Judgement Update | Applicability of Indirect Taxes on recovery of electricity charges
It is a common practice for developers or landowners giving property on rent, to recover electricity charges. While renting of property (non-residential) and its maintenance is subject to Indirect Taxes, sale and transmission of electricity is exempt.
In a recent decision in the case of Srijan Reality Private Limited v. CST, 2019-TIOL-594-HC-KOL-ST, the Calcutta High Court held that conversion of high-tension electricity into low-tension electricity by the landlord and distributing it to the tenant is a provision of service and exigible to service tax.
This update attempts to throw light on various aspects of this issue.
Position under erstwhile Indirect Tax regime
Electricity was a non-excisable product under excise law with no excise duty prescribed against the same under the Central Excise Tariff Act, 1985. Similarly, ‘transmission or distribution of electricity by an electricity transmission or distribution utility’ was exempt from service tax. Various State VAT laws exempted ‘electricity’ from payment of VAT. Only ‘electricity duty’ was levied by States on consumption of electricity which continues to apply under GST regime as well.
Bundling of sale of electricity with renting and maintenance services for levy of Service Tax
Under Service Tax law, there was a concept of naturally bundled services and unnaturally bundled services (where provision of two or more services was made).
It is a settled law that electricity is goods [Refer Indian Aluminium Co. v. State of Kerala, 1996 AIR 1431]. Basis this, renting of property and sale of electricity attracted different taxes i.e. service tax and VAT, respectively. Hence, where the service provider was making electricity available along with renting of property, the concept of bundling of service could not be applied. Therefore, there was no levy of service tax on electricity sale.
In Srijan Reality’s case (supra), the landowner was converting high tension electricity into low tension electricity. The Court relied on various definitions under the Electricity Act, 2003 (‘Electricity Act’) and observed that the petitioner is not an electricity trader or supplier and cannot legally supply electricity to another person. Thus, such an activity cannot be treated as trading of goods.
In our view, the aforesaid ruling does not lay down correct legal proposition. The Court should have discussed the taxability of this transaction independent of the compliances under the Electricity Act. In this case, the petitioner was supplying electricity to the occupiers. Thus, the activity undertaken by the petitioner was sale of goods only and cannot be made exigible to service tax.
Position under GST regime
Under the GST regime, electrical energy falls under the definition of ‘goods’. Government vide Notification No. 2/2017-Integrated Tax (Rate) dated June 28, 2017 (similar Notification has been issued under the CGST Act) has exempted electrical energy from the payment of GST.
Further, Notification No. 9/2017-Integrated Tax (Rate) dated June 28, 2017 (similar Notification has been issued under the CGST Act) exempts ‘transmission or distribution of electricity by an electricity transmission or distribution utility’. The term ‘electricity transmission or distribution utility’ means the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, or a distribution or transmission licensee under the
Under GST, the concept of composite supply and mixed supply is relevant. Under composite supply, supply of two or more goods or services or both which are naturally bundled and supplied in ordinary course of business (one of which is a principal supply) is treated as a composite supply which attracts tax as applicable to principal supply.
In case only electricity charges are recovered (without any renting of property), the same will be exempt from GST. Where electricity is made available while giving property on rent (either recovered by the landlord or paid directly by the tenant), the question arises whether provision of renting service and electricity become composite supply or not.
It is pertinent to refer to a recent advance ruling in the case of E-Square Leisure Private Limited, 2019-VIL-112-AAR where the AAR observed that one of the conditions of pure agency is that the invoice should be in the name of recipient and not pure agent. The AAR held that since invoice of electricity issued by electricity department is in the name of lessor (supplier), lessor cannot be said to be acting as a pure agent. Such supply will become ancillary supply to principal supply of renting of property and shall
be exigible to GST as a composite supply. The AAR further held that mere issuance of separate document for recovering electricity charges, will not change the nature of transaction from composite supply to pure agency.
In our view, the decision of AAR holding that the electricity charges when charged with other supplies (renting and/or maintenance) form a composite supply, is in accordance with the law. In the common parlance, the tenant always expects an electricity connection in a property that it is taking on rent. Neither the landlord nor the tenant considers property and electricity as two separate supplies. There is no intent of the supplier to be engaged in the business of supply of electricity. Thus, renting of property by the landlord along with recovery of electricity charges should be regarded as a single economic activity at supplier’s end. Therefore, the electricity charges recovered by the supplier becomes ancillary and shall be included in the taxable value for the purpose of charging GST under Section 15(2)(c) of the CGST Act which provides for inclusion of incidental expenses. The conclusion would be the same in case the charges are paid directly by the tenant / lessee to the electricity department. Hence, the taxpayers renting property should ensure that where the invoice of the electricity department is in their name, they pay GST on recovery of electricity charges along with rental charges.
Notably, in case electricity is treated as composite supply or electricity charges are included in the taxable value treating the same as ancillary to rental service, this results in indirectly levying GST on electricity. This needs to be tested on the ground of constitutionality of levy of GST on electricity. This is because ‘taxes on consumption or sale of electricity’ is a subject matter of State List (Entry 53) and such taxes are levied by States under this Entry. While Article 246A of the Constitution of India empowers the legislature to levy GST on supply of goods and services, the same should not be interpreted to permit encroachment upon the powers of the States who have been given exclusive powers under the State list. Hence, the taxpayers can challenge the levy of GST on sale of electricity.