Electricity Charges are Includible in Rent for Charging GST - AAAR

 

This is to apprise you about a recent decision by Appellate Authority for Advance Ruling (‘AAAR’) in the case of Harish Chand Modi, RAJ/AAAR/05/2021-22, wherein it was held that reimbursement of electricity expenses by the lessee to lessor would form part of taxable value and not to be treated as ‘Pure Agency Services’.

 

We have provided the summary of the ruling below:

 

Facts

 

·                The Appellant provides floors/offices on lease for a fixed amount of monthly rent along with the reimbursement of electricity charges on actual basis.  The Appellant sought advance ruling for the inclusion of reimbursement of electricity expenses in the value of taxable supply.

 

·                AAR held that the Appellant has not acted as a ‘pure agent’ and thus, electricity charges are includible in rent for the purpose of charging GST.

 

·                The Appellant challenged the AAR before the AAAR.

 

AAAR Decision

 

·                AAAR observed that Rule 33 of the CGST Rules, 2017 provides specific conditions to be satisfied if there is a case of pure agent. In the present case, the same is not satisfied on following two grounds:

 

1.       That there is no authorisation by tenant to the Appellant to act as a pure agent

 

2.       That since the electricity charges are paid in advance and later adjusted through invoice, the same is not on actual basis

 

·                Hence, it has been held that reimbursement of electricity charges would form part of taxable value and GST would be applicable on the same.    

 

 | Remarks

 

·                In our humble view, this ruling may not lay down a correct proposition, inter alia, on three grounds:

 

1.       The GST law does not stipulate that there must be a written authorization to act as a pure agent. Contract laws acknowledge the implied and oral agreements in India.

 

2.       Merely because electricity charges are paid in advance and later adjusted, it cannot be construed that these are not on actuals. As long as the adjusted amount is equal to actual electricity bill, the same is to be considered on actual basis.

 

3.       Doctrine of Colorable Legislation

 

Doctrine of Colorable Legislation

 

·                The Hon’ble Supreme Court has in many cases observed that ‘what cannot be done directly, should also not be done indirectly’ with respect to the law-making powers of the States and Centre. The same can be applied here in the context that ‘supply of electricity’ per se is not exigible to tax under GST and therefore, it cannot be made to tax indirectly.

 

·                One would argue that supply of electricity is exempted and therefore, not out of GST. Firstly, exemption does not presuppose a levy. Secondly, in our view, electricity is still a State subject even after Constitution 101^st Amendment [Entry 53 of the State List] and GST cannot encroach upon such a right of the States.

 

·                Therefore, in our view, taxing supply of electricity indirectly would be a colourable approach and not permissible.

 

Invoice is not in the Name of Tenant

 

·                One of the grounds also taken by GST authorities these days is that the electricity bill is not in the name of tenant. Therefore, one of the pure agency conditions is not met.

 

·                In our view, the contention may not be correct. GST registration provisions require that the electricity connection must be in the name of the lessor / owner of the property. It is but obvious that the bill shall also be in the name of the lessor / owner.

 

·                Therefore, to conclude that landlord is not a ‘pure agent’ since electricity bill is not in the name of tenant, is completely illogical and contradictory.