Electricity - Scope of Chapter 27
RECENTLY, we carried the judgement of Allahabad High Court relating to demand of 5%/10% under Rule 6 of the CENVAT Credit Rules, 2004 on Electricity generated from bagasse - 2013-TIOL-568-HC-ALL-CX. While holding that Electricity cannot be treated as exempted goods for the purpose of rule 6 of the CENVAT Credit Rules, the High Court observed
'Admittedly, none of these conditions are attracted in the instant case insofar as electrical energy, which is mentioned in Chapter 27 of the Central Excise Tariff Act, covers only those electrical energy which are generated from mineral fuels, mineral oils and products of their distillation, bituminous, substances, mineral waxes etc. The electrical energy generated from Bagasse is not covered under Chapter 27. Similarly, Chapter 27 does not cover electrical energy produced by solar power, hydro power, wind power or from bagasse. Therefore, we are of the view that electrical energy is not an excisable goods nor it is exempted goods as defined in Rule 2 (d) of the 2004 Rules'.
The highlighted part of the judgement evoked sharp response from our Netizens and a Netizen posted this on our Message Board:
The Hon'ble High Court has observed that chapter 27 "covers only those electrical energy which are generated from mineral fuels, mineral oils and products of their distillation, bituminous, substances, mineral waxes etc", and that therefore electricity generated out of bagasse, solar power etc will not be covered thereunder. The court seems to have been guided by the title of chapter 27, and has not been briefed on the existence of the General Rules for interpretation of the tariff. Rule 1 thereof stipulates that the titles of chapters do not provide any legal basis for classification and are for ease of reference only.
The Netizen is right. As per Rule 1 of the General Rules for interpretation of the Schedule,
The titles of Sections, Chapters and Sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions.
So, electricity even if generated from bagasse or solar power is very much covered under Chapter 27. Though the judgement of the High Court did not solely rely on this and this will not alter the ratio, perhaps if these finer points were explained by the parties to the Bench, the judgement would not have contained such a finding.
Modern society and production methods are inconceivable without electricity. It is a secondary energy source, which results from the conversion of primary sources of energy, such as coal, natural gas, oil, nuclear power, wind and solar energy. Unlike oil and gas it is not a physical substance that can be stored easily. Electricity is a physical process, which takes place throughout the cables that carry it, and it has to be generated more or less at the same time as it is being used.
The invention of the generator capable of producing alternating current is at the heart of the present structure of the power industry - a system that generates electricity in large power stations at remote sites and carries it over long distances to reach its final users. Its value chain consists of four activities: generation which converts energy sources into electricity, transmission which occurs when electricity is transmitted over high voltage networks to major demand centres; distribution which is the process by which transmitted power flows to the final consumers such as factories and homes; and supply - the name given to the metering, billing and other services provided to the final consumers.
Unlike oil, electricity is not a physical substance that can be stored easily. Electricity is a physical process, which takes place throughout the cables that carry it. WTO rules do not contain any specific provisions on electricity. Given the lack of disciplines on services under GATT 1947, electricity was defined as a good irrespective of its peculiar physical properties, in the Harmonized System (HS) Nomenclature on the codification of commodities. The definition is followed by the WTO tariff schedules. Electrical energy is classified under the code 2716. Accordingly, electrical energy qualifies as a good under WTO law and is, as such, subject to the rules of the GATT 1994.
There is another school of thought that Electricity should be defined as a service and should no longer be treated as a good. Electricity is not a physical substance, nor is it a fuel. It cannot be stored and must be consumed as it is produced.
Thus there was a doubt whether electricity is a good or service and whether it would come under GATT or GATS. So, the WCO has given the optional heading 2716 and the Member Countries are free to include it in their Tariff or not. India has chosen to include it. In India, electricity is treated as a good and in fact there used to be excise duty collected on electricity in the seventies.
Please also see Heads or Tails - Which is More Legal - The Heading of a Section or its Contents in DDT 1382 17.06.2010.