TMI Blog2018 (1) TMI 1667X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ₹ 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). 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 - Decided against revenue. - I.T.A. No. 125/Ahd/2015 - - - Dated:- 24-1-2018 - Shri N.K. Billaiya, Accountant Member And Shri Mahavir Prasad, Judicial Member For the Appellant : Shri V. K. Singh, Sr. D.R For the Respondent : Shri Gaurav Nahta, A.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 2,70,69,861/- (₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 ₹ 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004 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 electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 cogen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... micals 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 ₹ 1.70/- per Kg to its fertilizer unit where as in the assessee case steam is transfer at the rate of ₹ 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 ₹ 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 ₹ 1.16/- to ₹ 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 ₹ 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:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which incomes derived in part from agriculture and in part from business shall be arrived at. . . , (p. 139) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 TOTAL POWER GENERATED UNI TS 14023208 UNITS 15220300 UNIT S 14708800 14889700 14890900 14060310 POWE PLANT CONSUMPTION UNI TS 3011739 UNITS 3035967 UNIT S 2960203 3032648 3047536 2952422 POWER TO PROCESS UNI TS 11011469 UNITS 12184333 UNIT S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 INTEREST Rs. 361661 Rs. 859515 Rs. 1495029 2321120 2382390 2845500 5 DEPRECIATION Rs. 11149377 Rs. 11149458 Rs. 11149556 11149446 11107858 11107858 0 TOTAL EXPENSES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PROCESS Rs. 135349309 1.15 Rs. 131483657 1.15 Rs. 12S546744 1.15 86142633 0.80 71872809 0.65 47785932 0.45 GENERATING POWER ..... 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