PhD advisor used my paper in his grant report. But the paper was my work
"What are your analyses of this incident (especially how would it affect my contributions to the work if it is perceived as being part my advisor's project, while it is not)? What are your recommendations?"

My analysis is that this "incident" is normal, very common, and would not effect at all your perceived contributions. It is normal and common for scholars to list in their grant applications and reports any paper that was remotely done under the umbrella of the project, and that this is expected, for better or worse, in the academic system, where scholars need to justify their grants, in order to receive more grants.

What is written in a grant report/application has no bearing assigning  academic credit  per se, so it doesn't effect at all one's perceived contributions.

My recommendation is thus to be generous and not petty when assigning credits, and generally act with collegiality and not in a confrontational manner when dealing with your advisor, colleagues or, in time to come, your students. There are more important and consequential fights  than nitpicking on precise credit assignment. I see too many people (usually beginners in academia) over emphasizing "precise" credit distribution, until they forget the big picture.