CESTAT Chennai Sets Aside TANTRANSCO Demand As Time Barred, But Clarifies Rent-a-Cab Service Taxable

The Chennai Bench of Customs, Excise and Service Tax Appellate Tribunal on 24 March, held that hiring motor vehicles for official use, classified as rent-a-cab services are not eligible for exemption under the reverse charge mechanism and remain liable to service tax, as they are merely facilitative in nature and not integral to the core function of electricity transmission

A Bench comprising Technical Member M. Ajit Kumar and Judicial Member Ajayan T.V. clarified that such services does not have a direct and proximate nexus with the activity of transmission or distribution of electricity. They held:

“If an entity qualifies for an exemption from forward charge for the specified activity of transmission and distribution of electricity, the same exemption should also apply to that entity under partial reverse charge for the said activity.”

The dispute primarily concerned whether services such as works contracts, manpower supply, and rent-a-cab used by the Tamil Nadu Transmission Corporation Ltd. (TANTRANSCO), the appellant, in the course of its operations were covered by the negative list entry relating to the transmission and distribution of electricity.

TANTRANSCO argued that all services received were integrally connected with its statutory function of transmitting electricity and therefore exempt from service tax. It submitted that the expression “transmission or distribution of electricity” includes not only the principal activity but also all ancillary and support services having a direct and proximate nexus with such activity.

While the Tribunal accepted this contention in respect of works contract services such as erection, commissioning, and installation of transmission towers and substations and manpower supply services used for operational and logistical support, it took a different view regarding rent-a-cab services.

It observed that the test for exemption hinges on whether the service in question is indispensable and intrinsically linked to the transmission of electricity. Applying this “nexus” or “dependence” test, it held that hiring of motor vehicles for official use does not meet this threshold.

Such services, though convenient for administrative or operational purposes, are not essential for the actual process of transmitting electricity and do not have a direct or proximate connection with the core activity.

The Bench concluded that rent-a-cab services cannot be regarded as services “relating to” transmission or distribution of electricity and therefore fall outside the scope of the exemption provided under the negative list. As a result, such services are liable to service tax under the partial reverse charge mechanism. It stated:

“.....'manpower services' for handling movement of men and materials and for safeguarding offices, stores and vehicles are integrally connected with such activity. However, hiring of motor vehicles for official use (rent-a-cab service) does not have a direct and proximate nexus with transmission or distribution of electricity and is therefore not eligible for exemption under reverse charge. Hence the said service would not be exempted from the payment of tax on partial reverse charge basis.”

However, despite holding the service to be taxable in principle, the Tribunal ultimately set aside the demand on the ground of limitation. It noted that there was no evidence of suppression or intent to evade tax by the appellant.

Accordingly, it held the invocation of the extended period of limitation as unsustainable.

For Appellant: V. Ravindran, Advocate

For Respondent: Sanjay Kakkar, Authorised Representative