JUNE 12, 2012

By S Sivakumar, CA

IN terms of the Negative List of services, listed under Section 66D of the Finance Act, 1994, as amended by the Finance Act, 2012, clause (k) contains the following entry:

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

The TRU Circular D. O. F. No 334/1/2012-TRU dated March 16, 2012 contains the following enlightened 'clarifications' on this particular entry:

Quote :

4.11 Transmission or distribution of electricity

4.11.1 What is the meaning of electricity transmission or distribution utility?

An 'electricity transmission or distribution utility' has also been defined in section 65B of the Act. It includes the following -

•  the Central Electricity Authority

•  a State Electricity Board

•  the Central Transmission Utility (CTU)

•  a State Transmission Utility (STU) notified under the Electricity Act, 2003 (36 of 2003)

•  a distribution or transmission licensee licensed under the said Act

•  any other entity entrusted with such function by the Central or State Government

4.11.2 If charges are collected by a developer or a housing society for distribution of electricity within a residential complex then are such services covered under this entry?

No. The developer or the housing society would be covered under this entry only if it is entrusted with such function by the Central or a State government or if it is, for such distribution, a distribution licensee licensed under the Electricity Act, 2003.

4.11.3 If the services provided by way installation of gensets or similar equipment by private contractors for distribution of electricity covered by this entry?

No. the entry does not cover services provided by private contractors. Moreover the services provided are not by way of transmission or distribution of electricity

Unquote

On a combined reading of the clarifications issued by the Board and Section 66D, a layman like me would seem to arrive at the conclusion that transmission or distribution of electricity by a player who is not a 'utility' undertaking, would be liable to pay service tax, under the new service tax law.

As we know, Developers, Landlords and Promoters of commercial complexes, residential complexes, malls, etc., enter into contractual obligations with their customers/tenants/occupants, to provide uninterrupted supply of electricity generated thro' gensets, apart from distributing electricity obtained from the local Electricity Board. Thus, typically, these Developers would be distributing electricity received from the local Electricity Boards and would also be distributing electricity generated through gensets, etc.

How does the new service tax law deal with the distribution of electricity, whether self-generated or not, by these Developers?

Perse, the TRU Circular seems to suggest that, except for transmission or distribution of electricity by utilities, transmission or distribution of electricity by any other entity would be covered under the service tax. Is this view sustainable?

As we know, electricity is clearly recognized as 'goods' under the VAT law. For instance, electricity is included under the First Schedule to the Karnataka Value Added Tax Act, 2003. Of course, electricity is charged to VAT at zero rate. Moreover, electricity is also recognized as excisable goods, under the Central Excise Law. G eneration of power would amount to manufacture as per section 2(f) of the Central Excise Act, 1944 resulting in 'Electrical Energy' falling under CETH 2716 of the Central Excise Tariff Act, 1985.

The Apex Court has, in Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur reported in (2002-TIOL-226-SC-CT), has unequivocally held that electricity is "goods" for the purposes of imposition of sales tax under the Madhya Pradesh General Sales Tax Act, 1959. The Supreme Court had, in this case, noted that the definition of the term "goods" meant all kinds of "movable property" and included "all materials, articles and commodities". , delivered, stored, possessed etc. in the same way as any other movable property. Moreover, the Constitution Bench of the Supreme Court in State of A.P. etc. v. National Thermal Power Corpn. Ltd.and Ors. etc. 2002-TIOL-107-SC-CT has held that,electricity, though an intangible object is 'goods' covered by Entry 54 of List II of Schedule VII to the Constitution of India.

Distribution of electricity then, is distribution of goods… Generation and distribution of electricity generated out of gensets, is sale of electricity. Can, service tax, be levied on distribution and/or sale of goods? Under the current service tax law, the golden Notification No. 12/2003 would come to the rescue of the Developers/Landlords, etc. and, to the extent of the value of electricity sold/distributed, exemption is available in respect of service tax levy, not-withstanding the fact that, Developers, etc. are rendering renting, maintenance services. Moreover, under the current service tax law, the Government has exempted, thro' Notification No. 11/2010 dated 27-2-2010, transmission of electricity, from the service tax levy. To some extent, this exemption Notification, which is applicable to all players, has been of help. Post 1-7-2012, with this Notification and Notification No. 12/2003 not being in place, this area could see a lot of litigation.

Before concluding…

Despite that the CESTAT has given a stay on recovery of tax, in a few cases, the Department is of the view that, the value of electricity is to be added as part of the gross value charged, in cases where the output service is renting services, MMR services, etc., even under the current dispensation. Litigation, therefore, is bound to grow, on this subject, under the new service tax law, as aforesaid.

It seems unjust that, utility undertakings and non-utility players should be distinguished, in terms of exemption from the levy of service tax on transmission/distribution of electricity.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)