Analysis of recent Hon’ble High Court of Calcutta judgment in the case of Srijan Realty (P) Ltd v. Commissioner of Service Tax[1]. The ruling is given under Finance Act, 1994 (Service Tax law) and has raised a lot of eyebrows considering the fact that the ruling has vide implications under the GST law as well. The facts of the case are summarized below and are applicable to every other business entity running on a leased premises.

1. Petitioner is developer and operator of a commercial complex which is rented out to various tenants;

2. Petitioner has entered into an agreement with DPSC Ltd (licensee) to supply electricity to commercial complex;

3. Petitioner on receipt of electric supply redistributes the same to the tenants of the commercial complex;

4. The petitioner has installed sub-meters for respective tenants and based on which bills are raised.

Issue before the Court: Whether Service Tax is chargeable on petitioner on such supply of electricity?

Arguments of the Petitioner:

1. The activity of redistribution of electricity is a sale/trading activity and therefore not exigible to Service Tax as per Section 66D (negative list) of the Finance Act, 1994;

2. State legislature has the competence to levy taxes on consumption or sale of electricity in terms of entries 53 and 54 of List II of Schedule 7 read with Article 246 of the Constitution;

3. Absence of any license under the Electricity Act, 2003 does not mean that the petitioner is not selling or trading in electricity supply;

4. Electrical energy is incorporated under heading 271160000 in Central Excise Tariff Act, 1985 and therefore considered to be goods. It is considered to be goods as held in various landmark judicial precedents[2];

5. The absence of any authorisation to supply of electricity may invite penalties under the Electricity Act, 2003 but does not change the nature and character of the sale;

6. Dominance purpose test should be applied and transaction being indivisible, it should be considered as a sale.

Arguments of the Respondent:

1. Petitioner is enjoying high tension electric supply and converting it to low tension and thereafter redistributing it, which he is legally authorised;*

2. The petitioner is neither permitted to sell electricity as per Electricity Act, 2003 nor has any approval from any State or Central Authorities, to trade in electricity. The Court should not allow an interpretation which permits illegality to be perpetrated;

3. Petitioner is a consumer and not a trader as per Memorandum of understanding entered with licensee and bills raised by licensee.

Observations:

1. In view of the Electricity Act, 2003, the petitioner cannot be said to be engaged in trading, transmission or distribution of electricity;

2. The activity of petitioner of conversion of high-tension electric supply into low-tension electric supply and thereafter distributing to the tenants at best can be said to be service. Any other interpretation in terms of Electricity Act, 2003 should be avoided;

3. The entire transaction of supplying electricity from the point of generation to the point of consumption cannot be treated as being part of the sale of goods;

Judgment:

The activity is covered by Section 65B(44) and therefore liable to Service Tax. Further not excluded by negative list of Services defined under Section 66D of Finance Act, 1994.

Analysis of the Judgement:

1. The facts of the case are not new to be litigated. There are number of judicial precedents on the subject. Observations in few cases are reproduced below:

a. In the case of Ticel Bio Park Ltd., CESTAT Chennai [3] it was observed that recovery of electricity charges is ‘incidental reimbursable expenses’ on which there can be no service tax liability. Also electricity supply qualifies to be ‘sale of goods’which is outside the purview of Service Tax law.

b. In the case of ICC Reality (India) Pvt. Ltd., CESTAT Mumbai [4], it was observed that electricity is specifically covered under tariff schedule of Central Excise Tariff Act/VAT Act. The same is not chargeable to Service Tax.

2. Recovery of electricity charges from tenants are in essence ‘incidental reimbursable expenses’. The recovery is done as per sub-meters (units consumed multiplied by current rate per unit). There is no profit motive involved in such recoveries. In the case of Intercontinental Consultants and Technocrats Pvt. Ltd. [5], recently Hon’ble Supreme Court held that on reimbursement of expenses which are incurred while providing a Service (in the present case, renting service), no service tax can be charged.

3. It is also relevant to note that dominant nature of such transaction is of ‘Sale of Electricity’ rather than one of the ‘Service’. It is an indivisible contract which therefore implies that it is not possible to treat a certain portion of value as Service and levy Service Tax. An argument that the owner is not authorised under the Electricity Act, 2003 to sale electricity does not stand to test. To cure the violation of a particular law, tax laws can’t be interpreted accordingly.

4. It is also relevant to note that there is no need to refer negative list and particularly the entry which provides that transmission or distribution of Electricity Services by an electricity transmission or distribution utility is not taxable. This entry has nothing to do with the facts of the present case.

5. It is also relevant to note that such reimbursement of electricity charges will not qualify as pure agent considering the fact that invoices are raised in the name of owner and who in turn is liable to pay charges to licensee (distribution companies). An argument that recovery is based on actual cost will not make the owner ‘an agent’. Nonetheless, there is no need to go into the argument that the case is one of pure agency based on the above cited analysis.

Impact under GST law:

The rule which stated that Service Tax shall be charged on reimbursement has been discarded by Hon’ble Supreme Court under Service tax law only in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. However, the valuation provisions (Section 15 and rules made thereunder) still provides that ‘incidental reimbursable expenses’ are to be considered for charging GST. Accordingly, reimbursement of electricity charges along with Rental/Maintenance services can be said to be chargeable to GST on the basis of concept of Composite Supply until and unless the very chargeability as provided in Section 9 of GST Act is discarded by Courts.

[1] W.P. No. 770 of 2015

[2] Refer 2002 volume 5 Supreme Court Cases page 3 State of Andhra Pradesh v. National Thermal Power Corpn. Ltd.

[3]  2018 (9) TMI 1586

[4] 2013 TIOL 1751

[5] Civil Appeal No. 2013 of 2014

Though the facts of the every transaction to be dealt in detail. Reach out to me at ca.shivashish@gmail.com/+91-9818472772.

The information provided is not a substitute for legal and other professional advice. This is only for academic discussions.

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