HC strucks down GST Circular proposing tax on DISCOM on bundled services

High Court struck down GST Circular proposing levy of GST on DISCOM for various other bundled services connected with the transmission and distribution of electricity.

ABCAUS Case Law Citation:
ABCAUS 2733 (2019) (01) HC

The petitioner was public limited company (the petitioner company) and was engaged in the business of generation, transmission and distribution of electricity in the State of Gujarat and was duly registered under the Goods and Service Tax Acts.

The petitioner company had distribution licence in the several cities cities of Gujarat and the SEZ. It also had a distribution franchisee for cities in the State of Maharashtra and Uttar Pradesh.

It is the case of the petitioners that prior to the introduction of the negative list regime for service tax under the Finance Act, 1994, the petitioners as well as other transmission/distribution companies believed that since there is no specific clause in the charging provision of the Finance Act requiring payment of service tax, no service tax was required to be paid in respect of any amount collected from consumers relating to transmission and distribution of electricity.

The Government of India issued Notification No. 11/2010-Service Tax on 27.2.2010, exempting taxable service provided to any person by any other person for transmission of electricity. Another Notification No. 32/2010-Service Tax was issued on 22.6.2010, exempting taxable service provided to any person by a distribution licensee/franchisee for distribution of electricity.

In the meantime, the petitioners as well as other distribution/transmission companies received show cause notices proposing to impose tax under the Finance Act on various charges collected by such companies, in respect of the activities relating to transmission and distribution of electricity for the periods prior to the issuance of the exemption notifications dated 27.2.2010 and 22.6.2010.

Representations was made to the Government for intervention since the entire sector of transmission/distribution companies bona fide believed that no taxes are required to be paid under the Finance Act on activities relating to transmission and distribution of electricity. Pursuant thereto, the Government of India issued trade notice on 20.7.2010 under section 11C of the Central Excise Act, 1944 read with section 83 of the Finance Act, whereby it was provided that service tax payable on the taxable services relating to transmission and distribution of electricity, which was not being levied in accordance with the general trade practice, shall not be required to be paid for the period prior to issuance of exemption notifications dated 27.2.2010/22.6.2010.

The question arose as to whether the exemption for transmission and distribution of electricity would also include directly connected activities such as renting of meters. The Government of India issued circular dated 7.12.2010, wherein it was clarified that supply of electricity meters for hire to the consumers was an essential activity having direct and close nexus with the transmission and distribution of electricity and was, therefore, covered by the exemption for transmission and distribution of electricity.

On the basis of trade notice dated 20.7.2010, and the circular dated 7.12.2010, a show cause notice was issued to the petitioners proposing to impose service tax on different kinds of charges collected in connection with transmission and distribution of electricity, which came to be dropped by the adjudicating authority by observing that all such charges were in connection with transmission and distribution of electricity and therefore not taxable.

It was the case of the petitioners that service by way of transmission or distribution of electricity continued to be kept out of the tax net even post 1.7.2012, and, the petitioners, therefore, neither collected nor paid any tax under the Finance Act on charges collected in connection with transmission of electricity even post 1.7.2012.

With effect from 1.7.2017, the GST regime was introduced. Chapter-V of the Finance Act, which relates to levy of service tax was subsumed under the GST regime. The GST Act provided for levy of tax on goods and services. Section 11 of the Central Goods and Services Tax Act, 2017 ( “CGST Act”) as well as the State Goods and Services Tax Acts ( “SGST Acts”) conferred power on the Government to grant exemption.

In exercise of such powers, the Central Government has issued Notification No. 12/2017 dated 28.6.2017 providing for list of exempted services. Identical notifications have been issued under the State Goods and Services Tax Act by the respective State Governments. By virtue of Entry 25 of Notification No. 12/2017, transmission or distribution of electricity by an electricity transmission or distribution utility is taxed at nil rate.

It was the case of the petitioners that as such the legal position as prevailing under the Finance Act was continued even under the Goods and Services Tax Acts and tax leviable on service of transmission or distribution of electricity by an electricity transmission or distribution utility was exempted from tax under the GST Acts. The petitioners, therefore neither collected nor paid tax under the GST Acts with effect from 1.7.2017 on the charges collected for activities directly connected with transmission and distribution of electricity in accordance with the provisions of the Electricity Act and the GERC Regulations.

Thereafter, the Government of India issued the impugned circular dated 1.3.2018, clarifying that the service by way of transmission or distribution by an electricity transmission or distribution utility is exempt from GST under Notification No. 12/2017-CT(R), Sl. No. 25. The other services such as (i) application fee for releasing connection of electricity, (ii) rental charges against metering equipment; (iii) testing fees for meters/transformers, capacitors, etc.; (iv) labour charges from customers for shifting of meters or shifting of service lines; and (v) charges for duplicate bill; provided by the DISCOMS to consumers are taxable.

Thus, the new clarification sought to make distinction between the charges collected for consumption of electricity and other charges collected towards activities connected with the transmission and distribution of electricity.

It was case of the petitioners that by the impugned circulars, activities directly and closely connected with the transmission and distribution of electricity, have been declared to be taxable.

Subsequently, the Directorate General of Goods and Service Tax Intelligence issued summons to the petitioners requiring them to submit details relating to charges as mentioned in the impugned circular right from the year 2012-13. Tax was proposed to be levied under the Finance Act as well as under the GST Acts on such charges.

The conclusions drawn by the Hon’ble High Court were as under:

(a) As per the circular dated 7th December, 2010, the reason for saying that supply of electricity meters for hire to consumers is covered by the exemption notification is that such service is an essential activity having direct and close nexus with transmission and distribution of electricity. This circular only provides an interpretation of when a service would stand included in another service, namely, when such service is an essential activity having direct and close nexus with the exempted activity. Therefore, the fact that the exemption notifications came to be rescinded has no relevance inasmuch as all that the circular clarifies is what according to the Government of India would stand included in another service. Such interpretation would not change merely because such exemption is now granted under some other provision.

(b) The meaning of “transmission and distribution of electricity” does not change either for the negative list regime or the GST regime. Accordingly, the services which stood included within the ambit of transmission and distribution of electricity during the pre-negative list regime cannot now be sought be excluded by merely issuing a clarificatory circular, that too, with retrospective effect. By the clarificatory circular, the respondents seek to give a different interpretation of the very same services as against the clarification issued for the pre-negative list regime.

(c) From the very manner in which the respondents have treated the services related to transmission and distribution of electricity during the pre-negative list regime, the related/ancillary services would stand covered by the exemption granted to transmission and distribution of electricity by virtue of inclusion of such services in the list of negative services under section 66D (k) of the Finance Act as well as by virtue of exemption notification issued under the CGST Act.

(d) Any line which is used for carrying electricity for any purpose as well as any apparatus connected to any such line for the purpose of carrying electricity is mandatorily required to be provided to the consumer by the licensee. The term “electrical plant” takes within its sweep any plant, equipment, apparatus or appliance or any part thereof used for, or connected with, the generation, transmission, distribution or supply of electricity, except for electric meter and any electrical equipment, apparat-us or appliance under the control of a consumer. Sub-section (2) of section 43 of the Electricity Act casts a duty upon the licensee to provide, if required, electric plant or electric line for giving electric supply to the premises. Therefore, providing electric line and electric plant are elements of service which are naturally bundled in the ordinary course of business, with the single service of transmission and distribution of electricity which gives the bundle its essential character. The only related service which does not fall within the ambit of the definitions of electric line and electric plant is the meter used for ascertaining the quantity of electricity supplied to any premises. However, insofar as installation of electricity meter and hire charges collected in respect of electricity meters are concerned, by the circular dated 7th December, 2010 the Government of India has clarified that supply of electricity meters for hire to the consumers is an essential activity having direct and close nexus with transmission and distribution of electricity, and, therefore, is covered by the exemption for transmission and distribution of electricity extended under the relevant notifications. Therefore, all the services related to transmission and distribution of electricity are naturally bundled in the ordinary course of business of the petitioner and are required to be treated as provision of the single service of transmission and distribution of electricity which gives the bundle its essential character.

(e) The term “taxability” means liability to taxation. Thus, the term taxability would take within its sweep not being taxable also inasmuch as liability to taxation would also mean not being liable to any tax. Thus, the liability to tax of a bundled service has to be determined in the manner provided under sub-section (3) of section 66F of the Finance Act. If the services are naturally bundled in the ordinary course of business, the bundle of services shall be treated as provision of the single service which gives the bundle its essential character and where the services are not naturally bundled in the ordinary course of business, the same is required to be treated as provision of the single service which results in highest liability of service tax. Accordingly, where the services are naturally bundled in the ordinary course of business and the single service which gives such bundle its essential character is exempt from tax, the entire bundle will have to be treated as provision of such single service.

(f) In respect of the period falling under the negative list regime, the services in question would fall within the ambit of bundled services as contemplated under sub-section (3) of section 66F of the Act, and would have to be treated in the same manner as the service which gives the bundle its essential character, namely, transmission and distribution of electricity and, would therefore, be exempt from payment of service tax.

(g) The services provided by the petitioner are in the nature of composite supply and therefore, in view of the provisions of clause (a) of section 8 of the CGST Act, the tax liability thereof has to be determined by treating such composite same as a supply of the principal supply of transmission and distribution of electricity. Consequently, if the principal supply of transmission and distribution of electricity is exempt from levy of service tax, the tax liability of the related services shall be determined accordingly.

In view of the above findings, the Hon’ble High Court struck down Paragraph 4 (1) of the impugned circular No.34/8/2018-GST dated 1.3.2018 as to the extent the same reads as under as being ultra vires the provisions of section 8 of the Central Goods and Services Tax Act, 2017 as well as Notification No.12/2017- CT (R ) serial No.25:  

4. (1) Whether the activities carried out by DISCOMS against recovery of charges from consumers under the State Electricity Act are exempt from the GST (1) Service by way of transmission or distribution of electricity by an electricity transmission or distribution utility is exempt from GST under notification No.12/2017-CT (R ), Sl. No.25. The other services such as,-

i. Application fee for releasing connection of electricity;

ii. Rental Charges against metering equipment;

iii. Testing fee for meters/ transformers, capacitors etc.;

iv. Labour charges from customers for shifting meters or shifting of service lines;

v. charges for duplicate bill; provided by DISCOMS to consumer are taxable.

The impugned summon was also set aside to the extent the petitioners were called upon to produce the documents except clause related to income from shifting of HT lines received from MEGA.

Download Full Judgment Click Here >>

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