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"Supply of Electricity: Whether Sale or Service"

-An Article by CA Pankaj Sethi

 

 

1.    Issue

 

Apart from rent, certain amounts are collected by landlords for supply of supply of electricity which may either be supplied by state electricity board or through a backup generator.

The issue is whether same is taxable under service tax or sales tax. Further the point lies whether same is reimbursement or not.

 

2.    Provisions under VAT Act

Sec 16 of MP VAT Act, 2002 (as amended) provides for "Tax free goods" and non-levy of tax on the same.

 

"No tax under section 9 or section 10 as the case may be, shall be payable on the sale or purchase of goods specified in Schedule I, subject to the conditions and exceptions, if any, set out in the corresponding entry in the third column thereof."

 

Schedule-I, entry-13 refers "Electrical energy" as zero rated goods (tax free)

 

3.    Judicial Interpretation

Excerpts from Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur (1969) 1 SCC 200, on the question whether electricity is “goods” for the purposes of imposition of sales tax under the Madhya Pradesh General Sales Tax Act, 1959

“The term “movable property” when considered with reference to “goods” as defined for the purposes of sales tax cannot be taken in a narrow sense and merely because electric energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be movable property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, would attract punishment under Section 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other movable property”

View upheld by Constitution Bench of the Supreme Court in State of A.P. etc. v. National Thermal Power Corpn. Ltd. and Ors.

Electricity though an intangible object is ‘goods’ covered by Entry 54 of List II of Schedule VII to the Constitution of India.

4.    Provision under Excise Act

 

Electrical Energy is covered under Tariff item no.2716 00 00. However generation and distribution of electricity was chargeable to excise duty for a limited period and currently the same has been withdrawn.

The CEGAT Special Bench (New Delhi) in M P Electricity Board vs. CCE [1991 (52) ELT 618 (Tribunal)] confirmed Excise Duty on Electricity at the rate of 2 paise per KWH under Item No. 11-E CET u/s 3 of Central Excises and Salt Act, 1944, when  electricity was chargeable to excise duty .

From the above it is evidently clear that “electricity is goods and not service”

 

5.    Provisions under Service Tax

 

Old Exemptions

·       Notification 11/2010-ST, dated 27th Feb 2010 exempted transmission of electricity from service tax.

·       Distribution of electricity by a person authorized to distribute power was exempted from service tax vide  Notification No.32 dated 22nd Jun 2010.

·       Rental for electric meter by distribution companies was clarified to be out of purview of tax by circular no. 131/13/2010-ST dated 7th Dec 2010 on the premise that it was essential activity for distribution and transmission of electricity, hence exempted.

 

Reimbursement

 

Any reimbursement to be out of purview of tax has to follow the strict provisions as per Valuation Rules wherein only the actual amount is to be collected. The amount charged from tenants on account of electricity may be lower or higher than the expenditure. Such may not be actually covered as reimbursement. Secondly even if a small amount of % ge is charged as service charges, the balance amount may still not be the actual amount.

 

One should charge the amount as actuals or alternatively one may offer amount over and above the expenditure as service charges because it may not be possible to book the exact amount at the time of charging.

 

6.    Instruction Dated 29/08/2011

Concept paper on taxation of services based on a negative list of services for public debate

 

Para 7.3 In the light of the discussions in the previous paragraph, supplies of electricity, power, heat, refrigeration and ventilation may be specified as not comprising supply of services. Sale of SIM card with talk time [Idea Mobile Communication Ltd Vs CCEC, Cochin (2011-TIOL-71-SC-ST)], downloadable on-site software and similar supplies through the internet may be specified as services. Service element involved in the supplies in respect of works contracts, restaurants, outdoor catering may be subject to tax as services at the prescribed rates, so that goods portion falling within the taxation powers of state governments, will stand excluded.

 

7.    Provisions under Negative List Regime w.e.f. 01/07/2012

 

Section 66D:-

  

The negative list shall comprise of the following services, namely:––

 

(e) trading of goods

(k) transmission or distribution of electricity by an electricity transmission or distribution utility

Sec 65B (23) "electricity transmission or distribution utility" means the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003; or a distribution or transmission licensee under the said Act, or any other entity entrusted with such function by the Central Government or, as the case may be, the State Government;

T&D is exempted only to a holder of license under the Electricity Act. Further a landlord cannot be regarded as undertaking transmission and distribution of electricity.

On the other hand, the activity provision of electricity by landlord is covered under the activity of “trading of goods” - electricity being goods as stated supra- hence outside the purview of tax.

 

8.    Case law

 

In Econ Hinjewadi Infrastructure (P.) Ltd, the appellants were providing property on rent along-with maintenance and paying service tax on the same. They were also supplying electricity from common meter connection and charging the tenants from the same. Relying on the adjudication order in Panchsheel Tech Park (P.) Ltd. and also on the ground that electricity being goods is exempted u/s 12/2003-St, the Mumbai CESTAT granted stay from demand.