Ancillary Charges in Electricity Distribution & Liquidated Damages: CESTAT Delhi Clarifies Service Tax Scope

Background of the Dispute

Three Government of Madhya Pradesh electricity distribution undertakings – Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Limited, Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited and Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited – were subjected to multiple service tax demands and penalties relating to various components of their billing and contractual arrangements.

All three entities perform the same core function: distribution of electricity in different geographical zones of Madhya Pradesh (Eastern, Central and Western regions respectively). The show cause notices and adjudication orders raised substantially similar issues for all of them.

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Delhi was called upon to decide:

  • Whether certain charges linked to electricity supply and distribution are taxable as services, despite Section 66D(k) of the Finance Act (negative list for “transmission and distribution of electricity”); and
  • Whether liquidated damages recovered from contractors can be taxed as “declared service” under Section 66E(e) (i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”).

The Tribunal also had to consider the correctness of penalties imposed under various provisions of the Finance Act, 1994.

Most of the issues (late payment surcharge, meter rent, supervision/reconnection/disconnection charges, etc.) had already been adjudicated earlier by the same Bench in Final Order No. 51031 of 2021 dated 14 January 2021 in relation to Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. Ltd., where reliance was placed on the Gujarat High Court judgment in Torrent Power Ltd. versus Union of India (Special Civil Application No. 5443/2018).

Although the Revenue’s appeal against that earlier CESTAT order is pending before the Supreme Court (Civil Appeal No. 5973/2021), the Tribunal decided to follow its own precedent and the binding ratio of the Gujarat High Court.

The only fresh aspect that required independent examination in this batch of appeals was the taxability of liquidated damages.

Issues Considered by the Tribunal

The following components were examined for exigibility to service tax and related penalties:

  1. Late payment surcharge
  2. Meter renting charges
  3. Supervision charges, including
    • Reconnection charges
    • Disconnection charges
  4. Lease rental from use of electricity poles by cable TV network operators
  5. Works contract service
  6. Liquidated damages recovered from contractors for non-performance or delay

Each item involved a different legal argument under the Finance Act, 1994, particularly in the context of the negative list (Section 66D(k)), the definition and scope of “service”, “consideration” and the concept of “declared services” under Section 66E(e).

Negative List and Ancillary Charges: Application of Torrent Power Ltd.

Late Payment Surcharge

  • This surcharge is billed to consumers when electricity bills are not paid within the stipulated due date.
  • The Department argued that by allowing delayed payment against a surcharge, the distribution company is “tolerating” delayed payment, which amounts to a declared service under Section 66E(e) (tolerating an act or situation).
  • In its earlier 14 January 2021 order, the CESTAT had already rejected this view for the same assessee, holding that late payment surcharge is integrally linked to the transmission and distribution of electricity, which falls within the negative list under Section 66D(k).

Relying heavily on the Gujarat High Court ruling in Torrent Power Ltd. versus Union of India, the Tribunal reiterated that:

  • Transmission and distribution of electricity are specified in the negative list.
  • Charges closely connected with or ancillary to such activity (including late payment surcharge) form part of a naturally bundled service under Section 66F(3).
  • Since the principal service (transmission and distribution of electricity) is non-taxable, its inseparable ancillaries also enjoy the same exemption.

Accordingly, the Tribunal again held that no service tax is leviable on late payment surcharge.

Meter Renting Charges

  • The electricity distribution companies recovered meter rent from consumers for metering equipment installed at premises.
  • The Revenue contended that only “transmission and distribution of electricity” appears in Section 66D(k), while meter rent is not specifically mentioned, and therefore is taxable.

The Tribunal, following its previous decision and the Gujarat High Court in Torrent Power Ltd., emphasized: