2007 Supreme(SC) 184

2007(2) Supreme 343
SUPREME COURT OF INDIA
(From the Judgment & Final Order of the Appellate Tribunal for Electricity, New Delhi)
Dr. Arijit Pasayat and S.H. Kapadia, JJ.
Delhi Electricity Regulatory Commission—Appellant
versus
BSES Yamuna Power Limited & Ors.—Respondents
Civil Appeal No. 2733 of 2006
Decided on 15-2-2007
Counsel for the Parties :
For the appearing Parties : Vikas Singh, A.S.G, S.K. Dholakia, Harish N. Salve, S. Ganesh, J.J. Bhat, Sr. Advocates, Suresh Chandra Tripathy, Amit Kapoor, Anupam Verma, Ms. Vibha Datta Makhija, V.P. Singh, Anuj Berry (for M/s. Suresh A. Shroff & Co.), S. Wasim A. Qadri, Amrita Narayan, R.C. Kathia and D.S. Mahra, Advocates.

IMPORTANT POINT
Delhi Electricity Reforms Commission was not justified in reducing the rate of depreciation from 6.69% to 3.75% as it was contrary to the Policy Directions as well as Ministry of Power Notifications.

Headnote:Electricity (Supply) Act, 1948—Schedule VI, Section 57, 57A—Delhi Electricity Reforms Act, 2000—Sections 12, 28—Tariff fixation—Delhi Electricity Reforms Commission (DERC) reducing rate of depreciation from 6.69% to 3.75%—Justifiability when higher rates being prescribed in Ministry of Power Notifications—On 23-1-1992 Ministery of Power issued a notification stating that a licence shall provide for depreciation in its Annual Statement of Accounts as per straight line method—On 29-3-94, in continuation of the above Notification, MOP amended the Schedule indicating absence of linkage between the fair life of an asset and rate of depreciation—In MOP Notifications higher rate of depreciation stood prescribed without nexus to the fair life style of assets—Government of National Capital Territory of Delhi (GoNCTD) decided to vest Delhi Vidhyut Board in six successor companies including three distribution companies (DISCOMs)—On 23-5-01, DERC issued its Retail Supply Tariff Order and Tariff Determination Principles—DERC computed depreciation expenditure for DVB in relation to distribution of assets at 6.83%—Weighted Average Depreciation Rate proposed at 6.83% stood reduced to 6.69% for the Financial Year 2001-2002—On 22-11-2001, GoNCTD issued policy directions for restructuring of the Electricity Industry and privatization of Distribution Companies—After privatization of Distribution Companies, Electricity Act, 2003 was brought into force which saved Delhi Electricity Reforms Act—Vide Tariff Order dated 26-6-03 DERC reduced rate of depreciation from 6.69% to 3.75%—Review petition filed to challenge this reduced rate was dismissed—Vide Tariff Order dated 9-6-04 DERC denied to North Delhi Power Ltd. the assured return on equity at 16% as well as depreciation expenditure at the rate of 6.69%—However, Appellate Tribunal allowed appeal of NDPL on question of depreciation—Tribunal held that DERC has not given any reasons for deviating from the principles mentioned in Schedule VI to 1948 Act—Whether order passed by the Appellate Tribunal is sustainable—(Yes) —Judgment is confined to the transition period only.

       Held : The object underlying the MOP Notifications which provided for higher rate of depreciation appears to be two-fold – firstly, to reduce the Asset Replacement Period (‘ARP’ for short) and secondly, to fund the rapid increase in the replacement cost. The MOP Notifications proceeded on the basis that the Utilities were making losses, expenses on replacement was heavy and that the assets needed replacement in the shorter ARP. It is for this reason that in the MOP Notifications higher rate of depreciation stood prescribed without nexus to the fair life of the asset(s). This Principle under the above MOP Notifications got reflected in the subsequent BST Order which also, inter alia, prescribed the principles for tariff determination for 5 years. The above principles also got reflected in the Policy Directions issued by GoNCTD under Section 12 of DERA. It is for this reason that in the RFQ document the timetable shows that the bidders were required to take note of the Tariff Structure before making bids. The investors were put to notice regarding the Tariff Structure which existed before privatization. We are living in the complex and ever-expanding exigencies of Government. In the matter of grant of benefit of depreciation, the extent of the benefit lies in the economic wisdom of the Government. That wisdom constituted the basis of the MOP Notifications which emphasized Asset Replacement Period to be reduced by prescribing higher rate of depreciation because the Government intended replacement to take place not after 25 years but at the end of 13 to 15 years. The order of DERC dated 26.6.03 runs counter to the above reasoning behind the MOP Notifications as reflected in the BST Order dated 22.2.02 and in the Policy Directions of GoNCTD dated 22.11.01.(Para 40)

       In the present case, DERC was required to consider the effect of its decision. Privatisation and disinvestment were the Policy decisions taken by GoNCTD. The Utilities were incurring losses. The assets of the Utilities were getting depleted. The public-private participation is the order of the day. Therefore, the Policy Directions invited bids from the private sector on the basis of certain assurances. Under the above circumstances, on the facts of the present case, Legitimate Expectation was built into the investments made by the DISCOMs herein. The representations were there in the Policy Directions, BST Order laying down Normative Principles for tariff fixation for 5 years and the Transfer Scheme. Drawing up of tariff for 5 years was to impart certainty. As stated above, the tariff for the financial year 2001-2002 was to be adjusted in the next 4 years, namely, financial years 2002-03, 2003-04, 2004-05 and 2005-06. It is for this reason that even the RFQ document indicated Tariff Principles in the case of NDPL for the financial years 2002-03 and 2005-06. Even the Tariff Order dated 23.5.01 was based on the higher rate of depreciation without taking into account the fair life of the asset. In short, a package was offered to the prospective investors. The effect of the order of DERC dated 26.6.03 is to extend the ARP by 10.55 (years), if one goes by the said MOP Notification then the ARP comes to 13.45 years (90% value of asset divided by 6.69%, rate of depreciation). On the other hand, if one goes by the same value divided by 3.75% rate of depreciation then the ARP comes to 24 years. Similarly, on account of the reduction in the rate of depreciation from 6.69% to 3.75%, the overall actual return from the package becomes illusory.(Para 41)

       The certainty for 5 years is also obliterated for reducing the rate of depreciation. This violation also infringes the doctrine of Legitimate Expectation of the DISCOMs to get lawful and reasonable recovery of expenditure. DERC was expected to fix the rate in the context of the policy of privatization. The object behind fixation of principles for 5 years was to impart certainty and consistency in tariff designing, putting the prospective investors to notice regarding their tariff entitlements for 5 years and to provide Level Playing Field to the DISCOMs to compete with other competitors in the Electricity Industry. As stated above, DERC had to give good reasons for departing from the principles in the Sixth Schedule to the said 1948 Act. In the present case, it has been held by DERC that since the DISCOMs herein were not obliged to redeem debt (as they had not undertaken any loans), they were not entitled to the higher rate of depreciation. This assumption of DERC is wrong. There is a difference between the concept of Depreciation and the concept of Advance Against Depreciation (AAD). In the case of AAD, loan repayment may be one of the relevant factors. In the present case, as stated above, we are concerned with the reduction of authorized expenditure from 6.69% to 3.75%. In the present case, we are concerned with the reduction in the rate of depreciation from 6.69% to 3.75%. Therefore, in the case of reduction of authorized expenditure (depreciation) repayment of loan is not the relevant factor. One more points needs to be clarified. Conceptually, it is always possible to derive the rate of depreciation from the fair life of an asset. However, as stated above, it will depend on the object for which a fund or a reserve is sought to be created.(Para 41)

       DERC was not entitled to derive the rate from the fair life of the asset, particularly, when the consequence was to reduce the ARP substantially. In conclusion, we reiterate that in the present case because of inflation, we have to go by the Cost of Replacement instead of Historical Cost. However, we state that our judgment is confined to the facts of the present case alone and the reasoning given hereinabove is in the context of the period of 5 years. This judgment should not be construed to apply for all times. It is confined to the transition period only. (Para 41)

       Before concluding, we may state that the basic object of providing depreciation is to allocate the amount of depreciation of an asset over its useful life and not actual life so as to exhibit a true and fair view of the financial statements of an enterprise. Useful life is a period over which a depreciable asset is expected to be used. Useful life of an asset in a capital intensive industry is generally shorter than its physical life. Useful life is pre-determined by contractual limits or by amount of extraction or consumption dependent on the extent of use and physical deterioration on account of wear and tear which depends on operational factors such as the number of shifts, repair and maintenance policy of the Utility and reduced by obsolescence arising from technological changes, improvement in production methods etc. In the present case, DERC has not considered the difference between the physical life of an asset and the useful life of the asset.(Para 42)