2026 (2) TMI 1341 - AT - Service Tax

Bundled ancillary electricity charges treated as principal transmission service, demand set aside; extended limitation requires proof of willful suppression.

Amounts collected by a distribution licensee for activities incidental to transmission and distribution (meter rent, testing, connection fees, ... Exemption of transmission and distribution of electricity from service tax - bundled services - interpretation and application of Section 66F(3) - incidental or ancillary services to transmission and distribution of electricity - liquidated damages/penalties not leviable as consideration for a service - extended period of limitation - requirement of willful suppression or intent to evade tax - regularisation of tax treatment for ancillary services by executive/GST Council - HELD THAT:- The facts of the case are that M/s. NESCO Utility (appellant / DISCOM for short) is a 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. We find that the issue involved in this case has already been settled, in the case of M/s. Wesco Utility & Ors. [2025 (11) TMI 80 - CESTAT KOLKATA] held that ' We observe 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. Hence, we find that the Revenue has failed to back their allegation of suppression with any cogent evidence. ' Thus, the issue is no more res integra. Therefore, we set aside the impugned order qua confirming of the impugned demand of Service Tax, along with interest and penalties, and allow the appeal, with consequential relief, if any. Issues: Whether amounts collected by a distribution licensee (DISCOM) for activities incidental or ancillary to transmission and distribution of electricity (meter rent, testing, connection release fees, supervision charges, late payment surcharge, wheeling, cross-subsidy, liquidated damages/penalties etc.) for the period 2014-15 to 2017-18 are exigible to service tax; and whether the demand confirmed by the adjudicating authority invoking the extended period of limitation under the proviso to Section 73 of the Finance Act, 1994 can be sustained.Analysis: The issue was examined in light of the statutory scheme under the Finance Act, 1994 (including Section 66D(k), Section 66F and Section 66F(3)), the principles of bundled services and composite supplies, and the Electricity Act, 2003 (including Sections 43 and 45) which recognise meter, electric plant and related charges as integral to supply obligations and tariff. Pre-negative-list exemption notifications (Notification No.11/2010 and Notification No.32/2010) and Circular No.131/13/2010-ST show that supply of meters for hire and related activities were treated as having direct nexus with transmission and distribution. The Gujarat High Court in Torrent Power and subsequent Tribunal decisions applied Section 66F(3) to hold that services naturally bundled with transmission and distribution take the character of the principal (exempt) service and are therefore exempt. The Tribunal also reviewed authorities on taxability of liquidated damages/penalties and the requirements for invoking extended limitation periods, concluding that invocation of the proviso requires proof of willful suppression with intent to evade tax; mere reliance on audited totals without item-wise verification does not establish such suppression. The legislative developments and administrative regularization (Circular No.234/28/2024-GST and Notification No.08/2024-Central Tax (Rate)) further manifest the intent not to levy tax on ancillary services to transmission and distribution and regularize GST for later periods.Conclusion: The confirmed demand of service tax, interest and penalties is set aside; the appeal is allowed and the demand is not sustainable.