2021 (2) TMI 557 - HC - GST

High Court rules in favor of PSU in tax dispute, quashing Circular taxing electricity services

The High Court ruled in favor of the petitioner, a Public Sector Undertaking distributing electricity, in a case challenging a Circular dated 01.03.2018 ... Exemption of transmission or distribution of electricity - composite supply and principal supply test under Section 8 of the CGST Act - bundled services and essential character test - clarificatory circular cannot override statutory notification - ultra vires exercise by issuing a clarificationExemption of transmission or distribution of electricity - bundled services and essential character test - composite supply and principal supply test under Section 8 of the CGST Act - Validity of paragraph 4(1) of Circular No.34/8/2018-GST dated 01.03.2018 which seeks to make specific DISCOM services taxable despite Notification No.12/2017 exempting transmission or distribution of electricity. - HELD THAT: - The Court held that Notification No.12/2017-CT(R) unequivocally exempts the entire package of services described as transmission or distribution of electricity. The services enumerated in paragraph 4(1) of the impugned circular (application fee for release of connection, rental charges for metering equipment, testing fees, labour charges for shifting meters/service lines, and duplicate bill charges) are integral to and naturally bundled with the principal service of transmission and distribution of electricity. Applying the composite-supply/principal-supply test under Section 8 of the CGST Act and the bundled-services/essential-character doctrine, the tax liability of the composite transaction must be determined by the principal supply which imparts the bundle its essential character. Consequently, a clarificatory circular cannot carve out and render taxable constituent services when the parent notification exempts the principal supply; such an exercise is arbitrary and contrary to Section 8. The Court endorsed the reasoning in Torrent Power Ltd. (Gujarat High Court) and found paragraph 4(1) to be ultra vires the statutory scheme. [Paras 11, 12, 13, 15, 16]Paragraph 4(1) of Circular No.34/8/2018-GST dated 01.03.2018 is quashed as being ultra vires and contrary to the exemption notification and Section 8.Clarificatory circular cannot override statutory notification - ultra vires exercise by issuing a clarification - Relief and interim measures consequent to quashing of paragraph 4(1) of the impugned circular. - HELD THAT: - The Court granted mandatory injunctive relief restraining the respondents from raising any demand or taking coercive steps to recover tax based on the impugned paragraph 4(1) of the circular. The order thus protects the petitioner from enforcement actions premised on the quashed portion of the circular and disposes of the stay application accordingly. [Paras 16, 17]Respondents are restrained from raising demands or taking coercive measures to recover tax on the basis of the quashed paragraph; stay application disposed of.Final Conclusion: The writ petition succeeds: paragraph 4(1) of Circular No.34/8/2018-GST dated 01.03.2018 is quashed as ultra vires for attempting to tax services that form part of the exempted supply of transmission/distribution of electricity, and respondents are restrained from acting on that paragraph or recovering tax under it. Issues:Challenge to Circular dated 01.03.2018 on taxability of certain services related to electricity distribution.Analysis:1. The petitioner, a Public Sector Undertaking distributing electricity, challenged a Circular dated 01.03.2018, specifically Clause 4(1), issued by the Department of Revenue based on GST Council recommendations.2. The Circular declared certain services provided by DISCOMS as taxable, including application fees, rental charges for metering equipment, testing fees, labor charges, and duplicate bill charges.3. The petitioner argued that the Circular was arbitrary as it excluded essential services integral to electricity supply and distribution, which were exempted under the Central Goods & Services Tax Act.4. The petitioner cited a Gujarat High Court judgment that struck down a similar circular as contrary to the exemption notification and ultra vires the CGST Act.5. The respondents contended that the services listed in the Circular were not directly related to electricity transmission or distribution, justifying their taxability.6. The High Court noted the exemption notification clearly exempted the entire package of transmission and distribution services, making the Circular's attempt to tax specific services arbitrary and violative of the CGST Act.7. The Court emphasized that a circular cannot clarify an unambiguous statutory notification and criticized the attempt to levy tax on specific services through a circular.8. Citing the Gujarat High Court's detailed analysis, the High Court quashed Clause 4(1) of the Circular and restrained the respondents from recovering tax based on it.9. The judgment affirmed that all services related to transmission and distribution of electricity should be treated as a single exempt service, in line with the exemption notification.This comprehensive analysis of the High Court judgment highlights the legal arguments, precedents, and reasoning behind the decision to strike down the Circular's provision and uphold the exemption for electricity distribution services.