Safiya Malik

The Delhi High Court has set aside show cause notices (SCNs) issued under the Central Goods and Services Tax Act, 2017 (CGST Act), and the Integrated Goods and Services Tax Act, 2017 (IGST Act) against the Central Electricity Regulatory Commission (CERC) and the Delhi Electricity Regulatory Commission (DERC). The Court held that the regulatory functions performed by these commissions cannot be classified as "supply of services" for the purpose of levying GST.

The petitions challenged SCNs issued on May 29, 2024, and July 23, 2024, respectively, demanding GST on fees collected by the commissions under heads such as tariff fees, license fees, and annual registration fees. The SCNs alleged that the fees constituted taxable consideration under the CGST Act and IGST Act.

The respondents argued that while transmission and distribution of electricity are exempt from GST under Notification No. 9/2017-Integrated Tax (Rate), dated June 28, 2017, the support services provided by the commissions fell under the category of "support services to electricity transmission and distribution" and were taxable at 18%.

The commissions contended that their functions, such as tariff determination and licensing under the Electricity Act, 2003, were regulatory and quasi-judicial in nature, lacking any commercial objective. They asserted that such functions did not qualify as "business" or "supply of services" under the CGST Act.

Justice Yashwant Varma and Justice Dharmesh Sharma examined the scope of the commissions’ regulatory and adjudicatory functions under the Electricity Act, 2003.

The Court held that the commissions’ regulatory and adjudicatory roles could not be classified as "business" under Section 2(17) of the CGST Act. It noted:

"The regulatory function discharged by commissions would clearly not fall within the scope of the word ‘business’ as defined by Section 2(17). Even if the fee so received were to be considered as consideration, it was clearly not one obtained in the course or furtherance of business.”

The Court relied on Schedule III of the CGST Act, which excludes "services by a court or tribunal" from the definition of supply. The Court stated: "The functions performed by the commissions are vested in a quasi-judicial body enjoined to regulate and administer electricity distribution. Once that exclusion had come to be expressly incorporated, the respondents could not have undertaken an exercise to bifurcate or draw a wedge between the adjudicatory and regulatory role of commissions."

The Court observed that there was no material to suggest that the fees collected by the commissions were in consideration of any inducement or supply of goods or services. It stated: "The respondents have failed to bear in consideration the indubitable fact that the fees were not an outcome of an inducement to supply goods or services."

The Court rejected the applicability of Notification No. 8/2017-Integrated Tax (Rate), which classified support services under SAC 998631 as taxable. The Court observed:

"The exemption incorporated in Schedule III of the CGST Act would continue to govern and be applicable. The mere mention of support services in the notification would not detract from the exemption which otherwise operates."

The High Court quashed the SCNs dated May 29, 2024, and July 23, 2024, issued to CERC and DERC. It also set aside the order-in-original dated August 30, 2024, issued in connection with W.P.(C) 10680/2024, stating that it could not sustain once the SCNs were held invalid.

Case Titles: Central Electricity Regulatory Commission v. The Additional Director Directorate General of GST Intelligence & Anr.

Case Numbers: W.P.(C) 10680/2024

Bench: Justice Yashwant Varma and Justice Dharmesh Sharma

[Read/Download order]