Supply of Electricity and Water to FSNL and GMGL Deemed Sale of Goods, No Service Tax Applied

The CESTAT Kolkata held that the supply of electricity and water to FSNL and GMGL constitutes a sale of goods, not a business support service, and thus is not subject to service tax. The tribunal rejected the classification of these supplies as taxable services, noting that business support services involve outsourced activities normally performed by the business itself, which was not the case here. Additionally, demands based on provisions deleted post-01.07.2012 were found unsustainable, as the appellant had discharged service tax under the correct category after that date. Consequently, the confirmed service tax demand for the period 2007-08 to 2014-15 was set aside and the appeal allowed.

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ISSUES:

Whether the supply of electricity and water by a manufacturer to other entities within its premises constitutes a sale of goods or a taxable service under the category of Business Support Service.Whether the definition of Business Support Service under Section 65(104c) of the Finance Act, 1994, includes the provision of electricity and water as infrastructural support service.Whether service tax can be levied on transactions that amount to sale of goods under the negative list regime post 01.07.2012.Whether demand of service tax is sustainable when the tax charged is available as input credit to the recipient, invoking the principle of revenue neutrality.Whether confirmation of service tax demand based on deleted provisions for the period post 01.07.2012 is legally sustainable.

RULINGS / HOLDINGS:

The supply of electricity and water to entities operating within the factory premises is a transaction amounting to "sale of goods" and not a provision of service; hence, it is not exigible to service tax under the category of Business Support Service.The definition of Business Support Service under Section 65(104c) primarily covers "outsourced activity" and does not include supply of electricity and water as infrastructural support services; thus, the subject transaction does not fall within this taxable service category.Under the negative list regime, Section 65B(44) explicitly excludes "transfer of title in goods by way of sale" from the definition of service, rendering service tax demand on such transactions untenable.The demand of service tax is liable to be set aside on the ground of revenue neutrality since any service tax charged by the recipients is available as input credit to the appellant, making the demand unsustainable.Confirmation of service tax demand for the period post 01.07.2012 based on deleted provisions is legally unsustainable and liable to be set aside.

RATIONALE:

The Court applied the statutory framework under the Finance Act, 1994, including the definitions under Sections 65(104c), 65(105)(zzzq), and 65B(44), to determine the nature of the transaction.Precedents from the Supreme Court and Tribunals were relied upon, including judgments holding electricity and water as goods, and that service tax is not applicable on contracts for sale of goods.The principle of noscitur-a-sociis was invoked to interpret the scope of Business Support Service, emphasizing that it covers only outsourced activities that support the main business, excluding supply of goods essential for the main business operations.The Court recognized the principle of revenue neutrality, referencing relevant case law that demands are unsustainable when the tax is creditable downstream.The Court noted that demands based on provisions repealed or deleted after 01.07.2012 cannot be sustained for periods subsequent to their deletion, ensuring adherence to the correct legal provisions in force during the relevant period.

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