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, supervision, late payment surcharge, wheeling, cross subsidy, liquidated damages, etc.) were held not exigible to service tax because services naturally bundled with transmission and distribution assume the character of the principal exempt service under the statutory scheme; accordingly the adjudicated demand was set aside. Invocation of the extended limitation proviso was rejected absent proof of willful suppression with intent to evade tax. Administrative regularisation confirms non taxation of such ancillary charges.

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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.

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