GST UPDATE NO 117 ON TAXABILITY OF ELECTRICITY CHARGES RECOVERED FROM TENANT

Since introduction of GST Law, there had been many complexities and questions raised regarding applicability of GST on various transactions. It is well settled law that the renting of commercial properties is subject to GST being supply of service as per entry 5(a) of Schedule II. However, the matter of dispute is whether the reimbursement towards electricity, water charges collected by the lessor form lessee shall fall within the ambit of GST? Similar issue was raised before Maharashtra Authority for Advance Ruling in the case of M/s. INDIANA ENGINEERING WORKS (BOMBAY) PVT. LTD. The reasoning adopted by the Maharashtra Advance Ruling is subject matter of our today’s update. The applicant sought for advance ruling on whether electricity and water charges paid by applicant and collected from recipient as reimbursement are liable to GST. The applicant contended that the reimbursement of charges collected do not have a character of supply under Section 7 of CGST Act, 2017. Further, the applicant is of view that as the charges are collected at actuals, the same will not form part of the taxable value of service of renting of immovable property. Hence, as per Section 15 of CGST act, 2017, the transaction value shall exclude the expenses incurred as a “Pure Agent” and hence, GST shall not be leviable. Reliance was placed by assessee in case of SOUTH EASTERN COALFIELDS LTD. V/S C. CX &ST AND IN KIRAN GEMS PVT LTD. V/S CCE & ST. The Counsel of the department argued that GST is payable on electricity charges, water charges as these forms integral part of the immovable property for enjoyment of the right to use the said property. Furthermore, as per Section 15 of CGST Act, 2017, the transaction value shall include any incidental expenses incurred towards the value of consideration. The revenue also contended that conditions of Rule 33 of CGST Rules pertaining to pure agent are not fulfilled as the applicant is not authorized by the tenant to act as a pure agent. Moreover, making the payment of electricity and water charges to the government is the responsibility of the applicant as the connection is in the name of applicant only. Hence, the recovery of charges on reimbursement basis would not qualify as “pure agent” and cannot be deducted from the taxable value of service. The Maharashtra Advance Ruling held that utilities such as water, electricity etc. are basic amenities without which occupation of premises would not be possible. The provision of essential services is mandatory to be provided by the landlord. Hence, the reimbursement charges collected form the part of consideration. Further, going through Section 15(c) of CGST Act, it was concluded that the charges shall be included in transaction value of supply as these are incidental expenses. Further, the AAR upheld the view of the department concluding that the applicant shall not be treated as “Pure Agent” as conditions of Rule 33 are not fulfilled. Therefore, it was concluded that the reimbursed electricity and water charges charged by the applicant from the tenant by issuing debit note shall be considered in taxable value and GST shall be levied on it. The present judgement covers an issue which has been at the center stage for disputes since Service Tax regime. In case of UNION OF INDIA V/S M/S INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS LTD., hon’ble Supreme Court had held that no service tax is leviable on the reimbursement of expenses which are incurred while providing a Service. However, post decision, Section 67 of Finance Act was amended and the definition of “consideration” was amended to include reimbursable expenditure or cost which was made effective from 14.05.2015. Similarly, there are divergent views on the said issue in GST era. However, after observing the decision pronounced by AAR, applicant needs to establish a concrete evidence so as to prove his contention of satisfaction of conditions prescribed for “Pure Agent” as per Rule 33 of CGST Rules, 2017.

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GST UPDATE NO 117 ON TAXABILITY OF ELECTRICITY CHARGES RECOVERED FROM TENANT

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