A note on Denial of Service Tax Exemption to NBPDCL and SBPDCL under Notification 25/2012-ST.
Below is a note addressing the denial of service tax exemption and abatement on services provided to NBPDCL and SBPDCL, Bihar, under Notification No. 25/2012 – Service Tax, along with possible rebuttals and legal position
I. Background
The assessee has received consideration from North Bihar Power Distribution Company Ltd. (NBPDCL) and South Bihar Power Distribution Company Ltd. (SBPDCL) — entities wholly owned by the Government of Bihar — for services rendered. However, the department has disallowed exemption under Notification No. 25/2012-ST dated 20.06.2012, on the grounds that these entities do not qualify as a “Governmental Authority.” Additionally, the benefit of abatement under applicable notifications has also been denied.
II. Legal Framework
Notification No. 25/2012-ST, Entry 12(a), provides exemption to:
“Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession.”
Explanation 2 to the Notification defines “Governmental Authority” as:
“An authority or a board or any other body set up by an Act of Parliament or a State Legislature or established by any Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under Article 243W of the Constitution.”
III. Argument for Exemption
- Ownership and Control: Both NBPDCL and SBPDCL are wholly owned by the Government of Bihar and function under its administrative control. They were incorporated under the Companies Act, 1956, pursuant to the unbundling of Bihar State Electricity Board (BSEB) — a restructuring approved by the State Government under the Electricity Act, 2003.
- Entrusted Functions: The distribution and supply of electricity to the public is a function entrusted to municipalities under Article 243W, read with the 12th Schedule of the Constitution (Entry No. 14: “Provision of electricity and water supply”).
- Precedents & Clarifications:
- In various judicial pronouncements and circulars (e.g., TRU Circular D.O.F. No. 334/5/2015-TRU), services to government-owned companies carrying out public utility functions (such as electricity distribution) have been held eligible for exemption under Notification 25/2012-ST.
- In the case of CCE & ST, Raipur v. M/s. R.K. & Sons, exemption was granted for services provided to state-owned power companies.
IV. Argument for Abatement (if exemption is not accepted)
Even in the absence of full exemption, the assessee may be eligible for abatement of service tax, for instance under Notification No. 26/2012-ST, subject to fulfillment of prescribed conditions (e.g., non-availment of CENVAT credit, nature of construction service, etc.). Denial of abatement must be reasoned and not arbitrary, and a blanket denial merely because of exemption ineligibility is not legally sustainable.
V. Conclusion
The denial of exemption appears unsustainable in law given that:
- NBPDCL and SBPDCL are government-owned, and
- Their function — distribution of electricity — aligns with municipal functions under Article 243W.
Further, if exemption is denied, the department must still consider eligibility for abatement under the applicable notification and assess whether the prescribed conditions were fulfilled.
Recommendations
- File a detailed appeal or written submission relying on the ownership structure, nature of activity, Constitutional provisions, and relevant case law.
- Emphasize the public utility nature of the work and the non-commercial character of the services rendered.
- Demand abatement as an alternate claim, even if the exemption is disallowed.
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