Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.23 Query:

Treating telecom equipments and air conditioning

plant as a continuous process plant.

 

1. A public sector undertaking incorporated under the Companies Act, 1956, took over the reigns from erstwhile concerned Department under the Ministry of Communications, Government of India.

 

2.  The company is India’s nodal agency for overseas communications. It is the only overseas telecommunication service provider in the country. The main objective of the company is to plan, establish, develop, provide, operate and maintain all types of international telecommunication networks, systems and services.

 

3.  The main services provided by the company are telephone, telex, telegraph, leased channel, internet etc. For providing these services, links are established either through satellite circuits or through cable circuits. These satellites are not owned by the company and therefore are not reflected as plant and machinery in the company’s books of account. In order to connect the link with satellite, ground level plants are required which are owned by the company and accordingly capitalised. In respect of cables, the company is the owner and the same have been duly capitalised in its books.

 

4. The company’s plant and machinery basically consists of earth stations, switching and transmitting equipments, exchanges, microwave links, land cables and submarine cables. The working conditions under which these assets work differ from category to category.

 

5. As per the background and services provided by the company explained in paras 1-3 above, the company’s plant and machinery works continuously, 24 hours a day and 365 days a year. Accordingly, triple shift depreciation was being charged on plant and machinery since the incorporation of the company.

 

6.  The Ministry of Law, Justice and Company Affairs, Department of Company Affairs, issued a notification GSR No. 756 (E) on 16th December, 1993. As per this notification, the new concept of continuous process plant was introduced. The continuous process plant as clarified under note 7 to Schedule XIV means “ a plant which is required and designed to operate 24 hours a day”.

 

7.  According to the company, the plant is required to work 24 hours a day, to avoid loss of revenue. As all the equipments are required to function 24 hours a day, they are designed also to function 24 hours a day. In the event of shutting down the plant, which is an unforeseen event, there will not be any significant shutdown and startup costs. As the company is a service provider, there is no question of spoilage of material-in-process due to shutting down of the plant but there is definitely revenue loss.

 

8.  In view of the above, the plant and machinery installed since the financial year 1993-94 is being considered as continuous process plant and accordingly is depreciated @ 5.28% on straight line basis.

 

9.  The plant and machinery as explained above requires cooling effect for proper functioning. Therefore, the exchange/premises where these plant and machinery are installed are centrally airconditioned. Along with other plant, airconditioning plant also works round the clock. Accordingly, airconditioning plant used for the operation of plant and machinery is also being treated as continuous process plant and being depreciated accordingly.

 

10. Based on the above facts, the querist requests the Expert Advisory Committee to opine whether-

           

(i)         the company’s plant and machinery can be treated as a continuous process plant;

 

(ii)        the treatment of the air-conditioning plant as continuous process plant is correct or not.

 

                                                                    Opinion                                        October 17, 1997

 

1. The Committee notes paras 3 and 4 of the Guidance Note on ‘Some Important Issues Arising from Amendments to Schedule XIV to the Companies Act, 1956’, issued by the Institute of Chartered Accountants of India, which are reproduced below:

           

“3. The expression ‘Continuous Process Plant’ has been defined in the aforesaid notification as follows:

 

‘Continuous Process Plant’ means a plant which is required and designed to operate 24 hours a day.”

 

“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 it is 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 materials-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.”

 

2. The Committee notes from the above that in deciding whether a plant is a continuous process plant, the major consideration is that if such a plant is not run 24 hours a day, in view of its design and requirement, then there are significant shut-down and/or start-up costs and if such a plant is shut-down then there may be, inter alia, some damage to the plant itself/significant energy loss. The Committee notes from the facts of the query that in respect of the plant in question, in the event of its shutting down in an unforeseen event, there will not be any significant shut-down and start-up costs, nor would there be any spoilage of material-in-progress. Moreover, the company’s requirements to run the plant and machinery is based on the consideration of commercial necessity rather than due to the inherent technical nature of the plant and machinery itself. The Committee is, however, of the view that whether a plant and machinery is continuous process plant is largely a technical matter. Normally, in technical matter it is a practice to rely on the views of the relevant technical experts, who should take into account the various factors mentioned above in forming their opinion.

 

3. Regarding the treatment of air-conditioning plant as a continuous process plant by the company, the Committee notes that the said air-conditioning plant is required to run 24 hours a day for proper functioning of the company’s other plants. The querist has not stated whether the air-conditioning plant itself is technically required and designed to run 24 hours a day. The Committee is of the view that the latter will determine whether air-conditioning plant is a continuous process plant.

 

4. The Committee is of the opinion whether the plant and machinery and air-conditioning plant are continuous process plant should be decided on the basis of the factors discussed in paras 2 and 3 above.

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