Sbec Bioenergy Ltd., New Delhi vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT, AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.1099 /Del/2013 Assessment year : 2008-09 DCIT, Circle 7(1), Vs. M/s. SBEC Bioenergy Ltd., New Delhi 1400, Modi Tower, 98, Nehru Place, New Delhi. GIR / PAN:AADCS9993C (Appellant) (Respondent)

Appellant by : Shri BBR Kumar, Sr. DR Respondent by : Shri Premjit Singh Kashyap, CA

Date of hearing : 25.02.2015 Date of pronouncement :_ 13.03.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal filed by Revenue against the order of Ld. CIT(A) dated 17.12.2012. The grounds of appeal taken by Revenue are reproduced as under:

"1. The Ld. CIT(A) erred in law and merits of the case in deleting the addition of Rs.6,97,63,106/- made by A.O. on account of the sale value of exhaust steam supplied to SSI.

2. The Ld. CIT(A) erred in law and merits of the case in holding that 50% of receipts from UPSEB Rs.5,24,68,662/- are eligible for computation of deduction u/s 80-IA.

3. The Ld. CIT(A) erred in law and merits of the case in holding that steam is one of the form of power and as is eligible for deduction u/s 80-IA."

2 ITA No.1099/Del/2013 2. At the outset, Ld. A.R. submitted that the issue raised by Revenue in its grounds of appeal is squarely covered in favour of the assessee by the order of Tribunal in the case of assessee itself for earlier years and for subsequent y ear and in this respect, our attention was invited to paper book pages 2-22where a copy of Tribunal order for Assessment Year 2006-07 to 2009-10 were placed.

3. Ld. D.R. fairly conceded that the issue was covered in favour of assessee.

4. We have hard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) has allowed relief to the assessee following the order of ITAT in earlier years. Ld. CIT(A) has reproduced the findings for Assessment Year 2007-08. Ground nO.1 of appeal is similar to ground No.2 in Assessment Year 2007-08 which has been allowed by the Commissioner by holding as under:

"2.1 Ground No.2 is against addition of Rs 9,93,41,508 being the sale value of steam supplied to SSL worked out by the AO @ 236 per ton. The appellant had shown sale proceeds in respect of supply of power to UPSEB and SSL aggregating to Rs 11,59,51,575. However no sale proceeds in respect of exhaust steam supplied to SSL work shown in the accounts. The AO 'noted that in the earlier years the appellant had sold exhaust steam to SSL @ Rs 236 & Rs 75 per ton for varying periods. During this year however the steam was supplied free of cost. The AO therefore proposed to treat the sale proceeds of exhaust steam work out at the rate of Rs 236 per ton claimed income from the appellant in the same was as in earlier years. In response to show cause notice the appellant made written submissions by letter dated 3/2/06 and therefore by letter dated 13/3/06. The contents of letter dated 13/3/06 have been reproduced by the AO on page 4 of the assessment order. Since the said letter gives gist of history of this issue but same is reproduced in this order also even at the cost of repetition: -

3 ITA No.1099/Del/2013 1. Receipts from steam during A Y 2000-01 were recognized in the books @ Rs 236 per ton. However, due to revision of rates, in AY 01- 02 a reversal entry was passed in the books reducing the receipts excess accounted for in AY 2000-01.

2. In the assessment proceedings for AY 2000-01 the assessee company claimed that the receipts be reduced by Rs 3,82,59,074 since the rate of steam with retrospective effect had been revised to RS 75 per ton.

3. The Assessing Officer rejected this claim of the assessee company by observing in the order passed u/s 143(3) dated . 28/2/03 for A Y 00-01 that lithe effect for what has happened in the next assessment year would be seen next year during the course of further proceedings. "

4. The assessee went in appeal before CIT(A) and thereafter to ITAT against this rejection.

5. ITAT which is the final fact finding authority has mentioned the following facts in its order in ITA No.5461/Del/2003 & 1007/Del/2004 dated 26/3/04 as under (copy enclosed as Annexure B):-

a) The assessee company had entered into a conversion contract dated 1/10/98 with SBEC Sugar Ltd (SSL). This agreement was subject to PICUP's approval.

b) In view of PICUP's objection, an interim arrangement dated 26th. August, 99 was agreed. Under this interim arrangement, the parties agreed that they would pay and receive Rs 236 per metric ton for steam. For electrical energy it - was to charge at the same rate at which electricity was supplied to UPSEB.

c) Revenue in the books of accounts was recognized on the basis of this interim arrangement.

d) The interim arrangement was subsequently revised and under the revised arrangement it was agreed that the receipt from steam would be @ Rs 75 per metric ton.

e) The revenue has not doubted the genuineness of these agreements.

f) No material has been placed by the revenue to hold that this agreement of revision was not genuine and was prospective and not retrospective.

4 ITA No.1099/Del/2013 Thus the fact that the rate of steam was Rs 75 per metric ton as per second arrangement letter dated 20/6/01 was accepted and not subject matter of dispute. In AY 00-01 the department has never' doubted the genuineness of this agreement. The only dispute was regarding retrospective applicability of this arrangement since the arrangement was entered after the close of the previous year vide letter dated 20/6/01. In this regard we would like to bring to your notice that question sought to be referred by the department to the Hon. Delhi High court in AY 2000-01 reads as under:

"Because retrospective proviso of arrangement by which rates per unit were revised by subsequent letter dated 20/6/01 cannot exempt the income already accrued upto 31/3/00. "

Further as submitted in our letter dated 3/2/06 only real income could be taxed. SSL has stopped paying for charges of exhaust steam with effect from Oct. 2001. 'Thus no receipt should be estimated and. taxed on account of steam in the present assessment year. The proposed estimated income of steam computed @ Rs 236/ per tone is Unjustified and against the principles laid dqwn::-by the Supreme Courtend various High Courts including the terrttortetjuqids! High court.

2.2 As can be seen the appellant agreed that in the earlier years steam was sold @ Rs 236 per ton and that rate was retrospectively changed to Rs 75 per ton. However with effect from Oct., 2001 SSL has refused to make any payment towards supply of steam: Since there was uncertainty about realization of any sale price of supply of steam the appellant did not recognize the value following the Accounting Standard 9 as notified u/s 145(2) of the I. T. Act. Since there was no right to receive any amount for supply of steam and neither was any amount actually received there cannot be any income from sale of steam. It was contended that only the real income can be taxed under II provision. The AO did not accept the explanation submitted by the appellant on the ground that the steam definitely a value and the appellant was recognizing the receipts from sale of steam in earlier years. He mentioned that the rates regarding supply to SSL were never finalized as the conversion contract was subject to approval by PICUP. Sale value of steam was always recognized as per interim arrangements. The AO has, mentioned -that although addition on this 5 ITA No.1099/Del/2013

issue made in earlier years were decided by appellate authorities in favour of appellant, department had not accepted reduction of price of steam for Rs 236 per ton to Rs. 75 and has filed further appeal before ITAT in Assessment Year 01-02 & High court in AY 00-01. Hence there was no question of accepting the appellant's contention regarding supply of steam free of cost. In view of this the AO worked out sale proceeds of steam supplied by the appellant to SSL at Rs.99341508 and added to the total income.

2.3 In the appeal proceedings paper book running into 300 odd pages was filed along with written submissions for ~II the grounds. In the written reply the appellants AR explained the background facts relating to the dispute between the appellant company and SSL regarding price paper for supply of steam correspondence between the appellant and SSL o-n this issue by way of various letters exchanged was submitted in the paper book. The facts stating to this issue is simple terms were explained like -this. The power plant of the appellant company and sugar factory of SSL are located at the same place side by side. SSL supplies bagasse (sugarcane remains after extraction of juice) and water to the appellant company free of cost. The bagasse is used as fuel and burnt to produce steam from water. The steam is used to produce electricity using steam turbines by appellant company. The electricity generated is supplied to SSL and surplus, if any, to UPSEB. The exhaust steam after running the turbines is also supplied to 55L initially it was agreed between the two companies that the appellant company would receive conversion charges from SSL to converting bagasse and water into electric power and exhaust steam which will be supplied to SSL. For this purpose a Conversion Contract dated 10/12/98 was executed. According to this Conversion Contract following payments were to be received by the appellant from SSL as conversion charges:-

a) A fixed fee of Rs 19.75 million per month during the production season.

b) Variable charges in proportion to the quantities of electricity and steam supplied:

Rs 0.52/per unit of electrical energy, ie electricity Rs 40 per tonne of thermal energy, ie steam 2.4 The fixed fee of Rs 19.75 million per month included 50% of income received from sale of surplus electricity to UPSEB. Therefore, 6 ITA No.1099/Del/2013

it was provided in clause 7.11 that 50% of such reetization from UPSEB would be returned to SSL. As per Article 18 of the Conversion Contract the said agreement was to be approved by PICUP who had given loan of Rs 8 crores of SSL. PICUP strongly objected to payment terms as per Conversion Contract and did not give its approval. In view of PICUP's objection re-negotiation of the payment terms were proposed between the appellant & SSL. Pending the negotiations, interim arrangement dtd 26/8/99 for payment was agreed to.

According to this, Rs 236 per ton was to be paid for steam and supply to SSL. For electrical energy the same rate as for UPSEB was to be charged by appellant from SSL. For some period the appellant raised the bills and SSL made payment these for supply of steam as per this arrangement. However even this arrangement was objected to by PICUP on the ground that accepted rate of return justified in power industry was 16% of capital employed as against 21 % adopted for making the interim arrangement. In view of this SSL informed the appellant company that the proper rate of steam would be Rs. 75 per ton as against Rs 236 applied earlier. The rate of Rs 75 per ton as against Rs.236 applied earlier. The rate of Rs.75/- per ton was agreed to retrospectively i.e. from the 1st year of operation. The earlier invoices raised @ Rs. 236 per ton were also revised in view of this retrospective amendment to the interim arrangement. The appellant passed reversal entry in subsequent year and claimed reduction of income from sale of steam in AY 00-01 before the AD during assessment proceedings. The AD as also CIT(A) did not allow the reduction of receipt on the ground that it had already accrued. However ITAT Delhi in their order dtd 26/3/04 held that the income cannot. be said to accrue @ 236 per ton in view of retrospective amendment to the said agreement.

2.5 Subsequently SSL informed the appellant company by letter dtd 2/11/02 the decision not to pay anything for exhaust steam since Oct 2001. It was further followed by another letter dtd 21/2/03 wherein the main reasons for this decision were stated to be as under:

The Conversion Agreement dated 10/12/98 never came into operation, as PICUP has not approved the contract. The SSL supplies baggase and water free of any charge to SI-AL. Without these SI-AL cannot generate power. In addition water and steam condensate are also supplied free of any charge.

7 ITA No.1099/Del/2013 The steam that is supplied is exhaust steam, which has no value and cannot otherwise be used or sold. On the other hand, the baggase supplied to SI-AL free of any charge is easily saleable by SSL for which it does not get any compensation. No reduction/adjustments are also on that account in the charges for electric power that are being paid by SSL.

2.6 In view of this SSL stopped paying anything for exhaust steam from Oct. 2001. Since there- was a lot of uncertainty regarding realization of any amount for steam supplied from Oct. 01, the appellant did not raise any invoice to recognize revenue for the same.

The appellant relied on Accounting Standard 9 (AS 9) issued by ICAI on revenue recognition. It is now mandatory to follow such standards as accounting practice. The relevant clause is 10 to 12 of AS 9 were reproduced in the submissions (They have been reproduced by AO also on page 3 of assessment order as part of appellant's reply). It was therefore, stated that the appellant was fully justified in not recognizing any sale proceeds of steam applied to SSL. The main contention was that only real income can be taxed under the IT Act. Notional income on estimated basis cannot be brought to tax. In support of this legal. .contention also the appellant relied on a few judicial decisions. Therefore according to appellant the income estimated by AO from supply of steam to SSL and at the rate of 236 per ton was highly unjustified and against the judicial principles. Without prejudice, it was also stated that the AO has not giving justification for adopting the rate or steam at the rate of 236 per metric ton when only Rs 75 was chargeable by the appellant as per the revised interim arrangements made with SSL. It was mentioned by the appellant that the addition made in earlier years when the rate of steam was reduced from Rs 236 per metric ton to Rs 75 per metric ton was deleted by ITAT in AY 00-01 whose order has been followed by the CIT(A) in A Ys 01-02 order dtd 26/7/04 and 99-00 order dtd 4/1/06.

2.7 Subsequently by letter dated 5/9/06 the appellant further submitted that bagasse supplied by SSL to the appellant was a marketable commodity which could be sold @ around Rs 500 per ton. If the market value of bagasse supplied by 55L to appellant, free of cost, was worked out it would be about Rs 8.18 crores. As against this, even if the cost of 3,59,933 tons of steam supplied by appellant to 55L is 8 ITA No.1099/Del/2013

determined @ 236 it would amount to 8.49 crores. Hence it was not that the arguments of SSL in denying any payment for steam supplied by the appellant were without any basis. According to 55L the bagasse supplied by them to appellant did have a marketable value whereas steam supplied by 55L was not of any use as it was not a freely marketable commodity.

2.8 - I have carefully considered the submission made on behalf of the appellants. There is no dispute to the fact that the appellant has not credited any sale proceeds in respect of steam supplied to SSL during the year. It is also undisputed fact that SSL refused to pay anything for steam supplied to it- end has also not actually paid anything for that. The AO has estimated the sale value of steam at the rate of Rs 236 per metric ton which according to him was the real rate of steam in view of agreement applicable in earlier years. So far as estimating the value of steam -@ 236 per ton against Rs 75 in earlier year is concerned, the issue is covered in favour of appellant by order of ITAT in AY 00-01. Hence the only issue to be decided is whether the appellant was right. in not showing any revenue at all from supply of steam to SSL. It is to be noted that transaction of purchase/sale is in the form of a contract between the two parties. Sale price is the income of seller & liability being purchase price to the purchaser. It can be treated as income accrued in the hands of seller (and liability crystallized in the hands of purchaser) only if the relevant contract is accepted by both the parties to contract. There is no doubt that the steam was supplied by the SSL as it was done in earlier years. However, earlier the income (being sale value of steam) was credited in the accounts at the rate agreed and confirmed by the SSL. In fact the rate was retrospectively rendered & such reduction was agreed to by both the parties. On this basis itself the ITA T in A Y 2000-01 allowed reduction of income from sale of steam. The point to be noted is that the income from any contract (sale) can be said to accrue as per agreed terms of such contract. If there is any dispute by either party the accrual of income (of expenditure in the hands of other party) will be subject to the outcome of such dispute & accordingly contingent. Normally the income in such cases can be said to accrue in the year in which the dispute is resolved & other party acknowledges the debt. Even in such cases some party may choose to recognize its income or liability as accrued according to 9 ITA No.1099/Del/2013

facts & circumstances whereby it is certain to be able to enforce the terms of contract. However, the appellant did not recognize any revenue from sale of steam in current year according to AS-9, since SSL had categorically refused to make any payment for supply of steam. Therefore, non-recognition of any accrual of income from supply of steam does not appear to be unjustified.

2.9 It may be noted that normally if some buyer refuses to make payment for goods supplied to it; the seller would immediately stop supply of goods. However the appellant did not stop supply of steam to SSL even in the face of clear declaration of not getting any payment for the same. This appears to be unusual unless the appellant being other party to contract also accepted the said proposal finally. Since appellant's stand on contention of SSL was not specified the appellants AR was requested to clarify the stand of the appellant company on the proposal of SSL not to pay any price for supply of steam. In response to this it was submitted by the appellant's AR that the matter was discussed by the Board of Directors of the appellant company in their meeting on 8/7/03. A copy of the minutes of Board meeting for that day was submitted when asked to do so. It was stated that in the said meeting it was decided not to raise any invoice for supply of steam as it would unnecessarily result into unrealistic receivables. The Board also decided to reverse the billing made in the FY 01-02 and revise the income tax return.

The AR was further asked to clarify as to whether apart from not raising any bills; the decision of SSL has been accepted by the company or still the matter was being pursued with them for payment of steam charges. It was then stated that some dispute in respect of allotment of shares to foreign collaborator of the joint venture was pending before Company Law Board. The said matter has since been decided and after that the appellant company has confirmed by letter dated 9/1/06 to SSL that no conversion charges in respect of steam would be claimed from them wef 1/10/01. On asking a copy of said letter dated 9/1/06 was filed.

2.10 In view of the clarification as above there does not remain any doubt that both the parties to contract have agreed that no payment in respect of supply of steam was to be made to appellant by SSL. Therefore there cannot be said to be any accrual of income for supply of steam. The basis for this arrangement is also clear since it is a kind 10 ITA No.1099/Del/2013

of barter system where bagasse and water is supplied by SSL to appellant company free of charge while the appellant supplies electricity and steam to SSL. The appellant's income is from sale of surplus power to UPSEB. Even if theoretically the price of steam is computed at Rs 236 per ton (which however was never agreed and acted upon between the two parties) it is almost equivalent to the cost of bagasse worked out at the market price. Therefore in this kind of transaction there is no profit or loss in money terms to any of the company. However transaction of exchange of bagasse & water for power & steam is for mutual benefit and convenience. 2.11 Even if we look at things from a different perspective, the income of one company will be a deductible expenditure for the other and between the two there is no tax gain from this transaction. The income in the case of appellant is eligible to 100% deduction u/s 80-IA also. Hence no allegation of tax planning can be attributed in this transaction which appears to be wholly for business considerations. It may not be out of place to reproduce hereunder a part of letter dated 2/11/02 written by SSL to the appellant company.

"The sugar and power generation project are for all practical purposes two limbs of a single project one cannot survive without the other. In 1994, when the construction of the sugar plant was first taken up, the power generation facility was an integral part of the project and owned by this Company itself.

Subsequently in 1995 air Liquide offered to invest substantial monies in the power project and for doing so insisted that the power project be transferred to and owned by a separate company, independent from SSL. The ownership of the Plant and Machinery then came to be divided. Under this arrangement, the power generating facility was agreed to be transferred to and owned by SI-AL SBEC Bioenergy Limited, which was to be the joint venture between the Modi Group and Air Liquide/SIDEC. In 1997 after the project division had been implemented and the JC Company incorporated, serious disputes arose with Air Liquide end SIDEC which exposed both companies to be risk of liquidation. In those compelling circumstances, a compromise was worked out wherein various unreasonable terms insisted upon by air Liquide and SIDEC had to be accepted to protect the companies from liquidation, to avoid cancellation of the loan sanctioned by TREDA and to enable the two projects to be completed.

11 ITA No.1099/Del/2013 The terms for the conversion contract then stipulated by air- Liquide and SIDEC through the JV Company were totally one sided and in favour of the power company for the sole purpose of ensuring an adequate flow of funds to facilitate the repayment of the investments made by SI-AL in the share capital f the JC company. SI-AL had made it clear that it was in fact a lender and not an investor. This is evident from the documents signed then in particular the agreements where under it was agreed that the SI-AL shareholdings would be bought out. If Please note that it is our decision that on - resolution of the controversies with SI-AL Bioenergie France, SSL will acquire the entire share capital the JV company and make it its wholly owned subsidiary unless of course it· then decided to amalgamate the JV company with this company and bring the power project also directly into the ownership of SSL (Emphasis supplied).

2.12 From the above, it can be seen that the entire project of sugar production plant of SSL as well as the power generation unit of the appellant was in fact part of some project owned by one company. The power generation unit was separated to get investment from French company Air-Liquide, which agreed to join as JV (joint venture) partner. Therefore the transaction of exchange of bagasse & water with power & steam is in fact between two limbs of same project. If the whole project was owned by one company (as in fact it was initially) only the net profit of the entire project would have been taxable. As can be seen in the last paragraph reproduced above from he letter of SSL, the appellant company proposed to be made a subsidiary of SSL (and in fact has already become so). Looked from this angle, the transaction is between the holding and subsidiary company. Therefore in my opinion action of the appellant company in not charging for steam supplied to SSL is quite justified and cannot be said to be deliberate or motivated. Moreover even if an assessee gives (sells) his goods free of cost to other, there is no provision in the IT Act to tax its sale value' as income on presumptive basis. Legally speaking since no income has accrued & neither any payment has actually been received by the appellant company, making addition in respect of estimate price of steam amounts to taxing of notional income which is not permissible. In view of this the addition of RS 9,93,41,508 (Rs 8,49,44,188 after rectification) is deleted.

Unquote 12 ITA No.1099/Del/2013

2.5. On the basis of the findings of the CIT(A) for earlier years as well as the decision of the ITAT in the assessee's own case for earlier years, it is clear that this issue is squarely covered in favour of the appellant and the and the facts in this year are similar to those in the earlier years. The assessing officer has also noted in the assessment order that the issue is pending with higher authorities. After careful consideration of the facts of the case and considering the fact that the higher authorities have decided the issue in favour of the appellant, following the code of judicial discipline, I am inclined to agree with the contentions of the A. R. of the appellant that this issue is covered in favour of the appellant. Accordingly, this ground of the appellant is treated as allowed."

5. Respectfully following the order of the Tribunal in the case of assessee itself, ground No.1 of the appeal is dismissed.

6. Ground No.2 raised by Revenue is similar to ground No.4 in Assessment Year 2007-08 which Ld. CIT(A) has dismissed as the same had become infructuous. The relevant finding of Ld. CIT(A) are reproduced below:

"3.3. After going through the facts of the case, submissions of the A.R. of the appellant and the judicial pronouncements of higher courts on the same issue in the appellant's own case, the ground is being finalized as follows:

(a) This ground of appeal is against excluding 50% of receipts from UPSEB in respect of sale of surplus power for the purpose of computation u/s 80IA. This ground is also without prejudice to ground No.2 as it was alternative claim in respect of the same addition. It is found that this ground is similar to ground No.4 in appeal order for AY 05-06: The issue as decided in favour of appellant in view of earlier years decisions of CIT(A) in AY 99-00 and 01-02.

(b) Similar issue has been decided by the ITAT in favour of appellant in AY 99-00 and AY 01-02. In the said years, the ITAT has followed its order for AY 00-01 and has held that AO was not justified in reducing the amount received by appellant from the gross receipt eligible for deduction u/s 80- IA. However, because the entire addition in respect 13 ITA No.1099/Del/2013

of sale of steam was deleted this alternate ground becomes infructuous and hence treated as dismissed for statistical purposes."

7. Following the above tribunal order, ground No.2 having become infructuous, is dismissed.

8. Ground No.3&4 being general, do not require any adjudication.

9. In view of above, appeal filed by Revenue is dismissed.

10. Order pronounced on this 13th day of March, 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER Date: 13th March, 2015

Sp

Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

14 ITA No.1099/Del/2013 S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement 13/3 Sr. PS/PS 7 File sent to Bench Clerk 13/3 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order