TaxTMI 
TaxTMI 
2024 (11) TMI 975
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant/Corporation/CESCOM) against the Advance Ruling order No. KAR/ADRG/09/2023 Dated: 27.02.2023. BRIEF FACTS OF THE CASE: 3.1. The Appellant is a public sector company of Government of Karnataka engaged in the distribution of electricity and supply of electric power in the districts of Mysore, Mandya, Kodagu, Chamarajanagar and Hassan. The appellant is registered under the provisions of Central Goods and Services Tax Act, 2017 and Karnataka Goods and Services Tax Act, 2017 (herein after referred to as the CGST Act and KGST/ SGST Act respectively) having GSTIN 29AACCC6636P1Z1. 3.2. The Appellant is supplying electricity for housing, irrigation and also for all kinds of commercial and non-commercial purposes, the cliental comprising of individuals, farmers, organisations, hospitals, government organisations, commercial establishments, industries etc, and some of the leading industries and companies located in the said area such as M/s. Infosys Ltd., M/s. J.K.Tyres Ltd., M/s. ITC Ltd., M/s. Wipro Ltd. etc., To meet the huge energy demand and universal supply obligation, it purchases power from central and state generating stations, private power generators which also include g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ck up for seamless supply of electricity assured to such OA Consumers and therefore, in terms of the PPA, the Appellant has to pay Charges on the agreed units of the electricity supplied every month to its said generators. The purchase/sale tariff, as the case may be, of electrical energy includes two components i.e., capacity charges (fixed charges) and energy charges (Variable) and both are exempt from tax being towards Supply of electricity. It is pertinent to note that both the fixed Charges and variable charges paid by the Appellant on energy purchased under the PPA are part of its variable charges levied by the Appellant on the OA Consumer while OA consumer buys electricity from the Appellant and same is directly linked to number of units of the Appellant's electricity consumed by the OA Consumer. In the present transaction, the purchase cost is nothing but the fixed cost to the Appellant. 3.5. The availability of many private electricity generators paved way for stiff competition in the energy market because of which many, a times the prices quoted by the private generators are lesser than the price agreed in PSA and in such cases invoking open access clause in PSA r/w ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ivate generators of OA Consumer. 3.8. The Appellant sought for advance ruling in respect of the following questions: i. Since the Government of Karnataka holds 99.99% of equity in the Corporation, whether the Corporation is considered as "Governmental Authority" or "Local Authority"? ii. Since the Corporation is fully owned by the Government of Karnataka and audited by the Comptroller and Auditor General of India, whether filing of Annual Return in Form GSTR9 and Form GSTR9C is exempt under the Second Proviso to Section 44 of the CGST and KGST Acts? iii. Whether the Corporation is eligible to claim input tax credit on the inward supply of goods and services, which are capitalized in the books of accounts? iv. Whether the Corporation is eligible to claim input tax credit on the inward supply of services against output taxable supplies of support and auxiliary services and other supply of taxable goods? v. Whether the Corporation is eligible to claim input tax credit (on inputs, input services and capital goods) proportionately on the taxable output supply of support services and goods (scrap etc.) as per the provisions of Rule 42 and 43 of the CGST and KGST Rules? ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plicant is exempted from the payment of GST. 4. The Appellant was aggrieved in so far as Ruling No. vii of the Advance Ruling Authority, holding that "additional surcharge collected by the appellant from OA consumers is consideration for tolerating an act which is a taxable supply under Section 7(1) of the CGST Act". Therefore, this Appeal is being preferred before this Appellate Authority praying for (i) setting aside the Ruling No. vii of the Advance Ruling & (ii) to hold that Additional surcharge being collected by the appellant from OA consumer is neither supply of goods nor supply of service contemplated under Section 7 of the GST Acts; or (iii) to hold that the additional surcharge collected from OA consumer is nothing but the charges towards distribution of electricity, which is exempt supply as per Sl. No. 25 of Notification No. 12/2017-CT (Rate) dated 28.06.2023; or (iv) to hold that additional surcharge being collected from OA consumer is ancillary to the main supply of electricity to the OA consumers and the principal supply of electricity being exempted from payment of GST as per entry no. 104 of Notification No.2/2017 CT(R) dated 28.06.2017 read with Secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....navoidable obligation to bear the fixed costs consequent to the PPAs entered into with its private energy generators in order to cater to OA consumers under PSAs. Further, clause 5.8.3 of the National Electricity Policy also envisages such levy. Even clause 6.8.15 of the KERC order dated 09-06-2005 provides for levy of additional surcharge by the power corporations to meet the fixed cost. The additional surcharge collected is not towards any supply of goods or service and is to meet the fixed cost stranded, therefore, at the first instance, it does not fall within the scope of "supply" contemplated under Sec. 7 of the Act. It is nothing but recovery of stranded fixed cost from the OA Consumer as mandated under the above provisions of the statute. No Supply is involved in such collection made. 5.2. Money received by way of additional surcharge is not given by OA Consumer to refrain the Appellant from doing something in return. The dictionary meaning of the term "stranded" enumerated in clause 8.5 of the Tariff Policy 2016 means "left in a place one cannot get away" and by a conjoint reading of said clause with Sec. 42(4) of the Electricity Charges it can be gathered that the additi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o with OA consumers for permitting it to buy power from private producers. Therefore, additional surcharge received is towards 'not tolerating an act or situation' construing deterrence to such Act. 5.5. In para 10.1 of the said Circular dated 03-08-2022, it has been categorically stated that "the fact that the minimum fixed charges remain the same whether electricity is consumed or not or it is scheduled/consumed below the contracted or available capacity of a minimum threshold, does not mean that minimum fixed charge or part of it is a charge for tolerating the act of not Scheduling or consuming the minimum the contracted or available capacity or a minimum threshold". Additional Surcharge collected squarely covered under this para and hence not collected "for tolerating act" but in fact "collected not to tolerate an act", and hence exempt from GST. 5.6. The Concept to Para 5(e) of Schedule-II of CGST Act is borrowed from Service Tax regime and is identical to clause (e) of Sec. 66E (Declared Service) under the Finance Act, 1994. The department had taken a stand that liquidated damages amounts to consideration in the hands of assessee, under the Finance Act. The various ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be assessed as the Principal Supply and thus exempted from payment of GST. The said supply being a part of composite supply, within the meaning of Sec. 2(30) read with Section 8 of the GST Acts, and if so, the contract for principal supply being the supply of electrical energy (goods), even the Additional Surcharge collected is also exempt from payment tax in terms of Sec. 8(a) of the GST Acts read with Sl. No. 104 of Notification No.2/2017-Central Tax (Rate), dated 28 06-2017. Alternatively, if it is held that the said additional surcharge collected is in relation to supply of service, then also it being in relation to distribution of electricity by the power corporations including the Appellant, from the generation site of third party generators from whom the OA consumer is procuring the electricity to the premises of the OA consumer, it amounts to 'distribution of electricity' by the Appellant and therefore the collection of additional surcharge would be exempted supply as per entry no. 25 of the Notification No.12/2017-Central Tax (Rate), dated 28-06-2017, PERSONAL HEARING: 6.1. The Personal Hearing was held on 25.10.2024, which was attended by Shri. P.E Umesh, Adv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act. The additional surcharge collected is not a consideration for tolerating an act which is a taxable supply. It is nothing but recovery of stranded fixed cost from the OA Consumer as mandated under the above provisions of the statute. 6.3. He further submitted that the additional surcharge cannot be held as consideration towards tolerating an act. He drew reference to the Para 7, 7.1 & 10 of the Board Circular No. 178//10/2022-GST dated 3rd Aug 2022 and submitted that such Additional Surcharge is collected as per statute for 'not tolerating an act or situation of an OA Consumer for drawing power from independent power generators and such payments will not constitute 'consideration' and hence such activities will not constitute independent "Supply" within the meaning of the Act. 6.4. Alternately, he submitted that assuming that the additional surcharge is consideration towards supply of goods and services, in such case also, the main activity of distribution and supply of electricity is exempted activity in terms of entry no. 104 of Notification No. 02/2017 CT(R) as goods and i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of electricity by the appellant, from the generation site of third party generators of OA consumers to the premises of the OA consumer, it amounts to distributions of electricity and collection of 'Additional Surcharge' is exempted supply as per entry No.25 of the Notification No.12/2017-Central Tax(Rate) dated 28.06.2017. DISCUSSIONS AND FINDINGS: 7. We have gone through the entire case records including all the written as well as oral submissions made by the appellant. We have also examined the impugned order No. KAR ADRG 09/2023 dtd. 17.02.2023 passed by the Authority for Advance Ruling in Karnataka. On careful consideration of the same, the issue to be decided is whether the order passed by the Authority for Advance Ruling to the extent of holding that additional surcharge collected from Open Access Consumer as per sub section (4) of Section 42 of the Electricity Act, 2003, Clause 8.5.4 of the Tariff Policy 2016, Clause 5.8.3 of the National Electricity Policy and Clause 11 (vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act, is just and proper under the circumstances or needs any interference. 8. We observed that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t distribution licensee serving such consumers who are permitted open access under section 42(2), for loss of the cross-subsidy element built into the tariff of such consumers. An additional surcharge may also be levied under sub-section (4) of Section 42 for meeting the fixed cost of the distribution licensee arising out of his obligation to supply in cases where consumers are allowed open access. The amount of surcharge and additional surcharge levied from consumers who are permitted open access should not become so onerous that it eliminates competition that is intended to be fostered in generation and supply of power directly to consumers through the provision of Open Access under Section 42(2) of the Act. Further it is essential that the Surcharge be reduced progressively in step with the reduction of cross-subsidies as foreseen in Section 42(2) of the Electricity Act 2003." 8.4. The Regulation 11(vii) of the Karnataka Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulation, 2004 is as under: "According to section 42(4) of the Act, additional surcharge as may be specified by the Commission on charges of wheeling are payable by the consumer seeki....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s also noticed that Regulation 3 of KERC (Electricity Supply) Code, 2004 empowered the appellant to charge additional surcharge from their open access consumers. Thus, it is apparent that the appellant is collecting additional surcharge as per the Electricity Act; Tariff Policy; National Electricity Policy of Ministry of Power, Government of India and Karnataka Electricity Regulatory Commission (Terms and conditions for open Access) Regulation, 2004, KERC (Electricity Supply) Code, 2004 of Karnataka Electricity Regulatory Commission, Government of Karnataka from the open access customers, and therefore it forms part of tariff for the supply and distribution of electricity. 9. Advance Ruling Authority held that the consideration received towards additional surcharge is nothing but charge levied for tolerating an act which is supply under Section 7(1) of the CGST Act and is taxable under GST Act. We would like to examine whether there was any obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for which appellant agreed to receive consideration in the form of additional surcharge. In this regard we would like to draw attention to the CBIC Circula....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ponents, namely, a minimum fixed charge (or capacity charge) and variable per unit charge. The minimum fixed charges have to be paid by the SEBS/DISCOMS/individual customers irrespective of the quantity of electricity scheduled or purchased by them during a month. They take care of the fixed cost of generating/ supplying electricity. The variable charges are charged per unit of electricity purchased and increase or decrease every month depending on the quantity of electricity consumed. 10.1 The fact that the minimum fixed charges remain the same whether electricity is consumed or not or it is scheduled/consumed below the contracted or available capacity or a minimum threshold, does not mean that minimum fixed charge or part of it is a charge for tolerating the act of not scheduling or consuming the minimum the contracted or available capacity or a minimum threshold. 10.2. Both the components of the price, the minimum fixed charges/capacity charges and the variable/energy charges are charged for sale of electricity and are thus not taxable as electricity is exempt from GST. Power purchase agreements may have provisions that the power producer shall not supply electricity to a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....OMS are forced to back down the generation from conventional sources and are also required to pay Fixed Charges (or Capacity Charges) to the Generators, irrespective of actual energy being purchased. Thus, ESCOMs have stated that there is a need for recovery of the part of fixed cost towards the stranded capacity arising from the power purchase obligation through levy of Additional Surcharge. .............................. CESC has worked out Additional Surcharge of Rs. 1.29/ unit and has requested the Commission to continue levy of ASC for OA consumers procuring power from power exchanges and RE generators. .............................. CESC in its reply to the preliminary observation has submitted that it has determined the Additional Surcharge of Rs. 1.29 per unit as per estimated ARR for FY 23. ............................................. Commission's views and decision: The Commission in its previous order, considering the provisions of the Electricity Act, 2003, National Electricity Policy, Tariff Policy, KERC Regulations and Orders of Honourable Supreme Court and Honourable APTEL, has held that the Additional Surcharge can be levied on the open acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ff Order, 2022 dtd. 04.04.2022 has fixed the Additional Surcharge @ Rs. 1.20 per unit from OA consumers procured from other than Renewable Energy Sources and Rs. 0.35 per unit in case of Renewable Energy Sources, for FY 2023. Such Tariff Orders enable the appellants to charge the Additional Surcharge on monthly basis in the bills raised by them to their open access consumers. 11. We also find that the collection of Additional Surcharge is not towards any independent activity but is incidental levy to the main activity of Supply and distribution of electricity for which they have entered into Power Supply Agreements with their customers. The Additional Surcharge is collected to compensate the "Fixed Charges" which is stranded in the hands of the Appellant. This additional surcharge is a part of "Tariff' fixed by KERC and levied as per various provisions enacted by Central and State Governments. As per Regulation 11(vii) of the Karnataka Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulation, 2004, in the case of a new open access customer (i.e. if the open access customer was not a consumer of the licensee), no such additional surcharge is payable. ....