TaxTMI 
TaxTMI 
TaxTMI 
2007 (2) TMI 627
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....eciation in the said Ministry. A note was appended to the said Notification under which it was stated that the reference to the straight-line method in the said Notification was intended to differentiate the same from the concept of reducing balance method and not to derive rates from the fair life of the asset(s). On 29.3.94, in continuation of the above Notification, MOP amended the Schedule. A bare reading of the said amendment indicates absence of linkage between the fair life of an asset and the rate of depreciation. On 23.11.2000 the Delhi Electricity Reforms Act, 2000 ('DERA' for short) was enacted by the State Legislature to establish DERC and to restructure the electricity industry in Delhi. On 6.1.2001 the Government of National Capital Territory of Delhi ('GoNCTD' for short) decided to unbundle Delhi Vidhyut Power ('DVB' for short), its undertaking and assets, and vest the same in six successor companies including three distribution companies ('DISCOMs' for short). These three DISCOMs are North Delhi Power Limited ('NDPL' for short), BSES Yamuna Power Limited ('BYPL' for short) and BSES Rajdhani Power Limited ('....
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....ancial year 2001-02 plus sum total of all expenses such as power purchase cost, salary, O&M, administration and general expenses, interest on debt, return on equity minus increase in revenue due to reduction in T&D losses divided by estimated units sold in a year. Vide para 9.7, it was clarified that under the formula, the tariffs stipulated by DERC for the financial year 2001-02 was to get adjusted in the financial years 2002-03, 2003-04, 2004-2005 and 2005-06. Vide para 9.7, it was further stated that the above Tariff Setting Principles have been proposed to provide certainty to the tariff determination process. Under para 9.7.2 of the RFQ document, it was further stipulated that the order of DERC on the tariff proposal of DVB for the financial year 2001-02 shall be made available by 2.4.01 so that the pre-qualified bidders could submit their financial bids for the proposed DISCOMs. On 23.5.01, DERC issued its Retail Supply Tariff Order on the Annual Revenue Requirement ('ARR' for short) for the financial year 2001-02 and the Tariff Determination Principles for the financial years 2002-2003 till 2005-06. This Tariff Order computed the ARR of DVB for the ensuing year 2001....
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....nable restructuring of DVB and to privatize the business of distribution. It was further clarified that the transition period shall be of 5 years (2002 till 2007) to attract private participation in respect of AT&C loss reduction, tariff structure including return on equity of 16% and 50% additional revenue arising from AT&C loss reduction with inbuilt incentive to DISCOMs. Under the Policy Directions, GoNCTD assured the bidders that a BST Order shall be issued by DERC to facilitate investors to have a full idea of various elements in tariff fixation, before bidding. Vide para 19 of the Policy Directions, it was clarified that DERC shall be bound by Policy Directions on and from 22.11.01 till end of financial year 2006-07. Accordingly on 22.2.2002, DERC issued the BST Order on a Joint Petition filed by GoNCTD owned Distribution Companies (that is before privatization) and Delhi Power Supply Company Ltd. This BST Order, issued by DERC, approved Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the said DISCOMs, on the basis of the paying capacity of the Distribution Companies. The said BST Order issued by DERC also approved the Opening Levels of AT&C losses for....
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....value of an asset arising from use, efflux of time and market changes. It was further held that from a regulatory perspective, depreciation is a small amount of the original cost of the capital asset(s), built into the tariff computation every year with a view to provide the Utility a source of funding to repay instalments of debt capital. It was further held that since the asset is used over its operational life, depreciation is a percentage charged over the fair life of the asset(s). It was further held that in the BST Order dated 22.2.2002 the rate of depreciation was based on WADR since the details of the asset(s) at the beginning of the financial year 2001-02 were not available and, therefore, at that time DERC had taken the view that instead of rejecting the computation of ARR, submitted by DVB, it was better to give directions to DVB to update their data so that in future it could file proper computation concerning ARR. It was further held that the erstwhile DVB was required to file ARR by 31.12.01 for the financial year 2002-03 which they failed to do so and instead the three Distribution Companies filed a Joint Petition for determination of the Opening Levels of AT&C losse....
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.... Accordingly, the Review Petition of NDPL came to be dismissed as per the order of DERC on 25.11.03. Thereafter on 19.12.03 NDPL filed its petition for determination of ARR for financial year 2004-05 and for determination of Retail Supply Tariff in terms of Section 28 of DERA. Vide Tariff Order dated 9.6.04 DERC denied to NDPL the assured return on equity at 16% as well as depreciation expenditure at the rate of 6.69%. Vide Review Petition dated 8.7.04, NDPL requested DERC to revise its Tariff Order dated 9.6.04. On 23.7.04 NDPL preferred Writ Petition No.15175 of 2004 before this Court. That petition was disposed of on 9.8.05 upon constitution of Appellate Tribunal for Electricity ('ATE' for short). The above Review Petition dated 8.7.04 was dismissed by DERC on 29.10.04. Aggrieved by the above decision of DERC, NDPL preferred Writ Petition No.140 of 2005 in the Delhi High Court challenging the legality and validity of the impugned Tariff Order dated 9.6.04 in respect of creation of Regulatory Asset(s) whereby 53% of the operating expenses of NDPL was deferred without providing a schedule of recovery/amortization. However, in the meantime in view of the constitution o....
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....l decision may be taken, but the same shall be open to challenge by the affected parties. This matter shall be placed for further hearing after a period of six weeks. It is, however, made clear that we have not given any interim protection for any period other than the period to which the present appeal relates to. The determination made by the Appellate Authority shall be indicated to the parties." As per direction of this Court dated 23.8.06, ATE recorded it findings on the rate of depreciation vide its order dated 29.9.06 (hereinafter referred to "the impugned order"). By the impugned order, it was held that depreciation is not a source of fund, it is a process of Allocation of Cost and that funds are generated by sales and not by depreciation, which is an expenditure incurred in terms of Schedule VI. At the same time, ATE observed in its impugned order that in certain cases companies did follow Depreciation Fund Method for replacement of asset(s). According to ATE, Section 28 (3) of DERA was an enabling provision which empowered DERC to depart from the factors specified in Schedule VI while determining the revenues subject to DERC recording reasons thereof; that in respect ....
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....rred to above, which categorically stated that the straight-line method was not for derivation of rates from the fair life of the asset(s). Therefore, according to ATE, it was not open to DERC to derive the rate of depreciation at the rate of 3.75% from the fair life of the equipment as is sought to be done by DERC. According to ATE, the MOP Notification dated 29.3.94 had allowed depreciation at the rates mentioned therein on a straight-line method as an authorized expenditure which had no linkage with the fair life of the asset(s). According to ATE, NDPL was entitled to depreciation in terms of MOP notification dated 29.3.94, Policy Directions dated 22.11.01 and BST Order dated 22.2.02 and, therefore, there was no reason to reduce the rate of depreciation from 6.69% claimed by the DISCOMs herein as an allowable expenditure in terms of Schedule VI of the said 1948 Act. The said Policy Directions issued by GoNCTD under Section 12 of DERA to DERC, according to ATE, were binding on the DISCOMs which DERC failed to notice. According to the impugned order, DERC had accepted the WADR proposed for Generation Company in terms of MOP Notification dated 29.3.94. This rate was approved by DER....
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.... civil appeal by DERC. Mr. S.K. Dholakia, learned senior counsel appearing for DERC, submitted that under Section 28 of DERA, DERC had to fix tariff taking into account the interests of the DISCOMs and the consumers. Under Section 28, according to learned counsel, DERC is required to follow the Principles of Schedule VI of the said 1948 Act but it also has the power to deviate from the said Principles for reasons to be recorded by DERC. In this connection, it was pointed out that in exercise of the powers under Section 28, DERC had fixed the rate of depreciation at 3.75% having regard to the fair life of the assets. According to learned counsel, DERC was right in rejecting the claim of 6.69% on the ground that the said rate could be considered only if there was a debt redemption involved. Learned counsel further submitted that GoNCTD had never promised 6.69% as rate of depreciation in the RFQ, RFP or in the Policy Directions. In this connection, it was urged that allowing higher depreciation at the rate of 6.69% would increase the tariff level imposing a burden of almost Rs.300 crores on the consumers for the financial years 2002-03, 2003-04 and 2004-05. Learned Counsel further su....
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....02 on which reliance has been placed by DISCOMs herein, learned counsel submitted that the said BST Order was valid only for two months of February and March 2002 and, therefore, there was no promise under the said BST Order regarding fixation of the rate of depreciation for 5 years. It was further pointed out that in the said BST Order dated 22.2.02 there were certain variables which included items of expenditure which varied from year to year, one such item was depreciation. Accordingly, the Chart on Expenses allowed by DERC for NDPL show different amounts (in crores) allowed as depreciation expenses in the financial years 2001-02 (two months), 2002-03 (9 months), 2003-04 and 2004-05. This Chart, according to learned counsel, shows that it was open to DERC to allow depreciation as an item of expense on annual basis. At this stage, it may pointed out that in the course of hearing before us, learned counsel for NDPL submitted a Chart suggesting that the denial of depreciation at 6.69% resulted in reduction of rate of return on equity. In this connection, learned counsel pointed out that the Chart submitted by NDPL was erroneous. He pointed out that the disallowed depreciation ment....
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....ever the case of DISCOMs that the rate of depreciation had any connection with AT&C losses. According to learned counsel, DERC had exercised its power under the statute in going for a departure from Schedule VI to the said 1948 Act. Therefore, according to DERC, DISCOMs herein were entitled to depreciation in the above years derived from the fair life of the assets since during the said years there was no debt redemption involved. Mr. Harish N. Salve, learned senior counsel appearing on behalf of NDPL, submitted that under Section 28(2) & (3) of DERA, DERC was required to adhere to the financial principles and their obligations provided in Schedule VI to the said 1948 Act and if DERC wants to depart from those principles it has to record reasons in writing. Learned counsel submitted that the said reasons to depart and the flexibility of DERC to depart are both subject to provisions of DERA including Section 12(3) read with statutory Policy Directions dated 22.11.01 as reaffirmed by Parliament in Section 185(2)(e) of the Electricity Act, 2003. In this connection, our attention was also invited to para XVII of the Sixth Schedule to the said 1948 Act which gives the definition of the....
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....t from the Sixth Schedule was that the fair life of the assets was 25 years and since NDPL was not required to redeem the debt as it had not borrowed during the aforestated years DERC was entitled to derive the rate of depreciation at 3.75% having regard to the fair life of the asset(s) (25 years). According to learned counsel, the above reasoning of DERC was contrary not only to the representations made to the investors but it was also contrary to the Note appended to MOP Notification dated 23.1.92 which stated that the rate of depreciation shall not be derived from the fair life of the asset. Therefore, according to the learned counsel, DERC had departed from the Sixth Schedule which was untenable and per se illegal. In the alternative, Mr. Salve submitted that even if DERC was entitled to depart from MOP Notification dated 23.1.92 and BST Order dated 22.2.02, the impugned order of DERC cannot constitute a good order under Section 28(3) of DERA as it results in total dismembering of the total 5 year transition mechanism, it renders 16% ROE illusory and it extends the replacement period for assets from 13.45 years to almost 24 years. Learned counsel submitted that the limited iss....
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....rores approximately (equal to 16% of ARR); that the amount of depreciation allowed has been reduced by 60% and if the net return is calculated on the principles applicable to the BST Tariff then the said return would stand reduced to less than 0.5%. Therefore, even assuming for the sake of argument that DERC was entitled to deviate from the Sixth Schedule, the impugned exercise undertaken by DERC leads to unjustifiable reasons. Learned counsel submitted that DERC was wrong in holding that determination of the principles for tariff entitlements for next 5 years was not the key factor in the privatization process. Learned counsel for NDPL next contended that the reasons given by DERC for departing from the Sixth Schedule was specious, untenable and erroneous. In this connection, it was urged that depreciation is not a "source of funds". The source is always the "sale price" of goods. Depreciation is a non-cash charge. It reduces the distributable profit without reducing the cash profit. The difference between the distributable profit and cash profit is a sum which the company has to retain. Depreciation in a sense is a source of funds for future investments. However, it is not a "so....
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....senior counsel appearing on behalf of BYPL and BRPL, submitted that during the transition period, 2002-07, the tariffs of the aforestated to DISCOMs had to be fixed strictly in conformity with the BST Order dated 22.2.02. According to learned counsel, the said order dated 22.2.02 had laid down Normative Principles for tariff fixation. It was submitted that the said BST Order followed the MOP Notifications dated 23.1.92 and 29.3.94 by which WADR of 6.69% was admissible. During the said transition period it was not permissible for DERC to depart or deviate on any ground from the above MOP Notifications concerning rate of depreciation. In the alternative, learned counsel submitted that in the present case the rate has been reduced only on the basis of the estimated useful life of the assets which in law cannot be considered to a good or cogent ground or reason for departing from the MOP rates, particularly, when the said ground or reason is expressly prohibited by the MOP Notification of 1992 which lays down that the rates shall not be recomputed on the basis of the fair life of the assets. It was submitted that such a departure from the MOP rates violated Section 28 of DERA read with....
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....ed by DERC was contrary to such directions and, therefore, the impugned order passed by DERC was illegal and bad in law. This order of ATE, concerning the statutory binding effect of the Policy Directions, has been accepted by DERC. It has not been challenged. It has become final. Learned counsel, therefore, submitted that it was not open to DERC to raise any contrary or inconsistent regarding the binding effect of Policy Directions. Moreover, it was pointed out that even in the past DERC has followed the MOP Notification in its Tariff Order dated 23.5.01 for financial year 2000-01. This was even without FAR register. Learned counsel pointed out that the MOP Notification was also followed by DERC in the BST Order dated 22.2.02. In the said BST Order, there was no reference made for the depreciation rate to be computed on the basis of useful life of the assets, as has been done in the impugned order of DERC in the present case. Therefore, according to learned counsel, the departure from the BST Order was unjustifiable as Normative Principles set out in the BST Order had to be followed till 31.3.07, in terms of the Policy Directions dated 22.11.01. Learned counsel submitted that the ....
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....mitted that for allowing revenue requirement, DERC was duty-bound to follow the guiding Principles laid down in the Sixth Schedule to the said 1948 Act which provides for depreciation each year vide Section VI(a) of the Sixth Schedule. Such sum is required to be calculated in accordance with the principles set out in the MOP Notifications. The schedule given for calculation of the rates of depreciation refers to the assets existing in the books of accounts and the amount of depreciation is determined as a percentage of such value. This procedure is followed by most of the State Electricity Regulatory Commissions in India. Therefore, according to learned counsel, it was not open to DERC to deviate from the MOP Notifications and the Principles mentioned therein. For the following reasons, there is no merit in this civil appeal. Firstly, accounting for costs differs according to the object and the purpose for which the exercise is undertaken. Depreciation is Allocation of Costs so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset(s). Depreciation includes amortization of assets whose useful life is pre-dete....
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....inciple behind providing for depreciation was to recover the original capital invested in the purchase of the assets. Revenue is required to be held back by means of depreciation charged to profit and loss account to recover the original capital invested in the purchase of the assets. Revenue is required to be held back in order to keep the original capital intact. However, that model of Original Cost had to be replaced by the concept of Replacement Cost in recent years owing to the increase in the level of prices due to inflation. Thus, the concept of Historical Cost to a large extent is replaced by the concept of Replacement Cost. In the past, according to De Paula, accounts were prepared upon the basis of Historical Cost but on account of inflation in an economy like ours which is cost push economy, the concept of Historical Cost as basis of accounting is replaced by the concept of the Cost of Replacement of fixed assets. The above analysis by De Paula has been accepted by this Court in its judgment in the case of Associated Cement Companies Ltd., Dwarka Cement Works, Dwarka v. Its Workmen and another AIR 1959 SC 967. We quote hereinbelow paras 28 and 34 of the said judgme....
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....hat it is represented by assets that are being consumed or exhausted in the course of trading or seeking to earn income" (F. R. M. de Paula's Principles of Auditing', 1957, p. 136). It is also stated by the same author that "in all cases where one of the direct causes of earning revenue is gradually to consume fixed assets of wasting nature, the depreciation of such assets should be provided for out of revenue" (Ibid, p. 138). It is true that the author recognises that "owing to the very considerable increase in the price level since the termination of the 1939-45 war, industry is finding its original money capital insufficient for its needs. Thus the cost of replacement of fixed assets has greatly increased and in addition, further working capital is required to finance a given volume of production. Many economists, industrialists, and accountants contend that provision should be made, in arriving at profits, for this increased capital requirement". Having noticed this view the author adds that "at the time of writing this matter is still being debated and final decisions have not yet been reached", and he concludes that "until a final solution of this complex problem i....
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....ost. The MOP Notifications proceeded on the basis that the Utilities were making losses, expenses on replacement was heavy and that the assets needed replacement in the shorter ARP. It is for this reason that in the MOP Notifications higher rate of depreciation stood prescribed without nexus to the fair life of the asset(s). This Principle under the above MOP Notifications got reflected in the subsequent BST Order which also, inter alia, prescribed the principles for tariff determination for 5 years. The above principles also got reflected in the Policy Directions issued by GoNCTD under Section 12 of DERA. It is for this reason that in the RFQ document the timetable shows that the bidders were required to take note of the Tariff Structure before making bids. The investors were put to notice regarding the Tariff Structure which existed before privatization. We are living in the complex and ever- expanding exigencies of Government. In the matter of grant of benefit of depreciation, the extent of the benefit lies in the economic wisdom of the Government. That wisdom constituted the basis of the MOP Notifications which emphasized Asset Replacement Period to be reduced by prescribing hi....
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....rd reasons for such departure. In the present case, we are of the view that DERC was certainly entitled to take a departure from the principles set out in the Sixth Schedule to the said 1948 Act. However, that departure, in the facts and circumstances of the case, had to be within the framework of the Policy Directions issued by GoNCTD under Section 12. Further, in any event, the departure from the principles under the 1948 Act was required to be based on proper reasoning. In the present case, DERC was required to consider the effect of its decision. Privatisation and disinvestment were the Policy decisions taken by GoNCTD. The Utilities were incurring losses. The assets of the Utilities were getting depleted. The public-private participation is the order of the day. Therefore, the Policy Directions invited bids from the private sector on the basis of certain assurances. Under the above circumstances, on the facts of the present case, Legitimate Expectation was built into the investments made by the DISCOMs herein. The representations were there in the Policy Directions, BST Order laying down Normative Principles for tariff fixation for 5 years and the Transfer Scheme. Drawing up ....
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....(as they had not undertaken any loans), they were not entitled to the higher rate of depreciation. This assumption of DERC is wrong. There is a difference between the concept of Depreciation and the concept of Advance Against Depreciation (AAD). In the case of AAD, loan repayment may be one of the relevant factors. In the present case, as stated above, we are concerned with the reduction of authorized expenditure from 6.69% to 3.75%. In the present case, we are concerned with the reduction in the rate of depreciation from 6.69% to 3.75%. Therefore, in the case of reduction of authorized expenditure (depreciation) repayment of loan is not the relevant factor. One more points needs to be clarified. Conceptually, it is always possible to derive the rate of depreciation from the fair life of an asset. However, as stated above, it will depend on the object for which a fund or a reserve is sought to be created. We have already indicated that in the privatization process, there is a transition from "no profit organization" to "profit-based organization". The principles of Accounting will differ in the case of non-profit organization vis-`-vis private profit-based organization. That transi....