JUNE 12, 2015

By Ajay Sanwaria

IT is commonly known fact that commercial premises is being rented out by promoter, developer and owner ("said persons") to the tenants/occupier of the units ("tenants"), at an agreed price. In terms of the contractual arrangement between the parties, the said persons are required to provide electricity to the tenants. The said persons receives rental charges from the tenants towards renting of the premise and also recovers electricity charges on the basis of units consumed by raising invoices/debit notes.

At the time of development of premises, electricity connections are taken in the name of the said persons and an agreement is made with the Power Transmission Utility ("Utility") for supply and transmission of electricity. On completion, a separate maintenance company is formed which is entrusted with the responsibility of looking after the maintenance of the said premises. The electricity meters/connections thereafter are transferred in the name of the maintenance company. However, in some cases, connections are not transferred, albeit the maintenance company collects electricity charges and deposits the same with the utility.

In the ensuing paragraphs I have given my views with respect to service tax implication on recovery of electricity charges.

Positive list regime (effective till 30.06.2012)

Under the positive list regime of services, supply/transmission of electricity by the said persons/maintenance company to the tenants was not covered under any notified taxable services. However, in cases where commercial properties were let out to tenants and electricity charges were separately recovered, the department had sought to recover service tax on electricity charges on the ground that such charges form part of consideration for rendition of renting of immovable property services in terms of Section 67 of the Finance Act read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006 and that there were no pure agency arrangement between the parties for procurement and transmission of electricity. Similarly, demand notices were issued on the maintenance companies for non-payment of service tax on electricity charges, under management, maintenance or repair services.

This issue has been put to rest by the Appellate forums by a catena of judgments wherein the Hon'ble Bench has taken and/or prima facie formed a view that electricity charges would not be exigible to service tax on the following premise -

- Electricity qualifies as "goods" and is covered under the tariff heading 2716 00 00 of the Central Excise Tariff Act, 1985;

- Electrical energy has also been recognized as goods under VAT schedule of respective states;

- Value of goods supplied in course of rendition of service was exempt in terms of Notification No. 12/2003 - ST dated 20.06.2003.

Following judgments would be worth noting in this regard;

- ICC Realty India Pvt Ltd. vs. CCE, Pune-III - 2013-TIOL-1751-CESTAT-MUM

- Eon Hinjewadi Infrastructure (P) Ltd. vs. CCE - 2012-TIOL-1688-CESTAT-MUM

- M/s Vansum industries vs. CCE - 2013-TIOL-92-CESTAT-MUM

- Plaza Maintenance & Services Ltd. vs. CCE - 2011-TIOL-47-CESTAT-MAD

In any case, immunity from payment of service tax on electricity charges was available in case of pure agency arrangement between the parties.

Negative list regime (effective from 01.07.2012)

The term service was not defined under the positive list regime of taxation. However, under the negative list, the same is defined under Section 65B(44) of the Finance Act to read as under:

"service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a)an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other

manner; or

(ii) to (iii) ............................

In terms of the said section, an activity which is carried out by one person for another for consideration would be construed to be a service. Further, immunity from payment of service tax would be available only in cases which involves transfer of title in goods that to by way of sale, gift or in any other manner.

Clause (K) of the negative list provides exemption in case of "transmission or distribution of electricity by an electricity transmission or distribution utility". These utilities have been defined under Section 65B(23) to mean Central Electricity Authority, a State Electricity Board, the Central Transmission Utility, State Transmission Utility, notified under the Electricity Act, a distribution or transmission licensee licensed under the said Act, a ny other entity entrusted with such function by the Central or State Government.

In the scenario being discussed, the said persons would provide electricity to the tenants based on some pre-existing contractual obligation. It would be worth noting that on provision of such electricity, there is no transfer of title of electricity by way of sale, gift or in any other manner. Moreover, electricity cannot be sold by the said persons on account of implicit restrictions. Therefore, going by the strict interpretation of the definition of service, it appears that the exclusion clause does not get attracted.

It is possible to contend that the said persons are carrying out an activity by way of supplying electricity to the tenant and that the amount received towards electricity charges is nothing but consideration. Since, the said persons do not qualify as electricity transmission/distribution utility, such supply/distribution of electricity by the said persons would be exigible to service tax. This is also supported by Para 4.11.2 of Education Guide.

On the contrary, it is possible to argue that electricity qualifies as goods and the centre does not enjoy jurisdiction to levy service tax on supply of electricity. One may also place reliance on the decision of Appellate Forums (as discussed above) to contend that the ratio of judgments rendered with respect to erstwhile law will hold fort even under the current regime.

Basis above, the matter seems to be prone to litigation. To avoid any possible dispute from the department, apragmatic approach would be to have a pure agency agreement with the tenants for procuring electricity for and on their behalf, from the Utility.

Nonetheless, in the fitness of things, it would be prudent on the part of the CBEC to come out with clarification in the matter.