Income Tax Appellate Tribunal - Ahmedabad
The Dcit, Circle-4(1)(2),, Ahmedabad vs Vishal Fabrics Pvt. Ltd.,, Ahmedabad on 24 January, 2018
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'Mh' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" D " BENCH, AHMEDABAD
सव ी एन.के. ब लैया, लेखा सद य एवं महावीर साद, या यक सद य के सम ।
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER And
SHRI MAHAVIR PRASAD, JUDICIAL MEMBER
आयकर अपील सं./I.T.A.
No.125/Ahd/2015
( नधा रण वष / Assessment Year : 2011-12)
DCIT, बनाम/ Vishal Fabrics Pvt. Ltd.
Circle - 4(1)(2), Vs. B/h. Kashiram Mill
Ahmedabad. Compound,
Ranipur, Narol,
Ahmedabad.
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACV 6304 R
(अपीलाथ' /Appellant) .. ( (यथ' / Respondent)
अपीलाथ' ओर से /Appellant by : Shri V. K. Singh, Sr. D.R
(यथ' क* ओर से/Respondent by : Shri Gaurav Nahta, A.R.
ु वाई क* तार.ख /
सन Date of Hearing 12/01/2018
घोषणा क* तार.ख /Date of Pronounce ment 24/01/2018
आदे श / O R D E R
PER MAHAVIR PRASAD, JUDICIAL MEMBER :
This is an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals)-XIV, Ahmedabad, vide Appeal No.CIT(A)-XIV/DCIT(OSD)/476/2013-14 dated 10/10/2014 for Assessment Year (A.Y.) 2011-12, on the following Grounds:
1). "Whether the Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad is right in law and on facts in directing to allow the claim of deduction u/s.80IA of the Act of Rs.2,70,69,861/- despite the fact that assessee arbitrarily decided the selling price of ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -2- steam at 25% more while transferring the steam from eligible unit to non-eligible unit, and the A.O. was well within his powers to fix the rate u/s.80IA(8) of the Act".
2). "The order of the CIT(A) may be set aside to examine the selling price as per section 80IA(8) and proviso placed there under."
3). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer.
2. The relevant facts as culled out from the materials on record are as under:-
In this case, the return of income was filed on 24.09.2011 declaring total income of "Nil". The assessee filed revised return of income on 29.03.2013 declaring total income of "Nil". The return was revised due to change in depreciation rate in respect of Power Plant assets. The change in depreciation rate was retrospectively from A.Y.2004-05 as per the order of the Department."
2.1 The assessee company is engaged in the business of processing, manufacturing and trading of cloths. The A.O. Observed that:
(i) "During the course of assessment proceedings it was noticed that the assessee was having captive power plant on which the assessee was claiming deduction u/s. 80IA of the Act. During the year relevant to A.Y. 2011-12 the assesses had claimed deduction of Rs.4,60,84,940/-
u/s.80IA in respect of the Captive Power Plant established by it. From the details of profits generated from Captive Power Plant Division it was seen that out of the total sales of Rs.17,99,45,758/- made by Captive Power Plant to Process Division of the assessee Rs. 4,45,96,449/- was in respect of sale of power and Rs.13,53,49,309/- was ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -3- in respect of sale of steam. It was further seen from the details submitted by the assesses that during the year total steam generated by Captive Power Plant was 157762938 Kg. out of which 117695051 Kg. i.e. nearly 71 % was transferred to the process division. Thus, it was evident that the Captive Power Plant was so designed so as to produce steam in substantial quantity for the benefit of the ancillary object of the company for processing its main product textiles. The high pressure steam was generated for producing electricity and low pressure steam was generated for consumption as raw material for textile processing. Thus, majority of steam (71%) generated in Captive Power Plant was utilized in the overall operation of the assessee with respect to the textile processing rather than generation of electricity. It has also been mentioned in the computation given by the assesses that the cost of generation of steam is Rs.0.92/- per Kg. of steam whereas the sale price of steam has been taken to be Rs. I.15/- per Kg. of steam thereby deriving profit of Rs. 2,70,69,861/- (Rs. 0.23 x 11,76,95,051) from sale of steam which is 78.9% of total profit derived from Captive Power Plant."
(ii) "It is an accepted fact that steam is not a commercial commodity and is not brought to market for sale and purchase. It is not capable being transported to a distant place because it could 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 it to a nearby location as the steam is of low pressure & density, Thus, it is clear that steam is not marketable commodity and thus does not have any market value. Gujarat State Electricity Regulatory Commission (GERC) is regulatory commission in respect of Electricity generated in Gujarat. The tariff for generation and distribution of power in Gujarat is decided by GERC. It was informed by GERC that since steam is not a tradable commodity it cannot be purchased and hence the market price cannot be determined.
In a thermal power plant the prime mover is steam driven. Water is heated, turns into steam and spins a turbine, which drives an electrical generator. After it passes through the turbine the steam is condensed in a condenser and is recycled to where it is heated. In this case, the steam leaving the turbine at low pressure was fed into steam ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -4- pipes for distribution in process house where it is one of the inputs in manufacturing process. Thus, the steam which could have been re- circulated and used for generation of electricity was being sent to process house and not re-circulated. The price at which steam was being sold was arbitrarily decided by the assessee."
(iii) "Since the assessee cannot purchase steam from outside and steam is one of the raw material for textile process house the assessee purchase coal/lignite from which steam is generated and is used in process house. Similarly in the case of captive power plant also coal/lignite was bought and was used for production of steam which was being sent to process house. Since the steam cannot be purchased from outside market if the assessee has to use steam he has to generate it thus market rate of steam for the purpose of calculating deduction u/s.80IA of the Act has, to be taken as cost of production of steam by the Captive Power Plant.
Since the cost of production of steam by Captive Power Plant is Rs. 0.92/- per Kg. of steam the sale price has to be taken as Rs. 0.92/- per Kg. of steam only because the assessee cannot derive any profits from sale of commodity which is not available in market.
Accordingly, the assessee was given detailed show-cause vide letter dated 10.02.2014 asking the assessee to show-cause as to why the sale price of steam be not taken as Rs.0.92/- per Kg. of steam."
(iv) "In response to the showcause the assessee submitted its reply vide letter dated 20.02.2014. In his reply the assessee stated that-
"With reference to your show cause notice dated 10.02.2014 received on 12.02.2014 we have to state and submit as per following paragraph:-
1. Steam is the essential and most vital for textile processing unit.
Steam is used in different type of the processes i.e. desizing, washing in boiling water, scouring, bleaching, mercerizing, drying, printing and dying, steaming of printed fabric for colour fixation, washing/soaping of dyed/printed fabric, finishing and sanforizing/decadising i.e. requires steam to carry out all ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -5- process/operation and the without steam assessee could not produce the quality fabrics/cloth.
The company has generating steam from low pressure steam boiler for processing of fabric at different stages of production before commercial production of captive power plant. The production cost of steam from low pressure steam boiler ranging between Rs. 7.76 to Rs. 1.24 per Kg. The engineer certified is also is attach herewith. The power plant division has billed steam at the rate of Rs. 1.15 per Kg. to process division which is lower than the low pressure steam boiler cost of steam for process division.
2. The company is running an extraction cunt condensing Turbine and its for captive purpose to meet the heating and power requirements of the fabrics/clothes process division of the company. The function of the power plant is that of extraction steam and power on Turbine are inversely proportional and balances requirement of end user.
The kind of extraction condensing is a common option for the textile process houses due to its flexibility in operation between steam and power demands. As an engineering principle, when extraction steam demand is higher for process operations, the condensate and output on the Turbine would reduce and if the process demand is correspondingly the condensate and power output on turbine would increase.
From the above submission it is clear that the input steam quantity and sum of outgoing steam quantity and condensate is same. Hence the extraction steam is not a byproduct from Turbine. The contention of your honour that steam is byproduct of the power generator is not correct. It is being operated according to the necessity and need of the textile processing requirement, From the above submission it is clear Mint steam is originate as main product and not the byproduct of power generator and it is main product and its value to be fully recoverable from the user. Further, as pointed out in your show cause notice that by product has nil recoverable value is also not convincing not correct i.e. the steam has got economical commercial value and capable of value ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -6- adding to the fabric value i.e. your contention is , not sustainable on facts and law and also on commercial consideration.
3. Your Honour has not justifying the provisions of section 80IA of the Income Tax Act, 1961 by differentiating between electricity and steam. To qualify for tax holiday u/s. 80IA(4)(iv) generation of power is most critical condition of the section. The power can be of any form i.e. electrical, wind, thermal, solar, bio energy, stem all are considered as energy an energy considered as power. (Ref Sial SBEC Bioenergy Ltd v. CIT 2004 83 TTJ 866) The apex court in the cases reported in 1991 Vol II (SC)(1) and 1997 (6) SCC 420, referred to the definition of the word steam under the Factories and Municipal Corporation Acts, where steam was held to be form of power. Similar findings was given by Kerala High Court in the cases reported in 47 STC 68 and that in AIR 1962 SC 29. Further as per many dictionary definitions steam is defined as energy or power or nay form of energy or force available for application to work (as Hint of gravitation, running water, wind, steam, electricity). Thus the steam is a power product consider as energy/electricity.
In Sial SBEC Bioenergy, Tribunal agreed with the argument of the assessee that the idea of not mentioning the word electricity in section 80IA(4)(iv) was only for the purpose that the legislature wanted to give the word power a winder meaning. Further even in case of factories which uses cogeneration plants, where low pressure steam is used, they could work out the profit from such an undertaking and claim it exempt under section 80IA(4)(iv)of the Act.
Further as per SBEC Bioenergy, Tribunal observed that both of them (comparing steam with that of electricity) are capable producing same results. In the case of the assessee, a Textile Process House instead of using the electric energy, used thermal steam energy due to its peculiar nature of industry and requirement.
Hence it is evident from the above submission that the steam is power and qualify for the exemption u/s.80IA(4)(iv). The presumption of your honour "steam is merely a by product of electricity generation and cost of steam generation per unit to be ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -7- taken as sale price thereby deriving NIL profit from sale of steam to the process house" is bad in law and also on facts i.e. illegal and unsustainable.
4. The company's Captive Power Plant has been approved by the GEB by vide letter dated 01.03.2004 and sale of power is restricted to outside parties. As per policy only GEB or other government authorized company or body can sell the power to the consumer. Further as per common accepted practice and understanding any product or services not supported by the proper infrastructure are non tradable. In the case of fix assessee the steam power is being transmitted through the proper infrastructure of pipelines to Process Division. Assessee can also sold to other undertakings if it has surplus power/steam generation through setting up of proper infrastructure. Further as per section 80IA(i) is the deriving of the profit or gain from the activity to claim the exemption on profit earned Further in the assessee case power is not tradable in open market due to restrictions or ban is put by the government over its trading hence merely non trading of such product or service is not the ground for denial of the exemption.
As per the Hon'ble Madras High Court in the case of CIT, Madurai Vs. Thiagarajar Mills Ltd. Kappalur (Tax appeal no. 68 to 70/2010 dt. 07.06.2010) has held as follows:-
"In section 80IA(i) also no restriction has been imposed as regards the deriving of profit or gain in order to state that such profit or gain derived only through an outside source alone would make eligible for the benefits provided in the said section.
Therefore, it is true and correct law and also the intention of legislature, in holding that captive consumption of the power generated by the assessee from its own power plant would enable the respondent/assessee to derive profit and gains by working out the cost of such consumption of power in as much as the assessee is able to save lo the extent which would certainly be covered by S.80IA(1). When such will be the out come out of own consumption of the power generated, and gained by the assessee by setting up its own power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon S.80IA(1) of the Income Tax Act by way of deduction of the value ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -8- of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years."
There are two options would have been available to the assessee in the computation of the income arising out of the steam generation. These would be either by hiking the price in the open market if the product was saleable or was actually sold or in the alternative by considering the savings in the cost of the alternative use made of the product.
In the case of the steam generated, the possibility of the sale of the steam in open market is ruled out due to restriction on sale in open market. Since the consumption in different process of the textile unit would have increased the cost of fuel/raw material in the operations and since the generation of steam in the cogeneration of power and steam in the captive power unit resulted in savings, the assessee considered that to be its income in the profit and loss account of the CPP.
(Ref: HPCL v. DCIT, Bombay High Court petition no. 2513/2009) In the case of assessee, as per para 1 the company has valued the high pressure steam at, the less than the cost of the company to produce low pressure steam from boiler.
Steam transfer to Total sale value at Total cost of process process (A) Rs.1.15 per Kg. (B) division to generate same quantity of steam at Rs.1.20 (mean of Rs.1.16 to Rs 1.24) per Kg(C) 117695051 Kg Rs. 13,53,49,309/- Rs.14,12,34,061/-
It is evident from the above that the company has valued the sale of power steam to Process Division is below the cost of the Process Division.
Considering the above if the company had not installed the CPP the company could have incurred the cost of Rs.14.12 Cr. for manufacturing of textiles.
5. The basis idea of introduction of section 80IA(IV) is to promote the power generating units for empowerment of national power policy ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12 -9- of government. Hence for claiming exemption under section there has to be profit or gain from the generation of any form of power which being used in captive consumption or sold outside is not intention of the legislature. Ami there is no intention from the legislature that gain on out side sale only will be entitled lo claim exemption. The company has derived the profit front sale of steam power by selling at Rs. 1.15 Kg. to Process Division of the company i.e. inter division transaction. The company has maintained the separated sets of books of account for calculation of cost and profit/loss from the activity which is qualify u/s. 80IA(iv) of the Act. As the steam generated by the power unit is not tradable in the state, that does not mean that company cannot earn the reasonable profits from the activity by following cost plus method and the company has added margin of 25% to cost of steam power of Rs. 0.92/- per unit and sale at Rs. 1.15 per Kg. to process division. The selling price per unit of steam is Rs. 1.15 is reasonable mid justifiable on the following grounds.
• In the case, of M/s. Khaitan Chemicals and Fertilizers Ltd court has allowed the claim u/s.80IA where the company has produce steam in the captive power plant located in the stale of MP and transfer the steam at the rate of Rs. 1.70/- per Kg to its fertilizer unit where as in the assessee case steam is transfer at the rate of Rs. 1.15 per unit only.
• Torrent Power Ltd, a biggest power generator company in the Ahmedabad region has posted PBT margin of 21.86% in the A.Y. 2011-12 which has huge distribution network in the city. While comparing the margin of 25% of steam transfer lo Power Plant of Process Division.
• Further selling price of Rs.1.15/- per Kg includes the normal loss incurred due to condensation and insulated leakage which is estimated in the range of 3% to 5% of steam transfer to Power Plant to Process Division.
• Your honour has to consider the replacement cost of CPP for A.Y. 2010-11 considering the inflation and foreign exchange fluctuation.
• It is very much clear and specific that the steam is form of power and clearly as per the judgment of Sial Sbee Steam and electricity capable of produce same result, hence if we compare the selling price of steam of Rs.1.15/- per Kg with cost of electricity the company has paid to Torrent Power/GEB daring the A.Y. 2011-12 is at Rs. 5.5 per unit. As per the ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12
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accepted engineering standards 4.7 Kg of steam is equal to one unit of power.
Steam transfer Total sale value Conversion at Total sale prince
to Process at Rs.1.15 per 4.7 Kg=1unit of at Rs.5.5 per
Kg. power units
117695051 Rs.13,53,49,309/- 25041500 units Rs.13,77,28,251/-
As per above working total recorded sates value is of Rs. 13.53 Cr is lower than companies purchased power from GEB/Torrent at Rs. 13.77 Cr. Hence, sale price is reasonable, justifiable and acceptable.
Further as per section 80IA(8) "the profit 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 or services as on that date."
It is very clear from the provisions that the profit to be derived us per market value and not at cost as emphasized by your honour in show cause notice.
With the above submission we request your honour the sale price of steam be accepted at Rs.1.15 per Kg which is fair, reasonable, appropriate and justifiable. Your Assessee has charged sale of power to Process Division at price of Rs. 4.05 per unit against the cost of Rs. 5.5 per unit (landing cost of power to the company) which is 26.36% lower than the cost of power at which GEB/Torrent supply/ to the company. The company has followed the principles of the equity, justice and reasonableness while fixing the prices of sale of power in inter unit sales, (ref: HPCL r. DCIT - Bombay high court where as per the facts of the case AO has allowed the valuation of power at the rate at which unit is purchasing it from the APEB) The steam is non tradable commodity because of the restriction of sale by government considering the same., company has not sale the steam to Process Division at higher than Rs. 1.15 per Kg as the historical cost of low pressure steam from the boiler is in range of Rs. 1.16 to Rs. 1.24 per Kg. Hence on ground of reasonableness and appropriateness the Power Plant has sold ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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steam at discounted price as compared to low pressure steam boiler cost.
The company has set up the Captive Power Plant only on the basis of saving in Power consumption expenses and if othewise CPP is not set up then same cost of element is eligible for deduction as business expenses."
(v) The A.O. rejected assessee's explanation observed "i). The assessee has stated that the company was generating steam from low pressure steam boiler for processing of fabric at different stages of production before commercial production of Captive Power Plant. The production cost of steam from low pressure steam boiler is ranging between Rs. 1.16/- to Rs. 1.24/- per Kg. The assessee has further furnished on engineer certificate. The assessee further stated that the Power Plant Division has billed steam at rate of Rs. 1.15/- per Kg. to process division which is lower than the low pressure steam boiler cost of steam for Process Division.
This contention of the assessee is absolutely unacceptable, irrational and without any evidence. As per assessee's own submission vide letter dated 28.10.2013 the assessee has submitted details of production of steam by Captive Power Plant which is reproduced below:-
Total Steam Generated by Power Plant 157762938/ Kg.
Total expenses incurred Lignite & Coal Rs. 11,72,02,086/-
Maintenance expenses Rs. 1,35,69,303/-
Salaries & Wages Ks. 33,71,517/-
Interest Rs. 3,61,661/-
Depreciation Rs. 1,11,49,377/-
ITA No.125/Ahd/2015
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Total Rs. 14,56,53,944/-
145653944
Cost of steam generated = Rs. --------------
157762938
= Rs. 0.92/Kg.
Thus, as per assessee's own admission the cost of generation of steam is Rs. 0.92/Kg. The said cost has been arrived at after allocating maintenance expenses of the boiler and the depreciation of the boiler also. Thus, the cost of generation of steam is Rs. 0.92/Kg. of steam. Even if the captive power plant was not there the steam was to be generated and was to be used by the process division as steam is one of the inputs in textile processing and the cost of generation of steam would be same i.e. Rs. 0.92/Kg. The Captive Power Plant has in no way helped in reducing the cost of generation of steam. The assessee's contention that the production cost of steam from low pressure steam boiler is ranging between Rs. 1.16 to Rs. Rs. 1.24 per Kg. is not at all acceptable in view of the fact that the only things required for generation of steam are Fuel & Boiler. The cost of generation of steam has been worked out by Captive Power Plant Division (as per your own admission) has been arrived at after taking into account fuel, maintenance & depreciation of boiler. Thus, it is established beyond doubt that cost of production of steam is Rs. 0.92 per Kg.
ii) The assessee has contended that steam is energy and energy has to be considered as power and is thus eligible for deduction u/s.
80IA(4) of the Act. This contention of the assessee has already been accepted and the steam has already been held to be power within the meaning of sec. 80IA(4) of the Act.
iii) The assessee has further contended that its Captive Power Plant has been approved by GEB vide letter dated 01.03.2004 and sale of power was restricted to outside parties. As per policy only ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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GEB or other government authorized company or body can sell the power to the consumer."
This contention of the assessee is not acceptable in view of the fact that sale of power is not banned by GEB but if the assessee wants to sell power to third party it has to seek permission from GEB to determine that price also. The assessee has further stated that the steam power is being transmitted through proper infrastructure of pipelines to Process Division Assessee can sell the power/steam to other parties but due to ban/restriction put by government over its trading it is not selling steam This contention of assessee is supporting the view taken by tin. Department only that steam is a non tradable commodity. This is because steam is not capable of being transported to a distant place because it could 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 it to nearby location as the steam is of low pressure & density. Thus, steam is not marketable commodity and thus, does not have any market value. The value of steam has to be taken as its cost of production i.e. Rs. 0.92/Kg.
iv) The assessee has also stated that "since the consumption in different process of textile unit would have increased the cost of fuel /raw materials in the operations and since the generation of steam in the cogeneration of power and steam in the captive power unit resulted in savings, the assessee considered that to be its income in the profit & loss account of the CPP.
This contention is to totally imaginary and without any basis. It is established that steam is generated by using boiler & fuel and even if the captive power plant would not have been there the assessee would have generated steam by using fuel and boiler and it is also established that cost of generation of steam is Rs. 0.92 per Kg. of steam. As far as power is concerned it is true that the electricity which is available in market is at higher rate because market rate of electricity is decided after taking into ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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account transmission and distribution losses of power, if the electricity is generated captively then saving is there but in case of steam it has to be generated captively and it can never be purchased from outside. By establishing a Captive Power Plant for generation of steam the assessee cannot generate profits because in any case it has to produce steam in its factory for use in its process house.
v) The assessee has relied on the decision of Hon'ble Delhi High Court in the case of M/s. Khaitan Chemicals & Fertilizers Ltd., wherein the court has allowed the claim u/s. 80IA where the company has produced steam in the captive power plant located in the state of MP and transfer the steam at the rate of Rs. 1.7 per Kg. to its fertilizer unit. The facts of the case referred to by the assessee are totally distinguishable. In that case the assessee had a fertilizer plant and in the process of manufacturing of fertilizer huge amount of steam is generated which is being used for generation of power. Moreover, the decision of High Court was not on price of steam rather it was on the issue of whether intra unit transfer has to be treated sale/distribution of power within the meaning of provisions of sec. 80IA(4) of the Act Therefore, in view of the detailed reasons mentioned above following facts emerge:-
i). Cost of production of steam by Captive Power Plant is Rs.0.92/Kg.
ii). Only method of generating steam is by burning fuel and using boiler which is being done by Captive Power Plant and by Process Division.
iii). Even if the Captive Power Plant would not have been there the steam would have been generated by using fuel & boiler only.
Captive Power Plant has not used some other cost saving technology for generating steam.
iv). Steam is not a tradable commodity. It cannot be purchased from open market.
v). Deduction u/s. 80IA in respect of Captive Power Plant undertaking is in respect of profits derived from selling & ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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distribution of power. The profits can be said to be derived from Captive Power Plant, if the power is being generated by the Captive Power Plant at a rate which is lower than the market rate. It is true that the electricity generated by the Captive Power Plant is at lower rate as compared to market rate. However, in the instant case the 78.9% of the total profit generated by the Captive Power Plant is in respect of sale of steam.
The steam cannot be purchased from open market it has to be produced internally by fuel & boiler even if the Captive Power Plant would not have been there the cost of production of steam would have been same. The Captive Power Plant cannot be said to have derived profit from sale of steam at arbitrary price of Rs.1.15 per Kg. to process house. The sale price has to be taken as cost of production of steam i.e. Rs. 0.92 per Kg."
(vi) The A.O. therefore held "In view of the above the profit of Rs. 2,70,69,861/- claimed in respect of sale of steam to process is disallowed".
3. Thereafter, assessee preferred appeal before the ld. CIT(A) against the disallowance of Rs.2,70,69,861/- while computing the deduction u/s.80IA(4) of the Act. Ld. CIT (A) allowed the appeal of the assessee with following observation:
"It is therefore, the profit element embedded in production and captive consumption of steam for textile processing is included in the ultimate profit resulted from sale of textile. This profit may be more than the profit in other activities of textile division or may be less. But, the profit from such activity is there and it will always be higher than the cost. The question of disintegration of such profit is based on proper comparable such as chartered Engineer certificate or from the comparison of profit margin by electricity generating companies then the same has to be accepted. This further reaffirms as held by me earlier that such profit is also reflected by the saving cost in ultimate production of final product through such captive consumption.ITA No.125/Ahd/2015
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As far as legal proposition is concerned, Hon'ble Supreme Court has consistently held that incentive provisions, which confer concession, should be interpreted in a liberal manner, so as to sub-serve the purpose for which they are intended. In Bajaj tempo Ltd. Vs CIT(1992) 196 ITR188, the supreme court held that and provision in taxing statute granting incentives for promoting of growth and development should be construed liberally. It referred to a similar view taken in Broach Dist. Co.op. Cotton sales, ginning and processings society Ltd. (1989) 177 ITR 418 (SC), C1T Vs strawboard manufacturing co. Ltd. (1989) 177 ITR 431 (SC) and CBDT Vs Aditya V. Birla (1989) 170 ITR 137 (SC), which the general rule is that the provision relating to deductions, allowances and exemptions are expected to be interpreted rigidly, incentive provisions are to be interpreted differently as, they form an exception to the rule.
In is fact on record that this is not the first such claim by appellant and in earlier years on the basis of such valuation, deduction u/s.80IA(4)(iv) of the Act. were allowed from A.Y. 06-07. The appellant is therefore on the principle of consistency, eligible for such deduction. Further as required appellant filed a certificate inform 10CCB from a charted accountant of claim and therefore the reasonableness and valuation of steam is certified through that certificate with eligible deduction.
5.3. The appellant's ground 1 to 3 are interlinked and against disallowance of Rs.2,70,69,861 u/s.80IA of the Act. On the basis of above discussion, analysis and legal proposition, the A.O. is not justified in disallowing the same. The A.O. is directed to allow such claim based on proper facts, eligible condition and proper working of such deduction. The A.O. is directed to delete the addition so made and appellant gets relief accordingly. All the three grounds are treated as allowed.
5.4. In respect of ground related to initiation of penalty proceedings u/s.271(1)(c) of the Act, the same is now consequential and treated as allowed.
6. In result, the appeal of appellant is allowed."ITA No.125/Ahd/2015
DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12
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4. Now appeal is before us.
5. We have gone through the relevant record and impugned order. Ld. AR cited following judgments in support of its contention:
(i). "The assessee illustrated this ratio as adopted by Hon'ble Bombay High Court in the case of HPCL Vs. DCIT (supra) with following words:
"In the case of steam generated, the possibility of the sale of the steam in open market is ruled out due to restriction on sale in open market. Once the consumption in different process of the textile unit would have increased the cost of fuel/raw material in the operations and since the generation of steam in the cogeneration of power and stream in the captive power unit resulted in savings, the assessee considered that to be its income in the profit and loss account of the CPP. This was followed by reflecting the total cost of assessee for 117695051 kgs of steam at Rs.1.15 per kg. at Rs.13,53,49,309 as against the average cost (as per chartered Eng. ) at Rs. 1.16 to 1.24 at Rs. 14,12,34,061.
(vii) The assessee given following example to justify and establish the contention of sale price of steam adopted at Rs.1.15 per kgs over cost of 9.92 per kg. i.e. 25% on the principle of cost plus method.
(a) In the case of M/s. Khaitan Chemicals and Fertilizers Hon'ble MP High Court allowed transfer of steam at Rs.1.70 per kg.
(b) Torrent Power Ltd., a biggest power generator company in the Ahmedabad region has posted PBT margin of 21.86% in A.Y.2011-12.
(c) As per accepted Engg. Standard 4.7 kgs. of steam is equivalent to 1 unit of electricity. On this basis the sale price of 117695051 kgs. of steam @ 1.15/kgs. gives total ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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sale consideration of Rs.13,53,49,309 while if conversion factor of 4.7 kg. steam per unit of electricity then total expenditure for electricity at Rs.5.5 per unit will result into Rs.13,77,28,251 i.e. saving of total expenditure on the sale price of steam."
(ii). "(e) The Hon'ble Delhi High Court decision in the case of M/s. Khaitan Chemical & Fertilizers Ltd. (supra) do reflect the use of steam generated in captive power plant used in fertilizer plant at 1.70 per kgs. and eligible for deduction u/s.80IA of the Act but it does not deal with pricing of steam."
(iii). Hon'ble Delhi High Court in the case of CIT vs. DCM Shri Ram Consolidated Ltd. as relied on by appellant though the issue was related to computation of book profit u/s.115 JA but it was held that-
"Principle of apportionment of profits resting on disintegration of ultimate profits realized by the assessee by sale of final product has to be applied i.e. profit derived by assessee on transfer of energy from its captive power generation plants to its other unit is embedded in the ultimate profit earned on sale of its final products." The Hon'ble High Court held that -
"It cannot be said that the assessee is not engaged in the business. As rightly held by the Tribunal, the assessee had been authorised by the State Electricity Boards to generate electricity. The generation of electricity has been undertaken by the assessee by setting up a fully independent and identifiable industrial under- taking. These undertakings have separate and independent infra- structures, which are, managed independently and whose accounts are prepared and maintained separately and subjected to audit. The term 'business' which prefixes generation of power in clause (IV) of the Explanation to section 115JA is not limited to one which is prosecuted only by engaging with an outside third party. The meaning of the word 'business' as defined in section 2(b) of the Act includes any trade, commerce or manufacture or any ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12
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adventure or concern in the nature of trade, commerce or manufacture. The definition of business', which is inclusive, clearly brings within its ambit the activity undertaken by the assessee, which is, captive generation of power for its own purposes. The approach of the CIT(A) and, consequently the Tribunal, both in law and on facts cannot be faulted with. We are of the opinion that the Assessing Officer clearly erred in holding that, since the main business of assessee is of manufacture and sale of urea it could not be said to be in the business of generation of power in terms of Explanation (iv) to section 115JA of the Act."
(iv) The Hon'ble Supreme Court in the case of Tata Iron & Steel Co.
Ltd. and others vs. State of Bihar in 48 ITR 123 which is considered as land mark case in respect of apportionment of profit particularly from the captive consumption of a product to produce another product held that -
"That even in cases where the profit resulting from an ultimate activity is brought to tax, there could be an apportionment if there were an exemption in respect of the profits resulting from distinct activities at earlier stages is illustrated by the provisions of the Indian Income-tax Act itself. Thus, in the case of, say, a sugar mill, which grows its own cane, in the absence of any exemption for the income derived from agriculture, i.e., from the production of the cane, the entire profit of the mills from the sale of the sugar would have to be included in the taxable profits under section 10 of the Income-tax Act. But section 4(3)(viii) exempts agricultural income as defined in section 2(1). The result, therefore, is that there is a disintegration or dichotomy of the 'incomes, profits or gains of the business and of agricultural income, so that there has to be an apportionment between the two in order to determine the taxable income of an assessee. It is on account of this situation that section 59(2) of the Income-tax Act provides for rules being made for prescribing the manner in which and the procedure by which incomes derived in part from agriculture and in part from business shall be arrived at. . . ," (p. 139)"ITA No.125/Ahd/2015
DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12
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6. In earlier years, on the basis of such valuation, deduction u/s. 80IA (4)(iv) of the Act were allowed from A.Y. 06-07. In our considered opinion, assessee is therefore on the principle of consistency, eligible for such deduction. Further as required assessee filed a certificate inform 10CCB from a charted accountant for claim and therefore the reasonableness and valuation of steam is certified through that certificate is eligible deduction. In support of its contention, assessee also filed a rate chart at Page No.13 of Paper Book and same is reproduced as under:
VISHAL FABRICS PRIVATE LIMITED STATEMENT OF COMPUTATION OF COST OF STEAM AND POWER SN PARTICULARS 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 A QUANTITATIVE DETAILS 1 TOTAL STEAM KGS 157762938 KGS 159223900 KGS 154169059 154614651 155172583 146106760 GENERATION 2 STEAM TO KGS 117695051 KGS 114333615 KGS 109171082 107678291 110573541 106190960 PROCESS 3 STEAM POWER KGS 40067887 KGS 44890285 KGS 44997977 46936360 44599042 39915800 PLANT 4 FUEL KGS 46007204 KGS 43078021 KGS 43371340 38118207 37910326 35607106 COSUMED (LIGNITE) 5 STEM/FUEL 3.43 3.70 3.55 4.06 4.09 4.10 RATIO A1/A3 - 0 TOTAL POWER UNI 14023208 UNITS 15220300 UNIT 14708800 14889700 14890900 14060310 GENERATED TS S POWE PLANT UNI 3011739 UNITS 3035967 UNIT 2960203 3032648 3047536 2952422 CONSUMPTION TS S POWER TO UNI 11011469 UNITS 12184333 UNIT 11748597 11857052 11843364 11107888 PROCESS TS S B EXPENSES TOTAL RS/ TOTAL RS/ TOTAL *S/K INCURRED KC KG G 1 LIGNITE & Rs. 117202086 Rs. 111244170 Rs. 125388619 88141936 73476124 58649912 COAL ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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2 MAINTENANCE Rs. 13569303 Rs. 7530700 Rs. 11263070 8103337 7048532 625896 EXPENSES 3 SALARIES & Rs. 3371517 Rs. 3459680 RS. 3096961 3730681 2906145 1977572 WAGES 4 INTEREST Rs. 361661 Rs. 859515 Rs. 1495029 2321120 2382390 2845500 5 DEPRECIATION Rs. 11149377 Rs. 11149458 Rs. 11149556 11149446 11107858 11107858 0 TOTAL Rs. 145653944 0.92 Rs. 134243523 0.84 Rs. 152393235 0.99 113446520 0.73 96921049 0.62 75206738 0.51 EXPENSES C COST PER KG Rs. Rs. RS. 0.73 0.62 0.51 OF STEAM D STEAM USED IN KGS 117695051 KGS 114333615 KGS 109171082 107678291 110573541 106190960 PROCESS E STEAM COST CHARGED TO PROCESS Rs. 135349309 1.15 Rs. 131483657 1.15 Rs. 12S546744 1.15 86142633 0.80 71872809 0.65 47785932 0.45 GENERATING Rs. 10304635 Rs. 2759866 Rs. 26846491 27303887 25048240 27420806 POWER
7. We have also gone through the assessment order in details in that there is a finding of the AO in Page No.9 Para ii, wherein she has stated that 80IA(4) is an allowable deduction on steam and there is no dispute on it, steam has already been held to be power within the meaning of Section 80IA(4) of the Act. When on one hand AO herself is accepting ITA No.125/Ahd/2015 DCIT Vs. Vishal Fabrics Pvt. Ltd.
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that steam is eligible for deduction and on the other hand she is disallowing the deduction, it itself is contradictory, when once the AO is of the opinion that deduction is available on steam then no disallowance should have been made only on assumptions basis. The assessee has submitted several decisions in support of its contention and same are stated therein, the steam was transferred at a higher price. Further assessee has submitted engineer certificate at Page No.10 of Paper Book in which also the cost of generation of steam can be considered in the range of Rs.1.16/- to 1.24/- per kg of steam. Further the saving in cost due to Captive production also cannot be ruled out which has been elaborated discussed by the ld. CIT(A).
8. We therefore, relying on various decision in support of the claim made by the assessee and acceptance by the AO that steam is a form of power and eligible for deduction and for the basis of deduction relying on the engineers certificate as well different case laws held. CIT(A) has rightly deleted the addition and profit margin kept by the assessee in Captive consumption is fair and reasonable. In our considered opinion on the basis of consistency and ld. CIT(A) has passed a detailed and reasoned order. We upheld the order of ld. CIT(A).
ITA No.125/Ahd/2015DCIT Vs. Vishal Fabrics Pvt. Ltd.
A.Y. 2011-12
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9. In the result, appeal filed by the department is dismissed.
This Order pronounced in Open Court on 24/01/2018
Sd/- Sd/-
एन.के. ब लैया महावीर साद
(लेखा सद य) ( या यक सद य)
( N.K. BILLAIYA ) ( MAHAVIR PRASAD )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 24/01/2018
Priti Yadav, Sr. PS
आदे श क त"ल#प अ$े#षत/Copy of the Order forwarded to :
1. अपीलाथ' / The Appellant
2. (यथ' / The Respondent.
3. संबं6धत आयकर आयु8त / Concerned CIT
4. आयकर आयु8त(अपील) / The CIT(A)-XIV, Ahmedabad.
5. 9वभागीय त न6ध, आयकर अपील.य अ6धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, स(या9पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation 16/01/2018 .
2. Date on which the typed draft is placed before the Dictating Member ...17/01/2018
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S.................
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......
7. Date on which the file goes to the Bench Clerk.....................
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................