Lawyers explain why India's power producers can't avail the lower tax rate

With an intent to revive the economy from the looming market slowdown by attracting investments and to simplify the taxation structure, the Government of India had reduced the corporate tax rates for companies by inserting Section 115BAA and 115BAB in the Income Tax Act, 1961 (the ‘Act’) vide The Taxation Laws (Amendment) Act, 2019.

The table below provides a glimpse of the reduced corporate tax rates:



While the reduced rate of tax under Section 115BAA is available to all domestic companies, the benefit under Section 115BAB is available only to those domestic companies that are set up and registered on or after October 01, 2019 and are not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to or distribution of, such article or thing manufactured or produced by it.

Thus, a company’s eligibility under Section 115BAB of the Act hinges interalia on the determination whether the business of a company amounts to manufacture or not.

Section 115BAB does not provide a specific definition of the term ‘manufacture’ or ‘production’ but provides a list of activities that would not be considered as ‘manufacture of goods or production of article’, viz software development, printing of books, etc.

Therefore, in the absence of a specific definition for the purpose of Section 115BAB, the meaning of the term ‘manufacture’ would be in terms of Section 2(29BA) of the Act wherein it is defined to mean a change in a non-living physical object or article or thing:

1. resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
2. bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

In this background, an interesting question that arose was whether the activity of generation and distribution of power would be covered within the phrase ‘business of manufacture or production of any article or thing’ for the purpose of Section 115BAB.

The courts have in countless occasions considered electricity to be in the nature of goods and generation of power to be in the nature of manufacture. The Delhi High Court in the case of Principal Commissioner of Income Tax, New Delhi Vs. NTPC Sail Power Co. (P.) Ltd held that electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption, and use like any other movable property and hence, is in the nature of goods, by placing reliance on the decision of the Honourable Supreme Court in the case of State of AP & Others Vs National Thermal Power Corporation Ltd & Others. Accordingly, the benefit of additional depreciation under Section 32(1)(iia) was allowed even though the provision (prior to 2013) only allowed such deduction to an assessee engaged in manufacture and production of article or thing.

Accordingly, the legislature chose to treat ‘generation of power’ as an activity distinct from ‘manufacture or processing of goods’ or ‘manufacture or production of article or thing’ in the following provisions of the Act:


When compared with the above provisions, a doubt could have arisen as to whether generation of power would qualify for the benefit of concessional tax rate under Section 115BAB.

Availment of lower tax rate under Section 115BAB is subject to adherence to or compliance with all the provisions or conditions as provided therein. In other words, failure to satisfy any of the conditions as prescribed under Section 115BAB would result in invalidation of the option exercised under Section 115BAB, not only for the relevant assessment year but for every assessment year thereafter. In other words, the assessee would be then assessed under the normal provisions of the Act.

Thus, a power generation company would have faced the risk of long drawn litigation if it had availed benefit under the existing Section 115BAB. With a view to provide clarity and certaintyand to eliminate any such risk, various representations were madeby thestakeholders requesting extension of the benefit of concessional rate under Section 115BAB of the Act to the business of generation of electricity as well by express provision.

Acceding to such requests, an explanation is proposed to be inserted to Section 115BAB vide the Finance Bill, 2020 which provides that the ‘business of manufacture or production of any article or thing’ shall include the business of generation of electricity.It is noteworthy thatunlike the above listed provisions under the Act, generation or distribution of electricity has not been added as a separate category foran assessee to be eligible for reduced rate of tax under Section 115BAB. It has been clarified by way of an explanation that for the purposes of this section alone,business of generation of electricity would be included within the ambit of business of manufacture or production.

The scope of the term “manufacture” and “production” has been a subject matter of litigation for decades now, not only under Income Tax law but also under Central Excise. There are many activities in respect of which conflicting rulings have been rendered by the higher judiciary. Explanation to Section 115BAB(2)(b)provides a list of few such activities that are excluded from the scope of business of manufacture or production of any article or thing, such as bottling of gas into cylinder, conversion of marble blocks into slabs.

While the tax practitioners may continue to debate the need for the proposed amendment in the backdrop of existing judicial precedents, businesses intending to make huge capital investments in the power sector will definitely welcomethe express inclusion of generation of electricity in the realm of Section 115BAB. This is a good example of how to bring in certainty in tax laws and increase the ease of doing business in India.

S Vasudevan, Partner & Parvathy R Kartha, Senior Associate, Lakshmikumaran & Sridharan Attorneys

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