Naturally bundled electricity services remain exempt when part of the principal supply; a circular cannot narrow the statutory exemption.

Services naturally bundled with an exempt supply of transmission or distribution of electricity retain the character of that principal exempt supply. The Rajasthan HC held that a circular could not isolate connection fee, meter rental, testing charges, shifting charges, duplicate bill charges and similar related services for taxation when they formed part of the composite exempt activity. A clarificatory circular cannot override an unequivocal exemption notification, and selective taxation of constituent services in a naturally bundled supply is arbitrary and unreasonable. Para 4(1) of the circular was therefore ultra vires and quashed, and tax recovery on its basis was restrained.

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Issues: Whether para 4(1) of the impugned circular, which treated specified services connected with distribution of electricity as taxable, was contrary to the exemption granted for transmission or distribution of electricity and therefore liable to be quashed.

Analysis: The exemption notification for transmission or distribution of electricity covered the complete bundle of services forming part of that supply. The impugned circular sought to isolate specific services such as connection fee, meter rental, testing charges, shifting charges and duplicate bill charges and bring them to tax, even though they were integral or related to the exempt activity. The Court held that such carving out of part of a naturally bundled or composite supply was arbitrary and unreasonable, and that a clarificatory circular could not override an unequivocal statutory exemption notification. The Court agreed with the view that related services of this nature are to be treated as part of the principal exempt supply.

Conclusion: Para 4(1) of the circular was held to be ultra vires and was quashed, and the respondents were restrained from recovering tax on its basis.

Ratio Decidendi: Where services are naturally bundled with an exempt principal supply and form part of its essential character, they must be treated as part of that exempt supply, and a circular cannot alter the scope of the exemption by selectively taxing constituent services.

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