GST on recovery of electricity charges under lease and PPA

[Hithik]

Dear Experts,

Mr. B having onsite solar power purchase agreement with Mr. A wherein Mr. A has installed & owns solar & metering connection on the premises of Mr. B. further, Mr. B has leased out the said premised to Mr. C, Mr. A issues bill of supply to Mr. B say 15 Rs per unit for solar units consumed by Mr. C (being supply of electrical energy, no GST is charged by Mr. A to Mr. B), further Mr. B issues Tax Invoice to Mr. C for Rent and a separate bill for electricity units consumed at 18 per unit (i.e., including a markup over the rate charged by Mr. A)

Query:

1. In the above facts, where say no separate PPA or electricity supply agreement exists between Mr. B and Mr. C, whether the recovery of electricity charges by Mr. B would it be regarded as part of the composite supply of lease agreement and therefore would attract GST along with rent or continue to qualify as an exempt supply of electrical energy?

2. Further, if a separate PPA/electricity supply agreement exists between Mr. B and Mr. C, under which electricity is billed separately, would such supply qualify as an exempt supply of electrical energy under GST, notwithstanding that Mr. B procures the electricity from Mr. A and is not orignator and recovers it from Mr. C?

3. Alternatively, if Mr. B merely recovers the exact amount charged by Mr. A (i.e., 10 per unit without any markup) from Mr. C, similar to reimbursement of electricity charges commonly seen in commercial lease agreements wherein landlord recovers from tenant as charged by DISCOMS, can Mr. B be regarded as acting as a pure agent which would be excluded from the value of supply?

Please share your opinions.

Thank you in advance!!

[Sanjeev Agarwal]

Issue turns on the characterization of the supply rather than the nomenclature adopted in the invoices. My views:

1. No separate PPA between B and C

In my view, GST is likely to apply on the entire amount recovered towards electricity. Where the lease agreement is the only contract and electricity is supplied as an incidental facility to enable enjoyment of the premises, the recovery of electricity charges (particularly with a markup) is likely to be regarded as naturally bundled with the renting service and form part of a composite supply, with renting being the principal supply. Consequently, the electricity recovery may be includible in the value of taxable renting under sections 2(30), 2(90) and 15 of the CGST Act. The fact that electricity is an exempt supply when supplied independently may not, by itself, alter this characterization.

2. Separate PPA/electricity agreement

A stronger case exists for treating the transaction as an independent supply of electrical energy, provided the electricity supply is genuinely severable from the lease, separately contracted, separately billed, separately measurable through dedicated metering and not merely an ancillary obligation under the lease. However, litigation risk remains because Mr. B is not the generator or DISCOM but merely procures electricity from Mr. A and supplies it onward. The exemption for "electrical energy" does not expressly restrict the supplier to a generator or distribution licensee, but the department may dispute whether B is making an exempt supply of electrical energy or merely recovering utility charges.

3. Recovery at actuals (Pure Agent)

Merely recovering the exact amount charged by Mr. A does not automatically qualify Mr. B as a pure agent under Rule 33. The pure agent conditions are stringent and require, inter alia, that B incurs the expenditure on behalf of C, separately indicates the amount in the invoice, and neither intends to hold nor use the services on his own account. In the present facts, the PPA is between A and B, making B the recipient of electricity. Therefore, the pure agent argument appears weak unless the contractual arrangement itself satisfies Rule 33.

Overall: The separate PPA with dedicated metering provides the strongest basis for claiming exemption as an independent supply of electrical energy. The pure agent argument is comparatively less sustainable on the stated facts. The matter remains litigation-prone, and the contractual documentation will be decisive.

[Sadanand Bulbule]

Refer Point No. 3 of the CBIC Circular No. 206/18/2023 dated 20/09/2023 as regards to the taxability of such transactions.

[KASTURI SETHI]

Answer to Query No.1 : It is composite supply. Peruse the following decisions of AAR/AAAR :-

2021 (1) TMI 1255 - APPELLATE AUTHORITY FOR ADVANCE, RAJASTHAN - In Re : Harish Chand Modi

2019 (4) TMI 421 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA - IN RE : E-SQUARE LEISURE PVT. LTD.

 

[KASTURI SETHI]

Ans. to Query No.2 : Separate invoices, separate agreements etc. would not help inasmuch as leasing out/ renting of immovable property and supply of electricity are integrally co-related. Main service cannot be provided without supply of electricity. Both are naturally bundled.

Separation for the sake of availing exemption from GST for electricity supply is not possible.

 

[KASTURI SETHI]

Regarding Query No.3 (Pure Agent Issue) go through the following decision of AAR, West Bengal:-(in favour of the applicant)

2025 (3) TMI 160 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL - In re : Mega Flex Plastics Ltd.

 

[Sadanand Bulbule]

Dear all

My considered review is:

In strict law, electricity reimbursements bundled with commercial rent form part of a Composite Supply and are subject to 18% GST. The argument that a landlord is a "pure agent" for utility pass-throughs is legally fragile. While passing charges at actuals provides commercial fairness, it fails the statutory tests of Section 2(30), Section 8, and Section 15(2)(c) of the CGST Act. In any judicial review independent of administrative concessions, the primary Act will prevail, making electricity reimbursements taxable at the principal rate of 18%.

In other words:

Normally building owner has to get electicity connection from DISCOMs to his building either for residential or commercial utility, essentially to make such buildings usable for him or otherwise. And consumption of such electriclty is metred in his name for billing purpose. As such it cannot be stated/inferred that, he is engaged in the activity of supply of electricity stand alone to the tenants. Therefore practically and statutorily, it shall be construed as " Composite Supply" as without one, other is unusable.

Thus naturally such transaction is taxable at 18% as per the law.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, I fully agree with your understanding, interpretation, analysis and conclusion.

My Opinion :

"Composite supply" and "Pure Agent" cannot operate simultaneously. Both concepts operate in mutually exclusive fields.

Act will prevail over Rules, Notifications and circulars. In this context, two judgements of Supreme Court are worth reading and these are as under:-

A rule cannot override or be contrary to a Section ------CCE Vs. Ashok Arc reported as 2004 (12) TMI 94 - Supreme Court

Rules and Notifications cannot override Act and cannot be derogatory to the object of the Act--- UOI Vs. Jalyan Udyog - 1993 (9) TMI 108 - Supreme Court

 

[Sadanand Bulbule]

Dear Sirji

I humbly bow to your unconditional acknowledgement.

[Sadanand Bulbule]

Plz read it as bow down

[Shilpi Jain]

Here, the agreement between B and C will be relevant. If the exact amount is recovered there is a possiblity to take the pure agent stand. Otherwise the agreement clauses and other aspects need to be looked at before concluding on this query.

AI Summary

Electricity recovery under commercial leases may constitute composite renting supply unless independently contracted or validly structured through pure-agent conditions.
Electricity charges recovered by a lessor may be treated as part of a composite supply of renting where electricity is incidental to use of leased premises, particularly where no separate electricity agreement exists or a markup is charged. Separate contracting, billing and dedicated metering may support an independent exempt supply of electrical energy, though this remains disputed where the lessor procures electricity onward. Recovery at actual cost does not automatically qualify for pure-agent treatment, which requires satisfaction of prescribed conditions and may be difficult where the lessor is the contractual recipient.