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TMI Blog2024 (11) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016 notified by the Ministry of Power, Government of India provides that: The additional surcharge for obligation to supply as per section 42(4) of the Act should become applicable only if it is conclusively demonstrated that the obligation of a licensee, in terms of existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. The fixed costs related to network assets would be recovered through wheeling charges. As per National Electricity Policy, an additional surcharge be levied for meeting the fixed cost of the distribution licensee arising out of his obligation to supply in cases where consumers are allowed open access. As per Karnataka Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulation, 2004, the open access customer shall be liable to pay such additional surcharge as may be determined by the Commission from time to time. It is also noticed that Regulation 3 of KERC (Electricity Supply) Code, 2004 empowered the appellant to charge additional surcharge from their open access consumers. Thus, it is apparent that the appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST RULING Act would also mean reference to the corresponding similar provisions in the KGST Act. 2. The present appeal has been filed under section 100 of the Central Goods and Service Tax Act 2017 and Karnataka Goods and Service Tax Act 2017 (herein after referred to as CGST Act, 2017 and KGST Act, 2017) by M/s Chamundeswari Electricity Supply Corporation Limited, No. 29, 2nd Stage, Vijayanagara, Hinkal, Mysore 570017 (herein after also referred to as Appellant/Corporation/CESCOM) against the Advance Ruling order No. KAR/ADRG/09/2023 Dated: 27.02.2023. BRIEF FACTS OF THE CASE: 3.1. The Appellant is a public sector company of Government of Karnataka engaged in the distribution of electricity and supply of electric power in the districts of Mysore, Mandya, Kodagu, Chamarajanagar and Hassan. The appellant is registered under the provisions of Central Goods and Services Tax Act, 2017 and Karnataka Goods and Services Tax Act, 2017 (herein after referred to as the CGST Act and KGST/ SGST Act respectively) having GSTIN 29AACCC6636P1Z1. 3.2. The Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in open market, open access is provided in the Electricity Act and the Regulations issued from time to time, to such Industries or companies to buy power from private generators notwithstanding that they have entered into PSA With the Appellant. This mode is called in the trade as open access and customers as Open Access Consumers ( OA Consumers for short). It is pertinent to note that in order to comply with the obligations created in PSA, the Appellant enters into back-to-back Power Purchase Agreements (PPA) with private and state owned energy generators to purchase power as back up for seamless supply of electricity assured to such OA Consumers and therefore, in terms of the PPA, the Appellant has to pay Charges on the agreed units of the electricity supplied every month to its said generators. The purchase/sale tariff, as the case may be, of electrical energy includes two components i.e., capacity charges (fixed charges) and energy charges (Variable) and both are exempt from tax being towards Supply of electricity. It is pertinent to note that both the fixed Charges and variable charges paid by the Appellant on energy purchased under the PPA are part of its variable charges lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to meet the fixed cost stranded in the said transaction arising purely out of Appellant's obligation to supply power to OA Consumers, Sec.42(4) of the Electricity Act, 2003 read with clause 8.5 of the Tariff Policy, 2016; clause 5.8.3 of the National Electricity Policy; Regulation 11(VII) of the Karnataka Electricity Regulatory Commission (Terms and Conditions for open Access) Regulation, 2004; Regulation 3 of KERC (Electricity Supply) Code, 2004, provides collection of Additional Surcharge from OA consumers on the basis of quantum of energy wheeled from the private generators of OA Consumer. 3.8. The Appellant sought for advance ruling in respect of the following questions: i. Since the Government of Karnataka holds 99.99% of equity in the Corporation, whether the Corporation is considered as Governmental Authority or Local Authority ? ii. Since the Corporation is fully owned by the Government of Karnataka and audited by the Comptroller and Auditor General of India, whether filing of Annual Return in Form GSTR9 and Form GSTR9C is exempt under the Second Proviso to Section 44 of the CGST and KGST Acts? iii. Whether the Corporation is eligible to claim input tax credit on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim taxes paid under RCM, as input tax credit, subject to section 17(2) of the CGST Act read with Rule 42 and 43 of CGST Rules. vii. Additional Surcharge collected from Open Access Consumer as per subsection (4) of Section 42 of the Electricity Act, 2003, clause 8.5.4 of the Tariff Policy 2016, Clause 5.8.3 of the National Electricity Policy and clause 11 (vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act. viii. The Wheeling and Banking Charges collected by the Applicant is exempted from the payment of GST. 4. The Appellant was aggrieved in so far as Ruling No. vii of the Advance Ruling Authority, holding that additional surcharge collected by the appellant from OA consumers is consideration for tolerating an act which is a taxable supply under Section 7(1) of the CGST Act . Therefore, this Appeal is being preferred before this Appellate Authority praying for (i) setting aside the Ruling No. vii of the Advance Ruling (ii) to hold that Additional surcharge being collected by the appellant from OA consumer is neither supply of goods nor supply of service contemplated under Section 7 of the GST Acts; or (iii) to hold that the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers pay additional surcharge on the basis of energy wheeled to OA consumers from their private generators. As per clause 8.5 of the Tariff Policy 2016, the said charge is applicable only if it is conclusively demonstrated that the obligation of the Appellant, in terms of the existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. In the present case, the Appellant has such unavoidable obligation to bear the fixed costs consequent to the PPAs entered into with its private energy generators in order to cater to OA consumers under PSAs. Further, clause 5.8.3 of the National Electricity Policy also envisages such levy. Even clause 6.8.15 of the KERC order dated 09-06-2005 provides for levy of additional surcharge by the power corporations to meet the fixed cost. The additional surcharge collected is not towards any supply of goods or service and is to meet the fixed cost stranded, therefore, at the first instance, it does not fall within the scope of supply contemplated under Sec. 7 of the Act. It is nothing but recovery of stranded fixed cost from the OA Consumer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges and the variable/energy charges are charged for sale of electricity and are thus not taxable as electricity is exempt from GST. Power purchase agreements may have provisions that the power producer shall not supply electricity to a third party without approval of buyer. Such agreements which ensure assured supply of power to State Electricity Boards/DISCOMS are ancillary arrangements; the contract is essentially for supply of electricity. Accordingly, the PSA is not entered into with OA consumers for permitting it to buy power from private producers. Therefore, additional surcharge received is towards 'not tolerating an act or situation' construing deterrence to such Act. 5.5. In para 10.1 of the said Circular dated 03-08-2022, it has been categorically stated that the fact that the minimum fixed charges remain the same whether electricity is consumed or not or it is scheduled/consumed below the contracted or available capacity of a minimum threshold, does not mean that minimum fixed charge or part of it is a charge for tolerating the act of not Scheduling or consuming the minimum the contracted or available capacity or a minimum threshold . Additional Surcharge co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id provisions under the Electricity Act, Tariff Policy, 2016 and National Electricity Policy etc., without having any option or choice whether to tolerate or not of the act of OA consumer in opting for open access. 5.8. Assuming but not admitting that additional surcharge is held to be consideration towards supply, then also since the said supply is supplementary to the principal supply of Electrical Energy, for which the PSAs are entered into, the Additional Surcharge shall also be assessed as the Principal Supply and thus exempted from payment of GST. The said supply being a part of composite supply, within the meaning of Sec. 2(30) read with Section 8 of the GST Acts, and if so, the contract for principal supply being the supply of electrical energy (goods), even the Additional Surcharge collected is also exempt from payment tax in terms of Sec. 8(a) of the GST Acts read with Sl. No. 104 of Notification No.2/2017-Central Tax (Rate), dated 28 06-2017. Alternatively, if it is held that the said additional surcharge collected is in relation to supply of service, then also it being in relation to distribution of electricity by the power corporations including the Appellant, from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in their Ruling KAR ADRG 09/2023 dated 27.02.2023 held that additional surcharge collected by the appellant from OA consumers is consideration for tolerating an act which is a taxable supply under Section 7(1) of the CGST Act. Accordingly, additional surcharge collected from Open Access Consumer as per sub section (4) of Section 42 of the Electricity Act, 2003, Clause 8.5.4 of the Tariff Policy 2016, Clause 5.8.3 of the National Electricity Policy and Clause 11 (vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act. The additional surcharge collected is not a consideration for tolerating an act which is a taxable supply. It is nothing but recovery of stranded fixed cost from the OA Consumer as mandated under the above provisions of the statute. 6.3. He further submitted that the additional surcharge cannot be held as consideration towards tolerating an act. He drew reference to the Para 7, 7.1 10 of the Board Circular No. 178//10/2022-GST dated 3rd Aug 2022 and submitted that such Additional Surcharge is collected as per statute for 'not tolerating an act or situation of an OA Consumer for drawing power from independent power gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcharge due to the statutory provisions. It is clear that the collection of 'Additional Surcharge' is also nothing but fixed charges which forms one of the components of price of electricity as per PSA and accordingly exempted under entry No. 104 of Notification No.02/2017 CT(R) dated 28.06.2017. Even if it is held that the said 'Additional Surcharge' collected is in relation to supply of service, then also it being in relation to distribution of electricity by the appellant, from the generation site of third party generators of OA consumers to the premises of the OA consumer, it amounts to distributions of electricity and collection of 'Additional Surcharge' is exempted supply as per entry No.25 of the Notification No.12/2017-Central Tax(Rate) dated 28.06.2017. DISCUSSIONS AND FINDINGS: 7. We have gone through the entire case records including all the written as well as oral submissions made by the appellant. We have also examined the impugned order No. KAR ADRG 09/2023 dtd. 17.02.2023 passed by the Authority for Advance Ruling in Karnataka. On careful consideration of the same, the issue to be decided is whether the order passed by the Authority for Advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a contract. The fixed costs related to network assets would be recovered through wheeling charges. 8.3. Further, cluse 5.8.3 of the National Electricity Policy notified by the Ministry of Power, Government of India reads as follows: Under sub-section (2) of Section 42 of the Act, a surcharge is to be levied by the respective State Commissions on consumers switching to alternate supplies under open access. This is to compensate the host distribution licensee serving such consumers who are permitted open access under section 42(2), for loss of the cross-subsidy element built into the tariff of such consumers. An additional surcharge may also be levied under sub-section (4) of Section 42 for meeting the fixed cost of the distribution licensee arising out of his obligation to supply in cases where consumers are allowed open access. The amount of surcharge and additional surcharge levied from consumers who are permitted open access should not become so onerous that it eliminates competition that is intended to be fostered in generation and supply of power directly to consumers through the provision of Open Access under Section 42(2) of the Act. Further it is essential that the Sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e levied for meeting the fixed cost of the distribution licensee arising out of his obligation to supply in cases where consumers are allowed open access. As per Karnataka Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulation, 2004, the open access customer shall be liable to pay such additional surcharge as may be determined by the Commission from time to time. It is also noticed that Regulation 3 of KERC (Electricity Supply) Code, 2004 empowered the appellant to charge additional surcharge from their open access consumers. Thus, it is apparent that the appellant is collecting additional surcharge as per the Electricity Act; Tariff Policy; National Electricity Policy of Ministry of Power, Government of India and Karnataka Electricity Regulatory Commission (Terms and conditions for open Access) Regulation, 2004, KERC (Electricity Supply) Code, 2004 of Karnataka Electricity Regulatory Commission, Government of Karnataka from the open access customers, and therefore it forms part of tariff for the supply and distribution of electricity. 9. Advance Ruling Authority held that the consideration received towards additional surcharge is nothing but charge lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s will not constitute 'consideration' and hence such activities will not constitute supply within the meaning of the Act. .. Fixed Capacity charges for Power: 10. The price charged for electricity by the power generating companies from the State Electricity Boards (SEBS)/DISCOMS or by SEBS/DISCOMS from individual customers has two components, namely, a minimum fixed charge (or capacity charge) and variable per unit charge. The minimum fixed charges have to be paid by the SEBS/DISCOMS/individual customers irrespective of the quantity of electricity scheduled or purchased by them during a month. They take care of the fixed cost of generating/ supplying electricity. The variable charges are charged per unit of electricity purchased and increase or decrease every month depending on the quantity of electricity consumed. 10.1 The fact that the minimum fixed charges remain the same whether electricity is consumed or not or it is scheduled/consumed below the contracted or available capacity or a minimum threshold, does not mean that minimum fixed charge or part of it is a charge for tolerating the act of not scheduling or consuming the minimum the contracted or available capacity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of power, after approval by this commission, by considering the overall growth in sales. However, a large number of its high revenue yielding consumers are buying power under Open Access instead of availing supply from the ESCOMs. As a result, the generation capacity tied up by the ESCOMS remains idle. In this situation, ESCOMS are forced to back down the generation from conventional sources and are also required to pay Fixed Charges (or Capacity Charges) to the Generators, irrespective of actual energy being purchased. Thus, ESCOMs have stated that there is a need for recovery of the part of fixed cost towards the stranded capacity arising from the power purchase obligation through levy of Additional Surcharge. CESC has worked out Additional Surcharge of Rs. 1.29/ unit and has requested the Commission to continue levy of ASC for OA consumers procuring power from power exchanges and RE generators. CESC in its reply to the preliminary observation has submitted that it has determined the Additional Surcharge of Rs. 1.29 per unit as per estimated ARR for FY 23. Commission's views and decision: The Commission in its previous order, considering the provisions of the Electricity Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been and continues to be stranded. Accordingly, KERC, in its Tariff Order, 2022 dtd. 04.04.2022 has fixed the Additional Surcharge @ Rs. 1.20 per unit from OA consumers procured from other than Renewable Energy Sources and Rs. 0.35 per unit in case of Renewable Energy Sources, for FY 2023. Such Tariff Orders enable the appellants to charge the Additional Surcharge on monthly basis in the bills raised by them to their open access consumers. 11. We also find that the collection of Additional Surcharge is not towards any independent activity but is incidental levy to the main activity of Supply and distribution of electricity for which they have entered into Power Supply Agreements with their customers. The Additional Surcharge is collected to compensate the Fixed Charges which is stranded in the hands of the Appellant. This additional surcharge is a part of Tariff' fixed by KERC and levied as per various provisions enacted by Central and State Governments. As per Regulation 11(vii) of the Karnataka Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulation, 2004, in the case of a new open access customer (i.e. if the open access customer was not a consume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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