High Court Remands Adjudication on Service Tax Demand Raised on Electricity Charges of Rs 1.78 Cr

The petitioner, a development and leasing company of a commercial building, had purchased high-tension electricity from a distribution utility and provided it to submetered tenants. On the departmental audit, it was found that the petitioner received amounts with regard to electricity from tenants but did not pay service tax on the same. Thereafter, Show Cause Notices were issued in October 2016 and May 2017, alleging that electricity recoveries formed part of the taxable consideration for renting or maintenance services, resulting in a confirmed service tax demand of Rs. 1,78,60,449, along with interest and penalty. The adjudicating authority rejected the petitioner’s contention that such collections were mere reimbursements at actuals, and held that the supply of electricity by a non-utility entity did not fall under the exemption available to distribution licensees under Notification No.32/2010-ST dated 22.06.2010. The petitioner approached the Court contending that electricity constituted “goods”, and its recovery on a no-profit basis could not be treated as a taxable service, particularly when supported by identical rate parity between sub-meter readings and the distribution company’s invoices.

The Revenue, however, took the stand that the petitioner was not a licensed electricity distributor and had provided composite services by providing seamless power and administration of common facilities, thus bringing in service tax under the provisions of the Finance Act, 1994. Reliance was placed on Section 66B and Section 66D(k) of the Finance Act to contend that the exclusion was limited to transmission and distribution utilities accepted under law. The Court, after perusing records such as the Order-in-Original dated 30.11.2017 and April 2018 appellate observations, pointed out that the inquiry as to whether the petitioner simply passed actual electricity charges or levied any markup entailed meticulous factual scrutiny of metering data, bills, and consumption profiles, which could not be decided in writ jurisdiction.

Issue Raised: Whether electricity charges recovered by the petitioner from tenants on a sub-meter basis, claimed to be reimbursements at actuals without any markup, were liable to service tax under the Finance Act, 1994 or fell within the negative list exemption under Section 66D(k) read with Notification No. 32/2010-ST dated 22.06.2010.

HC Held: The High Court held that the dispute was primarily factual in nature and that the correctness of the petitioner’s claim, whether the electricity amounts collected were mere reimbursements reflecting the distribution company’s rates or included an additional charge, could not be determined without detailed scrutiny of records.  It was noted that the petitioner had submitted sample bills, consumption charts, and meter readings to prove rate parity, whereas the revenue objected to the propriety of such data. In such situations, the High Court felt it was not appropriate to invoke writ jurisdiction to decide such questions of fact and directed instead that the issue be remitted for fresh adjudication.

The Bench disposed of the writ petition accordingly by remanding the matter to the Adjudicating Authority for consideration afresh. The authority was directed to issue notice of hearing, allow both sides to place relevant documents and evidence, and pass a reasoned order within three months in accordance with law. The Court clarified that it had not expressed any opinion on the merits of the case, and all contentions of the parties remained open.

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