Reimbursements on electricity expenses from the occupants chargeable to Service tax

[Bimal jain]

Recently, the issue of levibility of Service Tax on reimbursements on electricity expenses received from the occupants of a complex came before a Single Member Bench of the Hon’ble Calcutta High Court, wherein the Hon’ble High Court has upheld the levy of Service Tax on such transactions. [Srijan Realty (P) Ltd. v/s Commissioner of Service Tax, Service Tax Commissionerate II - Kolkata & Ors. 2019 (3) TMI 821 - CALCUTTA HIGH COURT  W.P. No. 770 of 2015].

Issue: Whether the supply of electricity by the petitioner to the occupiers of “Galaxy Mall”, a commercial complex, is a service exigible to Service Tax under the Finance Act, 1994 (“the Finance Act”).

Facts & Background:

• The petitioner has a commercial complex developed and operated under the name and style of “Galaxy Mall” lying and situated at Asansol. The Commercial Complex has various occupants.
• In order to effect electric supply to the commercial complex, the petitioner entered into an agreement on October 26, 2010 with DPSC Ltd. (now known as Indian Power Corporation Ltd.).
• Such licensee provides electric supply through an 11KV substation installed at the commercial premises. The licensee raises a single consolidated electricity bill upon the petitioner.
• The petitioner on receipt of electric supply, redistributes the same to the occupiers of the commercial complex. The petitioner has installed sub- meters for the respective occupiers. Based on the readings of such sub-meters, the petitioner raises bills upon such occupiers.
• The petitioner initially collected Service Tax. However, upon objections being raised by the some of the occupiers, the petitioner consulted the Superintendent of Service Tax, ST II Commissionerate for determining whether such redistribution of electricity was exigible to Service Tax under the Finance Act or not.
• The Superintendent of Service Tax held the view that, such a service is exigible to Service Tax. The petitioner had obtained legal advice which was of a contrary view than the Superintendent of Service Tax.
• Thereafter, the petitioner by its letter dated January 30, 2015 intimated the Department that, it was not liable to pay Service Tax.
• The Assistant Commissioner of Service Tax, by a letter dated March 27, 2015, held the view that, the redistribution of electricity by the petitioner was eligible to Service Tax.

Held:

The Hon’ble Single Member Bench of the Calcutta High Court held that: -

• The petitioner does not have a licence to undertake trading in electricity under Section 12 of the Electricity Act, 2003. The petitioner also cannot be said to be engaged in the business of transmission as, the petitioner does not have such a licence. The petitioner is not a person authorized to transmit, supply, distribute or undertake trading in electricity.
• Any other interpretation will render the steps taken by the petitioner in receiving high-tension electric supply and making over low-tension electric supply to the occupants, violative of the provisions of the Electricity Act, 2003.

• Service is defined in Section 65B (44) of the Finance Act, as an activity carried out by a person for another for consideration and includes a declared service. The activity of the petitioner comes within the definition of service. The activity of the petitioner sought to be made exigible to tax does not come within exclusions contained in Section 65B (44).
• The transaction of the petitioner obtaining high-tension electric supply converting it to low-tension supply, and supplying it to the occupants, raising bills on such occupants and realizing the electricity consumption charges from such occupants, is a service which the petitioner renders, and such an activity is exigible to Service Tax under the Finance Act.

Our Comments:

The current judgment of the Hon’ble High Court has omitted in taking certain points into consideration to conclude on the taxability of supply of electricity in a complex. Since there is no profit mark up in the current transaction and the occupants are being charged on the actuals as per their consumption reflected in their respective sub - meters, it can be said that the amounts being received by the petitioner were reimbursements towards the payment made by the petitioner to the Indian Power Corporation Ltd. on behalf of the occupants and may be considered as Pure Agent.

In light of the judgment of Hon’ble Supreme Court in the case of Union of India v/s Intercontinental Consultants & Technocrats Pt. Ltd. reported in 2018 (3) TMI 357 - SUPREME COURT OF INDIA , wherein, it has been mandated the Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, to be ultra-vires for the period from May 1, 2006 to May 14, 2015 (“Impugned Period”) and held that only the gross amount charged against such services  by the service provider ‘for such service’ and the valuation of service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.

Now, it will be interesting to see whether this aspect of reimbursements will be considered by the Tribunals and other quasi-judicial authorities while adjudicating the pending litigations on the similar issue for the impugned period relating to the transactions wherein the assessees have not made any profit mark up and have just paid on behalf of the occupants and later collected electricity expenses as per the actual consumption.