1.8 Query: Rolling mills in a steel plant – whether a continuous process plant.
1. In integrated steel plants, coke-ovens, blast furnaces, steel melting shops and rolling mills are main plants for production of steel products. In coke-ovens, coal is charged to convert it in coke for blast furnace. Normally, a coke oven is not shut down. If any major repairs are required, then only a coke oven is shut down. The coke is sent to blast furnace through belt conveyors. In blast furnace, iron ore, coke and other ingredients are mixed and transformed into hot metal. This hot metal is sent to steel melting shop, where the hot metal is converted into ingots. Copies of process flow chart in respect of four integrated steel plants have been submitted by the querist for the perusal of the Committee. Depending on the need for conversion, these ingots are sent to blooming and slabbing mill of rolling mills for conversion into blooms and slabs. From slabbing mill, these are transferred to other mills of rolling mills to roll and make finished products like C.R. coil, wire rod, plates etc. Rolling mills of integrated steel plants comprise mainly hot rolling mills and cold rolling mills with their various constituent units, which have been separately submitted by the querist for information of the Committee. Separate written down value for each constituent unit is also available for depreciation purposes.
2. The querist has stated that in hot rolling mills as well as in cold rolling mills it is not essential to feed steel ingots or slabs continuously without break of operation. But, in case of hot rolling mills, if such operation is broken then the ingots and slabs are required to be reheated in soaking pits and reheating furnaces respectively, involving extra cost. Therefore, it is in the interest of the manufacturer to send hot ingots and slabs directly to hot rolling mills. However, in case of other rolling mills (cold rolling mills) operation is as per customers/market demand and specification (ingots are rolled as and when required). In coke oven, blast furnace and steel melting shops, there is a technological compulsion to operate plants 24 hours a day, i.e., if such plants are shut down, there will be significant damage to the plant and there is significant start-up and shut-down cost also. But, there is no such technological compulsion in case of rolling mills. The steel ingot may be sent for rolling or may be kept in stock as semi-finished product and can be rolled as and when so required. Therefore, cold rolling mills are not required to run continuously, rather these are required to run/actually run intermittently. Sometimes, steel ingot is also sold. Therefore, still ingot has been classified as saleable steel by steel plants.
3. The querist has further stated that on the aforesaid plants and machineries, depreciation was being charged by steel plants at the rate specified for plant and machinery for three shifts, i.e., @ 11.31% on straight line basis till 1992-93. In December, 1993, the Department of Company Affairs issued Notification classifying plant and machinery in two parts, i.e., continuous process plant and other than continuous process plant. The continuous process plant was defined to mean a plant which is required and designed to operate 24 hours a day. For continuous process plant, the depreciation rate (on straight line basis) is prescribed @ 5.28% without any extra shift allowance, whereas for other than continuous process plant the depreciation rate is on shift basis, i.e., @ 4.75% for single shift, @ 7.42% for double shift and @ 10.34% for three shifts.
4. The querist has informed that the company in question considered the entire plant including rolling mills (both hot and cold) as continuous process, on the ground that the steel plants are integrated steel plants. Accordingly, they charged depreciation @ 5.28% on plant and machinery by adopting the method mentioned in para 2(b)(i) of Circular No. 14/93 dated 20.12.93 of the Department of Company Affairs.
5. The querist has invited a reference to para 8 of the ‘Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956’, issued by the Research Committee of the Institute, which states that it is not necessary for the whole concern to be defined as a continuous process plant for the purpose of the applicability of the depreciation rates relevant thereto. When the attention of company’s management was drawn to this para (which contradicted their views), they referred to para 4 of the Guidance Note which states, “…..technical design of a continuous process plant is such that there is a requirement to run it continuously for 24 hours a day”. They interpreted the word ‘technical design’ as the technical design given in Detailed Project Report (DPR) of a plant. In the DPR of a plant, every rolling mill is designed to operate 24 hours a day, though it may or may not run so. They disregarded the view of technological compulsion. They were of the view that in modern era none of the integrated steel plants is designed to run less then 24 hours a day. The querist feels that if it was so, then there was no need of a specific mention of the word ‘required’ in the definition given by the Department of Company Affairs and the word ‘designed’ was sufficient to cover such plants as continuous process plant. The querist has also expressed his view that the word ‘inherent technical nature’ mentioned in para 4 of the Guidance Note refers to technological compulsion to operate 24 hours a day which existed in case of coke ovens, blast furnaces and steel melting shop. This view is not acceptable to the company in question.
6. The querist has accordingly sought the opinion of the Expert Advisory Committee on the following queries:
(i) Whether the treatment of all rolling mills in a steel plant as continuous process plant is correct.
(ii) If the answer of the Committee in case of (i) above is in the negative, then which of following units are considered by the Committee as other than continuous process plant:-
(a) Hot rolling mills
(b) Cold rolling mills
(c) Hot rolling mills and cold rolling mills, both.
Opinion July 11, 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 operated 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.”
3. The Committee is of the view that whether a particular rolling mill is a continuous process plant should be determined on the basis of the facts and technical evaluation that whether it is both ‘designed’ and ‘required’ to operate 24 hours a day. The Committee notes that the arguments advanced by the querist in paras 2 and 3 of the query, primarily emphasise the 'technical compulsion’ to operate certain mills 24 hours a day. The Committee is of the view that technical compulsion may be an indicator for ‘requirement’ to operate the plant 24 hours a day. However, apart from fulfilling the aforesaid condition, the plant should also be ‘designed’ to operate 24 hours a day. Whether a plant is ‘designed’ to operate 24 hours a day is also a question of fact of technical nature. The Committee wishes to point out that the expression ‘inherent technical nature’ does not only refer to the technological compulsion, but also to the design aspect of the plant.
4. On the basis of above, the Committee is of the opinion that whether a particular mill/plant is a continuous process plant is a technical question and should be determined keeping in view the individual facts and circumstance of each case on the basis of the inherent technical nature of plant. ___________________________
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