Hyderabad: Delayed payment surcharges collected by power distribution utilities are penalties meant to discourage late payment, not payment for “tolerating” a delay, and cannot be taxed as a service, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad bench, has ruled while junking a Rs 50 crore service tax claim against the Northern Power Distribution Company of Telangana Limited (NPDCL).
Meter-testing charges fared no differently. According to The Times of India, the bench held that testing meters is so tied to the job of distributing electricity that it counts as part of that exempt service, not a separate taxable one.
Technical member AK Jyotishi and judicial member Angad Prasad delivered the ruling on Friday, September 11, affirming a 2019 order by the Commissioner of Central Tax and Central Excise, Secunderabad, that had already cleared NPDCL of the demand.
At the centre of the dispute was Section 66E(e) of the Finance Act, 1994, under which the tax department classifies certain acts as taxable “declared services” if one party is paid to tolerate a situation caused by another.
The department tried to fit NPDCL’s delayed payment surcharge into that clause, arguing that the roughly Rs 374 crore the utility collected under this head between April 2013 and June 2017 was really consideration for going along with customers’ late payments. On that reading, it worked out to a Rs 50 crore service tax bill. A separate argument was mounted for meter-testing fees, which the department said stood apart from the exemption electricity distribution otherwise enjoys.
NPDCL’s defence rested on the fact that it had no say in either charge. Both were fixed by the Telangana State Electricity Regulatory Commission (TSERC) through tariff orders, it argued, leaving no room to treat them as negotiated payment for a service.
CESTAT sided with the utility, and went further on procedure: it refused to let the department invoke the extended limitation period for the October 22, 2018 show-cause notice, pointing out that the same facts had already surfaced in an earlier investigation. With the tax demand itself thrown out, the tribunal found nothing left to justify interest or penalties.
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