Sukumar Mukhopadhyay: Can excise be levied on electricity?

The Supreme Court verdict on electricity duty can have a vast revenue impact.

The media has extensively reported on it and government officials are exercised over the Supreme Court's recent observation in the Solaris case* that "electricity is not an excisable item." For the moment, this is theoretical, but it can have vast revenue implications if the government imposes an excise duty on electricity. If it is not excisable, as the Supreme Court has ruled, the government cannot impose excise duty. It did impose excise duty way back in the 1970s and gave it up after a few years when it found it very difficult to collect the duty from state electricity boards. But now that there are private generating companies, excise can be a source of revenue.

To begin with, I must point out that this judgement is not one on electricity as such, but on the admissibility of Cenvat credit for the duty paid on the fuel used in generating electricity which, in turn, is used to make caustic soda. Contrary to the stand taken by the revenue department, the Supreme Court decided that Cenvat credit is admissible. This is in spite of the fact that in between the intermediate product, namely electricity, emerges which the Supreme Court said is not excisable. The implication is that if it was excisable and there was a positive duty on it, then the case would not have arisen at all. In that case, Cenvat credit for fuel could be taken at the stage for payment of the duty on electricity within the factory itself which then could be taken as input credit and finally adjusted with the duty on caustic soda. So, the issue before the Supreme Court was not whether electricity is excisable or not.

Yet, the observation of the Supreme Court is fraught with great revenue implication if the government decides to levy a duty on electricity. The Supreme Court would have gone by the fact that electricity does not have a duty as there is no rate of duty indicated against the entry for electricity in the Central Excise Tariff under heading 27160000. There is just a blank. The actual entry is not exactly electricity, but electrical energy. Here, electricity and electrical energy are one and the same, although in theoretical physics, there is a difference. The definition of electricity in physics is that it is a flow of protons/electrons but the electrician's definition, that is, the definition in the trade parlance is that electricity is synonymous with electrical energy. The flow of electrical energy to any customer is termed as electricity. Electricity is the form in which electrical energy is passed on to the consumer in terms of units. The bill that the consumer receives is called an "electricity bill" and on the back of the bill is written "your energy charges @ Rs 2.4 per unit". So, electrical energy is synonymous with electricity for purposes of buying and selling. The Supreme Court too has given several well-known judgements that for the purpose of taxation, we have to follow not the scientific definition, but the meaning in the trade parlance. Thus, obviously the Supreme Court has used the expression electricity as synonymous with electrical energy.

Now electrical energy is specifically mentioned in the Central Excise Tariff and Customs Tariff under the same heading 27160000. However, in the Customs Tariff all items are mentioned irrespective of whether they are manufactured or not. In the Central Excise Tariff, on the other hand, only manufactured items should find mention. Electrical energy is a manufactured item which is bought and sold not only within the country, but across countries as well, such as from Bhutan to India, from Canada to the US, and so on. There is a definition of excisable goods in the Central Excise law under Section 2 (d) which says that excisable goods are those which are specified in the First and Second Schedules as being subject to a duty of excise. The word "excise" has to be read in relation to the entry in the Constitution. Therein, Entry 84 of List-I, Schedule 7 reads, "Duties of excise and tobacco and other goods manufactured or produced in India..." Thus, excisable goods have to be manufactured and not just be mentioned in the Central Excise Tariff. In several judgements the Court has clarified that even if an item is specified in the Tariff, it is not excisable if it is not manufactured**. So, when electrical energy is mentioned and it is also a manufactured item, it has to be excisable. As I have pointed out earlier, it bore a duty rate in the 1970s. At present, the government has not imposed any duty on it. But the fact remains that it is excisable. The Supreme Court would have written the expression "not excisable", most probably only in the sense that there is no excise duty indicated in the Tariff. There is a blank there. But 1(c) under Additional Notes of the General Rules For the Interpretation of The First Schedule says, "'Tariff item' means a description of goods in the list of tariff provisions accompanying either eight-digit number and the rate of duty of excise or eight-digit number with blank in the column of the rate of duty." It is statutorily provided that even a blank is a tariff item. Thus, electrical energy with a blank in the column of duty means that it is a tariff item that is excisable. As the Supreme Court has not taken into consideration this legal provision, it has been issued per incuriam, which means that it is not to be followed as a precedent.

The conclusion is the following:

Electrical energy (electricity) is excisable. So, the judgement of the Supreme Court has to be brought for review by a proper procedure.

The judgement not having considered the Interpretative Rules which are statutory, it has been given per incuriam. So, it does not have to be followed as a precedent.

Such other items like live animals, namely horses and asses, which now occur in the tariff, should be removed. Neither a horse nor an ass is a manufactured commodity. They appear in the Customs Tariff, but there is no place for them in the Central Excise Tariff. The introduction of these animals in the Central Excise Tariff was done apparently for its harmony with the Customs Tariff. But there is no harmony in respect of unmanufactured goods. This continuing mistake should be amended in the Budget so as to avoid confusion.

In some places there is entry of "free" in the duty column in the Customs Tariff which is meaningless. It should be either 'nil' or blank. 'Free' is not quite legal as there is no explanation in the Rules for that. It means nil in any case.

*2007-TIOL-135-SC-CX
**Moti Laminates vs CCE, 1995 (76) ELT 241 (SC) and Hyderabad Industries vs UOI, 1995 (78) ELT 641 SC

The writer can be reached at smukher2000@yahoo.com