2025 (12) TMI 321 - AT - Service Tax

Service tax relief for resident welfare association on water charges, clarification on pure agent valuation for common utilities

M/s The Kings Reserve Residents Welfare Association Versus Commissioner of Central Excise & Service Tax, Noida

CESTAT allowed the appeal filed by the resident welfare association, setting aside the demand of service tax, interest, and penalty. It held that ... Recovery of service tax with interest and penalty by invoking extended period of limitation - common area electricity charges collected by a resident welfare association from its members - water charges collected by a resident welfare association from its members and paid over to the water supplier - pure agent services or not - difference between ST-3 return filed and the ITR return - HELD THAT:- It is found that in the present case appellant had not collected charges from the members of its association for payment of electricity bills and the charges collected were for usage of the electricity in the common areas. The electricity supply company billed on account of usage of electricity in the common area in the name of appellant and the appellant in turn collected these charges from the residents on the basis of agreed formula on pro rata basis. Thus these electricity charges were billed in the name of appellant, collected by them and paid by them to the electricity supply company. As these charges are directly in raised in the name of appellant and are directly paid by them these charges are in the nature of the expense incurred by the appellant for providing the common area management services. Appellant has not acted as agent, to collect the charges from the person against whom the bill was raised and thus in view of the clarification issued by the Board and referred in the impugned order, these charges could not have been excluded from the gross receipts while determining the taxable value of the services provided. Appellant has taken one water connection and was distributing the water to various residents and flat owners. They were collecting the charges towards the water from the residents and flat owner on pro-rata basis depending on the consumption of the water by the flat owner/ resident and made the payment of same amount to the supplier of the water without any commission for rendering these charges. Definitely in respect of collection and payment of the water charges the appellant acted as pure agent and the amounts collected by them could not have been included in the taxable value of services provided. This is what has been clarified by the Board in the circular dated 10.01.2014 referred in the impugned order. It is observed that appellant was filing ST-3 return and paying service tax on the services provided by deducting the amount collected towards electricity charges for common facility and water charges - appellant entertained a bonafide belief that these amounts are to be excluded from gross receipt for determining the taxable value for payment of service tax. It is also not in dispute that from its services recipient appellant did not collect any service tax in respect of these amounts. In view of the bonafide belief entertained, there are no merits in invocation of extended period in making these demands. The demand is hit by limitation and the findings recorded in the impugned order in this regard cannot stand in the eyes of law - the impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether common area electricity charges collected by a resident welfare association from its members, for which electricity bills are raised in the association's own name, are includible in the taxable value of services for levy of service tax. 1.2 Whether water charges collected by a resident welfare association from its members and paid over to the water supplier, without any commission, qualify for exclusion from taxable value as expenditure incurred in the capacity of a 'pure agent'. 1.3 Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 was validly invoked for demanding service tax on the alleged short declaration of taxable value, and consequentially, whether interest and penalty under Sections 75 and 78 were sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of common area electricity charges collected by the association Legal framework (as discussed) 2.1 The Court considered Section 67 of the Finance Act, 1994 regarding valuation of taxable services on 'gross amount charged' and its inclusive definition of 'consideration', as well as Rule 5(1) and 5(2) of the Service Tax (Determination of Value) Rules, 2006 governing inclusion of expenditures and the conditions for exclusion where the service provider acts as a 'pure agent'. The Court also took note of CBEC Circular No. 175/1/2014-ST dated 10.01.2014 clarifying treatment of electricity charges and other common expenses collected by resident welfare associations. Interpretation and reasoning 2.2 It was found as a matter of fact that: (a) the electricity supply company raised bills for common area electricity in the name of the association; (b) the association collected amounts from the residents on a pro rata basis as per an agreed formula; and (c) the association itself paid these bills to the electricity supply company. The association did not collect these charges on behalf of any individual member in whose name the electricity bill was raised; instead, the liability was that of the association itself. 2.3 The Court agreed with the reasoning that electricity for lighting common areas is an 'intrinsic part of services provided' by the association, being essential to common area maintenance and facilities, and therefore forms part of the 'gross amount charged' under Section 67(1) read with Rule 5(1). Since the electricity bills for common areas were in the name of the association, the association was not acting as a 'pure agent' of its members for this component, as clarified in CBEC Circular No. 175/1/2014-ST, which specifically states that where electricity bills are issued in the name of the resident welfare association for common use (lifts, pumps, common lighting, etc.), no exclusion as pure agent is available. Conclusions 2.4 Common area electricity charges, being billed in the name of the association and incurred as part of its own expenditure in providing maintenance and allied services, are includible in the taxable value of services under Section 67 read with Rule 5(1); they are not excludible as pure agent reimbursements. Issue 2 - Exclusion of water charges as pure agent expenditure Legal framework (as discussed) 2.5 The Court relied on Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 defining the conditions under which expenditure incurred by a service provider as a 'pure agent' of the service recipient is excludible from taxable value, and on the clarifications in CBEC Circular No. 175/1/2014-ST regarding payment of utility bills by resident welfare associations acting as pure agents. Interpretation and reasoning 2.6 It was recorded that the association had taken one water connection and distributed water to various residents and flat owners, recovered the exact charges from them on a pro rata basis depending upon consumption, and paid the same amounts to the water supplier 'without any commission'. The Court considered this to be a case where the association was merely collecting and remitting the supplier's dues to the concerned authority without adding any consideration for itself in respect of such collection. 2.7 The Court held that in respect of water charges so collected and passed through, the association was acting as a 'pure agent' of the residents, satisfying the conditions in Rule 5(2), consistent with the illustration in CBEC Circular No. 175/1/2014-ST that where utility bills are raised in the name of the individual recipient and the intermediary merely collects and pays them without any markup, the intermediary acts as a pure agent. Conclusions 2.8 Water charges collected by the association from residents and remitted, without any commission or markup, to the water supplier are excludible from the taxable value of services as pure agent expenditure under Rule 5(2) and are not liable to service tax. Issue 3 - Validity of invoking the extended period of limitation and imposition of interest and penalty Legal framework (as discussed) 2.9 The Court examined the proviso to Section 73(1) of the Finance Act, 1994 regarding invocation of the extended period of limitation in cases involving fraud, collusion, willful misstatement, suppression of facts, or contravention with intent to evade payment of tax. The Court relied on the principles laid down by the Supreme Court in Uniworth Textiles Ltd., which held that: (a) 'willful' implies a conscious and deliberate intent to breach the law; (b) the burden to prove mala fides and circumstances justifying the extended period lies on the Revenue; and (c) the show cause notice must contain specific averments identifying the precise category of misconduct relied on for invoking the extended period. Interpretation and reasoning 2.10 It was undisputed that the association had been regularly filing ST-3 returns and paying service tax, while excluding amounts collected towards common area electricity and water charges from the taxable value. The Court observed that the association had not collected any service tax from its members on these excluded amounts. 2.11 On these facts, the Court held that the association had acted under a bona fide belief that the electricity and water components were to be excluded from the gross receipts while determining taxable value. The conduct did not exhibit any willful misstatement, suppression, or intent to evade. In such circumstances, applying the ratio of Uniworth Textiles Ltd., the ingredients for invoking the extended period under the proviso to Section 73(1) were not satisfied. 2.12 The Court further noted that, in the absence of a legally sustainable invocation of the extended period, the entire demand as confirmed in the impugned order, which was based on the extended limitation, could not stand. Consequently, interest liability under Section 75 and penalty under Section 78, being consequential to an unsustainable demand, were also not maintainable. Conclusions 2.13 The conditions for invoking the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 were not fulfilled, as the association's conduct reflected a bona fide belief rather than any willful suppression or intent to evade. The demand is therefore barred by limitation, and the associated interest and penalty are unsustainable. The impugned order was set aside and the appeal allowed.