In re Southern Power Distribution Company of AP Ltd. (GST AAR Andhra Pradesh)
(a) Whether the supply of services such as connection, re-connection, supervision of the works, erection of poles, sub-stations, transmission lines etc., and supply of meters etc., to the consumers for the purpose and during the course of supply of electricity to them are naturally bundled and thus form part of the composite supply of principal activity of supply of electrical energy?
(b) Whether the supply of services such as connection, re-connection, supervision of the works, erection of poles, sub-stations, transmission lines etc., and supply of meters etc., to the consumers for the purpose and during the course of supply of electricity to them can be treated as part of principal supply of transmission or distribution of electricity which is exempted?
(c) Whether the above supplies made to the consumers through contractors and third parties for the purpose of purpose of transmission or distribution of electricity or sale of electrical energy are also exempted?
Answers to questions (a); (b) & (c)
In the facts and circumstances presented by the applicant the “Transmission or distribution of electricity by an electricity transmission or distribution utility” is only exempted vide entry no. 25 of the Notification No. 12/2017- Central Tax (Rate) New Delhi, the 28th June, 2017. Any service, other than transmission or distribution of electricity, rendered by the applicant is not covered in the said entry for claiming exemption. Services rendered apart from “transmission or distribution of electricity” are taxable.
(d) If the answer to the above questions is ‘NO’, whether the works executed under Deendayal Upadhyay Gram Jyoti Yojna for Rural Electrification ( DDUGJY’), Integrated Power Development Scheme (‘IPDS’) and Restructured Accelerated Power Development and Reforms Program supplies made through contractors are liable to 12% GST since they are executed under grants provided by central government and no commercial activity is involved with regards these works?
(e) If the answer to the above questions at (A), (B) and (C) is ‘NO’, whether the execution of the Agricultural Demand Side Management Scheme (AGL) works are liable to 12% GST since they are executed for the purpose of non-commercial?
Answers to the questions (d) & (e):
The activities referred by the applicant are not covered in the Notification No.24/2017-Central Tax (Rate), dated 21.09.2017 for availing concessional rate of 12% GST rate and the applicable rate of tax is 18% (9% under Central tax and 9% State tax).
(f) Whether the supply of services and goods made by the applicant through contractors by way of construction, erection, commissioning, or installation of infrastructure for extending electricity distribution network up to the tube well of the farmer or agriculturist for agricultural are exempted vide Notification No.14/2018- Central Tax (Rate) dated 26.07.2018?
Answer to the question (f)
The Applicant is only entitled for the benefit of NIL rate of GST under SI. No. 10A of Notification no. 12/2017-Central Tax (Rate), dated 28.06.2017, amended by notification no. 14/2018-Central Tax (Rate), dated 26.07.2018 for the stated works and not for the contractors providing services to the applicant.
Read AAAR Order : GST: Services rendered apart from ‘transmission or distribution of electricity’ by Discom are taxable
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, ANDHRA PRADESH
ORDER
(Under sub-section (4) of Section 98 of Central Goods and Services Tax Act, 2017 and sub- section (4) of Section 98 of Andhra Pradesh Goods and Services Tax Act, 2017)
1. The present application has been filed under Section 97 of the Central Goods & Services Tax Act, 2017 and Andhra Pradesh Goods & Services Tax Act, 2017 (hereinafter referred to CGST Act and APGST Act respectively) by M/s. Southern Power Distribution Company of AP Ltd., (Corporate Office), Srinivasapuram, Tirchanoor Road, Tirupati – 517503, Andhra Pradesh (hereinafter referred to as applicant), registered under the Goods & Services Tax
2. The provisions of the CGST Act and APGST Act are identical, except for certain provisions. Therefore, unless a specific mention of the dissimilar provision is made, a reference to the CGST Act, would also mean a reference to the same provision under the APGST Act. Further, henceforth, for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST or AP GST Act would be mentioned as being under the GST Act.
3. BRIEF FACTS OF CASE:
3.1 M/s Southern Power Distribution Company of Andhra Pradesh Limited., (referred to as ‘Discom’ or ‘APSPDCL’, for brevity) is a state-owned company having ‘Distribution Licence’ as defined in Electricity Act, 2003, and are engaged in distribution of electricity to consumers and also in transmission of electricity from sub-stations.
3.2 As a distribution licensee under Section 2(17) of the Electricity Act, 2003, main activity of APSPDCL is supply of electricity and for this purpose engages in other ancillary activities in connection and in relation to supply of electricity. Some of the activities it is engaged in and are in connection with supply of electricity to the consumers are mentioned below:
(a) Granting electricity connections including re-connection and also supply of equipment such as meters.
(b) Creation of distribution and transmission systems.
(c) Maintenance of the distribution and transmission networks.
(d) Collection of charges from the consumers for the services provided as per the rates prescribed by ERC.
(e) Supervision of execution of works by the contractors.
(f) Allowing other generating companies to transmit electricity through its network.
3.3 On Verification of basic information of the applicant, it is observed that the applicant falls under State jurisdiction, i.e. Tirupati-II Circle, of Chittoor Division. Accordingly, the application has been forwarded to the jurisdictional officer and a copy marked to the central tax authorities to offer their remarks as per the Section 98(1) of CGST /APGST Act 2017. In response the concerned jurisdictional officer concerned stated that there are no pending proceedings relating to the applicant and no proceedings were passed on the issue, for which the advance ruling sought by the applicant.
4. QUESTIONS RAISED BEFORE THE AUTHORITY
4.1 The applicant seeks Ruling from the Hon’ble Advance Ruling Authority on the following questions:
(a) Whether the supply of services such as connection, reconnection, supervision of the works, erection of poles, substations, transmission lines etc., and supply of meters etc., to the consumers for the purpose and during the course of supply of electricity to them are naturally bundled and thus form part of the composite supply of principal activity of supply of electrical energy?
(b) Whether the supply of services such as connection, reconnection, supervision of the works, erection of poles, substations, transmission lines etc., and supply of meters etc., to the consumers for the purpose and during the course of supply of electricity to them can be treated as part of principal supply of transmission or distribution of electricity which is exempted?
(c) Whether the above supplies made to the consumers through contractors and third parties for the purpose of transmission or distribution of electricity or sale of electrical energy are also exempted?
(d) If the answer to the above questions is ‘NO’, whether the works executed under Deendayal Upadhyay Gram Jyoti Yojna for Rural Electrification (‘DDUGJY’), Integrated Power Development Scheme (‘IPDS’) and Restructured Accelerated Power Development and Reforms Program supplies made through contractors are liable to 12% GST since they are executed under grants provided by central government and no commercial activity is involved with regards these works?
(e) If the answer to the above questions at (A), (B) and (C) is ‘NO’, whether the execution of the Agricultural Demand Side Management Scheme (AGL) works are liable to 12% GST since they are executed for the purpose of non-commercial?
(f) Whether the supply of services and goods made by the applicant through contractors by way of construction, erection, commissioning, or installation of infrastructure for extending electricity distribution network up to the tube well of the farmer or agriculturist for agricultural purpose are exempted vide Notification No.14/2018- Central Tax (Rate) dated 26.07.2018?
5. APPLICANT’S INTERPRETATION OF LAW AND FACTS:
5.1 The applicant submits that as mentioned in the Memorandum of Association, their objectives are supply of quality electricity to the consumers and execution of various infrastructure projects through contractors. The activities of Discom are controlled by Electricity Regulation Commission established both at central and state levels under the Electricity Regulatory Commissions Act, 1998 for the purpose of rationalization of electricity tariff, transparent policies regarding subsidies, promotion of efficient and environmentally benign policies and matters connected therewith or incidental thereto. Discom cannot act independently in fixing tariffs etc., without approval of the State Regulatory Commission. Further, the Discom will not execute any work directly and all the works relating to creation of infrastructure are executed by the contractors.
5.2 Any consideration received for supply of any goods and services attracts GST. However, the services provided by a distribution licencee are always out of the ambit of the tax. Prior to introduction of GST, service tax was exempted on the services provided by a distribution licencee. Notification No.45/2010-ST dt. 20.07.2010 issued by the Government of India under Section 11C of the Central Excise Act, 1944 made applicable to the matters of Service Tax by section 83 of Finance Act, 1994 provided exemption from payment of service tax on all taxable services relating to transmission of electricity provided till 21.02.2010 and all services relating to distribution of electricity provided till 21.06.2010 and they were exempted thereafter also under other notifications.
5.3 CBIC clarified in its Circular No. 356/13/2010-TRU dt. 7.12.2010 that even the rental amounts collected by way of renting of meters from the individual consumers of electricity is also not chargeable to service tax as per the said notification since renting of meters is also related to transmission of electricity.
5.4 Subsequent to introduction of negative list in the Finance Act, 1994, the services relating to transmission and distribution are placed in the negative list under Section 66D (k) of the Act which reads as follows:
“(k) Transmission or distribution of electricity by an electricity transmission or distribution utility”.
5.5 From the above, it is clear that Discom was not required to pay any service tax on any service it provided to a consumer/ client. When the Revenue raised its contention that Notification No.11/2010-ST does not cover the services provided by private firms and the exemption is not applicable after June 2010, the Hon’ble Tribunal did not accept the contention and in its decision in the case of Kedar Construction vs. CCE, Kolhapur [2014-TIOL-2138-CESTAT-MUM] it was clearly held that all the services related to transmission of electricity are exempted under Notification No.11/2010-ST. In the recent case of Narasa Reddy v. UOI and Others in W.P. No.23639/2018 dt. 12.12.2018, the Hon’ble High Court of Andhra Pradesh held that all services provided to a distribution licencee are outside the purview of service tax under Notification No.32/2010-ST dt. 22.06.2010. However, the applicant was registered with service tax for the purpose of payment of service tax under reverse charge mechanism for certain services received by it as required under Section 68(2) of the Act and was accordingly discharging service tax and filing returns.
5.6 Even after introduction of GST, the supplies are continued to be exempt. Entry No.25 under heading 9969 in Notification No.12/2017-Central Tax dt. 28.06.2017 stipulates that ‘transmission or distribution of electricity by an electricity transmission or distribution utility’ attracts nil rate of tax i.e., the exclusion from service tax provided in Finance Act, 1994 is continued even in GST regime. All supplies of services and goods made by Discom are in relation to or incidental to main supply of electricity and this supply is exempted from GST.
5.7 The Discom falls under the definition of ‘a Government entity’ as defined in Notification No.31/2017-Central Tax (Rate) dt. 13.10.2017 since it is established by Government of Andhra Pradesh and more than 90 percent of the equity and control is held by the said Government.
5.8 All these services provided by Discom are in relation to supply of electricity which is exempted. Section 2(30) of the GST Act defines “composite supply” as “a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply”. Section 2(90) of the GST Act defines “principal supply” as “the supply of goods or services which constitutes the predominant element of a composite supply and which any other supply forming part of that composite supply ancillary”. There is no doubt that every supply made by the Discom is naturally bundled with the principal supply of electricity and provided in conjunction with each other.
5.9 In the recent decision of Hon’ble High Court of Gujarat in the case of Torrent Power Ltd vs. UOI 2019-TIOL-15-HC-AHM-GST, the Hon’ble High Court while holding the Circular dt.1.3.2018 issued by CBIC clarifying that certain services provided by Discoms are liable to GST, held that all services provided by a Discom are naturally bundled and form part of composite supply of electricity and thus are exempted. The issue of principal supply has been discussed by Hon’ble Advance Ruling Authority in various decisions. Since the rate of tax for principal supply is nil, the same rate is attracted to all the ancillary supplies made in provision of principal supply. Therefore, the applicant opines that all supplies made by him to his consumers and clients in relation to supply of electricity are not liable to GST. However, the registration continued under GST vide GSTIN No.37AAHC4056Q2ZM and the applicant is discharging GST on certain services viz., testing services, supervising services etc., to avoid litigation.
5.10 As submitted above, the applicant though provides supply of electricity and services relating to supply of electricity, it is also entrusted to carry out certain projects of Central and State Governments such as Deendayal Upadhyay Gram jyoti Yojna for Rural Electrification (‘DDUGJY’), Integrated Power Development Scheme (‘IPDS’), Restructured Accelerated Power Development and Reforms Program etc,, relating to strengthening of power distribution network and Rural Electrification for public welfare. These welfare schemes are promoted by the Central/ State Government with extension of grants to the Discom.
5.11 Further, Services supplied by electricity distribution utilities by way of construction, erection, commissioning, or installation of infrastructure for extending electricity distribution network up to the tube well of the farmer or agriculturist for agricultural use are partially exempted vide Notification No. 14/2018-Central Tax (Rate) dt.26-07-2018 amending Notification No.12/2017-Central Tax (Rate) dt. 28-06-2017.
5.12 Though all the above activities are in relation to principal supply of electricity which is exempted, the applicant opines that the execution of the above services through third-party contractors are exempted from GST and even if not exempted, they are at least eligible for concessional rate of tax as provided in Notification 24/2017-Central Tax (Rate) dt: 21.09.2017, Notification No. 31/2017-Central Tax (Rate) dt. 13.10.2017, Notification No.32/2017-Central Tax (Rate) dt. 13.10.2017 and Notification No. 1/2018-Central Tax (Rate) dt. 25.01.2018. However, to avoid future litigation, the applicant approached the Authority for Advance Ruling with his queries.
6. RECORD OF PERSONAL HEARING:
6.1 Shri Y. Srinivasa Reddy, Advocate appeared for personal hearing held on 03.04.2019 by representing the applicant and he reiterated the submissions already made in the application and requested to pass necessary orders.
6.2 The applicant furnished further submissions after personal hearing vide their letter dated 29.04.2019 as here under.
1. They filed the subject application seeking answers to certain issues with regards to the taxability under GST Act on ancillary services provided by it in relation to transmission and distribution of electricity which is exempted vide Notification No. 12/2017-CT (R) dt. 28.06.2017.
2. The argument of the applicant is that all the services which were provided to the consumers of the applicant are nothing but ancillary activities which are naturally bundled with the main activity of transmission and distribution of electricity and these activities together with the activity of transmission or distribution will become a composite supply and since in the composite supply, the principal activity ,s supply of electricity which is exempted, the ancillary activities cannot be charged to GST as an independent activity. It is also the argument of the applicant that many of these activities wherever construction or supply Of goods is involved, GST is paid by the contractors and the applicant reimbursed the same. A detailed statement showing how various activities of the applicant are naturally bundled with the mam activity of transmission and distribution of electricity was filed during the Hearing.
3. The applicant further submitted as follows. The term ‘taxable supply’ is defined under Section 2(108) of the Act as “a supply of goods or services or both which is leviable to tax under this Act”. There is no doubt that the act of transmission or distribution of electricity is a service taxable under this Act but is exempted vide Notification No.12/2017-CT (R) dt. 28.06.2017. It is not a non-taxable supply as defined under Section 2(78) of the Act. Further, this issue was raised before the Hon’ble High Court of Gujarat during the course of arguments in the recent case of Torrent Power Ltd vs. UOI 2019-TIOL-15-HC-AHM-GST and the Hon’ble High Court had considered the same and then held that this contention of Revenue is not sustainable. The relevant parts of the decision are extracted below:
The Revenue’s argument on this issue is mentioned in para 4.2 of the judgment which is extracted below:
It was submitted that insofar as the GST regime is concerned, these services are not exempted by the notifications issued under section 11 of the GST Act, and hence, when on one service tax is leviable and the other service is exempted, section 8 of the CGST Act would not apply. It was contended that related/ancillary services are not exempted by virtue of any notification under section 11 of the CGST Act and that the impugned circular merely clarifies that these services are not exempted.
The decision of the Hon’ble High Court on this point is in para 27 of the judgment which is extracted below:
27. It has been contended on behalf of the respondents that clause (a) of section 8 of the CGST Act would not be applicable where the principal supply is exempt from levy of service tax. In the opinion of this court, there is nothing in section 8 of the Act to read any such construction. What the section says is that the tax liability of a composite or a mixed supply shall be determined in the manner provided there under. In a given case, the tax liability may be nil, but that would not take such service out of the purview of section 8 of the Act, which would be attracted if the supply is either composite or mixed in nature, notwithstanding that the end result may be nil tax liability.
Summary:
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.
The applicant prayed that since the issue is clarified, the ruling may please be given at the earliest basing on the decision of Hon’ble High Court.
7. DISCUSSIONS AND FINDINGS
7.1 We have gone through the case records of the application, additional submissions and oral submissions at the time of personal hearing carefully. The applicant being a distribution licencee of electricity is of the view that various other activities or services rendered for which they charge separate recoveries from their customers are naturally bundled with distribution of electricity and accordingly those services are also exempted under entry 25 of Notification no.12/2017 – Central Tax (Rate) dated 28.06.2017 wherein Transmission or distribution of electricity by an electricity transmission or distribution utility. They relied on the decision of Hon’ble High Court of Gujarat in the case of M/s Torrent Power Limited. Vs. Union of India. They also sought for certain clarifications on the eligibility of exemption on the issues of services under ‘Deendayal Upadhyay Gram Jyoti Yojna for Rural Electrification’ (DDUGJY), ‘Integrated Power Development Scheme’ (IPDS) and Restructured Accelerated Power Development and Reforms Program and also Agricultural Demand Side Management Scheme (AGL). The issues are examined hereunder.
7.2 The entry no. 25 of the Notification No. 12/2017- Central Tax (Rate) New Delhi, the 28th June, 2017 reads as follows:
