Meter Testing Naturally Bundled With Electricity Distribution, Not Taxable Separately: CESTAT Hyderabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has ruled that meter-testing charges collected by an electricity distribution utility are naturally bundled with distribution of electricity and cannot be taxed separately.

“We accordingly hold that meter-testing is ancillary and naturally bundled element of distribution of electricity. The activity takes its tax character from the principal service falling within Section 66D(k) of the Finance Act, 1994,” Judicial Member Angad Prasad and Technical Member A.K. Jyotishi observed.

The tribunal also held that additional charges collected from consumers for delayed payment of electricity bills were not consideration for “agreeing to tolerate an act or situation” under Section 66E(e) of the Finance Act, 1994.

It further held that the extended limitation period was unavailable to the Revenue.

Northern Power Distribution Company of Telangana Ltd., an electricity distribution utility, had collected additional charges from consumers for delayed payment of electricity bills and charges for testing meters.

The Department sought service tax on ₹374.41 crore in additional charges, involving tax of ₹50.71 crore. It alleged that the amount was consideration for agreeing to tolerate delayed payment and separately proposed service tax on meter testing as an independent service.

Section 66E(e) treated agreeing to tolerate an act or situation as a declared service for service-tax purposes. The tribunal held that this required an express or implied agreement under which one party undertook to tolerate the act or situation for consideration.

Here, consumers were required to pay their electricity bills by the prescribed due date. The surcharge arose only when that obligation was breached. The company was not agreeing to let consumers delay payment in return for consideration. Rather, the charge was imposed to secure timely payment and discourage default.

The tribunal, relying on the Gujarat High court's ruling in Torrent Power Ltd. and the Delhi bench's decision in Madhya Pradesh Vidyut Vitaran Company Ltd., held that the additional charges were not consideration for a declared service under Section 66E(e).

The proposed service tax of ₹50.71 crore on this count was therefore correctly dropped.

On meter testing, Section 66D(k) placed transmission or distribution of electricity by an electricity transmission or distribution utility in the negative list during the relevant period. Section 66F(3) provided that where different elements were naturally bundled, they received the tax treatment of the service giving the bundle its essential character.

The tribunal found that meter testing had a direct and close nexus with electricity distribution. Consumption was measured through the meter and the reading formed the basis for billing.

Testing the meter was therefore inseparable from distribution, measurement and billing. The separate fee charged for testing did not change the character of the activity.

The tribunal also rejected the extended limitation period under Section 73(1). The charges were collected under publicly available tariff orders and regulations and were recorded in the company's books. The DGGI had also earlier investigated the company and issued a notice covering a period that overlapped with the later notice. The tribunal found no positive evidence of deliberate suppression with intent to evade tax.

It accordingly held that the disputed activities were not liable to service tax. Interest did not arise and penalties could not be imposed independently. The Revenue's appeal was dismissed and the order dropping the proceedings was upheld.

For Appellant: A. Rangadham, Authorised Representative.

For Respondent: C. Umakanth Sarma, Advocate.