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TMI Blog2021 (9) TMI 1420X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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-eligible units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rong 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 Officer referred the matter to the TPO for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 4.609545 per unit is taken as comparable price for calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 polishing the water. After the De-aerator, this water feed to the boiler with the help of boiler feed pump and simultaneously Bin mass fuel is feed to boiler in boiler furnace and Burning of biomass fuel continuously for heating the boiler and generate the steam @ 67 kg/cm2, 485 deg e. This steam goes to steam turbine and run the turbine (a), 8200 rpm & rotate the alternator @ 1500 rpm by using the reduction gear box. This alternator generate the 11 KV and supply to process plant and then step down the 11 KV to 440 V with the help of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment 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 steam from its eligible unit on which it has claimed deduction u/s.80IA which is not in dispute, because the conditions laid down in Section 80-IA(4)(iv) of the Income Tax Act was fully applicable. In so far as eligible unit which was generating electricity unit, the details of electricity unit generated and distributed to manufacturing process of pharma and another products was as under: Details of Electricity units generated and distributed to Manufacturing process Month Total Generation of Electricity Units Auxiliary Consumption Units transferred to Manufacturing Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the Memorandum and Article of Nectar. For a company to be eligible to trade on the platform of Indian Energy Exchange, there should be approval from Central Electricity Regulatory Commission (CERC), which is a regulatory authority for all the electricity distributors and suppliers. Nectar doesn't possess any such approval from CERC. The company should be a gridconnected entity for affecting delivery of electricity as cleared and settled by the Indian Energy Exchange. Nectar doesn't have grid connectivity for affecting delivery of electricity. 10. It has been further submitted that for the purpose of calculating the profitability of Power Plants, company has considered electricity unit rate of Rs. 6.72, which is less than sale unit rate of Rs. 7.15 as charged by Punjab State Power Corporation Limited from industrial undertakings in Punjab; and unit rate of Rs. 7.57 actually paid by the company to Punjab State Power Corporation Limited. The company had 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 State Power Corporation Limited, i.e. Rs 6.72 per unit. Therefore, electricity unit rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is having 8 oral manufacturing plants in Derabassi. Different finished products are being manufactured in different oral plants. In all the plants, the raw material is being poured into vessels and then with the help of steam the material is being heated up to its boiling point. Once the material reaches its boiling point, other materials are added in that vessel so as to make the chemical reaction and manufacture finished goods. iv). Utilities: - Like heating is a part of manufacturing process, cooling is the next step in that manufacturing process. Once the chemical reaction took place, we need chilled water for cooling effect which is generated with the help of Vapor Absorption Machine (VAM) which is operated through steam. 12. During the year under review, power plants have generated and transferred steam to generate electricity units and to manufacturing processes of various pharmaceutical and phyto-chemical products as per details below: Month Total Steam Generated (MT) Steam used for Generation 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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 Husk = 112,786,868 X 3.96 = 446,635,997 Kgs i.e. 446,636 MT The basis for working of steam and units is based on the following factors: S. No Factors Kcal/Kgs Generated 1. 1 Kg Steam to turbine @ 67Kg/cm2, 485 deg.e 746 Kcal (Enthalpy of Steam Generation) as per properties of steam 2. 1 Kg of Extraction Steam @ 6Kg/cm2, 250 deg. C 567 Kcal (Enthalpy of Steam Extraction) as per properties of steam 3. 1 Kgs of Condenser Steam 50 Kcal (Enthalpy of Steam Condensing) as per properties of steam Steam from boiler sent to turbine at 100%, which is having the following allocation Steam to turbine @ 67Kg/cm2, 485 deg.e = 446,636X 746 333,190,456 MKcal Less: Friction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been rejected under cogent ground. DECISION 17. After considering the aforesaid submissions and the facts and material discussed in the impugned order, we find that the Transfer Pricing Adjustment of the specified domestic transaction has been with regard to sale of electricity units to the other unit for manufacturing process of pharma and phyto-chemical products. 18. In so far as sale of electricity unit from eligible unit to other manufacturing units, it is seen that, assessee had sold the electricity @ 6.72 per unit. Ld. TPO has rejected the assessee's method of benchmarking at the said rate by holding that average sale rate as per Indian Energy Exchange is much lower, i.e., 2.81909 per unit as against sale made by the assessee of Rs.6.72 per unit. He has incorporated the detail obtained by him u/s. 133(6) from IEX which gives the average price of power trade in the exchange. From the submissions made before us as 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or by other business of assessee and was not sold to outsiders. Assessee's power generating unit could not as such claim any benefit under section 80-IA computed on basis of rates chargeable by distribution licensee from consumer and such benefit could only be claimed on basis of rates fixed by Tariff Regulation Commission for sale of electricity by generating companies. c. Supreme Court of India in the case of ITC Limited v/s Commissioner of Income Tax Kolkata - III [2016] 74 taxman.com 244, has held as under SLP granted against High Court's ruling that assessee's power generating unit could not as such claim any benefit under section 80-IA computed on basis of rates chargeable by distribution licensee from consumer and such benefit could only be claimed on basis of rates fixed by Tariff Regulation Commission for sale of electricity by generating companies. d. High Court of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. The TPO has erroneously treated the assessee's power plant as Biomass Gasifier Power Plant in which no steam is generated, instead of Biomass Steam Power Plants has wrongly came to conclusion that the cost of Steam generation is "Nil" as against Rs. 2160/ MT. Ld. TPO has failed to understand the operational working of Husk based power plants in which total expenditure is incurred first on generation of steam and thereafter part of steam is used for generation of electricity units and majority of steam is transferred to manufacturing processes of Pharma units of the assessee. 23. In any case, steam is a form of power eligible for deduction u/s.80IA and same cannot be denied by taking its steam cost at Nil. Further. He has grossly erred in ignoring the audited certificate by Senior Chartered Engineer who is an approved valuer by Income Tax Department and the Cost Accountant appointed by the Central Government without any accounts report, without any agency or expert. Accordingly, for this unit also, we hold that no transfer pricing adjustment is required. 25. In the result, the additions, made by the Assessing Officer are directed to be deleted and consequently, the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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