Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.38  Query:    

Electric Arc Furnace – Whether a continuous process plant.

           

1.  A company is engaged in the production of special and alloy steels through Electric Arc Furnaces. The querist has described the process of manufacture carried on by the company as follows: -

 

“An Electric Arc Furnace is a shell (with roof) made of steel which is lined inside with refractory bricks. After charging scrap in the shell, electric power is transmitted into Furnace through Graphite Electrodes. The Graphite Electrodes carrying electric power when lowered in the Furnace establish an arc between the electrode tip and the scrap, which produces heat and in the process the scrap gets melted in liquid metal form. The liquid metal form after refining and alloying as per the desired chemistry of steel is tapped from the Furnace in heated ladles and cast into billets as per the capacity of the Furnace and each batch takes from 3½ hours to 4 hours. In the event, if there is a stoppage due to whatsoever reason during manufacturing process, the liquid metal gets colder and has to be melted again resulting into very heavy power consumption. Even otherwise, the Furnace has to be essentially run around the clock because if there is a stoppage after a particular batch is completed, the Furnace shall get colder when at the time of processing of next lot would require very heavy energy consumption for heating the Furnace chamber. In case, there is a stoppage of about 3 hours between the two batches, the energy consumption in the first batch after restarting is higher to the extent of 15% to 20%.”

 

2.  The querist has raised the query in the context of the new category ‘Continuous Process Plant’ as classified in Notification NO. G.S.R. 756(E) dated 16.12.1993, issued by the Ministry of Law, justice and Company Affairs, amending Schedule XIV to the Companies Act, 1956, prescribing the revised depreciation rates applicable to different plant and machinery and other assets.

 

3. The querist has sought the opinion of the Expert Advisory Committee as to whether the above mentioned ‘Electric Arc Furnace’ can be categorised as ‘Continuous Process Plant’ as defined in the said notification.

 

                                                                    Opinion                                        February 8, 1995

 

1.The Committee notes that the Notification mentioned in para 3 of the query defines a ‘Continuous Process Plant’ as a plant which is required and designed to operate 24 hours a day.

 

2. The Committee further notes paragraphs 4 and 5 of the Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956, issued by the Institute of Chartered Accountants of India, which are reproduced below:

“4.  The words “required and designed to operate 24 hours a day” are very significant and should be interpreted with reference to the inherent technical nature of the plant, i.e., the technical design of a continuous process plant, is such that there is a requirement to run it continuously for 24 hours a day. If not so run, there are significant shut-down and/or start-up costs. If such a plant is shut-down, there may be significant spoilage of material-in-process/some damage to the plant itself/significant energy loss. It is, however, possible that due to various reasons, e.g., lack of demand, maintenance etc., such a plant may be shut down for some time. The shut down does not change the inherent technical nature of the plant. For instance, a blast furnace which is required and designed to operate 24 hours a day may be shut down due to various reasons; it would still be considered as a continuous process plant and the relevant rate as per Schedule XIV would be applicable.”

 

“5.   There can be certain plants which, though may work 24 hours a day, yet their technical design is not such that they have to be operated 24 hours a day, e.g., a textile weaving mill. In such cases, extra shift rates as prescribed in Schedule XIV would be applicable.”

 

3. From the facts of the query, it is not clear whether the electric arc furnace in question has been designed and required to run 24 hours a day which are the considerations for deciding whether a plant is a continuous process plant. The occurrence of losses due to stoppages is a consideration of consequential nature and not a determinant of the inherent technical nature of the plant. For instance, another indication of inherent technical nature of the plant, as envisaged in the Guidance Note, is that in the event of lack of demand of the product, whether it is technically practicable to run all the available machines at less capacity utilisation for single or double shift or it is technically practicable to run only a few machines at full capacity 24 hours a day, and shut down rest of the machines. In the latter case, the machines would be considered as ‘continuous process plant’. The Committee is, therefore, of the opinion that whether the electric arc furnace is a continuous process plant should be determined on the basis of the inherent technical nature of the plant as explained hereinbefore.

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