GST on reimbursement of electricity charges
Most commonly, in contracts of leasing a building or apartment, the property owner collects rent from the tenant along with the reimbursement of electricity charges on an actual basis. In most such contracts, the electricity meters are in the owners’ name, and the electricity bills are also received in their name. Further, the sub-meters are installed by such tenants on the premises of the tenants to measure the actual electricity consumption. Based on the reading of such sub-meters, the actual reimbursement of electricity charges is collected from the tenants. In all such cases, where the GST liability has not been discharged on the portion of electricity, the GST Department has been quite proactive in the issuance of notices to such service providers.
Electricity being goods or services and its exemption
At the outset, one needs to understand the nature of electricity and the various stages of its supply.
The supply of electricity can be bifurcated into three stages – generation, transmission, and distribution. Even the definition of electricity under the Electricity Act 2003 provides that electricity means electrical energy generated, transmitted, supplied, or traded for any purpose.
In the exemption notification for both goods and services, exemption entry pertaining to electricity has been provided. Exemption notification no. 2/2017- Central Tax (rate) dated 28th June 2017 which contains the exemption on goods provides that the rate of GST on electrical energy would be considered as NIL. Further, the exemption notification no. 12/2017-Central Tax (rate) dated 28th June 2017 containing the list of exempted services provides the following exemption under HSN code 9969:
“Transmission or distribution of electricity by an electricity transmission or distribution utility”
From the above, one can gather that the first stage of the generation of electricity has been treated as a supply of goods.
On the other hand, the transmission and distribution of electricity have been classified as a supply of services. However, this is subject to the condition that such activity should be carried out by a transmission or distribution utility.
Once the distribution is complete by the distribution utility to the owner of the premises, the provision of electricity by the owner to the tenant would not fall within the exemption entry. The such provision continues to remain a service that has not been exempted from GST.
One can take reference from Section 12 of the Electricity Act 2003 wherein it has been provided that no person can transmit, distribute, or trade in electricity unless he is licensed to do so under the said Act. The owner cannot be said to have such a license in their possession. Therefore, they can neither be considered as a transmission or distribution utility nor be treated as a trader of electricity as goods. Hence, they do not fall within the exemption entry of electricity either as goods or services under the GST law.
It may be noted that the Service tax regime also provided for similar exemptions on services of transmission and distribution of electricity by transmission and distribution utility. Therefore, one can also take reference from the judgment of 12/16/22, 6:05 PM VILGST | Articles | GST Article the Calcutta High Court in the case of Srijan Realty Pvt Ltd [2019-VIL-112-CALST] under the Service tax regime wherein the following was held:
“The petitioner is not a person authorized to transmit, supply, distribute or undertake to trade in electricity. In view of the definitions as obtained in the Electricity Act 2003 therefore the petitioner cannot be said to be distributing or selling or trading in electricity when it is receiving high tension supply from Indian Power Corporation Ltd and providing low-tension electricity to the occupants of the commercial complex. Sale, trading, and distribution took out of the contention, the only other thing that remains to describe the activity undertaken by the petitioner is service”
Though there are multiple judgments that electricity may be treated as goods (viz. Aluminium Co vs State of Kerala [1996-VIL-38-SC-ST], MP State Electricity Board [1968-VIL-05-SC], National Thermal Power Corporation [2002-VIL-10- SC]), the same may not apply to the given case. This is because most of these judgments would be prior to the enactment of the Electricity Act 2003 and the change in the Service tax regime from 1st July 2012. Further, some of these judgments do not discuss the applicability of GST separately in the case of the generation, transmission, and distribution of electricity.
Hence, proceeding on the stand that the supply of electricity by the owner to the tenant would be considered as exempted goods may not stand the test of judicial scrutiny.
Recovery of electricity as a pure agent
Whether the electricity charges should be included in the value of supply to charge GST forms the core area of dispute here.
The value of supply for charging GST has been provided under Section 15 of the CGST Act 2017. Section 15(5) read with Rule 33 of the CGST Rules 2017 provides for the exclusion of the value of reimbursements from the purview of taxable value under GST.
Overriding the provisions of the entire chapter on valuation, Rule 33 had been issued for the case of a pure agent. The said rule states the following:
“Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-
(i) the supplier acts as a pure agent of the recipient of the supply when he makes the payment to the third party on authorization by such recipient;
(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.
Explanation.- For the purposes of this rule, the expression ‘pure agent? means a person who-
(a) enters into a contractual agreement with the recipient of the supply to act as his pure agent to incur expenditure or costs in the course of the supply of goods or services or both;
(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as a pure agent of the recipient of supply;
(c) does not use for his own interest such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.”
The above clearly provides that in certain cases, the expenditure or cost incurred by a person would be excluded from the value of the supply even if recovered from the recipient of the supply. For this, both the meaning of pure agent and the conditions to be satisfied has been provided.
We will discuss each of the clauses of the meaning and conditions of the pure agent. Therefore, we will understand whether the reimbursement of the electricity charges should be excluded from the value of the supply.
The first aspect of the meaning of pure agent provides that the pure agent should be a person who enters into a contractual agreement to act as his pure agent and to incur all expenditures or costs on behalf of the recipient.
This means that the contract between the tenant and the owner should clearly establish that the burden to bear the electricity falls on the tenant. Further, the owner of the premises should be authorized as a pure agent to bear such costs on behalf of the tenant.
However, on the contrary, one can argue that the primary responsibility to bear such cost falls on the owner as he is registered with the electricity department. Therefore, he cannot be authorized as an agent if he is liable to pay such a cost as the principal.
Title to the goods or services
One of the challenges to the condition of being a pure agent is the question regarding the title to the goods or services. If such title to the goods or services is being held by the agent, he cannot be considered a pure agent. As an adverse view, one may state that the electricity bill is issued in the owner’s name and therefore, he cannot be considered a pure agent while recovering the cost from the tenant. However, one can opine that the electricity is being provided by the electricity distribution utility. At no point, this electricity distribution utility transfers ownership or title to electricity in favor of any person.
Only a right to enjoy the amenity is provided by the said utility. Therefore, technically there is no receipt of title to electricity in the favor of anyone. Hence, the condition of pure agency stands validated.
Does not use the goods or services for own interest
There is no doubt that the electricity procured is being directly used by the tenant. The person using and occupying the premises can only use and enjoy the benefit of electricity or any other amenity.
The owner does not enjoy the usage of electricity at any point in time. The premises are designated to the tenant during the tenure of the contract.
Hence, this condition that the pure agent should not use the goods or services for their own interest stands satisfied.
Receives only the actual reimbursement
If the electricity charges are recovered based on the actual usage of electricity and the accurate reading of the sub-meters installed, the reimbursement would be actual in nature and the pure agency gets satisfied.
To prove the above, one needs to match the actual electricity charges incurred based on the actual metered consumption against the cost recovered from the tenant.
However, in respect of the transmission and distribution losses, it may be a challenge to state that the same is on account of the actual consumption of electricity. Generally, the recovery for such losses is ad-hoc and not on an actual basis. Therefore, the payment may be for more than the actual usage based on the sub-meters readings installed.
Amount separately indicated in the invoice
The next condition is that the reimbursable amount should be separately indicated in the invoice raised by the pure agent. This means that the invoice raised by the owner to the tenant should have distinctly indicated the electricity charges amount.
The supply is in addition to the services provided on its own account The supply provided by the owner to the tenant not only includes the electricity charges but other services including rent, common area maintenance charges, etc.
The concept of pure agent has been borrowed from the Service tax law. The conditions for satisfaction of pure agency were provided in Rule 5(2) of the Service Tax (Determination of Value) Rules 2006. If we review the above conditions, it can be seen that the provisions of the pure agent were more stringent in the Service tax regime.
There are various judgments under the Service tax regime wherein it was held that the conditions of ‘pure agent’ were satisfied in similar situations.
In the case of South Eastern Coalfields Ltd vs Commissioner of C. Ex. & S.T., Raipur [2019-VIL-1639-CESTAT-DEL-ST], it was held that as the appellant has recovered the electricity charges on actual consumption basis and not on a floor area basis, for their shop premises, thus electricity charges cannot be clubbed with the amount of rent, for purpose of levy of Service Tax.
In the case of Logix Soft Tel Pvt. Ltd. Versus Commissioner of Central Excise, Noida-I [2018-VIL-1399-CESTAT-ALH-ST], it was held that where the appellant had collected amounts based on sub-meters from the tenants, it was not liable to pay GST on the reimbursement of electricity charges received.
In the case of Hotel Lake View Ashok vs CGST CE and CC Bhopal [2018- TIOL-2891-CESTAT-DEL] – 2018-VIL-1324 CESTAT-DEL-ST, it was held that where the appellant had collected charges with regard to the supply of water and electricity on an actual basis, such recovery would be deemed to have taken place as a pure agent.
In all the above cases during the Service tax regime, the collection of electricity charges on the cost-to-cost basis for payment to the electricity department was held not to be liable to tax on account of pure agency.
From the above, it can be gathered that the contract is paramount for determining if the electricity charges collected can be a pure agent. The structuring of the clauses of the agreement should be in such a way that all the conditions of the pure agency should be satisfied. Further, the mechanism of raising invoices by the original supplier and the pure agent in favor of the recipient would also play an important role in inferring pure agency.