TMI Blog2021 (9) TMI 1420X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be applied as external CUP. Accordingly, we hold that the sale of electricity @ 6.72 per unit is at Arms Length and no adjustment is required in this segment/unit. Adjustment in the transfer of steam, it is an undisputed fact that steam has been used for generation of electricity unit and for manufacturing process purely for captive consumption by the assessee, and therefore, it is fully eligible for deduction u/s.80IA. In the transfer pricing study report, the assessee had justified the price of transfer; firstly, by taking CUP in the manner specified hereinabove The cost plus method was adopted and also the ld. TPO has required the assessee to furnish the cost of the steam produced. In response, the assessee has filed a report from approved senior chartered engineer who has given his report and the details of working. TPO without any cogent material or any expert report has rejected the working. Even if the cost plus method is adopted as held by the TPO, then how can he take the cost of steam at Nil and held that it is biomass which is byproduct therefore there is no cost. Such an observation of the TPO is de hors any proper reasoning because from a bare perusal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-15 in pursuance of the directions given by the ld. Dispute Resolution Panel vide order dated 20.09.2018. In the grounds of appeal, the assessee has challenged the addition On Transfer Pricing Adjustment at Rs.33,36,66,839/-. The grounds of appeal reads as under: 1.1 The assessment order passed by the Ld. AO in pursuance to the directions issued by the Hon ble Dispute Resolution Panel ( DRP ) is a vitiated order as the Hon ble DRP erred both on facts and in law in confirming additions made by the Ld. AO/Ld. Transfer Pricing Officer ( TPO ) to the Appellant s income by issuing an order without appreciation of facts and law. 1.2 The Ld. AO erred on facts by considering power plants of the assessee as Biomass Gasifier Power Plants instead of Biomass Steam Power Plants . This has been clarified vide our letter dated 02.02.2017 and Chartered Engineer Certificate. The raw materials and operational working of both power plants are altogether different. 2. Power Unit The Ld. AO/TPO erred on facts and in law in determining the arm s length price ( ALP ) of the Assessee s Specified Domestic transactions pertaining to transfer of power units from eligible to non-e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1). All these authorities can t be wrong in calculating actual cost of steam. 4. That the Ld. AO/TPO erred on facts and in law in making addition of adjustment of transfer pricing of Rs. 33,36,66,839/- and in doing so have grossly. 4.1. erred in not restricting the addition under chapter VI-A to Rs. 31,87,41,278/-. 4.2. erred in not considering revenue of Rs. 20,05,82,507/- (4,35,14,600 units @ Rs.4.609545) allowed by TPO in his order. 3. The facts in brief are that the assessee-company is engaged in the business of manufacturing and delivery of high quality pharmaceutical products and research in health sector. The production of its pharmaceuticals products requires high volume of electricity and power steam for heating, cooling, controlling and humidity and chemical reactions. It has set up two electricity power plant OF 6 MW each in Dera Bassi (Punjab) for fulfilling the captive consumption needs of the assessee-company. The said plants generate both electricity and steam aiding in the manufacturing process. Since, the assessee has entered into specific domestic transaction within the meaning of Section 92BA with its associated enterprises; the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submitted that Punjab State Electricity Regulatory Commission has fixed tariff of Rs.6,52 per unit; for Biogas Gasifier Power Projects. Contention of assessee is considered , il was found that Net Applicable Tariff Rote upon adjusting for Accelerated Depreciation benefit rate fixed by PSERC was Rs.6.40 per unit, it is further seen that this was generic tariff for RE technologies for F.Y .- 2013-14. There are various other variable factors which have to be considered while deciding final tariff, these factors are- Plant Load Factor and number of operating days for Non-fossil fuel based Cogeneration: fuel cost and return on equity. Since PSERC hits not fixed tariff for assessee s unit, therefore, it cannot be presumed that these factors have boon considered while deciding tariff of Rs.6.40 per unit. Under these circumstances solely Generic Tariff cannot be taken as base for determining CUP. However it can be taken as a base to some extent. Therefore, the rates of power traded at TEX and generic rates decided by PSERC cart be taken as base for comparability under CUP. With above discussion average of generic tariff mid power traded at IEX is taken as comparable price. Thus Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 MT out of f which transmission loss was 43500 MT and net quantity was 103136 MT. The Cost Accountant has worked out pricing based on (his quantity. It may be mentioned that the entire steam was utilized to run turbine for power generation based on capacity of power plant. Therefore, the costing is for power generation and for plain use of steam. Therefore, the cost certificate submitted by the assessee do not serve (he purpose. Steam produced is utilized for power generation. The 'unutilized part of steam may have been used by the assessee for other purposes but obviously it does not have any cost. Entire cost has been utilized for generation of power. Before proceeding further it is important that process of power generation is understood:- Raw water is generated from grounds and collected in a storage lank and after the treatment i.e. removing all the salts, carbonates, bicarbonates by the mythology using inn- exchange, extract all the minerals from water and feed to the boiler via De-aerator. These salts arc removed from water to avoid the boiler and steam turbine from scaling. In De-aerator, steam is given to remove the dissolved oxygen in water for further po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be added for transferring the same to the non-exempt unit. In such eventuality arm s length price of steam is taken at NIL, resulting in adjustment of Rs.68,44,75,920/- [Adjustment Rs.68,44,75,920/-] 5.1 Accordingly, he worked out the adjustment of Rs.77,63,11,525/-. Since the assessee has claimed deduction u/s.80IA amounting to Rs.33,36,66,839/- from these units and accordingly he restricted the adjustment of Rs.33,36,66,839/-. 6. Before the DRP a very exhaustive submissions along with detailed analysis was filed. However, the ld. DRP confirmed the adjustment made by the TPO. 7. We have heard both the parties and also perused the relevant finding given in the impugned orders. The assesseecompany is having two Biomass steam turbine based captive power plants of 6.00 MW each situated in Dera Bassi (Punjab) which are generating electricity units steam for distributing the same to the manufacturing processes of various pharmaceutical and phyto-chemical products situated within the same premises in Derabassi (Punjab). The power plants have started generating power steam w.e.f June 2007 Jan 2013, respectively. Since assessee was generating electricity and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,609,500 827,300 2,782,200 6.72 18,696,384 Mar-14 4,672,300 941,100 3,731,200 6.72 25,073,664 Total 54,109,800 10,595,200 43,514,600 292,418,112 8. In the Transfer Pricing Study Report, the assessee has used CUP method, by taking rate fixed by Punjab State Electricity Regulatory Commission Electricity and per unit rate charged by Punjab State Power Corporation Limited for FY 2013-14 for Biomass based Power Projects to arrive at Arms Length Price by taking power rates as under: S. No. Particulars Rate 1 Average Electricity unit rate fixed by Punjab State Electricity Regulatory Commission for FY 2013-14 for Biomass based Power Projects Rs. 6.24 2 Average Electricity unit rate actually paid by the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab State Power Corporation Limited, i.e. Rs 6.72 per unit. Therefore, electricity unit rate of Rs. 6.72 is to be treated as Arm s Length Price. Thus, most of the methods in the case of the assessee could have been either CUP or resale price method wherein the rate of Rs.6.24 per unit which was the purchase rate fixed by Punjab State Electricity Regulatory Commission would have been taken otherwise the CUP method is to be applied which is not even disputed by the authorities below. Here, in this case, the assessee has taken average electricity unit rate fixed by Punjab State Electricity Regulatory for Assessment Year 2014-15 for Biomass based power plant and based on such rate, selling rate per unit was at Arms Length. 11. Regarding adjustment in selling of steam from the eligible unit, it was submitted that Steam is the essential and most vital for Pharma phyto-chemical manufacturing units, is used in different type of the processes for heating up and cooling of raw materials/chemicals to create some reactions and finally to convert it to finished product. Steam is required mainly used in 3 Solvent recovery plants, 2 Phyto chemical plants, 8 Oral drug manufacturing plants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Electricity Units (MT) Steam transferred to Manufacturing Processes (MT) Rate/ MT Revenue Apr-13 37,890 12,967 24,923 2,160 53,833,680 May-13 40,039 13,147 26,892 2,160 58,086,720 Jun-13 38,912 13,022 25,890 2,160 55,922,400 Jul-13 40,520 12,330 28,190 2,160 60,890,400 Aug-13 41,512 12,648 28,864 2,160 62,346,240 Sep-13 39,785 13,448 26,337 2,160 56,887,920 Oct-13 40,269 13,611 26,658 2,160 57,581,280 Nov-13 29,464 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... radable commodity, therefore, it cannot be purchased and hence market price cannot be determined as an alternative CPM was being used by calculating the transfer rate per MT for steam to manufacturing process. Relying upon the decision of Co-ordinate Bench in the case of DCIT vs. KR Pulp Papers Ltd. in ITA No.1920/Del/2013 order dated 13.01.2016 wherein it was held that the formula of cost of steam should be adopted in the ratio of energy consumed. Accordingly, the assessee had furnished report of Shri R.D. Sharma, Senior Chartered Engineer approved by Income Tax Department and banks whose report can be summarized:- Total rice husk consumption is 112,786,868 Kgs (Rs. 562,003,635/-). One ton rice husk has generated 3.96 MT of steam as per the following accepted formula: - Steam Generation /Ton of fuel = (Efficiency X Gross Calorific Value of Fuel) = Enthalpy of Steam - Enthalpy offeed water) X100 78X3200 = 3.96 (746-115) X100 Steam generation from 112,786,868 Kgs of Hu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils below: - Particulars Steam Power Total Energy Consumed 185,862,379 MKcal 46,526,053 MKcal 232,688,432 MKcal %age 80% 20% 100% Revenue 684,475,920 292,418,112 976,894,032 Carbon Credit - 5,285,280 5,285,280 Total Revenue 684,475,920 297,703,392 982,179,312 Raw Material Consumed 449,602,908 112,400,727 562,003,635 Other Manufacturing Expenses 7,664,305 1,916,076 9,580,381 Personnel Expenses 19,783,977 4,945,994 24,729,971 Depreciation 52, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as before the authorities below, the assessee s main contention has been that the rates of IEX cannot be applied, because, firstly, there was no trade of Biomass based power plant in Punjab; and secondly, there was no actual delivery of electricity unit in this year. The other reason given has been highlighted in paragraph 9. 19. Here, in this case, what needs to be benchmarked for is, whether the sale of electricity unit rate by the eligible unit to its non eligible unit is as per the market rate or not i.e., whether it is an Arms Length Price. The external CUP has been adopted by taking the rate of charged by Punjab State Power Corporation Ltd. which has been charging sale unit rate of Rs. 7.15 from industrial undertaking in Punjab. Another reason to justify this CUP was that Assessee Company itself has paid for its own consumption at unit rate at Rs.7.57 per unit to Punjab State Power Corporation. To justify the sale rate to its other unit, the assessee-company has taken average per unit rate of Rs.6.24 fixed by Punjab State Electricity Commission and unit sale rate of Rs. 7.15 charged by Punjab Stated Corporation Ltd. Thus, it was stated that if these two rates are com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi in the case of Commissioner of Income Tax v/s Orient Abrasive Ltd. [2014] 271 CTR 626. 20. Once there was a direct internal CUP, i.e., the assessee company had purchased electricity from Punjab State Power Corporation at Rs.7.57, then it represents the market rate on which any industry undertaking or consumer is getting the electricity. Thus, we do not find any reason as to why such market rate or CUP should be rejected. Nowhere, it has been brought by the TPO as to why the average trading rate in Indian Energy Exchange should be applied as external CUP. Accordingly, we hold that the sale of electricity @ 6.72 per unit is at Arms Length and no adjustment is required in this segment/unit. 21. In so far as adjustment in the transfer of steam, it is an undisputed fact that steam has been used for generation of electricity unit and for manufacturing process purely for captive consumption by the assessee, and therefore, it is fully eligible for deduction u/s.80IA. In the transfer pricing study report, the assessee had justified the price of transfer; firstly, by taking CUP in the manner specified hereinabove in paragraph 13. 22. Thereafter, the cost plus method was ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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