Case Law


In his Budget speech of February 28 2003 for the financial year 2003-2004, the finance minister announced proposals to amend provisions relating to direct and indirect taxes. These proposals are contained in the Finance Bill 2003. Key proposals concerning the power sector are outlined below.

Direct taxes
Presently, where foreign companies act as EPC (engineer, procure and construct) contractors for power projects that are financed under international aid programmes, 10% of the amount paid or payable to the contractor is deemed to be the contractor's profits and therefore taxable under Section 44BBB of the Income Tax Act 1961.

Section 44BBB is to be amended so that the contractor can claim lower profits or a loss if (i) it maintains accounts and other documents as required under Section 44AA, and (ii) its accounts are audited by a chartered accountant and the contractor submits the audit report to the assessing officer.

Indirect taxes
The bill proposes that customs duty on specific equipment for high-voltage transmission projects be reduced from 25% to 5%.

Power projects
Currently, 19 mega-power projects with a generating capacity in excess of 1,000 megawatts and which supply power to more than one state are entitled to:

  • exemptions from customs duty on imports of capital equipment;
  • 10-year tax breaks; and
  • exemptions from sales tax and local levies.

The bill proposes that these benefits be extended to all projects with a capacity of more than 1,000 megawatts and which supply power to more than one state.

The bill also proposes that Rs200 million be allocated to the Council for Scientific and Industrial Research, to be earmarked for research into solar energy, wind turbines and hydrogen fuel as viable alternatives to fossil fuels.

Case Law

The case of West Bengal Electricity Regulatory Commission v CESC Ltd ((2002) 8 SCC 715) concerned the Calcutta Electric Supply Corporation's tariff structure, which was fixed in 1998 at an average of 330 paise per kilowatt-hour (kWh). In November 2001 the West Bengal Electricity Regulatory Commission increased the tariffs to an average of 337 paise per kWh and called for the gradual abolition of cross-subsidies (whereby one consumer group pays more to enable another group to pay less).

The Calcutta High Court ruled in favour of the corporation and allowed a tariff of 396 paise per kWh. On appeal, the Supreme Court held that the average tariff should be 390 paise per kWh.

In the course of its judgment, the Supreme Court noted that although the High Court's power is co-extensive with that of the West Bengal Electricity Regulatory Commission, the fact that the latter is an expert body must be borne in mind. Accordingly, the matter was referred back to the commission.

On December 16 2002, on the basis of the court's interpretation, the commission fixed the average tariff at 390 paise per kWh and ruled that this tariff should be made uniformly applicable.

Consequently, consumers who paid less than this rate must pay two years' worth of arrears, while those who paid more will be entitled to a refund. The abolition of cross-subsidies, if implemented across the board, will have far-reaching effects throughout India, particularly in states such as Punjab, Haryana, Uttar Pradesh, Madhya Pradesh and Rajasthan, where agriculture is mostly mechanized. In addition, a corresponding increase in the country's retail power tariff is now expected.

For further information on this topic please contact Bahram N Vakil or Upendra Joshi at CZB & Partners by telephone (+91 22 5639 6880) or by fax (+91 22 5639 6888) or by email ([email protected] or [email protected]).