The Hindu Business Line : The power of steam

THE power sector is an important constituent of national development. And to give a fillip to this sector, tax incentives, among other things, have been provided in the Income-tax Act (Act). But an oft-asked question is on the forms of power covered by the tax provisions. This was examined recently by the Income-Tax Tribunal, Delhi Bench, in the Sial SEC Bioenergy Ltd case.

Section 80IA(4)(iv) permits tax holiday to an undertaking set up for the generation or generation and distribution of power.

In the Sial case, the question before the Tribunal was whether the steam generated after use in generating electricity (by rotating the turbines) is a form of power when used in other processes.

The dispute was whether the generation of power pertains to only generation of electricity, as contended by the Revenue, or any form of energy (electrical, thermal, wind or steam), as was the stand of the assessee, so as to qualify for tax holiday under Section 80IA(4)(iv).

The assessee in question was in the business of power generation. The process involved the burning of baggase in a boiler to high temperature and pressure steam. The steam is then transferred to turbines through pipes to rotate them. The turbines then rotate the alternator, generating electricity in the process. The low-pressure exhaust steam is then drawn from the turbines to heat sugar juices to help evaporate the water from the juices. According to the assessee, the evaporation of water from the juices took place by transfer of thermal heat energy from steam to the juices.

The dispute between the Revenue and the assessee was about whether the receipts from generation and supply of steam were eligible for relief under Section 80IA(4)(iv). According to the Revenue, the steam was not a form of power.

The word `power' is not defined in the Act. The settled position, in such situations, was to refer to the meaning in the cognate statutes and the dictionaries. The apex court, in the cases reported in 1991 Vol II (SC)(1) and 1997(6) SCC 420, held that, under the Factories and Municipal Corporation Acts, steam was a form of power. A similarl finding was given by the Kerala High Court in the cases reported in 47 STC 68 and AIR 1962 SC 29.

In the Webster's Dictionary, `steam' is defined as `energy'. And the Webster's Abridged Dictionary defines it as `power or energy'. The Oxford English Dictionary goes a step further, defining steam as `mechanical or electrical energy or any form of energy or force available for application to work (as that of gravitation, running water, wind, steam, electricity).' Energy is also defined as `ability of a matter to do work'.

Comparing the work done by the steam with that of electrical energy, the Tribunal held that both were capable of producing the same end-results.

In the case of the sugar manufacture, the assessee used thermal rather than electric energy . Thus, both were forms of power.

Before the Tribunal, the assessee also referred to the provisions in other parts of the Act. Section 80E, before its deletion by the Finance Act, 1967, allowed tax holiday to certain specified industries, including `generation or distribution of electricity or any other form of power'. The other sections where a similar phrase was used were: 10(23f), 33B, 72A(7)(a)(3), 10(6), 10(5)(b), 32A and 80RRA.

The Tribunal agreed with the assessee's argument that non-mention of the word `electricity' in Section 80IA(4)(iv) was only because the Legislature wanted to give power a wider meaning. Once the Legislature has not used the word `electricity' in the section, the courts cannot put it in the provision.

The Tribunal concluded that the word `power' has to be given a meaning which in common parlance means `energy'. The energy can be of any form — mechanical, electrical, wind or thermal. Thus, the steam produced by the assessee would be termed as power and qualify for the benefits of Section 80IA(4)(iv).

The assessee supplied electricity for its internal use as well as to the Uttar Pradesh State Electricity Board (UPSEB). For calculating tax holiday, the rate charged from the UPSEB was applied to profits from generation and distribution of electricity for internal use. With regard to supply of steam, a rate of Rs 75 per tonne was applied.

Section 80IA(10) ordains that if between the eligible undertaking and the assessee, the course of business is so arranged that the business transacted between them produces to the assessee in the eligible business more than the ordinary profits, which might be expected to arise in such eligible business for the purpose of deduction under the Section.

In the instant case, the assessee had two undertakings, one generating and distributing electricity and the other generating and distributing steam. The cost of input has been accounted for in the first undertaking. For the second undertaking, the cost of residual steam was nil. The question that may arise is: What is the arm's length price of the steam generated in the second undertaking? The assessing officer (AO) may like to determine this price before allowing tax holiday to the second undertaking. This may or may not be what the assessee adopted — Rs 75 for a tonne of steam.

The aforesaid judgment would have far-reaching consequences. A large number of taxpayers may be generating steam and using it for internal consumption. They could work out the profits from such an undertaking and claim it exempt under Section 80IA(4)(iv).

(The author is a former Chief Commissioner of Income-tax.)