The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has held that additional charges collected for delayed payment of electricity bills do not constitute consideration for “agreeing to tolerate an act or situation” under Section 66E(e) of the Finance Act, 1994.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) ruled that meter-testing is directly connected with and naturally bundled with the distribution of electricity. Consequently, meter-testing charges receive the same tax treatment as the principal electricity distribution service falling within the negative list under Section 66D(k) of the Finance Act.
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The dispute arose from a show cause notice dated October 22, 2018, issued to the electricity distribution utility for the period from April 2013 to June 2017. The utility was engaged in distributing and supplying electricity in Telangana and collected delayed-payment surcharges and meter-testing charges from consumers in the course of its statutory functions.
The Department proposed to levy service tax on delayed-payment charges of approximately ₹374.41 crore, involving a tax demand of about ₹50.72 crore. According to the Department, the utility continued supplying electricity despite consumers’ failure to pay their bills by the prescribed date and thereby provided the declared service of agreeing to tolerate an act or situation.
Service tax was also proposed on meter-testing charges on the ground that testing a consumer’s electricity meter against a separately prescribed fee constituted an independent taxable service under Section 65B(44) of the Finance Act.
The adjudicating authority, through an order dated November 20, 2019, dropped the proceedings. Challenging that decision, the Department contended before the Tribunal that Section 66D(k) exempted only the transmission or distribution of electricity by an electricity transmission or distribution utility. The benefit, it argued, could not automatically be extended to every ancillary activity undertaken by such a utility.
The Department maintained that the delayed-payment surcharge was recovered because the utility tolerated the consumer’s default and continued the electricity supply. It further submitted that meter testing was performed on payment of a distinct charge and should therefore be treated as an independent service.
The electricity distribution company countered that the disputed amounts were collected under tariffs, regulations and conditions of supply framed by the Telangana State Electricity Regulatory Commission. It had no discretion in prescribing or recovering those charges.
On delayed-payment surcharge, the company argued that there was no agreement under which it undertook to tolerate non-payment. Consumers were statutorily and contractually required to pay their electricity bills by the due date. The surcharge was imposed to discourage default and compensate for delayed payment, rather than to provide an independent service.
The company further submitted that meter testing was essential for measuring electricity consumption and issuing accurate bills. The activity was thus inseparable from the statutory function of electricity distribution.
Accepting the utility’s arguments, the Tribunal observed that the Department’s approach of examining every ancillary activity of an electricity distribution company in isolation could not be sustained where the activity was intrinsically connected with and naturally bundled with electricity distribution.
The Tribunal relied on Section 66F(3) of the Finance Act, which governed the tax treatment of bundled services during the relevant period. Where different elements were naturally bundled in the ordinary course of business, the bundle was required to be treated as the single service that gave it its essential character.
Referring to the Gujarat High Court’s decision in Torrent Power Ltd. v. Union of India, the Tribunal noted that activities such as applications for electricity connections, rental of metering equipment, testing of meters and transformers, and shifting of meters or service lines had been recognised as directly connected with electricity transmission or distribution.
The decisive test was not whether a separate fee was recovered or a separate accounting entry was made. The relevant consideration was whether the activity had a direct and close nexus with electricity transmission or distribution and was naturally bundled with the principal service.
Addressing the applicability of Section 66E(e), the Tribunal held that the provision requires an express or implied agreement under which one party assumes an obligation to tolerate an act or situation in exchange for consideration. A mere flow of money following a breach or default was insufficient to establish such a service.
In the present case, the utility did not agree that consumers could delay payment. On the contrary, the electricity bills and applicable tariffs required consumers to make payment within the prescribed time.
“The delayed-payment surcharge is imposed only upon failure to comply with that obligation. Its object is to secure timely payment and discourage default,” the Tribunal observed.
It added that consumers did not intend to purchase a service of tolerance, nor did the electricity distribution company undertake delayed payment as an activity for consumers. There was no reciprocal arrangement under which the surcharge could be considered payment for an independent service.
The continuation of electricity supply under the Electricity Act and the applicable regulatory framework could not, by itself, amount to an agreement to tolerate delayed payment. The utility was governed by statutory conditions concerning supply and disconnection and could not be treated as voluntarily rendering a separate service merely because electricity was not disconnected immediately after every default.
The Tribunal also referred to CBEC Circular No. 96/7/2007-ST dated August 23, 2007, issued in the context of telephone bills. The circular clarified that an amount collected for delayed payment of a bill was not consideration for providing the underlying service. According to the Tribunal, the principle supported the utility’s case that delayed-payment charges were not consideration for any separately rendered service.
CESTAT consequently held that the ₹50.72 crore service tax demand proposed on delayed-payment surcharges had been correctly dropped by the adjudicating authority.
On meter-testing charges, the Tribunal observed that the electricity meter is the statutory and technical instrument through which the quantity of electricity supplied to a consumer is measured. Electricity bills are raised based on the consumption recorded by the meter.
Ensuring that a meter functions correctly and records electricity consumption accurately is therefore inseparable from the distribution, measurement and billing of electricity. Meter testing was not an unrelated technical or consultancy service offered independently in the market.
The activity was undertaken by the company in its capacity as an electricity distribution utility and in furtherance of its functions under the Electricity Act and the applicable regulations. A separately prescribed charge did not alter the essential nature of the activity.
The Tribunal accordingly held that meter testing was an ancillary and naturally bundled element of electricity distribution. It took its tax character from the principal service covered by Section 66D(k), and the demand raised on meter-testing charges was therefore unsustainable.
CESTAT separately rejected the Department’s invocation of the extended limitation period. It noted that the DGGI had already issued an earlier show cause notice dated April 11, 2018, covering the period from July 2012 to June 2017 after investigating the company’s activities.
The subsequent notice dated October 22, 2018, covered the overlapping period from April 2013 to June 2017. Once the Department had acquired knowledge of the utility’s activities and records during the earlier investigation, suppression of the same facts could not ordinarily be alleged in another notice covering the same period.
The Tribunal further observed that the charges were collected under publicly available tariff orders and regulatory provisions and were duly recorded in the company’s books. There was no clandestine activity or undisclosed consideration.
No positive evidence demonstrating deliberate suppression of facts with an intention to evade service tax had been placed on record. The dispute also involved the interpretation of Sections 66D(k), 66E(e) and 66F of the Finance Act.
The Tribunal therefore held that the extended period under the proviso to Section 73(1) was unavailable to the Department. Since the disputed activities were not taxable, no interest was recoverable. Penalties were also ruled out because the issue was interpretational, the utility had acted under a bona fide understanding of the law, and all receipts were disclosed in its accounts.
Finding no legal or factual infirmity in the Commissioner’s decision, CESTAT dismissed the Department’s appeal and upheld the order dropping the service tax demand, interest and penalties.
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