AAR: Wheeling Charges and Banking Charges Collected by Electrical Supply Corporation is Exempted from Payment of GST

AAR: Wheeling Charges and Banking Charges Collected by Electrical Supply Corporation is Exempted from Payment of GST

The Authority for Advance Ruling (AAR), Karnataka by its two-division member bench of Dr. M.P. Ravi Prasad and Kiran Reddy T. observed that wheeling charges and banking charges collected by applicant- M/s. Chamundeshwari Electricity Supply Corporation Limited is exempted from the payment of Goods and Service Tax (GST).

The factual matrix of the case is that the applicant- M/s. Chamundeshwari Electricity Supply Corporation Limited is company engaged in distribution of electricity and sale of energy. It purchases power from central and state generating stations, major independent power producers, and independent power producers from non- conventional sources like wind, solar, and mini-hydro, as well as from Telangana State Power Generation Corporation Limited, Damodar Valley Corporation Limited, and short-term and medium-term co-generators.

The Corporation supplies and distributes power to various consumers, such as companies, industries, commercial shops, hospitals, farmers, irrigation pumps, individuals, government organizations, etc., in the districts of Mysore, Mandya, Chamarajanagar, Hassan, and Kodagu. The retail tariff is determined by the Karnataka Electricity Regulatory Commission (KERC) as per the Electricity Act 2003.

Consequently, the applicant sought an advance ruling on the various issues.

The applicant submitted that the Government of Karnataka holds 99.99% of equity in the Corporation. It was ambiguous whether the corporation is considered a "government authority" or a "local authority." It further submitted that as per Section 44 of the GST Act, every registered person shall furnish annual return which may include a self-certified reconciliation statement. However, an exemption has been granted under the second proviso to any Department of the Central Government or a State Government or a local authority, whose books of accounts are subject audit by Controller and Auditor General.

In the case of the Corporation, firstly, it is a Government Authority and secondly, set up by an Act of State Legislature. Thirdly, the books of accounts of the Corporation is audited by the Controller and Auditor General. Therefore, the applicant was of opinion that it was exempted from submission of annual returns and reconciliation statement. (i.e., Form GSTR-9 and Form GSTR- 9C).

The issues before the Authority were the following:

1. Whether the corporation is eligible to claim an input tax credit on the inward supply of goods and services that are capitalized in the books of accounts.

2. Whether the corporation is eligible to claim input tax credits on inbound services against output taxable supplies of support and auxiliary services and other taxable goods.

3. Whether the corporation is eligible to claim input tax credits (on inputs, input services, and capital goods) proportionately on the taxable output supply of support services and goods (scrap, etc.) as per the provisions of Rules 42 and 43 of the CGST and KGST Rules.

4. Whether the corporation is eligible to claim taxes paid under RCM as an input tax credit.

5. Whether an Additional Surcharge collected from an Open Access Consumer is taxable under the GST Acts.

6. Whether "Wheeling and Banking Charges" allowed by the Commission (KERC) as 5% and 2% of the energy input into the distribution system by open access consumers, respectively, are taxable under the GST Acts.

The bench opined that there are two conditions to be satisfied to be covered under government authority. Firstly, it must be either set up by an Act of Parliament or a State Legislature or be established by any government with 90 percent or more participation by way of equity or control. Secondly, it must be either set up or established to carry out any function entrusted to a municipality under Article 243W of the Constitution or to a panchayat under Article 243G of the Constitution.

The bench admittedly noted, that the Government of Karnataka holds 99.99% of the equity in the applicant company, which was established by the Government of Karnataka, and hence the first condition stood satisfied. According to Article 243W of the Constitution and the Twelfth Schedule to the Constitution relate to the functions entrusted to a municipality. It was verified and found that the supply of electricity is not covered.

Article 243G of the Constitution and the Eleventh Schedule to the Constitution relating to the functions entrusted to a panchayat. It was verified and found that rural electrification, including the distribution of electricity, is covered. But the applicant company is not set up or established only to provide rural electrification, and hence the second condition is not satisfied.

The bench observed, "Article 243W of the Constitution and the Twelfth Schedule to the Constitution relating to the functions entrusted to a municipality are verified, and it is found that the supply of electricity is not covered. Article 243G of the Constitution and the Eleventh Schedule to the Constitution relating to the functions entrusted to a panchayat. It was verified and found that rural electrification, including the distribution of electricity, is covered. But the applicant company is not set up or established only to provide rural electrification, and hence the second condition is not satisfied."

The AAR held that the applicant is eligible to claim input credit on the inward supply of services against output taxable supplies of support and auxiliary services and other supply of taxable goods, Section 17(1) and 17(2) of the CGST Act, 2017.

The AAR stated that the tax on a transaction is paid under reverse charge basis would still be a tax on the inward supply of goods or services or both and would be eligible as input tax credit under Section 16(1) of the CGST Act subject to apportionment of input tax credit in terms of Section 17(2) of the Act.

Further, the AAR observed that, "consideration need not be in the form of money only and it is very clear from the words used 'money and otherwise' and also by the words 'monetary value of any act or forbearance' and hence the wheeling and banking charges collected by the applicant in kind, i.e., in terms of energy units but not in terms of cash, is taxable, if the same is found to be taxable, under the GST Act."

The AAR further found that the service provided by the applicant to the users as wheeling charges, the applicant was only providing the services of transmission of electricity only and whatever the applicant was charging were for the services for transmission of electricity from the point of production to the point of usage.

Hence, the AAR found that nothing but the amount of consideration charged for the energy consumed and the consideration charged for supply of electrical energy is exempted from the levy of GST as Notification No. 2/2017- Central Tax (rate) dated 28th June, 2017.

Accordingly, the AAR ruled that "Wheeling and Banking Charges" collected by the applicant are exempt from the payment of GST.