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DCIT Versus M/s. SBEC Bioenergy Ltd.

2015 (3) TMI 794 - ITAT DELHI

Addition made on account of the sale value of exhaust steam supplied to SSL - not charging for steam supplied to SSL - transactions between holding and subsidiary company - Held that:- The entire project of sugar production plant of SSL as well as the power generation unit of the appellant was in fact part of some project owned by one company. The power generation unit was separated to get investment from French company Air-Liquide, which agreed to join as JV (joint venture) partner. Therefore t .....

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sidiary company. Therefore in my opinion action of the appellant company in not charging for steam supplied to SSL is quite justified and cannot be said to be deliberate or motivated. Moreover even if an assessee gives (sells) his goods free of cost to other, there is no provision in the IT Act to tax its sale value' as income on presumptive basis. Legally speaking since no income has accrued & neither any payment has actually been received by the appellant company, making addition in respec .....

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T has followed its order for AY 00-01 and has held that AO was not justified in reducing the amount received by appellant from the gross receipt eligible for deduction u/s 80- IA. However, because the entire addition in respect of sale of steam was deleted this alternate ground becomes infructuous and hence treated as dismissed for statistical purposes. Thus ground having become infructuous, is dismissed. - Decided in favour of assessee. - I.T.A. No.1099 /Del/2013 - Dated:- 13-3-2015 - Shri G. C .....

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e Ld. CIT(A) erred in law and merits of the case in holding that 50% of receipts from UPSEB ₹ 5,24,68,662/- are eligible for computation of deduction u/s 80-IA. 3. The Ld. CIT(A) erred in law and merits of the case in holding that steam is one of the form of power and as is eligible for deduction u/s 80-IA. 2. At the outset, Ld. A.R. submitted that the issue raised by Revenue in its grounds of appeal is squarely covered in favour of the assessee by the order of Tribunal in the case of asse .....

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the findings for Assessment Year 2007-08. Ground nO.1 of appeal is similar to ground No.2 in Assessment Year 2007-08 which has been allowed by the Commissioner by holding as under: 2.1 Ground No.2 is against addition of ₹ 9,93,41,508 being the sale value of steam supplied to SSL worked out by the AO @ 236 per ton. The appellant had shown sale proceeds in respect of supply of power to UPSEB and SSL aggregating to ₹ 11,59,51,575. However no sale proceeds in respect of exhaust steam su .....

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missions by letter dated 3/2/06 and therefore by letter dated 13/3/06. The contents of letter dated 13/3/06 have been reproduced by the AO on page 4 of the assessment order. Since the said letter gives gist of history of this issue but same is reproduced in this order also even at the cost of repetition: - 1. Receipts from steam during A Y 2000-01 were recognized in the books @ ₹ 236 per ton. However, due to revision of rates, in AY 01- 02 a reversal entry was passed in the books reducing .....

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ar during the course of further proceedings. " 4. The assessee went in appeal before CIT(A) and thereafter to ITAT against this rejection. 5. ITAT which is the final fact finding authority has mentioned the following facts in its order in ITA No.5461/Del/2003 & 1007/Del/2004 dated 26/3/04 as under (copy enclosed as Annexure B):- a) The assessee company had entered into a conversion contract dated 1/10/98 with SBEC Sugar Ltd (SSL). This agreement was subject to PICUP's approval. b) I .....

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agreed that the receipt from steam would be @ ₹ 75 per metric ton. e) The revenue has not doubted the genuineness of these agreements. f) No material has been placed by the revenue to hold that this agreement of revision was not genuine and was prospective and not retrospective. Thus the fact that the rate of steam was ₹ 75 per metric ton as per second arrangement letter dated 20/6/01 was accepted and not subject matter of dispute. In AY 00-01 the department has never' doubted th .....

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annot exempt the income already accrued upto 31/3/00. " Further as submitted in our letter dated 3/2/06 only real income could be taxed. SSL has stopped paying for charges of exhaust steam with effect from Oct. 2001. 'Thus no receipt should be estimated and. taxed on account of steam in the present assessment year. The proposed estimated income of steam computed @ ₹ 236/ per tone is Unjustified and against the principles laid dqwn::-by the Supreme Courtend various High Courts incl .....

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T. Act. Since there was no right to receive any amount for supply of steam and neither was any amount actually received there cannot be any income from sale of steam. It was contended that only the real income can be taxed under II provision. The AO did not accept the explanation submitted by the appellant on the ground that the steam definitely a value and the appellant was recognizing the receipts from sale of steam in earlier years. He mentioned that the rates regarding supply to SSL were nev .....

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estion of accepting the appellant s contention regarding supply of steam free of cost. In view of this the AO worked out sale proceeds of steam supplied by the appellant to SSL at ₹ 99341508 and added to the total income. 2.3 In the appeal proceedings paper book running into 300 odd pages was filed along with written submissions for II the grounds. In the written reply the appellants AR explained the background facts relating to the dispute between the appellant company and SSL regarding p .....

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o produce steam from water. The steam is used to produce electricity using steam turbines by appellant company. The electricity generated is supplied to SSL and surplus, if any, to UPSEB. The exhaust steam after running the turbines is also supplied to 55L initially it was agreed between the two companies that the appellant company would receive conversion charges from SSL to converting bagasse and water into electric power and exhaust steam which will be supplied to SSL. For this purpose a Conv .....

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included 50% of income received from sale of surplus electricity to UPSEB. Therefore, it was provided in clause 7.11 that 50% of such reetization from UPSEB would be returned to SSL. As per Article 18 of the Conversion Contract the said agreement was to be approved by PICUP who had given loan of ₹ 8 crores of SSL. PICUP strongly objected to payment terms as per Conversion Contract and did not give its approval. In view of PICUP's objection re-negotiation of the payment terms were propo .....

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e of return justified in power industry was 16% of capital employed as against 21 % adopted for making the interim arrangement. In view of this SSL informed the appellant company that the proper rate of steam would be ₹ 75 per ton as against ₹ 236 applied earlier. The rate of ₹ 75 per ton as against ₹ 236 applied earlier. The rate of ₹ 75/- per ton was agreed to retrospectively i.e. from the 1st year of operation. The earlier invoices raised @ ₹ 236 per ton we .....

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said agreement. 2.5 Subsequently SSL informed the appellant company by letter dtd 2/11/02 the decision not to pay anything for exhaust steam since Oct 2001. It was further followed by another letter dtd 21/2/03 wherein the main reasons for this decision were stated to be as under: The Conversion Agreement dated 10/12/98 never came into operation, as PICUP has not approved the contract. The SSL supplies baggase and water free of any charge to SI-AL. Without these SI-AL cannot generate power. In a .....

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2001. Since there- was a lot of uncertainty regarding realization of any amount for steam supplied from Oct. 01, the appellant did not raise any invoice to recognize revenue for the same. The appellant relied on Accounting Standard 9 (AS 9) issued by ICAI on revenue recognition. It is now mandatory to follow such standards as accounting practice. The relevant clause is 10 to 12 of AS 9 were reproduced in the submissions (They have been reproduced by AO also on page 3 of assessment order as part .....

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ton was highly unjustified and against the judicial principles. Without prejudice, it was also stated that the AO has not giving justification for adopting the rate or steam at the rate of 236 per metric ton when only ₹ 75 was chargeable by the appellant as per the revised interim arrangements made with SSL. It was mentioned by the appellant that the addition made in earlier years when the rate of steam was reduced from ₹ 236 per metric ton to ₹ 75 per metric ton was deleted by .....

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steam supplied by appellant to 55L is determined @ 236 it would amount to 8.49 crores. Hence it was not that the arguments of SSL in denying any payment for steam supplied by the appellant were without any basis. According to 55L the bagasse supplied by them to appellant did have a marketable value whereas steam supplied by 55L was not of any use as it was not a freely marketable commodity. 2.8 - I have carefully considered the submission made on behalf of the appellants. There is no dispute to .....

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t ₹ 75 in earlier year is concerned, the issue is covered in favour of appellant by order of ITAT in AY 00-01. Hence the only issue to be decided is whether the appellant was right. in not showing any revenue at all from supply of steam to SSL. It is to be noted that transaction of purchase/sale is in the form of a contract between the two parties. Sale price is the income of seller & liability being purchase price to the purchaser. It can be treated as income accrued in the hands of s .....

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-01 allowed reduction of income from sale of steam. The point to be noted is that the income from any contract (sale) can be said to accrue as per agreed terms of such contract. If there is any dispute by either party the accrual of income (of expenditure in the hands of other party) will be subject to the outcome of such dispute & accordingly contingent. Normally the income in such cases can be said to accrue in the year in which the dispute is resolved & other party acknowledges the de .....

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y be noted that normally if some buyer refuses to make payment for goods supplied to it; the seller would immediately stop supply of goods. However the appellant did not stop supply of steam to SSL even in the face of clear declaration of not getting any payment for the same. This appears to be unusual unless the appellant being other party to contract also accepted the said proposal finally. Since appellant's stand on contention of SSL was not specified the appellants AR was requested to cl .....

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o unrealistic receivables. The Board also decided to reverse the billing made in the FY 01-02 and revise the income tax return. The AR was further asked to clarify as to whether apart from not raising any bills; the decision of SSL has been accepted by the company or still the matter was being pursued with them for payment of steam charges. It was then stated that some dispute in respect of allotment of shares to foreign collaborator of the joint venture was pending before Company Law Board. The .....

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any accrual of income for supply of steam. The basis for this arrangement is also clear since it is a kind of barter system where bagasse and water is supplied by SSL to appellant company free of charge while the appellant supplies electricity and steam to SSL. The appellant's income is from sale of surplus power to UPSEB. Even if theoretically the price of steam is computed at ₹ 236 per ton (which however was never agreed and acted upon between the two parties) it is almost equivalent .....

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ppellant is eligible to 100% deduction u/s 80-IA also. Hence no allegation of tax planning can be attributed in this transaction which appears to be wholly for business considerations. It may not be out of place to reproduce hereunder a part of letter dated 2/11/02 written by SSL to the appellant company. "The sugar and power generation project are for all practical purposes two limbs of a single project one cannot survive without the other. In 1994, when the construction of the sugar plant .....

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I-AL SBEC Bioenergy Limited, which was to be the joint venture between the Modi Group and Air Liquide/SIDEC. In 1997 after the project division had been implemented and the JC Company incorporated, serious disputes arose with Air Liquide end SIDEC which exposed both companies to be risk of liquidation. In those compelling circumstances, a compromise was worked out wherein various unreasonable terms insisted upon by air Liquide and SIDEC had to be accepted to protect the companies from liquidatio .....

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his is evident from the documents signed then in particular the agreements where under it was agreed that the SI-AL shareholdings would be bought out. If Please note that it is our decision that on - resolution of the controversies with SI-AL Bioenergie France, SSL will acquire the entire share capital the JV company and make it its wholly owned subsidiary unless of course it· then decided to amalgamate the JV company with this company and bring the power project also directly into the ow .....

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e project. If the whole project was owned by one company (as in fact it was initially) only the net profit of the entire project would have been taxable. As can be seen in the last paragraph reproduced above from he letter of SSL, the appellant company proposed to be made a subsidiary of SSL (and in fact has already become so). Looked from this angle, the transaction is between the holding and subsidiary company. Therefore in my opinion action of the appellant company in not charging for steam s .....

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iew of this the addition of ₹ 9,93,41,508 (Rs 8,49,44,188 after rectification) is deleted. Unquote 2.5. On the basis of the findings of the CIT(A) for earlier years as well as the decision of the ITAT in the assessee's own case for earlier years, it is clear that this issue is squarely covered in favour of the appellant and the and the facts in this year are similar to those in the earlier years. The assessing officer has also noted in the assessment order that the issue is pending wit .....

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