Late Payment Surcharge on Electricity Supply Not Taxable as Declared Service: CESTAT Chandigarh

Commissioner of Central Goods & Service Tax Vs NHPC Limited (CESTAT Chandigarh)

The appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, was filed by the Revenue against Order-in-Original No. 22/2020-ST dated 09.12.2020, whereby the adjudicating authority had dropped the entire service tax demand of ₹101,00,08,680 along with interest and penalties proposed against NHPC Limited for the period from 01.04.2013 to 30.06.2017.

NHPC Limited was engaged in the generation and supply of electricity to various distribution companies (DISCOMs) under Power Purchase Agreements (PPAs). Besides energy charges, NHPC collected Late Payment Surcharge (LPS) from DISCOMs when payments were delayed beyond the prescribed period. The Revenue alleged that the LPS constituted consideration for tolerating delayed payment by customers and was taxable as a declared service under Section 66E(e) of the Finance Act, 1994. A show cause notice dated 22.10.2018 was issued demanding service tax under Section 73(1), along with interest under Section 75 and penalties under Sections 77(2) and 78.

The adjudicating authority dropped the proceedings after holding that generation and supply of electricity were exempt under the service tax law; LPS represented interest on delayed payment for the exempt supply of electricity; it could not be treated as an independent service; it formed part of the tariff structure prescribed by the Central Electricity Regulatory Commission (CERC); and NHPC had not rendered any declared service under Section 66E(e). Consequently, no service tax was payable on the LPS collected from DISCOMs.

Before the Tribunal, the Revenue argued that NHPC had agreed to tolerate delayed payment by its customers instead of exercising contractual remedies under the PPAs, and that the pre-quantified LPS constituted consideration for tolerating an act within the meaning of Section 66E(e). It also relied upon advance rulings and contended that the introduction of the exemption entry relating to tolerating non-performance of contracts reflected the legislative intent to tax such consideration.

NHPC submitted that electricity is goods and that the LPS arose solely in connection with the sale of electricity. It relied upon CBIC Circular No. 214/1/2023-ST dated 28.02.2023, which adopted Circular No. 178/10/2022-GST dated 03.08.2022 for the service tax regime, clarifying that late payment surcharge or fee is naturally bundled with the principal supply and should be assessed as part of that supply. NHPC also referred to earlier CBIC circulars treating such charges as penal in nature and relied upon several Tribunal decisions supporting its stand. It further relied upon Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006, excluding interest on delayed payment of consideration from taxable value.

After considering the submissions, the Tribunal identified the principal issue as whether LPS collected over and above the value of electricity supplied was taxable as a declared service under Section 66E(e) of the Finance Act, 1994.

The Tribunal observed that the adjudicating authority had correctly concluded, after examining the PPAs and the CERC Tariff Regulations, 2014, that LPS was a component of the electricity tariff and became payable only when electricity charges remained unpaid beyond the stipulated period. It further held that LPS was intrinsically linked to the supply of electricity, which fell within the negative list under Section 66D(f) of the Finance Act, and that the Department had incorrectly attempted to artificially separate LPS from the principal supply. In the absence of the supply of electricity, there could be no LPS, making both components part of a composite supply rather than independent services.

The Tribunal also relied upon CBIC Circular No. 214/1/2023-ST adopting Circular No. 178/10/2022-GST, which clarified that late payment surcharge is an ancillary supply naturally bundled with the principal supply and should receive the same tax treatment as the principal supply. It further referred to earlier CBIC Circular No. 96/7/2007-ST and Instruction No. 137/25/2011-ST, which described late payment surcharges as penal charges arising from delayed payment.

The Tribunal noted that the issue was no longer res integra and that various Tribunal decisions had already held that late payment surcharge connected with electricity supply was not independently taxable. It also relied upon the Gujarat High Court decision in Torrent Power, as discussed in the Tribunal’s earlier decision in Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd., which recognised ancillary services relating to transmission and distribution of electricity as bundled services receiving the same treatment as the principal exempt supply.

Holding that the principles laid down in the cited decisions squarely applied to the present case, the Tribunal found no infirmity in the adjudicating authority’s order. It upheld the Order-in-Original and dismissed the Revenue’s appeal.

Cases Discussed

• Commissioner of CGST & Central Excise, Lucknow v. M/s Rosa Power Supply Company Limited (CESTAT Allahabad), 2025 (4) TMI 1098-CESTAT ALLAHABAD
• M/s India Infoline Limited v. Additional Director General (Adjudication) New Delhi (CESTAT New Delhi), 2025 (3) TMI 574 – CESTAT NEW DELHI
• Commissioner of Central Excise, Service Tax & Central Tax, Delhi South v. M/s Power Finance Corporation Ltd. (CESTAT New Delhi), 2024 (11) TMI 58-CESTAT NEW DELHI
• Re: M/s South India Krishna Oil & Fats Pvt Ltd (A.A.R., Andhra Pradesh), 2024 (2) TMI 1054 – A.A.R., Andhra Pradesh
• IIFL Holding Ltd. v. Commissioner of CGST & Central Excise (Tri. – Mum.), (2024) 17 Centax 272 (Tri. – Mum.)
• State of A.P. vs. National Thermal Power Corporation Ltd & others (Supreme Court), 2022-TIOL-107-SC-CT
• Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. Ltd. v. Commissioner of CGST & Central Excise, Jabalpur, 2022 (67) G.S.T.L. 86 (Tri. Del.)
• Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. v. Principal Commissioner CGST and Central Excise, Bhopal, 2021 (2) TMI 155-CESTAT NEW DELHI
• M/s South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur (CESTAT New Delhi), 2020 (12) TMI 912 – CESTAT NEW DELHI
• Re: M/s Chennai Port Trust (A.A.R. Tamilnadu), 2019 (8) TMI 1285 – A.A.R. Tamilnadu
• Torrent Power (Gujarat High Court), 2019 (1) TMI 1092 – Gujrat High Court

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

The present appeal filed by the Revenue is directed against the impugned Order-in-Original No. 22/2020-ST dated 09.12.2020 passed by the Additional Director General (Adjudication), Director General of GST Intelligence, New Delhi, vide which the learned Adjudicating Authority has adjudicated the Show Cause Notice dated 22.10.2018 and dropped the entire proceedings raised in the said Show Cause Notice against the Respondent-Assessee. Particulars of the appeal are given herein below:

2. Briefly stated facts of the present case are that the Respondent M/s NHPC Limited (in short ‘NHPC’) were engaged in generation and supply of electricity, and were registered with the Service Tax Department. The electricity so generated by the Respondent via thermal, hydro, nuclear and renewable energy sources in all the plants, is supplied to distribution companies (‘DISCOMs’) situated all over the country.

2.1 Intelligence gathered by the officers of Directorate General of GST Intelligence (‘DGGI’), Jaipur Zonal Unit indicated that the Respondent in accordance with a Power Purchase Agreement (‘PPA’) executed with DISCOMs for production and supply of electricity, had received substantial amount, over and above charges for actual supply of electricity from DISCOMs, but had not paid service tax on the same, which appeared liable for payment of service tax as the Respondent had provided taxable services falling under the category of declared service, as defined under clause (e) of Section 66E of the Finance Act, 1994.

2.2 It was found that in the consolidated Balance Sheet of NHPC, they were recording the Late Payment Surcharge collected by them separately under the head “Other Non-Operating Income”, whereas the income received from sale of electricity was being recorded under the head “Revenue from Operations”.

2.3 It appeared from the depositions made by Shri Alok Khandelwal, Assistant Manager (Finance) of NHPC and scrutiny of documents furnished by the Respondent that NHPC were engaged in power generation through conventional & non-conventional sources and they sold electricity to various DISCOMs, including the DISCOMs of Rajasthan, based on the PPA executed with them. Further, consideration for the electricity generated and supplied was collected by NHPC through their invoices, which contained two tier tariff viz. ‘Energy Charges’ and ‘Late Payment Surcharge’. The Energy Charges are charged based on the actual energy sold by NHPC and the Late Payment Surcharge are calculated based on the delay made by the customers in payment of such bills. NHPC had executed long term PPA with their customers and as per the terms & conditions of PPA, NHPC charged surcharge from their customers for the delay in payment. These surcharges had been computed on the rate as prescribed in clause 45 of Central Electricity Regulatory Commission (‘CERC’) Regulations, 2014. To collect surcharge, NHPC issued invoices to their customers.

2.4 Thus, it appeared that the Respondent have rendered the taxable service of tolerating the act of their customers in making delayed payment, which activity is classifiable as ‘declared service’ in terms of Section 66E(e) of the Finance Act, 1994 and the consideration received in the name of/in the form of ‘Late Payment Surcharge’ formed the service charges towards the said tolerance.

2.5 Further, it appeared from the documents/records furnished by NHPC that the customers who could not make payments on due dates had wilfully defaulted against the payments due and were aware of the consequences that Surcharge/Late Payment Charges would be charged by NHPC.

2.6 Further, it appeared that as envisaged in the PPA, NHPC did not resort to sell the contracted capacity of electricity to third parties or reallocated to others, but invoices were issued to their customers for collecting surcharges for delay in payment. Therefore, in all such cases, it appeared that the NHPC tolerated the act of wilful default in payment by their customers and received compensation by way of ‘Late Payment Surcharge’ towards their act of tolerance or forbearance vis-à-vis the said default in payment. Therefore, the ‘Late Payment Surcharge’ appeared to be actually pre-quantified damages pursuant to contractual obligation in respect of the parties to the contract. Therefore, in wake of above facts & circumstances, the quantum of damages, though named as ‘Late Payment Surcharge’, had been pre-quantified as per PPA entered between NHPC and their customers, the nature of the same appeared to be nothing else but ‘consideration’ for tolerance of the act of default in paying the monthly bill amounts before the prescribed due dates.

2.7 On the above said allegations, a Show Cause Notice dated 22.10.2018 was issued for demand and recovery of service tax amounting to Rs.101,00,08,680/- under Section 73(1) of the Finance Act, 1994, along with interest under Section 75 of the Act and penalties under Sections 77(2) & 78 of the Act.

2.8 The Respondent filed a detailed reply to the said Show Cause Notice and contested the allegations made in the Show Cause Notice with documentary evidences.

2.9 After following the due process, the learned Adjudicating Authority vide the impugned Order-in-Original has dropped the entire proceedings in favour of the Respondent mainly on the following terms:

(i) The process of generation and supply of electricity (being a goods) by NHPC is exempt under Service Tax Law and the same is not the subject matter of dispute.

(ii) The Late Payment Surcharge (‘LPS’) is nothing but the interest on delayed payment of consideration for generation/supply of electricity (being exempt service) and is having a direct relation with the exempted supply/activity.

(iii) LPS cannot be treated as separate service and same shall be included in the value of initial supply to which such charges relate, and the portion of delayed payment surcharge attributable to exempted supply will be exempted. Reliance placed on the Advance Ruling Authority in the case of M/s Madhya Pradesh Poorv Kshetra Vidyut Vitran Company Limited. Hence, LPS does not amount to any independent service. Thus, any process for generation and supply of electricity (being goods) is exempt under Service Tax Law and consequently any charges including the late payment surcharge collected/received for supply of electricity is not liable to service tax.

(iv) LPS being part of the tariff structure fixed for sale of electricity by the CERC and the Assessee is recovering LPS at rates fixed by CERC. Thus, NHPC has not provided any declared service under Section 66E (e) of the Finance Act.

(v) NHPC was not liable to pay any Service Tax on Late payment surcharge charged and collected from DISCOMs for delay in payment of charges for the sale of electricity.

(vi) Thus, NHPC was not liable to pay service tax of Rs.101,00,08,680/- pertaining to the period from 01.04.2013 to 30.06.2017 under proviso to Section 73(1) of the Finance Act, 1994 and accordingly the demand against NHPC raised vide the SCN dated22.10.2018 was dropped under Section 73(2) of the Finance Act, 1994.

2.10 Being aggrieved by the said Order-in-Original, the Department has filed the present appeal consequent upon review of the impugned Order-in-Original by the Competent Authority in terms of Section 86(2) of the Finance Act, 1994 read with Section 174(2) of the CGST Act, 2017 on the following grounds:

(A) There is no dispute on the issue that both the activities of Distribution & Transmission and retail supply of Electricity are exempted from service tax as ‘Electricity’ is treated as goods. However, the amount collected by NHPC as Late Payment Surcharge (‘LPS’) against supply of electricity is nothing but ‘consideration’ towards tolerating certain act of their customers, which is leviable to service tax under the category of “declared service” in terms of Section 66E(e) of the Finance Act.

(B) The case laws relied upon by NHPC before the Adjudicating Authority pertains to issues relating to taxability of interest, late fee and penalty charged for delayed payment, whereas the issue in the present case is quite different.

(C) The relevant Show Cause Notice dated 22.10.2018 has alleged that service tax is chargeable on the services provided by NHPC to DISCOMs by not acting according to the process prescribed under the Agreement mutually agreed upon that if the bills are not paid by Bulk Power Customer to NHPC within 60 days from the date of billing or required letters of credit/Payment Security Mechanism are not maintained in terms of the Agreement, NHPC shall have the option to regulate and reallocate the power of Bulk Power Customer in accordance with the directives/guidelines issued/to be issued by CERC/Govt of India from time to time.

(D) NHPC have executed long term Power Purchase Agreement (‘PPA’) with their customers and as per the terms & conditions of PPA, NHPC charged surcharge from their customers for delay in payment. From the above, it is very clear that in case of delay in payment of electricity charges by any Bulk Power Customer, NHPC should have acted according to the procedure as prescribed and mutually agreed upon by both the parties of such Agreement. However, NHPC chose not to act accordingly but offered their Bulk Power Customer to pay something to them in the form of ‘Late Payment Surcharge’ for not acting according to the mutually agreed procedure i.e. to regulate and/or reallocate the power of Bulk Power Customer in accordance with the directives/guidelines issued/to be issued by CERC/Govt of India from time to time. Such offer made by NHPC for not acting according to the agreement creates a situation where they become a service provider for the declared services falling under section 66E(e) of the Finance Act.

(E) The consideration for the electricity generated and supplied was collected by NHPC through their invoices, which contained two tier tariff viz. Energy Charges and Late Payment Surcharges. The Energy Charges were charged based on the actual energy sold by NHPC, whereas the Late Payment Surcharge had been calculated based on the delay made by the customers in payment of such bills and not on the basis of energy charges or energy sold.

3. Heard both sides and perused the material on record.

4. The learned Special Counsel, Mr. Shyam Raj Prasad, appearing on behalf of the Appellant-Revenue submits that the impugned Order-in-Original is not sustainable in law as the same has been passed without properly appreciating the facts & the law.

4.1 He further submits that the Adjudicating Authority has not appreciated the various clauses of PPA entered into between the NHPC and its bulk buyers. He further submits that w.e.f. 01.07.2012, a new service tax regime called ‘Negative List Service Tax Regime’ was introduced, whereby all services became taxable excluding those which are specified in Section 66D of the Act (Negative List), provided they satisfy the definition of “service” in terms of Section 65B(44) of the Finance Act, 1994. He also refers to the definition of “service” as prescribed under Section 65B(44) of the Act and submits that the definition of “service” includes declared service which is defined in Section 65B(22) of the Act as under:

“declared service” means any activity carried out by a person for another person for consideration and declared as such under Section 66E”.

He also refers to the relevant entry of Section 66E of the Act, as reproduced herein below:

“66E(e) – agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.”

He further submits that entry 66E(e) of the Act may be split into following components:

i. Agreeing to the obligation to refrain from an act.

ii. Agreeing to the obligation to tolerate an act.

iii. Agreeing to the obligation to tolerate a situation.

iv. Agreeing to the obligation to do an act.

He further submits that the above four clauses indicate a basic structure, a request to refrain/tolerate/do and a corresponding agreement to oblige.

4.2 He further submits that in order to examine whether the present case falls under the domain of declared service, the PPAs executed between NHPC and Bulk Power Customers may be referred to. He then refers to relevant portion of the terms of the PPA dated 08.08.2017 between NHPC and M/s BSES Yamuna Power Ltd.

4.3 He further submits that Late Payment Surcharge has been pre-quantified as per PPA entered between NHPC and their customers, and the nature of the same is nothing else but ‘consideration’ for tolerance of the act of default in paying the monthly bill amounts before the prescribed due dates.

4.4 He also refers to insertion of S.No. 57 in Mega Exemption Notification No. 25/2012-ST vide Notification No. 22/2016 dated 13.04.2016, i.e.:

“57. Services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract”.

The same is indicative of the Government’s stand that fines or liquidated damages collected for tolerating non-performance of a contract are liable to service tax as the said activity is declared as a service under Section 66E(e) of the Finance Act.

4.5 He further submits that a joint and collective reading of Section 66B and Section 66E(e) of the Finance Act makes it clear that the service, i.e. declared service provided by NHPC for consideration i.e. late payment surcharge, is liable to service tax.

4.6 In support of his above submissions, he relies on the following case-laws:

• Re: M/s Chennai Port Trust – 2019 (8) TMI 1285 – A.A.R. Tamilnadu
• Re: M/s South India Krishna Oil & Fats Pvt Ltd – 2024 (2) TMI 1054 – A.A.R., Andhra Pradesh

5. On the other hand, the learned Consultant, Mr. Atul Kumar Gupta, appearing on behalf of the Respondent-Assessee reiterates the findings of the impugned Order-in-Original. He submits that the Adjudicating Authority has passed the impugned Order-in-Original after considering various clauses of PPA, various rules as prescribed under Finance Act and various judgments delivered on the issue in hand.

5.1 He further submits that the Show Cause Notice itself mentions that late payment charges are charges for electricity supplied by the Respondent to DISCOMs and electricity is an excisable ‘goods’ as specified in First Schedule of Central Excise Tariff Act, 1985 under Chapter Sub-Heading 27160000 and also held by the Hon’ble Supreme Court in the case of State of A.P. vs. National Thermal Power Corporation Ltd & others – 2022-TIOL-107-SC-CT.

5.2 He further submits that the issue involved here is no longer res integra as stands clarified vide CBIC’s Circular No. 214/1/2013-ST dated 28.02.2023 in favour of the Assessee, vide which the CBIC has issued a clarification on the scope of Section 66E(e) of the Finance Act, wherein detailed Circular No. 178/10/2022-GST dated 03.08.2022 issued under GST Regime has been adopted/referred for Service Tax Regime as well. The Circular dated 03.08.2022 discusses scope of entry “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” at length, i.e., the entry under which the Appellant-Revenue intends to cover the late payment surcharge received by the Respondent-Assessee allegedly holding these charges to be taxable under Service Tax.

5.3 He further submits that late payment surcharge or fee is a facility granted by the supplier naturally bundled with the main supply; it is an ancillary supply naturally bundled and supplied in conjunction with the principal supply and therefore, should be assessed as the principal supply.

5.4 He also submits that the principal supply in the present case is sale of electricity as also stands admitted by the Appellant-Revenue itself in the Show Cause Notice wherein it has been repeatedly stated that the Respondent-Assessee shows two components in the invoice raised to its customer, viz. (a) Energy Charges, which represents charges towards sale of electricity to DISCOMs, and (b) Late Payment Surcharge for delayed payment made by the customer to the Respondent-Assessee.

5.5 He also submits that the findings given by the Adjudicating Authority in the impugned Order-in-Original are in consonance with the Para 9 of the Circular dated 03.08.2022 and hence, the Adjudicating Authority has correctly passed the impugned Order-in-Original.

5.6 He further submits that prior to negative list regime (prior to 01.07.2012), the CBIC issued various clarifications vide Circular No. 96/7/2007-ST dated 23.08.2007 and Instruction No. 137/25/2011-ST dated 03.08.2011, which clarified that late payment charges are in the nature of penal charges for loss caused due to delayed payment by the customer. He also submits that these clarifications were issued in pre-negative list regime, however, nature of charges would remain same in both pre-negative list & post-negative list, which is penal in nature and does not represent any service being provided by one person to another.

5.7 He further submits that this issue of taxability of late payment surcharge has already been decided by various benches of the Tribunal in favour of the Assessees in the following cases:

• Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. v. Principal Commissioner CGST and Central Excise, Bhopal – 2021 (2) TMI 155-CESTAT NEW DELHI
• Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. Ltd. v. Commissioner of CGST & Central Excise, Jabalpur – 2022 (67) G.S.T.L. 86 (Tri. Del.)
• Commissioner of CGST & Central Excise, Lucknow v. M/s Rosa Power Supply Company Limited – 2025 (4) TMI 1098-CESTAT ALLAHABAD
• Commissioner of Central Excise, Service Tax & Central Tax, Delhi South v. M/s Power Finance Corporation Ltd. – 2024 (11) TMI 58-CESTAT NEW DELHI
• M/s India Infoline Limited v. Additional Director General (Adjudication) New Delhi – 2025 (3) TMI 574 – CESTAT NEW DELHI
• IIFL Holding Ltd. v. Commissioner of CGST & Central Excise – (2024) 17 Centax 272 (Tri. – Mum.)
• M/s South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur – 2020 (12) TMI 912 – CESTAT NEW DELHI

5.8 He also refers to the Rule 6 of Service Tax (Determination of Value) Rules, 2006 which provides the charges which are included or excluded from the value of taxable services provided or to be provided; sub-rule (2) thereof provides for various charges which are excluded from the value of any taxable service and specifically includes “interest on delayed payment of any consideration for the provision of services or sale of property, whether movable or immovable” under clause (iv). Further, he submits that by virtue of Rule 6(2)(iv) ibid, no service tax liability can be imposed on delayed payment surcharge received by the Respondent.

6. We have considered the submissions made by both the parties and have also perused the impugned Order-in-Original as well as the various case-laws relied upon by both the parties.

7. We note that the main issue involved in the present case is levy of service tax on the amount collected by NHPC, in guise of Late Payment Surcharge, over and above the value of electric energy sold by them to the Bulk Power Customers, i.e. Distribution Companies (DISCOMs) during the period from 01.04.2013 to 30.06.2017 under taxable services falling under the category of ‘declared service’ as defined under clause 8(e) of Section 66E of the Finance Act, 1994.

8. We find that the learned Adjudicating Authority, after considering the various clauses of the PPA entered into between the Respondent-NHPC and the DISCOMs, and the various regulations of the Central Electricity Regulatory Commission (Terms & Conditions of Tariff) Regulations, 2014, which governs the tariff of electricity charges and late payment surcharge, has rightly concluded that Late Payment Surcharge is a component of electricity tariff only and payable only in such cases where there is a delay in payment of electricity charges by the DISCOMs beyond a specified period of 60 days from the date of invoice.

9. Further, we find that the learned Adjudicating Authority in the impugned Order-in-Original, in para 24.2, has rightly observed that Late Payment Surcharge is intrinsically linked to the supply of electricity which is outside the purview of service tax levy by virtue of being notified under negative list of services vide Section 66D(f) of the Finance Act, and hence, Late Payment Surcharge is also covered under negative list. By way of classifying Late Payment Surcharge under declared service [Section 66E(e) of the Finance Act], the Department has artificially bifurcated the two activities, which is incorrect. In case there is no sale of electricity, there will be no Late Payment Surcharge and hence, both are so integrated with each other to constitute a composite supply and do not form any independent service.

10. Further, we find that the CBIC has issued a clarification on the scope of Section 66E(e) of the Finance Act vide Circular No. 214/1/2023-ST dated 28.02.2023, wherein a detailed Circular No. 178/10/2022-GST dated 03.08.2022 issued under GST regime has been adopted/referred for Service tax regime as well. This is because Section 66E(e) of the Finance Act is exactly similar to Para 5(e) of Schedule II of the CGST Act, 2017. After going through the contents of the Circular No. 178/10/2022-GST dated 03.08.2022, we find that Late Payment Surcharge or Fee is a facility granted by the supplier naturally bundled with the main supply. It is an ancillary supply naturally bundled and supplied in conjunction with the principal supply, and therefore should be assessed as the principal supply.

11. We also find that prior to the negative list regime, i.e. prior to 01.07.2012, there were various circulars issued by the CBIC, which clarified that Late Payment Surcharges are in the nature of penal charges for loss caused due to delayed payment by the customer. In this regard, we may refer to clarification issued vide Circular No. 96/7/2007-ST dated 23.08.2007 and Instruction No. 137/25/2011-ST dated 03.08.2011.

12. Further, we find that the issue of taxability of Late Payment Surcharge is no more res integra and has been settled by various benches of the Tribunal in favour of the Assessees in the case-laws relied upon by the Respondent-Assessee (as cited in para 5.7 above). In this regard, we may refer to the decision of the Principal Bench in the case of Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. vs. Pr. Commr. of CGST & CE, Bhopal (supra), wherein the Tribunal has considered the identical issue and held as under:

“22. These three charges have been collected by the appellant in terms of the 2009 Regulations. The Principal Commissioner has confirmed the demand of service tax on „late payment surcharge‟ under section 66E(e) of the Finance Act by holding that the same is a consideration received by the appellant “for tolerating an act of electricity consumers by receiving the payments after the prescribed due date for payment of electricity bills. The Principal Commissioner has confirmed the demand of service tax on meter rent as a declared service under section 66E(f) of the Finance Act by holding that the same is the consideration received by the appellant for transfer of goods by way of hiring. The Principal Commissioner has also confirmed the demand of service tax on supervision charges collected from electricity consumers by holding that the same is taxable as it is not covered under any exemption.

23………………..

24. ……………….

25. ……………..

26. The issue as to whether the charges collected in connection with transmission of electricity even after July 01, 2012 would be subjected to tax as according to the Department they would not be exempted under section 66D(k) of the Finance Act, came up for consideration before the Gujarat High Court in Torrent Power [2019 (1) TMI 1092 – Gujrat High Court] after referring to the position prior to the introduction of the negative list and the Notifications referred to above and the introduction of the negative list regime w.e.f July 01, 2012, the Gujarat High Court observed as follows:

10. Insofar as the first phase is concerned, the respondents do not dispute that the related/ancillary services to transmission and distribution of electricity are exempt from payment of service tax. The dispute, therefore, relates to the period of the negative list regime and the CGST/SGST regime.

11. Insofar as the second phase, namely, the negative list regime is concerned, with effect from 1.7.2012, section 65B of the Finance Act, 1994 came to be amended and service tax became leviable on all services, other than those services specified in the negative list. Admittedly, transmission and distribution of electricity by an electricity transmission or distribution utility, finds place in the negative list and, is therefore, not exigible to service tax.

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 prenegative 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 prenegative 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.

(emphasis supplied)

27. The Gujarat High Court also examined whether services provided with fall within the ambit of bundle services as contemplated under Section 66F(3) of the Finance Act and observed that for the phase relating to the negative list, the services in question would fall within the ambit of bundle services, as contemplated under 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. The service would, therefore, be exempted from payment of service tax. The relevant portion of the order is reproduced below:

20. The facts of this case are required to be examined in the light of the above statutory provisions. In this case, we are concerned with transmission and distribution of electricity being the main services and application fee for releasing the connection for electricity; rental charges against metering equipment; testing fee for meters/transformers, capacitors etc.; labour charges from customers for shifting of meters or shifting of service lines; charges for duplicate bills provided by DISCOMs to consumers being related services. The question is whether an element of provision of these services is combined with an element or elements of provision of the main service of transmission and distribution of electricity. As noticed earlier, the respondents have themselves treated such related/ancillary services as part of the main service of transmission and distribution of electricity for the pre-negative list regime. Apart, therefrom, considering this issue independently, reference may be made to certain provisions of the Electricity Act. Sections 43 and 45 of the Electricity Act.

22. Thus, 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. Moreover, 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, apparatus or appliance under the control of a consumer fall within the ambit of electrical plant as defined under section 2(22) of the Electricity Act. Sub­section (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. Evidently 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.

23. Besides, a perusal of the GERC Regulations indicates that the services which are sought to be taxed now are the services, which the petitioner is required to mandatorily provide at the rate prescribed by GERC, a statutory authority constituted under the provisions of the Electricity Act. In the opinion of this court, all these services are essential activities which have a direct and close nexus with transmission and distribution of electricity. In terms of the earlier clarification dated 7.12.2010 issued vide Circular No.131/13-2010-ST, the Government of India had clarified that an activity, which is an essential activity having direct and close nexus with transmission and distribution of electricity would be covered by the exemption for transmission and distribution of electricity extended under the relevant notifications. Therefore, the taxability of the related/ancillary services are required to be given same treatment as is given to the single service, which gives such bundle its essential character, namely, transmission and distribution of electricity.

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 supplied)

28. It is clear from the aforesaid judgment of the Gujarat High Court that the activities that are related/ancillary to transmission and distribution of electricity would be exempt from payment of service tax since transmission and distribution of electricity is exempted. It is also clear from aforesaid decision that all services related to transmission and distribution of electricity are bundled services, as contemplated under section 66F(3) of the Finance Act, and are required to be treated as a provision of a single service of transmission and distribution of electricity, which service is exempted from payment of service tax.

29. Thus, for all the reasons stated above, it is not possible to sustain the levy of service tax on the amount collected by the appellant for late payment surcharge, meter rent and supervision charges.”

13.We observe that the ratios of the above-cited decisions are squarely applicable to facts of the present case, and therefore, by following the ratios of the said decisions, we are of the considered view that there is no infirmity in the impugned Order-in-Original passed by the learned Adjudicating Authority and consequently, we uphold the same by dismissing the appeal of the Revenue.

(Order pronounced in the court on 30.06.2026)