Natural bundling of electricity surcharge with exempt supply defeats service tax treatment as a separate declared service.

Late payment surcharge on delayed electricity charges was held not taxable as a declared service under section 66E(e) of the Finance Act, 1994, because it was intrinsically linked to the exempt supply of electricity. The surcharge formed part of the electricity tariff structure, had no independent existence apart from the principal supply, and could not be artificially separated from the generation and supply of electricity. As a facility or ancillary levy naturally bundled with the principal exempt supply, it had to be assessed in the same manner as that supply and not as a separate taxable service. The demand was therefore not sustainable.

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Issues: Whether late payment surcharge collected on delayed payment of electricity charges is taxable as consideration for a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The late payment surcharge was held to be intrinsically linked to the exempt supply of electricity and payable only upon delay in payment of the electricity tariff. It was found that the surcharge formed part of the electricity tariff structure, had no independent existence apart from the principal supply, and could not be artificially bifurcated from the exempt activity of generation and supply of electricity. The charge was treated as a facility or ancillary levy naturally bundled with the principal supply, and therefore assessed in the same manner as the principal supply rather than as a separate declared service.

Conclusion: The late payment surcharge was not exigible to service tax under section 66E(e) and the demand was not sustainable against the assessee.

Ratio Decidendi: An amount that is intrinsically connected to an exempt principal supply and is naturally bundled with it cannot be treated as an independent declared service merely because it is separately quantified or described as a surcharge.

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