No Service Tax on works contract & manpower services integrally linked to electricity transmission

Tamil Nadu Transmission Corporation Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

The case before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, concerns an appeal challenging an Order-in-Original dated 18.11.2016, which confirmed service tax demand, interest, and penalties against the appellant for the period 01.07.2012 to 31.03.2014. The demand arose under the reverse charge mechanism in respect of services such as works contract, manpower supply, and rent-a-cab services received by the appellant.

The appellant, a government-owned entity functioning as a State Transmission Utility under the Electricity Act, 2003, is engaged exclusively in the transmission of electricity. Intelligence gathered by the department indicated that the appellant had received services relating to erection, commissioning, installation, and dismantling of transmission infrastructure, along with manpower and transport services. It was alleged that service tax was not paid on these services as required under Section 68(2) of the Finance Act, 1994 read with Notification No. 30/2012-ST. Following investigation, a show cause notice dated 17.07.2015 was issued proposing recovery of tax, interest, and penalties.

The appellant argued that all the services in question were integrally connected with transmission and distribution of electricity, which is placed in the negative list under Section 66D(k) of the Finance Act, 1994, and therefore exempt from service tax. It relied on judicial precedents and exemption notifications asserting that services “for” or “relating to” transmission and distribution of electricity should be interpreted broadly. It was also contended that the demand was time-barred and that there was no suppression or intent to evade tax.

The department, on the other hand, argued that while transmission of electricity itself is exempt, services used to provide such transmission are not automatically exempt unless specifically covered. It maintained that works contract, manpower supply, and rent-a-cab services fall within taxable categories and are liable under reverse charge. It also contended that extended limitation was applicable due to non-registration and non-payment.

The Tribunal examined the scope of Section 66D(k), which excludes transmission or distribution of electricity by a utility from service tax. It observed that such activity cannot occur in isolation and necessarily involves various direct and ancillary services. Referring to statutory definitions under the Electricity Act, 2003 and judicial precedents, the Tribunal held that the expression “transmission or distribution of electricity” has wide amplitude and includes activities integrally connected to such function.

Applying this interpretation, the Tribunal found that works contract services relating to erection, commissioning, and construction of transmission infrastructure are indispensable for transmission of electricity and are therefore covered by the exemption. Similarly, manpower services used for handling materials, safeguarding assets, and supporting operations were held to have a direct and proximate nexus with transmission and distribution and were also exempt.

However, the Tribunal distinguished rent-a-cab services, holding that hiring motor vehicles for official use does not have a direct and proximate nexus with transmission or distribution of electricity. Accordingly, such services were not eligible for exemption.

On the issue of limitation, the Tribunal observed that the matter involved interpretational issues and there was no evidence of suppression, fraud, or willful misstatement. Relying on Supreme Court judgments, it held that extended limitation could not be invoked. As a result, even the demand relating to rent-a-cab services was held to be time-barred.

In conclusion, the Tribunal set aside the impugned order, holding that the demand for works contract and manpower services was not sustainable on merits, and the demand for rent-a-cab services was barred by limitation. The appellant was granted consequential relief, and the appeal was allowed.

FULL TEXT OF THE CESTAT CHENNAI ORDER

This appeal challenges Order-in-Original (OIO) No. CBE/ST/2016-Commr. dated 18.11.2016 (impugned order), passed by the Commissioner of Central Excise, Customs and Service Tax, Coimbatore.

2. Brief facts are that intelligence received by the department indicated that the appellant had received services relating to erection, commissioning, installation and dismantling of transmission towers, lines and substations, as well as construction and allied works at substations, through contractors registered with TNEB (Works Contract Service). The appellant had also hired motor vehicles for official use (Rent-a-Cab Service) and engaged labour on a man-day basis for handling movement of men and materials and for safeguarding offices, stores and vehicles (Supply of Manpower Service). These activities were attracting service tax under the reverse charge mechanism with effect from 01.07.2012 in terms of section 68(2) of the Finance Act, 1994 read with Notification No. 30/2012-ST dated 20.06.2012. As service tax was not paid, a letter dated 24.06.2013 was issued seeking details, followed by a summons dated 10.12.2013. In response, the appellant’s authorised officer appeared on 03.01.2014 and admitted non-registration and non-payment of service tax. Consequently, a show cause notice (SCN), dated 17.07.2015 was issued proposing recovery of duty with interest and penalties under sections 76, 77 and 78. The Adjudicating Authority confirmed the demand with interest, appropriated the tax paid, and imposed penalties, leading to the present appeal.

3. Ld. Advocate Shri V. Ravindran appeared for the appellant and Ld. Authorized Representative Shri Sanjay Kakkar appeared for the respondent.

3.1 Shri V. Ravindran Ld. Counsel for the appellant, submitted a Table giving a snap shot of the dispute, which is reproduced below:

TABLE

He submitted that:

A. The appellant is a 100% Government of Tamil Nadu–owned PSU, constituted under Section 131 of the Electricity Act, 2003, functioning as a State Transmission Utility exclusively engaged in transmission of electricity.

B. Taxes on consumption or sale of electricity fall under Entry 53 of List II of the Seventh Schedule to the Constitution, within the exclusive legislative domain of States under Article 246(2). Consistent with this constitutional position, services relating to transmission and distribution of electricity were exempt from service tax prior to 01.07.2012 under Notifications 11/2010-ST and 32/2010-ST, with retrospective protection granted by Notification 45/2010-ST.

C. With effect from 01.07.2012, transmission and distribution of electricity by an electricity utility were placed in the Negative List under Section 66D, which was declaratory in nature, reaffirming the constitutional non-taxability of such activities.

D. The present appeal concerns the sustainability of service tax demands on Works Contract, Manpower Supply and Rent-a-Cab services received during 01.07.2012 to 31.03.2014, and the legality of appropriation of tax already paid.

E. The Show Cause Notice dated 17.07.2015 alleged non-registration, non-payment of service tax under reverse charge, and non-filing of returns. Although the appellant subsequently registered and discharged the entire tax liability in 2014, the impugned order confirmed the demand with interest and imposed penalties under Sections 77 and 78, while dropping penalty under Section 76.

F. The appellant challenges the impugned order on merits and limitation, relying on settled judicial precedent and exemption notifications which consistently hold that all services “for” or “relating to” transmission and distribution of electricity are exempt, including during the Negative List and GST regimes. The expressions “for” and “relating to” have been accorded wide amplitude by courts and tribunals.

G. All disputed services were essential, integrally connected, and exclusively used for transmission of electricity, and therefore squarely covered by the exemptions and Section 66D. He relied on the following judgments in support of his averments:

H. Further, the Show Cause Notice issued on 17.07.2015 covers a period partly beyond the normal limitation of 30 months. The invocation of extended limitation is unsustainable, as the issue is interpretational, the appellant is a government entity, and there was no suppression or mala fide intent.

I. Accordingly, the demand, interest and penalties are unsustainable, and the appellant prays that the appeal be allowed with consequential relief, including refund of service tax paid and appropriated.

3.2 Shri Sanjay Kakkar the Ld. Authorized Representative, who appeared for revenue, reiterated the points given in the findings of the impugned order. He stated that:

A. TANTRANSCO does not sell electricity but merely transmits it on behalf of TANGEDCO, as reflected in its accounts showing income from transmission charges. While transmission for consideration constitutes a service under Section 65B(44), such services are expressly exempt under Section 66D(k), and no tax is proposed on transmission charges.

B. Under Section 66F(1) of the Finance Act, 1994, a reference to a main service does not include services used to provide that main service, unless expressly stated otherwise.

C. The present notice concerns works contract services received by TANTRANSCO for construction, erection, and commissioning activities, which the noticee does not dispute fall within Section 65B(54). The service portion of a works contract is a declared service under Sections 65B(22) and 66E(h) and is taxable under Section 66B. The service recipient, TANTRANSCO, is liable to pay 50% of the service tax under the reverse charge mechanism, by virtue of Notification No. 30/2012-ST read with Section 68(2).

D. Reliance on the erstwhile circular issued under Section 65(25b) is misplaced, as that provision ceased to apply from 01.07.2012 and, in any event, did not exempt construction of substations, transmission lines, or related infrastructure.

E. The same reasoning applies to manpower supply and rent-a-cab services, which are also taxable under the reverse charge mechanism.

Accordingly, the service tax demands proposed against TANTRANSCO as the service recipient are sustainable.

F. The Ld. A. R. referred to the judgment of CESTAT Mumbai in MSC Agency (India) Pvt Ltd Vs Commissioner of Central Excise, Thane II [2014 (6) TMI 592 – CESTAT Mumbai], to state that bonafide belief is not blind belief and that no evidence has been led to show that the appellant took all reasonable precautions, hence the SCN invoking the extended period was valid. He further stated that the judgments cited by the appellant, mostly relate to the pre-negative list period and are not relevant in deciding the case.

The Ld. A. R. prayed that the appeal may be rejected.

4. Heard the parties and perused the appeals and connected documents.

5. The dispute relates to the period from 01.07.2012 to 31.03.2014, after the introduction of the Negative List, as set out in Section 66D of the Finance Act, 1994. The relevant potions of the concerned sections are reproduced below:

SECTION 66B. Charge of service tax on and after Finance Act, 2012.— There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

***** ***** *****

SECTION 66D. Negative list of services.—

The negative list shall comprise of the following services, namely :—

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“(k) transmission or distribution of electricity by an electricity transmission or distribution utility:”

(emphasis added)

Hence Section 66D(k) of the Act excludes “transmission or distribution of electricity by an electricity transmission or distribution utility”, from service tax. The issue is whether the Works Contract, Manpower Recruitment, and Rent-a-Cab services received by the appellant were used for transmission or distribution of electricity and are therefore non-taxable, or whether, in terms of Section 66F(1) of the Finance Act, 1994, they remain taxable as services used to provide the main service.

5.1 There is no dispute that the exclusion of transmission or distribution of electricity by an electricity transmission or distribution utility, by inclusion in the Negative List, is an entity specific exemption for a specific activity which is a general public utility and that the appellant is eligible for the same.

5.2 The dispute stems from the fact that while Section 66D(k) excludes transmission or distribution of electricity by a utility, it does not expressly extend the exclusion to direct or ancillary services. However, transmission or distribution of electricity cannot be done in a vacuum and require the involvement of a transmission or distribution system supported by direct or ancillary services in successfully undertaking the said service. The principle that tax relief provisions for public utility services should be broadly or liberally construed to advance the legislative intent of public benefit is well-established in Indian tax jurisprudence.

5.3 The scope of the expression “transmission or distribution of electricity” may be understood with reference to the Electricity Act, 2003.

a. As per section 2(74) of the said Act, 2003, ‘transmission’ has been defined to include conveyance of electricity by means of transmission lines.

b. As per section 2(72) of the said Act, “transmission lines” means all high pressure cables and overhead lines (not being an essential part of the distribution system of a licensee) transmitting electricity from a generating station to another generating station or a sub-station, together with any step-up and step-down transformers, switch-gear and other works necessary to and used for the control of such cables or overhead lines, and such buildings or part thereof as may be required to accommodate such transformers, switch-gear and other works.

c. As per section 2(19) “distribution system” means the system of wires and associated facilities between the delivery points on the transmission lines or the generating station connection and the point of connection to the installation of the consumers;

d. As per section 2(77), “works” includes electric line, and any building, plant, machinery, apparatus and any other thing of whatever description required to transmit, distribute or supply electricity to the public and to carry into effect the objects of a licence or sanction granted under this Act or any other law for the time being in force.

e. As per Rule 4 of the Electricity Rules 2005 – “Distribution System – “The distribution system of a distribution licensee in terms of sub-section (19) of Section 2 of the Act shall also include electric line, sub-station and electrical plant that are primarily maintained for the purpose of distributing electricity in the area of supply of such distribution licensee notwithstanding that such line, sub-station or electrical plant are high pressure cables or overhead lines or associated with such high pressure cables or overhead lines; or used incidentally for the purposes of transmitting electricity for others.”

The expression is therefore of wide amplitude and would include all direct and ancillary services connected with transmission and distribution of electricity.

6. The taxability of services connected with transmission or distribution of electricity under the Negative List of the Finance Act 1994 and CGST Act was examined by the Hon’ble Gujarat High Court in Torrent Power Ltd. Vs UoI [2019 (1) TMI 1092]. While considering the challenge to the Board’s Circular dated 01.03.2018, the Court held that charges such as application fees, meter rent, and testing fees, being directly and closely connected with transmission or distribution of electricity, are exempt under Entry 25 of Notification No. 12/2017 dated 28.06.2017, and observed as follows:

“12. The first question that arises for consideration is whether services relating to transmission and distribution of electricity fall within the ambit of clause (k) of section 66D of the Finance Act and, are therefore, exempt. In this regard, it may be noted that prior to the coming into force of the negative list regime, goods and services were exempted by virtue of notifications issued in exercise of powers under sub-section (1) of section 93 of the Finance Act. By virtue of Notification No. 11/2010 dated 27.2.2010, the Central Government exempted transmission of electricity from the whole of service tax leviable thereon under section 66 of the Finance Act; and by virtue of Notification No.32/2010-Service Tax dated 22.6.2010, distribution of electricity came to be exempted from the whole of service tax leviable thereon under section 66 of the Finance Act. Thus, what was exempt under those provisions was transmission and distribution of electricity, despite which, during the pre-negative list regime, the respondents have considered services related to transmission and distribution of electricity as exempted from service tax by virtue of those notifications. Insofar as electricity meters are concerned, vide circular No.131/13/2010-ST dated 7.12.2010, it was clarified that supply of electricity meters for hire to consumers being an essential activity, having direct and close nexus with transmission and distribution of electricity, the same is covered by the exemption for transmission and distribution of electricity extended under relevant notifications.

13. Thus, 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 would have no bearing inasmuch as the circular only clarifies 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.

14. It may be noted that insofar as the exemptions prior to the negative list regime as well as post the negative list regime are concerned, it is the transmission and distribution of electricity that has been exempted by virtue of notifications. During the negative list regime, transmission and distribution of electricity has been placed in the negative list. Therefore, in all the three phases, what was exempted was “transmission and distribution of electricity”. However, while for the pre-negative list phase, the respondents considered the services related to transmission and distribution of electricity as exempt under the exemption notifications, for the negative list regime and the GST regime, they seek to exclude such services from the ambit of transmission and distribution of electricity. From the affidavits-in-reply filed on behalf of the respondents, there is nothing to show as to how the very services, which stood included within the ambit of transmission and distribution of electricity now stand excluded. The sole refrain of the respondents is that in view of the fact that the exemption notification stands rescinded, the clarification also stands rescinded. What is lost sight of is that the clarification was only in respect of electric meters, whereas all related services were included within the ambit of transmission and distribution of electricity and given the benefit of the exemption notifications. Moreover, the clarificatory circular merely clarifies the stand of the Government as regards what would stand included within the meaning of “transmission and distribution services” namely, essential activities having direct and close nexus with the transmission and distribution of electricity. The respondents having themselves considered the services in question as being covered by the exemption for transmission and distribution of electricity as such services were essential activities having a direct and close nexus cannot be now permitted to take a U-turn and seek to exclude such services without pointing out any specific change in the nature of the exemptions, except that they are provided under different statutory provisions. In the opinion of this court, the meaning of “transmission and distribution of electricity” does not change either for the negative list regime or the GST regime. If that be so, 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.

15. Thus, 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, such 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.

16. Examining the issue from the alternative argument advanced on behalf of the petitioners, if related services are per se not covered within the ambit of transmission and distribution of electricity, the question that next arises for consideration is whether such services would fall within the ambit of bundled services as contemplated under section 66F (3) of the Finance Act and within the ambit of “composite service” as defined under section 2 (30) of the CGST/SGST Acts, and, therefore, liable to be taxed at the rate of the principal supply. Another question is whether section 66F (3) of the Finance Act would cover cases where the single service which gives such bundle its essential character is placed in the negative list and section 8 of CGST/SGST Acts would cover the cases of composite supply where exemption from service tax has been granted in respect of the principal supply.

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24. It has been contended on behalf of the respondents that sub-section (3) of section 66F of the Finance Act would not apply where the single service which gives the bundle of services its essential character is exempt from the levy of service tax. In the opinion of this court, there is nothing in the language employed in sub-section (3) to section 66F to read into it a requirement that such service should not be exempt from tax. All that the sub-section provides is that taxability of bundled services shall be determined in the manner provided therein. 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.

25. Thus, insofar as the phase relating to the negative list regime is concerned, the services in question would fall within the ambit of bundled services as contemplated under subsection (3) of section 66F of the Finance 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.”

(emphasis added)

7. The Hon’ble Rajasthan High Court in Jodhpur Vidyut Vitran Nigam Ltd Vs UoI [2021 (2) TMI 557], while examining the taxability of services under CGST, such as application fees, meter rentals, testing charges, labour charges for shifting meters/service lines, and charges for duplicate bills, as clarified by the Board vide Circular dated 01.03.2018, expressly concurred with the view of the Hon’ble Gujarat High Court in Torrent Power Ltd. (supra).

8. The issue examined by the High Courts was whether services relating to transmission and distribution of electricity are covered under section 66D(k) of the Finance Act and hence exempt. It was held that during the pre-negative list regime, such services were consistently exempted by notification. Circular No. 131/13/2010-ST dated 7.12.2010 clarified that supply of electricity meters on hire, being an essential activity having a direct and proximate nexus with transmission and distribution, is covered by the exemption. Mere rescinding of exemption notifications does not alter this position, as the circular only clarifies the scope of the exempt service. The revenue, having earlier accepted such services as exempt, cannot subsequently take a contrary stand in the absence of any material change in law. The High Court has held that the meaning of “transmission and distribution of electricity” remains unchanged under the negative list as well as GST regime. Accordingly, the said services are exempt under section 66D(k). Even otherwise, being naturally bundled with the principal exempt service, they are liable to be treated as bundled/composite services and enjoy the same exemption.

9. The judgments dealt with an entity-specific exemption from forward charge of duty for a specified activity, provided by electricity transmission or distribution utilities to consumers. However, the present dispute stands on a slightly different footing as it concerns tax demanded under partial reverse charge basis, for services received by the appellant albeit for transmission or distribution of electricity. However, though not averred to by the appellant, the issue can be looked at from another angle in the case of an entity-based exemption. If an entity qualifies for an exemption from forward charge for the specified activity of transmission and distribution of electricity, the same exemption should also apply to that entity under partial reverse charge for the said activity.

10. Hence as held by the two High Court judgments above, [Torrent Power Ltd / Jodhpur Vidyut Vitran Nigam], the expression “transmission and distribution of electricity” encompasses not only the core activity but also all direct and ancillary services having a proximate and integral nexus, without which transmission or distribution would not be possible or commercially impracticable. To determine whether (i) works contract, (ii) manpower recruitment, and (iii) rent-a-cab services involve such a relationship and are thereby exempt, it may be appropriate to employ what is called as “the dependence test” to see whether the impugned services are integrally connected with the entire process of transmission or distribution of electricity without which such service would be impossible or commercially inexpedient. A similar view was adopted by a Coordinate Bench of this Tribunal in Tangedco Vs CC, CGST & CE, Chennai [2024(18) Centax 145 (Tri. Mad)].

11. The appellant’s in their written submissions have submitted the Table given below stating whether the three activities are related to the transmission and distribution of electricity.

12. As discussed above, the issue being examined pertains to an entity-specific exemption for a specified activity, for which tax is demanded under partial reverse charge basis. ‘Works contract services’ relating to erection, commissioning, installation and dismantling of transmission towers, lines and substations, as well as construction and allied works at substations, are indispensable for transmission and distribution of electricity. Likewise, ‘manpower services’ for handling movement of men and materials and for safeguarding offices, stores and vehicles are integrally connected with such activity. However, hiring of motor vehicles for official use (rent-a-cab service) does not have a direct and proximate nexus with transmission or distribution of electricity and is therefore not eligible for exemption under reverse charge. Hence the said service would not be exempted from the payment of tax on partial reverse charge basis. However as per our findings above we find that the issue involves complex legal issues and does not disclose any deliberate attempt on the part of the appellant to evade duty. In fact, duty involved on the said service found dutiable is less than Rs two lakhs. The Supreme Court in Easland Combines, Coimbatore Vs Collector of Central Excise, Coimbatore [(2003) 3 SCC 410 = 2003 (152) E.L.T. 39 (S.C.)), clarified that mere non-payment of duty or failure to obtain registration, absent of fraud, suppression, or willful misstatement, is insufficient to attract the extended limitation period. This principle was reaffirmed in Uniworth Textiles Ltd. Vs Commissioner of Central Excise, Raipur [2013 (288) E.L.T. 161 (S.C.)] wherein the Apex Court citing Easland Combines (supra), held that the Act contemplates a positive action which betrays a negative intention of willful default. Hence while the demand warrants to be dropped on merits in the case of ‘works contract service’ and ‘manpower service’, the SCN is time barred in the case of ‘rent-a-cab service’.

13. We accordingly set aside the impugned order. The appellant is eligible for consequential relief. The appeal is disposed of accordingly.

(Order pronounced in open court on 24.03.2026)