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TMI Blog2011 (11) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... vor of the assessee. Sale of the Fly Ash Bricks - Operational profit vs Ancillary profit- eligible profits - power generating units - Held that:- Only operational income is an eligible profits and not all ancillary income. Mere existence of some commercial connection by way of raw material to the impugned profits does not make it an eligible income. In said case profits earned on sale of the 'fly ash'(by-product) is different from the profits earned on sale of the bricks made out of the said 'fly ash'. Option is available to the assessee either to sell the said byproduct( resulting in operational income), which the assessee did not prefer in this case, the assessee's decision to opt for the other option to use the said byproduct as raw material for the brick making unit for producing the bricks and earn the profits thereof, does not make the brick making unit as the integral part of the 'power generating unit'. Therefore, the profits earned on sale of the bricks does not constitutes an operational Income of the power unit, an eligible unit for the benefits u/s 80IA of the Act. See Liberty India Ltd. v. CIT (2009 - TMI - 34471 – Supreme Court). Decided against the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of generation and distribution of electricity; and (ii) steel division. The steel division requires electricity and draws the same form the other undertaking which generates the electricity. Thus, the assessee accounted captive consumption of electricity. Electricity division is exempt undertaking u/s 80-IA of the Act and the Steel Division is not an exempt undertaking. During the assessment proceedings, the AO found that the electricity for captive consumption is accounted at the tariff higher than the sale price recorded for sale to SEB. In the process, AO interpreted that the Inflated the profits of the eligible undertaking and deflated the taxable profits of the steel making undertaking. Factually, the assessees sold the electricity not only to the SEB but also to other persons at the market rate. The sale price of the electricity sold to the SEB is @ Rs. 1/- per unit. On the other hand, the sale price at which the electricity sold to other persons i.e. M/s. R.R. Ispat Limited, M/s. Hira Steels Ltd. and to its power division @ Rs.3.30 per unit. Assessee accounted per unit rate transferred to the steel division for capital consumption adopting Rs.3.30 per unit. This rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titute the 'market price'. If the same is considered, there is no addition warranted on this issue. Ld counsel referred to the paper book and read out relevant portions from the decision of the Delhi Bench Jindal Steel & Power Ltd. (supra). The relevant conclusion reads as under: "Price at which the State Electricity Board supplies power to its consumers is to be considered to be the market value for transfer of power by the assessee's electricity generating undertaking for captive consumption for the purposes of s. 80-IA(8), and not the price at which power is supplied by the assessee to the Board." 9. On the other hand, Ld DR for the revenue mentioned that the said judgment in the case of Jindal Steel & Power Ltd. (supra) is inapplicable to the case of the assessee and filed the following written submission in this regard which is as under: 1. The original name of the assessee was Ispat Godavari Ltd. Which was later on changed as Godavari Power and Ispat Ltd. is the matter of fact. 2. Wheeling power agreement dated 22.4.2003 is placed in the II volume of paper book of the assessee. 3. On page 10 of the agreement two sister concerns i.e. R.R. Ispat Ltd. Urla and Hira Steel Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services would ordinarily fetch in the open market. Market value is an expression which denotes a price arrived at between the buyer and the seller in the open market wherein the transaction take place in the normal course of trading. In present case, the CSEB is purchasing power from power plants at the rate different from its selling price. The private person can set up a power generation unit having restriction on the use of power generated and at the same time the tariff at which a power generating unit can supply power to Electricity Board is also liable to determined in accordance with the statutory requirements. In this context it can be safely deduced that determination of tariff between the assessee and the Electricity Board can be said to be an exercise between a buyer and seller neither in a competitive environment and or in the ordinary course of trade in business. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in normal course of trade and competition. The price at which the steel division is purchasing power from CSEB can be considered to be the market value for the purpose of section 80IA(8) for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings, the A.O. examined the sales account of power division and found that the sale proceeds on sale of the said bricks was found credited and the relevant profits earned on sale of the Fly Ash Bricks are considered by the assessee as eligible profits for the purpose of claiming of deduction u/s 80-IA of the Act. At the end of the assessment proceedings, the A.O. held that the said sale proceeds of fly ash bricks is not eligible for deduction u/s 80-IA as these profits are not derived from the generation and distribution of power and accordingly, he denied the benefit of deduction. Aggrieved with the same, the assessee filed an appeal before the CIT(A). Before him, the assessee contended that the fly ash brick plant is an integral part of the power plant. It is a functional requirement of the power plant to make a suitable arrangement for disposal of fly ash without which the assessee company could not have run the power plant. This is the mandatory requirement of Chhattisgarh Environment Conservation Board (CECB) to have such facility. The assessee company has to adopt dry ash extraction system and dry ash disposal system as an integral part of the project. The ash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Undertaking of Electricity Generation. As per the assessee, solid waste like FLY ASH are completely utilized in company's FLY ASH BRICK manufacturing unit, which is one of largest capacity in ASIA. Therefore, profits earned on sale of the said Bricks constitutes an eligible Income for the purpose of the deduction u/s 80IA(8) of the Act. Referring to the ratio decidendi of the judgment of the Supreme Courts Judgment in the case of the Liberty India Ltd. v. CIT Ld Counsel mentioned that the said judgment is inapplicable to the facts of this case. As per the Counsel, the profits derived out of the sale of the said Bricks constitute an 'operational income' of the power generating unit within the meaning of the said Apex Court's judgment. Ld counsel is critical of the views of the CIT(A) who stated that the brick manufacturing activity is not an integral part of the generation of power undertaken by the assessee as he did not opt for the other option of selling the said fly ash to the Cement or Brick Industries. 16. On the other hand, Ld DR for the revenue heavily relied on the said judgment of the Supreme Court and others and mentioned that it is not case of sale of fly ash per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed as 'derived' from the Power generating unit of the assessee. Unless the any profits are derived from such unit, the benefit of deduction u/s 80-IA is not available to the assessee on such profits. 19. We find that there is no dispute on facts. But there is dispute on interpretational front of the law and the ratios of the cited judgment. The essential objections of the assessee revolve around the following namely, (i) brick making is an integral part and not an independent activity, (ii) profits earned on sale of the brick made out of the fly ash, the raw material constitutes an operational income; (iii) fly ash based brick industry is a mandatory requirement legally as a fly ash disposal system. From the revenue point of view, the assessee is not entitled to the benefits of deduction u/s 80-IA in respect of the profits earned from the sale of the 'Fly Ash Bricks manufactured out of the Fly Ash produced as by-product out of the unit manufacturing power. As per the revenue, the assessee has got an option to sell the impugned 'fly ash' i.e. the byproduct to the Cement Industry or made use of the same as raw material for manufacture of Fly Ash Bricks and the assessee pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4)…" Thus, we need to examine if the profits on sale of the Bricks manufactured out of the fly ash generated out of the power generating unit constitutes 'derived' from the said undertaking or enterprise relating to infrastructure development. From the above diagrammatic presentation, it is clear that the 'Power Generating unit' is an eligible business and the fly ash is generated out of the 'Power Generating unit'. It is fact that the assessee has not sold the said 'fly ash', the by-product, which is merely used as a one of the raw materials for making of the bricks. What is sold in this regard is the brick made out of the said fly ash. Thus, the assessee earned profits out of the sale of the bricks. Therefore the immediate source of the impugned profit is the sale of bricks, which are manufactured by the 'Brick Making Unit. We have already discussed above that the fly ash is the connecting link between the two units under discussion. Thus, we have to decide if the profits earned out of the sale of Bricks, which are made out of the 'fly as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 80-IB of the Act qua sale of moulds and spare parts of moulds. But in respect of repairs and maintenance charges it was not entitled to deduction in view of the clear provisions of section 80-IB of the Act, because those receipts had not immediate or direct nexus with the industrial undertaking and that was not source of profit of industrial undertaking. 24. Otherwise, the relevant discussions and conclusions of the Tribunal as narrated in para 35 is reproduced as under. "Now we will conclude our decision in terms of the above as under : (i) ** ** ** (ii) The assessee is earning job work charges as well as repairs and maintenance, which are included in job work charges, no doubt it is established that there is commercial connection between profits earned on account of repairs and maintenance and the industrial undertaking but for that source of profit is not directly from industrial undertaking. The business of industrial undertaking had directly to yield that profit to claim deduction under section 80IB.... (iii) We have considered the case law relied on by both sides noted and discussed, but we find that the provision of section 80-IB of the Act is in pari mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. In the instant case, if the ashfly is directly sold without any value addition and profits are earned, such profits are defined to have genesis in the 'power unit' Thus, the profits earned must be innate to the power unit undertaking. 26. Whereas in the instant case, the Impugned profits are earned by the Brick unit, which is a separate unit with a distinct set up and process, separate technology & manpower etc. Such profit being the income of the upstream industries does not constitute an operation income of the power unit. Therefore, any profits of the non-eligible for the purpose of section 80-IA of the Act downstream or upstream units (Fly Ash Brick Units) of the Electricity Generating Units, an eligible unit, are not to be construed as 'derived' from the eligible undertaking and therefore, it does not form part of an 'operational income' of the assessee. Mere flyash or raw material oriented connectivity between the Units for generating Power and manufacturing the Flyash Bricks does not establish direct nexus at the level of sources of the 'profits' of the undertakings, which is the requirement of the law. Such far related connectivity of the sources of profits does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yash generated and transferred by the eligible power unit to the non-eligible Brick unit. AO shall grant deduction u/s 80-IA on profits so computed. 28. To sum up, it is the case of the assessee that the profits earned on manufacturing and sale of the 'fly ash brick', which are manufactured out of 'brick making unit' using the 'fly ash' the by-product generated out of the 'power generating unit, the eligible business, constitutes an 'operational income' as fly ash (i.e the pollutant) disposal is an integral part or a part and parcel of the said business of 'power generating unit'. As per the discussion above, we find, that considering the option available to the assessee either to sell the said byproduct, the option the assessee did not prefer in this case, the assessee's decision to opt for the other option to use the said byproduct as raw material for the newly installed brick making unit for producing the bricks and earn the profits thereof, does not make the brick making unit as the integral part of the 'power generating unit'. 29. From the scope of the expression 'derived' used in the said section 80IA(1) of the Act, we find that it is the settled that that to be an eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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