Query No. 25

Subject:

Depreciation of Water Treatment Plant and Sewage Treatment Plant.1

A. Facts of the Case

1. A public sector company is engaged in the operation of mining of ore and processing of the same to produce the final product. The company has constructed Water Treatment Plant (WTP) for treating raw water. The company has also constructed Sewage Treatment Plant (STP).

2. The querist has stated that following are the features of the WTP:

(a) Water received from various sources is stored in a reservoir called ‘Barrage’. The barrage water is treated in the plant. The water is treated with various chemicals like alum solution, bleaching powder, etc.

(b) Water treated in WTP is used both for industrial and domestic purposes.

(c) WTP consists of the following major items;

(i) Barrage

 

(ii) Construction of rapid sand filter.

 

(iii) Construction of reservoir.

 

(iv) Construction of overhead tanks.

 

(v) Pumps.

(d) The barrage which was constructed in the year 1963 and the remaining part of WTP, constructed in the year 1965, are still in use. In the year 1992-93, the capacity of the WTP was enhanced to cater to the increasing needs.

3. The querist has further mentioned the features of the STP, which are as follows:

(a) Raw sewage comes from residential complex through pipe by gravity to sewage pumping station.

 

(b) Raw sewage is pumped to grit chamber through inclined bar screen, to remove the undesired elements of sewage.

 

(c) From grit chamber, the sewage flows to Aeration chamber (four large separate compartments, made of R.C.C casting, fitted with Aerators in each).

 

(d) From Aeration chamber, water flows to clarifier. The overflow of the clarifier flows to tank where chlorination is being done before discharge to environment.

 

(e) STP consists of the following major items;

(i) Grit chamber made of iron rod

 

(ii) Aeration chamber with aerators.

 

(iii) Chlorination tanks made of M.S plate.

 

(iv) Sand filter bed (brick wall with sand bed)

 

(v) Pumps.

(f) The STP, which was constructed in the year 1965, is still in use. The capacity of the STP was enhanced in the year 1999-2000.

4. According to the querist, considering the nature of expenditure for WTP and STP (majority of civil construction) and useful life, the company is charging depreciation @3.34% i.e., as prescribed for ‘Factory Building’ in Schedule XIV to the Companies Act, 1956.

5. The Comptroller and Auditor General of India (C&AG), during the course of audit for the financial year 2003-04, commented as under:

"The company charged depreciation on the WTPs and STPs @3.34% applicable to ‘Factory Building’ that considering that the major portion of their expenditure relates to civil construction. But the fact remains that the nature of plant does not depend on the elements of expenditure. Since these plants carried out mechanical process using electrical energy, these should be treated as a composite plant and not as factory building."

B . Query

6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the depreciation rates of WTP and STP adopted by the company are correct.

(b) If not, what should be the depreciation rate?

C. Points considered by the Committee

7. The Committee notes that the basic issue raised in the query relates to the determination of the nature of ‘Water Treatment Plant’ and ‘Sewage Treatment Plant’ for their classification into ‘Factory Buildings’ or ‘Plant and Machinery’ for the purpose of charging depreciation thereon, as per Schedule XIV to the Companies Act, 1956. The Committee has, therefore, considered only this issue and has not touched upon any other issue arising from the facts of the case.

8. In this regard, the Committee notes that the terms ‘Factory Buildings’ and ‘Plant and machinery’ have not been defined in the Act and must, therefore, be construed in their ordinary commercial and industrial parlance. The Committee is of the view that to decide whether a structure is plant or not, functional test should be applied. The functional test requires to examine various aspects to determine whether it is an apparatus with which the activity or activities is/are carried on or it is the setting or part of the premises in which the activity or activities is/are carried on. On applying the functional test in the present case, the Committee is of the view that WTP and STP are basically used as apparatus to perform the activities of water treatment and sewage treatment rather than as a ‘premises’ for carrying on business. Accordingly, the Committee is of the view that WTP and STP should be treated as ‘Plant and machinery’ rather than ‘Factory buildings’.

9. For determining the rate of depreciation to be charged in respect of such ‘Plant and machinery’, the Committee notes that Schedule XIV to the Companies Act, 1956, does not prescribe any special rates for such plants. Therefore, general rates applicable to ‘Plant and machinery’ should be applied.

D. Opinion

10. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6 above:

(a) The depreciation rates of WTP and STP, based on the rates applicable to ‘Factory Building’, adopted by the company are not correct.

 

(b) The company should charge depreciation at the general rates applicable to ‘Plant and machinery’ under Schedule XIV to the Companies Act, 1956.

1 Opinion finalised by the Committee on 27.12.2004