GENERATION OF ELECTRICITY IS A MANUFACTURING ACTIVITY

[Mr. M. GOVINDARAJAN]

Whether electricity is a good?  The Supreme Court in ‘Commissioner of Sales Tax V. Madhya Pradesh Electricity Board’ – 1968 (11) TMI 85 - SUPREME COURT OF INDIA held that the electricity falls within the definition of goods as defined under the Sale of Goods Act. The Supreme Court in ‘State of Andhra Pradesh V. National Thermal Power Corporation Limited’ 2002 (4) TMI 694 (SC) explained what electricity is.  Electricity is that the production (generation), transmission, delivery and consumption are simultaneous, almost instantaneous.  Electricity as goods comes into existence and consumed simultaneously, the event of sale in the sense of transferring property in the goods merely intervenes as a step between generation and consumption.

The term production and generation can be used interchangeably in the case of electricity and generation of electricity can also be termed as production of electricity.

The term ‘production’ and ‘manufacture’ signify the same meaning, rather the word ‘production’ has a wider meaning than the word ‘manufacture’. While every manufacture can be characterised as production, every production need not amount to manufacture. The ‘manufacture’ takes in bringing into existence of new goods by a process which may or may not amount to manufacture.

In ‘National Thermal Power Corporation Limited V. Deputy Commissioner of Income Tax’ – 2012 (5) TMI 127 ITAT Delhi, the Tribunal held that the process of generation of electricity is akin to manufacture or production of an article or thing.

In ‘Assistant Commissioner of Income Tax V. M, Satishkumar’ – 2012 (11) TMI 215 - ITAT CHENNAI, the assessee is in the business of sale of imported second hand textile machinery and generation of electricity through windmills. The assessee had installed two wind mills. The first wind mill was installed in the year 2005 and the second was installed in the month of September 2007. The assessee claimed 100% depreciation in respect of the second windmill installed as per the provisions of Section 32(1) and item (xiii) of new Appendix 1 read with Rule 5. 

The assessee filed its return for the assessment year 2008-09 on 29.9.2008.  The case of assessee was selected for scrutiny. Notice was issued to the assessee. The Assessing officer rejected the claim of the assessee for the grant of additional depreciation on the wind mill installed during the relevant assessment year. He observed that the assessee is not entitled to claim additional depreciation on the windmill as the assessee is not involved in manufacturing of any goods.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) against the order of Assessing Officer. The Commissioner (Appeals) allowed the appeal of the assessee. The Revenue has come in for appeal before the Tribunal against the order of Commissioner (Appeals). The Revenue contended the following:

• For availing the benefit of additional depreciation, it is essential that the assessee should be engaged in manufacturing activity;
• The assessee is not involved in manufacturing activity;
• The assessee is a commission agent and not a manufacturer and therefore he is not entitled for additional depreciation.

The assessee put forth the following submissions before the Tribunal:

• The assessee is operating windmill for generation of electricity;
• The assessee had installed first wind mill way back in the year 2005 and not claimed additional depreciation on the first windmill, since the assessee was not involved in any manufacturing activity at that time;
• Now the assessee is claiming additional depreciation on the second windmill as the assessee is already in the business of generation of electricity;
• The generation of electricity can also be called as manufacture of electricity and thus the assessee is eligible for additional depreciation.

The Tribunal analyzed the various judgments relied on by the revenue as well as by the assessee. The Tribunal held that a perusal of the judgments clearly shows that generation of electricity is akin to manufacturing of a new product. Electricity which may not be seen with eyes but it can be felt. The electricity can be transmitted, transferred, delivered, stored, possessed etc., The Tribunal was of the view that the generation of electricity is a manufacturing activity. The assessee is involved in the manufacturing activity and fulfils the conditions as laid down under Section 32(1) (iia). Further the Government of India vide Finance Act, 2012 has amended the provisions of the said section to include the business of generation or generation and distribution of power, eligible for benefit under the said section. Although the said amendment is with effect from April 1, 2013 but it gives impetus to the view that generation of electricity is a manufacturing activity and qualifies for the benefits under the said section.  The Tribunal upheld the findings of the Commissioner (Appeals) and dismissed the appeal filed by the Revenue.