DILIP GUPTA

1. M/s. Southern Power Distribution Company of Andhra Pradesh Ltd.the appellant has filed this appeal to assail the order dated 16.04.2019 passed by the Commissioner of Central Tax, Tirupati GST Commissionerate, Tirupati the Commissioner by which the demand has been confirmed and an order for recovery from the appellant under the proviso to action 73(1) of the Finance Act, 1994 the Finance Act with interest and penalty.

2. This appeal has been filed against demand of service tax on amount received by the appellant against activities performed during the period from 01.07.2012 to 30.06.2017, for which show cause notice dated 28.04.2018 was issued alleging suppression of facts with intent to evade payment of service tax.

3. The details of the demands confirmed in the impugned order and the reasons, in brief, are as follows:

4. Shri Y. Sreenivasa Reddy, learned counsel for the appellant, mainly submitted that:

(i) The issue of taxability of penalties/liquidated damages is covered by decisions of the Tribunal rendered in M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. vs. Principal Commissioner CGST and Central Excise Bhopal 2021 (2) TMI 821-CESTAT New Delhi , M/s. South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax, Raipur 2020 (12) TMI-CESTAT New Delhi and Madhya Pradesh Poorva Kshetra Vidyut Vitran Company Ltd. vs. CCE, Madhya Pradesh 2022 (4) TMI 773-CESTAT New Delhi;

(ii) The activities of appellant, being in relation to distribution of electricity, are not leviable to service tax as was held by the Gujarat High Court in Torrent Power Ltd. vs. Union of India 2019 (1) TMI 1092-Gujarat High Court and the Rajasthan High Court Jodhpur Vidyut Vitran Nigam Ltd. vs. Union of India and others 2021 (2) TMI-Rajasthan High Court;

(iii) Wheeling charges and cross subsidy charges are related to transmission of electricity and outside the purview of service tax;

(iv) Service tax does not apply on supervisory charges and testing charges, and transformer and meter testing charges collected as per the statute;

(v) On rental charges, demands have been made by VAT authority treating the renting as deemed sale and hence, no service tax can be demanded; and

(vi) Demand for the extended period alleging suppression of facts with intent to evade service tax against a government company is against the settled legal position, and hence the demand is largely barred by limitation.

5. The appellant is a state-owned company established for the purpose of supply/distribution of electricity in certain parts of the State of Andhra Pradesh. As 100% of the shares of the company are held by the State of Andhra Pradesh, the appellant claims to be a 'Government Authority', as defined in clause 2(s) of the notification dated 20.6.2012. The activities of the appellant are regulated and controlled by the Electricity Regulation Commissions established both at Central and State levels under the Electricity Regulation Commissions Act, 1998. The appellant collects fee or any other charges as mandated under the Electricity Act, 20039 and the Regulations and Instructions framed by the State Electricity Regulation Commission.

6. The period of dispute is from July, 2012 upto June, 2017. Section 66D of the Finance Act provides for a negative list of services. This negative list comprises, amongst others, in sub-clause (k), ‘transmission or distribution of electricity by an electricity transmission or distribution utility’. The issue involved in this appeal is not regarding the amount collected by the appellant for supply of electricity; the dispute is regarding the amount collected towards collection for penalties for liquidated damages, wheeling charges, cross subsidy charge, supervision/incidental charges, transformer and meter testing charges, and rental amount collected from contractors. These charges have been collected by the appellant in terms of the Electricity Act and the 2009 Regulations.

7. The Commissioner has confirmed the demand of service tax on the amount collected from the penalties under section 66E(e) of the Finance Act by holding that the same is a consideration received by the appellant ‘for tolerating an act’. The Commissioner has confirmed the demand of service tax on wheeling charges and cross-subsidy charges treating them to be a declared service. The Commissioner has also confirmed the demand of service tax on supervision/incidental charges, transformer and meter testing charges and the rental amount collected from contractors by holding that the same is for a service contemplated section 65B(44) of the Finance Act.

8. According to the appellant, the amount has been collected in terms of the 2009 Regulations for the services bundled in the ordinary course of business for providing electricity. They are, therefore, required to be treated as a single service for providing services for transmission and distribution of electricity, which service is exempted under the negative list under section 66D(k) of the Finance Act.

9. In this connection it needs to be noted that prior to introduction of the negative list regime for service tax under the Finance Act, there was no specific clause in the charging provisions of the Finance Act requiring payment of service tax on the amount collected from the consumers in relation to transmission and distribution of electricity. The Government of India issued a Notification dated 27.02.2010 exempting taxable service provided to any person by any other person for transmission of electricity. Another Notification dated 22.06.2010 was issued exempting taxable service provided to any person by a distribution, licensee or franchisee for distribution of electricity. There was some confusion and notices were issued by the Department in respect of the activities relating to transmission and distribution of electricity for the period prior to the aforesaid notification. Various representations were received by the Government relating to the period prior to 27.02.2010 and 22.06.2010 as the transmission/ distribution companies believed that service tax was not required to be paid on activities relating to transmission and distribution of electricity. A Trade Notice dated 20.07.2010 was then issued by the Government of India that service tax shall not be required to be paid for the period prior to the issuance of the aforesaid two notifications on the services relating to transmission and distribution of electricity.

10. A question, however, arose as to whether the exemption granted for transmission and distribution of electricity would also include directly connected activities such as meter rents. The Government of India issued a Circular dated 07.12.2010 clarifying that supply of electricity meters to the consumers was an essential activity having direct and close nexus with transmission and distribution of electricity and was, therefore, covered by the exemption granted to transmission and distribution of electricity.

11. Thereafter, the negative list regime was introduced with effect from 01.07.2012. As noticed above, section 66D(k) includes ‘transmission or distribution of electricity by an electricity transmission or distribution utility’.

12. The issue as to whether the charges collected in connection with transmission of electricity even after 01.07.2012 would be subjected to service 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. 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. 01.07.2012, 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 prenegative 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.

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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. ***** 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)

13. The Gujarat High Court also examined whether services provided will fall within the ambit of bundled 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 bundled services 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.

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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)

14. 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.

15. The aforesaid judgment of the Gujarat High Court was followed by the Rajasthan High Court in Jodhpur Vidyut Vitran Nigam Ltd.

16. A Division Bench of the Tribunal in M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. also followed the aforesaid judgment of the Gujarat High Court and held that all services related to transmission and distribution of electricity are exempted from service tax.

17. Each of the heads under which the demand has been confirmed can now be examined.