2025 (8) TMI 1658 - AT - Service Tax

Supply of electricity to tenants is sale of goods not taxable service; VAT discharged so no service tax

Commissioner of CGST & Central Excise, Kolkata Versus M/s DLF Infocity Developers (Kolkata) Limited

CESTAT KOLKATA - AT upheld the adjudicating authority's finding that the respondent's supply of electricity to tenants constituted sale of goods, not a ... Taxable service or supply of goods - supply of electricity - transmission or distribution of electricity services - HELD THAT:- The said issue has been examined by the by the Hon’ble Madras High Court in the case of Kumbakonam Electric Supply Corporation Ltd. Versus Joint Commercial Tax Officer, Esplanade Division Madras [1963 (9) TMI 43 - MADRAS HIGH COURT], which has been affirmed by the Hon’ble Apex Court in the case of Commissioner of Sales Tax, Madhya Pradesh, Indore Vs. Madhya Pradesh Electricity Board, Jabalpur [1968 (11) TMI 85 - SUPREME COURT], wherein electricity has been held as goods. Same view has been taken again by the Hon’ble Apex Court in the case of State of AP & Others versus National Thermal Power Corporation Ltd. And Others [2002 (4) TMI 694 - SUPREME COURT], wherein after relying on the decision in the case of Madhya Pradesh Electricity Board [1968 (11) TMI 85 - SUPREME COURT], it was held electricity as goods. This Tribunal also in the case of ICC Reality (India) Pvt. Ltd. Vs. Commissioner of Central Excise, Pune III [2013 (12) TMI 854 - CESTAT MUMBAI], held that once electricity has been held to be goods and the entire transaction of sale of goods and the question of charging service tax on the same, treating it as provision of service, is incorrect and unwarranted - Further, this Tribunal in the case of Radius Water Ltd. Vs. Commissioner of Central Excise & Service Tax, Raipur [2017 (9) TMI 83 - CESTAT NEW DELHI], which has been affirmed by the Hon’ble Apex Court, wherein it has been held that the transaction involving pure sale of water would not be susceptible to service tax. Admittedly, in this case, the respondent has supplied electricity to their tenants against payment. Therefore, the same will be termed as sale of goods on which VAT has also been discharged. Therefore, no service tax is payable by the respondent. The same view has been taken by the adjudicating authority in the impugned order. Therefore, there are no infirmity with the impugned order and the same is upheld. The appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of supplying electricity to tenants by the respondent constitutes sale of 'goods' (electricity) rather than a taxable 'service'. 2. Whether amounts recovered from tenants for electricity consumption constitute consideration for a service (chargeable to service tax) or reimbursement/price of goods (not chargeable as service tax), including where recovery exceeds actual cost. 3. Whether the respondent qualifies as an 'Electricity Transmission or Distribution Utility' under the statutory definition and related notifications, and if not, whether exemption notifications apply. 4. Whether the transaction can be treated as a 'pure agent' arrangement or procurement of goods on behalf of tenants such that the value is excludible from valuation for service tax. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of supply of electricity - goods or service Legal framework: The analysis proceeds under the statutory classification of 'goods' versus 'service' for tax purposes; historically courts have treated electricity as 'goods'. The Finance Act distinctions and service tax levy require determining the nature of the transaction. Precedent Treatment: Earlier judicial decisions have held electricity to be goods. The Tribunal and higher courts have repeatedly applied that proposition in analogous contexts. Interpretation and reasoning: The Tribunal relied on prior authorities holding electricity as goods and on factual findings that electricity was supplied to tenants against payment and VAT was discharged on the transactions. Where electricity is sold to tenants based on consumption, the economic substance is sale of a commodity rather than provision of a service. Ratio vs. Obiter: The holding that electricity, when supplied for consideration to consumers/tenants, constitutes sale of goods is treated as ratio followed by the Court. Conclusions: Supply of electricity to tenants in the factual matrix is properly characterised as sale of goods (electricity) and not a taxable service. Issue 2: Nature of recovered amounts - consideration for service vs price of goods; effect of mark-up Legal framework: Service tax valuation rules exclude sale of goods where a taxable service is alleged to incorporate sale of goods; exemptions/notifications and the concept of pure agent/purchase on behalf inform whether recovered amounts are includible in service valuation. Precedent Treatment: Tribunal and higher courts have held transactions involving pure sale of commodities (electricity, water) not susceptible to service tax; earlier Tribunal decisions treated distribution/sale to tenants as sale and, in certain facts, as pure agent arrangements. Interpretation and reasoning: The Adjudicating Authority examined agreements showing billing patterns (grid rates, cost plus 20%, etc.), CA certificates of payments to the distribution company, and VAT payment; it concluded that the receipts represented recovery of the price of electricity rather than service consideration. The Revenue pointed to mark-up over cost and argued that where amounts exceed cost the transaction is not purely expense recovery. The Tribunal accepted the Adjudicating Authority's finding that the transaction was sale of electricity and that VAT was charged, thus negating service tax liability. The Tribunal noted prior decisions where even where a common meter was used and sub-metering effected, the arrangement was either sale or pure agent and not service. Ratio vs. Obiter: The conclusion that where the factual matrix shows sale of electricity and VAT liability, the receipts are price of goods and not service consideration is treated as ratio. Observations about mark-up are factual distinctions and therefore not binding beyond the facts (considered obiter regarding scope of mark-up relevance). Conclusions: Where the supplies to tenants are sales of electricity (VAT charged and paid), the recovered amounts are the price of goods and not chargeable to service tax; issues of mark-up must be assessed on factual evidence but did not displace the sale character in this case. Issue 3: Qualification as 'Electricity Transmission or Distribution Utility' and applicability of exemption notifications Legal framework: Definition of 'Electricity Transmission or Distribution Utility' in the Finance Act and statutory notifications exempt distribution/transmission by specified entities; determination depends on whether the supplier falls within the defined class (licensee, franchisee, utility notified under Electricity Act etc.). Precedent Treatment: Notifications exempting transmission/distribution by authorised entities are recognized; where the supplier is not such an entity, exemption may not apply unless the transaction is otherwise characterised as sale of goods or a pure agent arrangement. Interpretation and reasoning: Revenue contended the respondent did not qualify as a notified utility, and therefore services rendered would be taxable. The Adjudicating Authority and the Tribunal did not rest the decision on the statutory exemption route but on the primary characterisation of the transaction as sale of goods with VAT paid. The Tribunal observed that even if transmissions by specified utilities are exempt, qualification under the definition is distinct and requires documentary proof - however that factual issue was rendered academic once the transaction was characterised as sale. Ratio vs. Obiter: The observation that qualification under the utility definition is distinct from the sale/service character is obiter in the sense it was not necessary to the operative decision; the ratio rests on characterisation as sale of goods. Conclusions: Lack of formal qualification as a transmission/distribution utility would not alter the conclusion where the transaction is properly treated as sale of electricity; exemption notifications are not determinative where VATed sale is established. Issue 4: Application of 'pure agent' doctrine and procurement on behalf of tenants Legal framework: Valuation rules provide that amounts reimbursed as payments made as a 'pure agent' or where goods are procured on behalf of the recipient may be excluded from service valuation; requires demonstration of agency, pass-through of costs, and no markup beyond disbursement. Precedent Treatment: Tribunal decisions have accepted that where a distributor collects electricity charges and remits to the supplier, acting merely as a conduit or pure agent, such receipts are excludible from service valuation. Interpretation and reasoning: The Adjudicating Authority treated the activity as procurement of goods on behalf of tenants in view of CA certificate and billing arrangements; the Tribunal endorsed the view that the arrangement resembled sale/procurement or pure agency rather than provision of a taxable service. Revenue pointed to mark-ups and cost-plus recoveries to argue against pure agent treatment. The Tribunal concluded that on the facts (VAT chargeable, payment to electricity supplier, nature of billing), the pure agent/purchase on behalf characterisation applied. Ratio vs. Obiter: The application of the pure agent doctrine to exclude such recoveries from service valuation in appropriate factual circumstances is part of the ratio for this case; remarks on when mark-ups negate pure agency are fact-specific and therefore obiter beyond these facts. Conclusions: The arrangement qualified as procurement/sale or pure agent recovery for the facts at hand; therefore amounts recovered for electricity were excludible from service tax valuation. Overall Conclusion The Tribunal upheld the Adjudicating Authority's decision: supplies of electricity to tenants were transactions in goods (with VAT liability) or procurement/pure agent recoveries and not taxable services; accordingly, the service tax demand was dismissed.