2025 (11) TMI 80 - AT - Service Tax

Government utility's transmission and bundled services held exempt under s.66D(k); tax demand quashed as time-barred

CESTAT allowed the appeal, holding the government-owned utility's transmission and distribution activities (including ancillary/bundled services) exempt ... Non-payment of Service Tax - services related to transmission or distribution of electricity - penalties recovered as Liquidated Damages - bundled services or not - exemption under the negative list under section 66D(k) of the Finance Act - invocation of extended period of limitation - HELD THAT:- The DISCOMs are providing the service relating to transmission and distribution of power. They are wholly owned undertakings of the Government of Odisha by virtue of holding 100% share capital and licensees under Section 14 of Electricity Act 2003, engaged in the distribution of electricity in the licensed area of the State. The activities of the appellant are regulated and controlled by the Odisha State Electricity Regulation Commissions (OERC) and Central Regulatory Commission established both at Central and State levels under the Electricity Regulation Commissions Act, 1998 - The power charges have been collected by the DISCOMs for the relevant years of dispute 2014-15 to 2017-18 (up to June 2017) under Section 62 & 63 and other applicable provisions of Electricity Act 2003 read with relevant provisions of OERC (Terms and Conditions for determination of Wheeling and Retail Supply Tariff) Regulations, 2014 and OERC (Conduct of Business) Regulations, 2004 and other Tariff related matters. It can be observed that the income is accounted for under several headings. Some of the incomes like ‘insurance claim received’, ‘interest from bank’, ‘interests on refund of income tax’, ‘provisions made’ etc. are outright not liable for any Service Tax payment. The other likely taxable income, but exempted, has been listed by the appellant within the 18 categories, which tallies with the CA’s Certificates - it is seen that the Revenue’s allegation about the non-payment of Service Tax is without any proper verification so as to demand the same only for the purported services, but is based on the total turnover of the appellant, which is legally not sustainable. From the judgement of Hon’ble Gujrat High Court in the case of Torrent Power Ltd Versus Union of India [2019 (1) TMI 1092 - GUJARAT HIGH COURT], it is seen that all the ancillary activities connected the transmission and distribution have been taken as a part of the ‘bundled service’ in terms of Section 66 F and the exemption has been taken as eligible for all such services. Therefore, the ratio laid down by the High Court is squarely applicable to the facts of the present case. Hence, we have no hesitation to apply the same. Vide Notification Nos.11/2010 ST dated 27.10.2010 and 32/2010 ST dated 22.06.2010 prior to 1.7.2012, full exemption has been granted for power transmission and distribution services. From 1.7.2012, the Negative List under 66D (k) provides for full exemption for Service Tax in relation to Transmission and Distribution of the electricity. This clearly shows the legislative intent not levy any Service Tax. Therefore, it can be fairly concluded that the right from 2010 till 2024, no Service Tax / GST was ever required to be paid on any direct or ancillary service related to transmission or distribution of electricity. Time limitation - HELD THAT:- The appellant is a Public Sector Undertaking working under the Odisha Government. They have recorded all the transactions in the books of accounts, from wherein the Revenue has gathered the data to issue the SCN. Further, the issue has been decided in favour of the appellant in several cases. Therefore, they could have entertained Bonafide belief that they are not required to pay any Service Tax. The Revenue has not brought in any evidence to the effect that the appellants have charged the Service Tax on their clients. All these, point out that rather than suppressing any activity or data, the appellant has been transparent in their dealings - the Tribunal dealing with identical issue, has relied on Pushpam Pharmaceutical Co. vs. Commissioner of Central Excise, Bombay, [1995 (3) TMI 100 - SUPREME COURT] and Continental Foundation Joint Venture Holding vs. Commissioner of Central Excise, Chandigarh-I, [2007 (8) TMI 11 - SUPREME COURT], to hold that the allegation of suppression cannot be sustained and accordingly, set aside the confirmed demand for the extended period - the confirmed demand for the extended period set aside on account of time-bar. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether various receipts and charges collected by electricity distribution utilities (including penalties/liquidated damages, cross-subsidy charges, reliability surcharge, meter rent, service/connection/reconnection/processing fees, testing and supervision charges, accounting adjustments and other miscellaneous receipts) are taxable as services under the Finance Act, 1994 (service tax regime) or are exempt as transmission or distribution of electricity or as bundled/ancillary services thereto. 2. Whether the principles of interpretation for bundled services (Section 66F(3)) require treatment of ancillary charges as a single service whose essential character is transmission/distribution (thus attracting exemption where that main service is exempt under the negative list Section 66D(k) or earlier exemption notifications). 3. Whether amounts characterized as liquidated damages or penalties constitute consideration for a taxable service or are compensatory in nature and therefore not exigible to service tax (including declared service under Section 66E(e)). 4. Whether the adjudicated demands were properly quantified by reference to consolidated audited financial statements without bifurcation of receipts; and whether such demands framed after issuance of show-cause notices invoking extended limitation under willful suppression (extended period) are sustainable in law. 5. Whether subsequent GST-era notifications and CBIC clarifications (exempting certain ancillary services and regularizing past GST treatment) bear upon the characterisation and exemption of pre-GST and negative-list period receipts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of receipts as transmission/distribution or separate taxable services Legal framework: Pre-negative list exemptions by government notifications exempted transmission and distribution (pre-1.7.2012); negative list regime from 1.7.2012 placed 'transmission or distribution of electricity by an electricity transmission or distribution utility' in the negative list (Section 66D(k)); definition of service in Section 65B and interpretation principles in Section 66F(3); declared services under Section 66E; Electricity Act provisions (Sections 43, 45) and tariff/regulatory framework govern allowable charges. Precedent treatment: The Tribunal and High Courts (noted decisions) have consistently held that ancillary charges closely connected to transmission/distribution are exempt as part of the main activity; the Gujarat High Court's reasoning in Torrent Power (applied by subsequent tribunals) is followed. Interpretation and reasoning: The Court examined the nature of receipts and found they arise in the ordinary course of regulated transmission/distribution activity and are collected in terms of tariffs fixed under the Electricity Act and State Commission regulations. Many receipts (meter rent, connection/reconnection fees, testing, supervision, cross-subsidy, reliability surcharge, etc.) have a direct and close nexus with supply of electricity; such elements are naturally bundled with the main service. The Court emphasised that statutory provisions (Sections 43 and 45 of the Electricity Act) contemplate provision of plant, lines and meter-related charges as part of supply, reinforcing the natural bundling. Ratio vs. Obiter: Ratio - Ancillary/related charges that are naturally bundled with transmission/distribution must be treated as the single service giving the bundle its essential character; where that principal service is exempt, the entire bundle is exempt. Obiter - Observations on specific accounting items that are clearly non-taxable (insurance, interest) functioned as illustrative guidance rather than new law. Conclusion: Receipts which are incidental or ancillary to transmission/distribution are exempt from service tax under the negative list regime and prior exemption notifications; the confirmed demands on such receipts are unsustainable. Issue 2 - Application of Section 66F(3) (bundled services interpretation) Legal framework: Section 66F(3) prescribes treatment of bundled services - if elements are naturally bundled, treat as the single service giving the bundle its essential character; otherwise, treat as the single service producing highest liability. Precedent treatment: The Gujarat High Court in Torrent Power interpreted Section 66F(3) to require that bundled services naturally forming part of transmission/distribution are to be treated as that single exempt service; tribunals have followed this approach. Interpretation and reasoning: The Court held that sub-section (3) does not require the main service to be taxable; 'taxability' in the sub-section includes the possibility of being non-taxable. Where related services are naturally bundled in the ordinary course of business with transmission/distribution, they take the essential character of that exempt service and are therefore exempt. The Court relied on functional and statutory nexus (Electricity Act provisions and tariff/regulatory mechanisms) to determine natural bundling. Ratio vs. Obiter: Ratio - Section 66F(3) mandates classification of naturally bundled ancillary services as the exempt principal service; such treatment applies across pre-negative list, negative list and GST regimes where the principal service is exempt. Obiter - Commentary on conceptual meaning of 'taxability' and comparison with composite supply principles under GST was explanatory. Conclusion: Section 66F(3) supports treating ancillary/ancillary-like receipts as part of the exempt service; such receipts cannot be separated for service tax levy when naturally bundled. Issue 3 - Liquidated damages / penalties: taxable declared service or compensation Legal framework: Section 66E(e) declares certain activities taxable; distinction between consideration for services (contract performance) and compensation for breach (liquidated damages) drawn from decisions and statutory definitions. Precedent treatment: Multiple tribunal decisions (including Southern Power Distribution, M.P. Poorva Kshetra, South Eastern Coalfields) have held amounts received as liquidated damages/penalties are compensatory and not consideration for a declared service; these decisions were followed. Interpretation and reasoning: The Court accepted the distinction that liquidated damages are compensatory for failure to perform contractual obligations and are not paid in exchange for toleration as an independently desired service. The purpose of LD is deterrent/compensatory, not procurement of a service; therefore LD/penalties cannot be taxed as declared service under Section 66E(e). Ratio vs. Obiter: Ratio - Liquidated damages/penalties recovered under contracts are not consideration for a taxable service and are not exigible to service tax as declared service. Obiter - Discussion of policy/function of LD as 'in terrorem' and differentiation between liquidated and unliquidated damages provided context. Conclusion: Confirmed demands treating liquidated damages/penalties as taxable declared services are not sustainable; such receipts are not taxable as service consideration. Issue 4 - Quantification method and extended limitation (time bar) invoked on ground of willful suppression Legal framework: Section 73 (Finance Act) / analogous limitation provisions permit extended period where willful mis-statement, fraud or suppression with intent to evade tax is proved; normal quantification requires examination of receipts and proper bifurcation per Section 67 principles. Precedent treatment: Supreme Court authorities require clear proof of deliberate suppression or intent to evade to invoke extended limitation; tribunals have set aside extended-period demands where revenue failed to establish suppression of material facts. Interpretation and reasoning: The Court found Revenue's quantification was based on gross P&L/balance sheet figures without bifurcation into taxable/non-taxable heads; revenue did not verify nature of receipts before computing assessable value. DISCOMs produced CA-certified bifurcation showing many non-taxable or exempt items. On extended limitation, the Court held the record lacked cogent evidence of willful suppression or intent to evade; bonafides and regulatory context (state-owned utilities, reliance on extant notifications/circulars and litigation) negated a finding of deliberate suppression. Ratio vs. Obiter: Ratio - Demands quantified on lumpsum financials without head-wise analysis are legally unsustainable; extended limitation cannot be invoked without clear, cogent proof of willful suppression/intent. Obiter - Remarks on transparency of public utilities and reliance on litigated positions contextualise findings. Conclusion: The demand quantification by lump-sum method is unsustainable; the extended period demand is time-barred because the Revenue failed to prove willful suppression; confirmed extended-period demands set aside. Issue 5 - Effect of subsequent GST notifications/CBIC circulars on pre-GST/negative-list period Legal framework: Notifications and administrative clarifications under GST exempting ancillary services and regularising past treatment; principle of consistency in interpreting the nature of transmission/distribution across regimes. Precedent treatment: Courts/tribunals have treated exemptions and explanatory circulars in earlier regimes as indicating legislative intent and supported retrospective characterisation where the underlying activity remains unchanged. Interpretation and reasoning: The Court observed that the exemption trajectory - pre-negative list notifications, negative list placement and GST exemptions/clarifications - demonstrates legislative intent not to tax transmission/distribution and its closely related ancillary services. While GST-era notifications apply from specific dates, the Court regarded the clarifications and historical treatment as persuasive for construing earlier regimes and underscoring the nature of the services as exempt/bundled. Ratio vs. Obiter: Ratio - Subsequent GST exemptions and clarifications corroborate the long-standing legislative intent and support exemption characterisation of ancillary activities; they reinforce but do not solely determine pre-GST legal entitlement. Obiter - Application of GST-era regularisation to earlier years is explanatory rather than creating new rights for past periods. Conclusion: The legislative and administrative evolution supports finding that ancillary receipts are part of exempt transmission/distribution; GST notifications/circulars strengthen the conclusion and assist interpretation but do not supplant statutory analysis for earlier periods. Final Conclusions (collective) (a) The confirmed service tax demands based on aggregate book figures without bifurcation are legally unsustainable. (b) Charges and receipts that are incidental or ancillary to transmission and distribution of electricity are naturally bundled with the principal exempt service and are therefore not exigible to service tax under the pre-GST service tax/negative list regime. (c) Liquidated damages/penalties recovered are compensatory and not consideration for a taxable declared service; such amounts are not taxable. (d) The Revenue failed to prove willful suppression or intent to evade tax; demands based on extended limitation are time-barred and set aside. (e) The adjudicating authority's dropping of certain demands was not interfered with; appeals against confirmed demands were set aside on merits and as time-barred where applicable.