9911796707
TMI Blog2025 (3) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... ved a notice under section 143(2) of the Act. The Assessee, during the course of the assessment proceedings, submitted the relevant information/ documents as called upon by the Ld. AO from time-to-time. The Assessee is acompany incorporated under Companies Act, 1956, it is engaged in the business of manufacturing of paper and paper products. The Assessee is a leading wood and agro based paper manufacturer in India. The Assessee manufactures paper using wood chips, veneer waste, wheat straw, sarkanda etc. Over the years the Assessee has manifested itself as quality producer of writing/ printing paper. The Assessee has a wide product mix with well accepted quality in the market based on non- conventional raw materials. The product profile includes Super Snow White, Snow White, Map litho, Colored Paper, Ledger Paper, Cartridge Paper, Duplicating Paper, Bond Paper with and without watermarks from GSM range 42 to 200 3SM. These products are extensively used in the printing of text books, note books, directories, envelops, diaries, calendars, computer stationery, copy manufacture annual reports and high-class printing segment for domestic as well as export sales". 3. On the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit. That the DRP was misled by observations cum calculations of TPO in working out salerate of power 5. That the AO on the directions of DRP had erre i infact in confirming the cost-plus method adopted by the TPO for value of steam at Rs. 35,68,26,820/- by applying 63.79% of total cost incurred. That the DRP has erred in rejecting the value o' power considered by the assessee on the basis TNM method at Rs 47,97,24,111/-and confirming addition of Rs 12,28,97,957/ -. 6. The AO on the directions of DRP had erred both in fact and law in confirming action of TPO regarding loss to be reduced from steam transferred to the paper manufacturing unit. That DRP has failed to appreciate the fact that loss in respect of friction/ radiation/ convection takes place before steam is transferred to paper unit and as such, has no effect on steam transferred to paper unit. 6.1 That there are two stages at which the steam is transferred from turbine to paper unit and losses in terms energy at these stages is approximately 2.5%, which is part of 20.5% already considered in the working submitted before TPO. That the balance loss of 18% takes place at the third stage when the steam is conden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. That the penalty proceedings u/s 270A of the Income Tax Act, 1961 has been wrongly initiated. 11.1 That the Assessee craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed of. 4. During the proceedings before us, the ld. Counsel for the Assessee has filed a detailed written submissions which is being considered and decided as under :- 5. Ground No. l is general in nature. 5.1 Grounds No. 2-4 relate to the addition of Rs. 17,48,29,351 made by the Assessing Officer (AO) concerning the variation in the arm's length price of power, where the AO, following the directions of the Dispute Resolution Panel (DRP), reduced the sales value of power to Rs. 23,72,90,275 from the assessee's reported value of Rs. 41,21,19^626. Ground No. 8 addresses the change in the transfer pricing method from the Transaction Net Margin Method (TNMM) to the External Comparable Uncontrolled Price (CUP) method, which could affect the determination of the arm's length price and, consequently, the transfer pricing adjustments. 5.2 The assessee has established two captive electricity and steam generation units (referred to as Co-generation Unit 1 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Village Rupana, District Muktsar, Punjab. The high-pressure steam is transferred to turbine generators. The power generated from the turbines, along with medium-pressure steam and low-pressure steam, is transferred to and utilized in the main manufacturing unit, namely, the paper manufacturing unit. d) The assessee has adopted the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) for the transfer of power, in accordance with the provisions of Section 92C(1) of the Income Tax Act, 1961, read with Rule 10B of the Income Tax Rules, 1962. The assessee computed the sale value of power at 741,21,19,626, based on a rate of 76.73 per KWH for the total consumption of 6,12,36,200 units (i.e., 76.73 x 6,12,36,200 units). e) The rate of 76.73 per KWH adopted by the assessee for the transfer of power is lower than the comparable rate for generating electricity from biomass fuel, as available in the public domain. This issue was brought to the attention of the Dispute Resolution Panel (DRP) through a reply dated 19.10.2023.The AR further drew the attention of the Bench to the generic tariff rate for renewable energy technologies using biomass as fuel, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 per KWH rate referred to by the TPO in the show-cause notice (SCN). j) The Authorized Representative (AR) submitted that the Dispute Resolution Panel (DRP) erred in rejecting the Transactional Net Margin Method (TNMM) and instead applied the external Comparable Uncontrolled Price (CUP) method to arrive at the average rate and compute the difference of Rs. 1,74,82,93,51. The AR also provided a comparison between the method adopted by the DRP and the method applied by the assessee, as detailed below: Particulars Units of electricity produced Rate per unit conside r-ed by the assessee Rate per unit considered by DRP Difference (per unit) Difference (Rs.) Sale of power 61236200 6.73 3.875 2.855 17,48,29,351 Method TNMM External CUP 7 The Authorized Representative (AR) submitted that the TNMM method applied by the assessee was correct, as it was based on the data of comparable companies, which was submitted along with the Transfer Pricing (TP) study. The AR further explained that even if the application of the CUP method is considered correct, it would be more prudent to apply internal CUP rather than external CUP in this case. 8 The AR drew the atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to appreciate that other charges levied by the Indian Energy Exchange are over and above the basis rate, which are reflected separately in daily obligation statement. The following charges are additionally charged over and above the basic rate: *. NLDC Application Fee- Application fee charged by National Load Dispatch Centre *. Transmission charges by Central Transmission utility ('CTU') *. NLDC scheduling and operating charges-Scheduling charges levied by National Load Dispatch Centre *. Transmission charges levied by State Transmission utility ('STU') *. Scheduling and operating charges levied by State Load Dispatch center (SLDC) 9.4 In addition to the above amounts, the customer is also liable to pay to Punjab state power corporation Ltd. (PSPCL), the following amounts, which are reflected in the invoice of PSPCL: - i. FCA surcharge for availing power from open access @ INR 0.11/ Unit of power purchased from open access and ii. 15% electricity duty (ED) and 5% Infrastructure development fee (IDF) totaling to 20% of the power purchased from open access by applying the tariff rates published by PSPCL multiplied by the units purchased from open ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation. - For the purposes of this sub-section, "market value", in relation to any goods or services, means- i. the price that such goods or services would ordinarily fetch in the open market; or ii the arm's length price as defined in clause (ii) of Section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. 6.6 The Authorized Representative (AR) has also brought on record various case laws to support the assessee's arguments, which are as follows: (a) Commissioner of Income-tax vs. Jindal Steel & Power Ltd. [2023] 157 taxmann.com 207 (06.12.2023) I. Section 80-IA of the Income-tax Act, 1961 read with section 43A of the Electricity (Supply) Act, 1948 - Deductions - Profits and gains from infrastructure undertakings (Computation of deduction) - Assessment year 2001-02 - Assessee, engaged in electricity generation and industrial activities, established captive power plants due to insufficient supply from State Electricity Board - Sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings (Computation of deduction) - Assessment years 2004-05 to 2006-07 - Assessee, a manufacturer of iron and steel, had established a Captive Power Plant in State of Chhattisgarh to supply electricity to its steel division - It had sold power to steel division at same rate, which was charged by Chhattisgarh State Electricity Board [Board] for supply of electricity to industrial consumers - Assessee claimed deduction under section 80-IA -Assessing Officer computed market value of power supplied by assessee to steel division by taking into account rate charged by Chhattisgarh Electricity Company Limited, Raipur for supply of electricity to Board - Whether market value of power supplied by assessee to its steel division should be computed considering rate of power charged by Board for supply of electricity to industrial consumers - Held, yes. d) Similarly, the Hon'ble Bombay High Court in the case of COMMISSIONER OF INCOME TAX- LTU VERSUS RELIANCE INDUSTRIES LTD reported in 2024 (3) TMI 1016 as held that market value of the power supplied to the Steel-Division should be computed considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that the method adopted by the Assessee for determining the arm's length price was correct, and the adjustments made by the Assessing Officer were not in line with the applicable provisions of the Income Tax Act. Therefore, in this situation, and in our opinion, the addition made by the Assessing Officer on this account cannot be sustained. Accordingly, the Assessee's appeal on this issue is allowed. 11. Ground No. 6-7 relates to the addition of Rs. 12,28,97,957.00 made by the Assessing Officer (AO) concerning the variation in the arm's length price of steam. The AO, following the directions of the Dispute Resolution Panel (DRP), reduced the sales value of power to Rs. 35,68,26,820 from the assessee's reported value of Rs. 47,97,24,777. Additionally, Ground No. 8 addresses the change in the transfer pricing method from the Transactional Net Margin Method (TNMM) to the Cost Plus Method (CPM), which could affect the determination of the arm's length price and, consequently, the transfer pricing adjustments. 12. The Transfer Pricing Officer (TPO), in his order, has held that the Cost-Pius Method (CPM) is the most appropriate method for determining the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the TPO is flawed, as the loss has been deducted twice. The AR brought to our attention the calculation made by the TPO and submitted by the assessee, as per the Chartered Engineer's Certificate, which is produced as follows: Revised Calculation as per TPO (Table B) -Page 121 of PB Particulars Mkal (As per TPO) Remarks Medium and Low- pressure steam produced 27,52,57,845 The AR submitted that the high- pressure (HP) steam is transferred to the turbine, which subsequently generates medium-pressure steam, low pressure steam, and electricity. As such, it was contended that the TPO erred in considering that medium pressure (MP) steam and low-pressure (LP) steam were transferred to the turbine. Wastage @ 20.5% -5,64,27,858 The AR also submitted that 20.5% loss has already been accounted when high-pressure steam energy (HP) energy is used in turbine to generate MP steam, LP steam and electricity. And as such, the TPO had erred in reducing 20.5% wastage from the finished product, namely Medium and Low-pressure steam which constitutes duplication. MP & LP transferred to Paper unit 21,88,29,987 ( 3 = 1-2) The AR further submitted that the medium pressure (MP) and low-p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (CPM) as the most appropriate method (MAM), solely pointing out that steam is not transferred. The AR contended that the steam captively consumed was marketable and drew attention to the TPO's order in the case of "Khanna Paper Mills," where the TPO accepted that the arm's length price (ALP) of steam must be calculated after adding margins. Additionally, it was argued that there is no prescribed cost method in Section 92C for determining the ALP in transfer pricing. 20. The Cost-plus Method determines the arm's length price of products manufactured / services rendered in a controlled transaction by comparing the gross profit margin applied to the direct and indirect costs incurred for production or for rendering services by the tested party against the margin earned by the party or by an independent party under uncontrolled similar conditions. The gross profit mark-up of the third party is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit margin in the open mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as power and the rate calculated by considering the steam used in electricity is very much appropriate. 25. It was further explained that steam is a commercially viable product and it is a form of power and therefore it cannot be said that there is NIL profit as it is captively consumed. It was pointed out that the assessee had submitted a detailed cost sheet following the standards issued by the Institute of cost and works accountant for determining the exact cost of steam, it has also been certified by the chartered accountant and further a chartered engineer certificate is also provided. All these cost statement duly certified by the professionals were rejected by the TPO without any basis. 26. The AR argued that since power in the form of steam was generated by the captive power plant and consumed in the manufacture of paper, the assessee is entitled to a deduction under Section 80-IA of the Income Tax Act. The AR emphasized that the Department had filed a Special Leave Petition before the Hon'ble Supreme Court against the judgment of the Hon'ble Madras High Court in T.C. No. 1773 of 2008. In the judgment dated 6th November, 2008, the Apex Court dismissed the Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner (Appeals) was not justified in allocating indirect expenses not directly relatable to industrial unit of assessee for purpose of computation of its income for deduction under section 80-IA - Held, yes - Whether as regards third ground, sale of sludge did not amount to income derived from industrial undertaking and, therefore, it was not eligible for deduction under section 80-IA - Held, yes - Whether, however, in view of fact that steam produced by assessee from eligible unit was a bye-product and income from sale of steam was income derived from industrial undertaking, it was eligible for deduction under section 80-IA - Held, yes b) Similarly in the case of M/S. TATA CHEMICALS LIMITED Vs DEPUTY COMMISSIONER OF INCOME TAX-2 (3) MUMBAI reported in 2023 (9) TMI 25 - ITAT MUMBAI. It was held that assessee is entitled for deduction u/s. 80IA of the Act in respect of sale of steam from its power plant to non-eligible units. Assessee was justified in recognizing the sale income of power at the rate of 4.74 power unit. Thus we find that basis on which the deduction u/s. 80IA of the Act has been denied by the Id. AO ' or the year under consideration has no legs to stand i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked the fact that the assessee claimed a deduction under section 80G for CSR contributions amounting to Rs. 2,47,500, not Rs. 3,47,500 as stated. The remaining donation was made in the normal course to [name of the recipient], which is eligible for the 80G deduction. The assessee has provided the relevant documents in Appendix-Ill of the corporate tax adjustment, as detailed in Exhibit-13. It was further highlighted that the AO has not raised any objections or pointed out any discrepancies in the documents submitted by the assessee. 29.2 The AR explained that the AO failed to recognize that there is no explicit provision in the law to support the contention that the assessee should be denied the benefit of a deduction under Chapter VIA of the Income Tax Act, which is used for calculating the 'Total Taxable Income". It is a matter of record that only donations related to CSR contributions are restricted, and this limitation applies specifically to those payments. However, the legislature has not imposed a similar restriction on other types of donations. Therefore, such a restriction is clearly absent for other donation entries. In light of this, denying the assessee the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant page no 53 of PB relied upon by the DRP is in favour of the assessee as the amount was payable as per books of accounts of the assessee. c) It clearly indicates that the liability of the assessee had not become extinct. It does not make any difference even if M/s Valmet Technologies and Services Pvt ltd. have booked the same as bad debts u/s 36(l)(vii) but it does not mean that the debtor has lost the hope of recovering the outstanding sum. d) The AR explained that it is not the case where M/s Valmet Technologies and Services Pvt ltd. has not made any efforts to recover the amount and has voluntarily stated that no amount is receivable from the assessee. Therefore, the provisions of Sec 41/1) are not applicable in the present case. e) It was further submitted that the assessee has deducted this amount in next year's ITR and considered a sum of Rs. 12,50,000/- on 01.04.2024 in the books of accounts and as such, taxing the same amount in the year under consideration tantamount to double taxation. 32. The Id. Counsel has also brought on record different case laws which are as under: - (a) [2023] 157 taxmann.com 547 (Kolkata - Trib.) in the ITAT KOLKATA BENCH 'C Har ..... X X X X Extracts X X X X X X X X Extracts X X X X
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