• Dated 28^th January, 2025

Fees collected by electricity commissions are exempted from GST

The Delhi High Court (HC) has determined that the fees charged by the Central Electricity Regulatory Commission (CERC) and the Delhi Electricity Regulatory Commission (DERC) are exempt from the Goods and Services Tax (GST).

Background of the case: -

The Appellants, namely the Central Electricity Regulatory Commission (CERC) and the Delhi Electricity Regulatory Commission (DERC), are statutory regulatory bodies operating in the electricity sector in the public interest. Their functions include setting tariffs, issuing licenses, and ensuring fair practices in accordance with their statutory obligations, which are not undertaken as services for profit. The Appellants collect processing fees for issuing licenses and for other regulatory functions performed in the discharge of their statutory duties. However, the GST Department issued a Show Cause Notice (SCN) demanding Goods and Services Tax (GST) on the regulatory fees collected by the Appellants under the provisions of the Central GST (CGST) Act, 2017, and the Integrated GST (IGST) Act, 2017. The Department classified the fees as taxable services under Service Accounting Code (SAC) 998631, which pertains to "support services to electricity transmission and distribution," thereby subjecting them to an 18% GST rate. Aggrieved by the said demand, the Appellants have challenged the classification and levy of GST before the Hon'ble Delhi High Court.

Petitioner's Contention: -

• Both Appellants have filed petitions before this Court challenging the validity of the Show-Cause Notices issued to them on 29th May 2024 and 23rd July 2024, respectively. The respondents, through these notices, have sought to demand the discharge of liabilities arising under the Central Goods and Services Tax Act, 2017, and the Integrated Goods and Services Tax Act, 2017, in relation to the fees received by the Appellants while performing their regulatory functions under the Electricity Act, 2003.
• The Central Electricity Regulatory Commission (CERC) has asserted that it primarily discharges statutory functions and, therefore, does not engage in trade or commerce in any form. It has further contested the distinction drawn by the respondents between its adjudicatory and regulatory roles. In light of the above, the CERC has taken the position that, in the absence of any commercial intent or business objective, the performance of such statutory functions in the public interest cannot be subjected to a levy under either the Central Goods and Services Tax (CGST) Act, 2017, or the Integrated Goods and Services Tax (IGST) Act, 2017.

Respondent's Contention: -

• The respondents have sought to differentiate between the 'adjudicatory' and 'regulatory' functions performed by the two statutory bodies, asserting that the revenue generated from their regulatory functions is subject to taxation under the provisions of the Central Goods and Services Tax Act, 2017, and the Integrated Goods and Services Tax Act, 2017.
• The respondents contend that, based on intelligence gathered, it was determined that the Central Electricity Regulatory Commission (CERC) was not fulfilling its Goods and Services Tax (GST) obligations on amounts received as tariff and license fees from various power utilities. They assert that the functions performed by CERC fall within the scope of "support services to electricity transmission and distribution services," classified under Service Accounting Code (SAC) 998631.
• The respondent argued that the support services rendered fall within the purview of taxable services as per Serial No. 24(ii) of Notification No. 8/2017-Integrated Tax (Rate) dated 28 June 2017, thereby classifying them under the category of "Support services to mining, electricity, gas, and water distribution.".
• That the department contended that no GST is leviable on services provided by way of transmission or distribution of electricity by an electricity transmission or distribution utility, as these are exempt from tax under Serial No. 26 of Notification No. 9/2017-Integrated Tax (Rate) dated 28 June 2017. However, it argued that support services rendered in connection with electricity transmission and distribution, classified under Service Accounting Code (SAC) 998631, are taxable at 18%.
• The department further maintained that the functions performed by the Central Electricity Regulatory Commission (CERC) are distinct from the activities of transmission or distribution of electricity by a utility and instead fall within the scope of "support services to electricity transmission and distribution service providers." Consequently, it was held that, as the CERC is neither engaged in electricity transmission nor operates as a distribution utility, it cannot claim exemption from the payment of GST.

Held:-

• The Hon'ble High Court held that the regulatory and adjudicatory functions performed by CERC and DERC under the Electricity Act, 2003, constitute statutory obligations and do not qualify as business activities.
• The court underscored that the functions of the commissions, being statutory in nature and performed without any intent for pecuniary gain, do not fall within the definition of 'business' under Section 2(17) of the CGST Act. It further noted that Schedule III of the CGST Act expressly excludes services rendered by courts and tribunals from the scope of GST. Consequently, the court held that CERC and DERC, as quasi-judicial bodies, are covered by this exemption.
• Therefore, The Hon'ble High Court held that the regulatory and adjudicatory functions of the commissions are inseparable and inherently statutory, rejecting the tax authorities' argument that these roles could be compartmentalized. The court further clarified that notifications issued under the CGST or IGST Acts cannot override the statutory exemptions enshrined in the CGST Act. Consequently, the court deemed the Show Cause Notices (SCNs) to be arbitrary and unsustainable.

Author : Pritam Ghosh

CENTRAL ELECTRICITY REGULATORY COMMISSION VS THE ADDITIONAL DIRECTOR DIRECTORATE GENERAL OF GST INTELLIGENCE