The Himachal Pradesh High Court in a recent judgment prima facie observed that Goods and Services Tax (GST) cannot be levied on the supply of electricity by an electricity provider without the levy of any charges.
The Writ Petition was filed by National Hydroelectric Power Corporation Limited (NHPC), a Government of India undertaking involved in planning, organizing and setting up of hydro power plants for power generation.
The Petition was lodged by NHPC against the impugned order confirming the demand of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST)/Union Territory Goods and Services Tax (UTGST), along with penalty equivalent to the tax imposed according the provisions of Section 74(9) of the CGST Act, 2017 in liaison with the corresponding Section 74(9) of the SGST Act, 2017 and Section 21 of the UTGST Act, 2017.
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Show-Cause Notice (SCN) dated 05.10.2021 was issued to 13 Goods & Services Tax Identification Number (GSTINs) of the Petitioner alleging default in payment of Service Tax along with a Demand Order of Rs.72 Crores in unpaid Tax along with allied interests and penalties after invocation of extended period of limitation under Section 73(1) of the Finance Act, 1994.
The Petitioner is party to an Agreement with the State of Himachal Pradesh, entered into for the purpose of establishing and functioning of power generation projects in the State. Functioning of such hydro-power plants causes much distress to the environment and inhabitants surrounding the Plant.
As a means to alleviate the distress caused to the surroundings, the Petitioner Power-Plant Agreement required NHPC to provide 12% of the power generated to the State Government and 1% to the Local Area Development Fund, completely free of cost.
The power-sharing clause in the Agreement is based on a power-sharing letter dated 01.11.1990 issued by the then Department of Power, Ministry of Energy, Government of India, and the Hydropower Policy, 1998.
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The Impugned Order holds that the supply of free electricity by the Petitioner is a form of ‘consideration’ that is “paid” by the Petitioner towards licensing services rendered by the State Government and cannot be deemed as “compensation” for the distress caused by the running of the Plant.
The Additional Director General (Adjudication) (ADGA) on adjudication of the SCN Demand Order dated 19.06.2024 proceeded to drop the demand of Service Tax against the Petitioner on the ground that 12% free power is provided by the Petitioner as “compensation” in terms of the Hydro Power Policy, 2008, Central Electricity Regulatory Commission’s Regulations 2014 and letter/Notification dated 01.11.1990 issued by Government of India, Ministry of Energy, Department of Power under No. 16/46/86-DO(NHPC) (Vol.II).
ADGA further placed reliance on the decision rendered by CESTAT, New Delhi in South Eastern Coalfields Lvd. Vs. Principal Commissioner, CGST & Central Excise, Indore that free power supplied to the home state cannot be deemed to be a form of ‘royalty’ and is to be treated as a compensation for the distress instead.
A key reference was made to the Constitutional Mandate (Article 48 of the Constitution of India) and by the Parliament (The CAMPA Act, 2016, Forest Conservation Act 1980) “to collect the charges for granting diversion of forest land for non-forest purposes like mining to preserve, conserve and regeneration of lost ecological balance……Therefore, a payment in the form of Net Present Value, Compensatory Afforestation Charges and other such site specific charges are required to be paid to make good the damage caused by such user agency.”
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The High Court Bench constituted by Chief Justice Mamidanna Satya Ratna Sri Ramachandra Rao and Justice Satyen Vaidya prima facie observed that the contentions raised by the Petitioner that the supply of free electricity is in lieu of “compensation” for distress and not “consideration”, and may provide grounds for disqualifying the same from the imposition of GST.
The High Court, while deferring the judgment in the matter, executed an interim stay on all proceedings as per the Demand Order.
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