein the court was concerned with the expression "for the purpose of business of construction, manufacture or production." There is no dispute that the expression "for the purpose of business" is much wider but their Lordships were not considering the expression "derived from". Since the expression "derived from" has to be used in the restricted sense, it cannot include the incidental receipts earned in the course of such business. There must be direct link with the main activity of the business of industrial undertaking and the profits earned. In our opinion, both the above judgments are quite distinguishable.
16. In view of the above discussion, we uphold the orders of CIT (A) except in respect of receipts by way of sale of ash. Consequently, the AO is directed not to exclude the sale of ash for the purpose of computing deduction Under Section 80I and 80IA.
17. In the result, appeals of the assessee are partly allowed.