GST Caselaw

#GSTCase-71-Renting of Immovable Property-GST applicable on Electricity and Water Charges collected on actual basis from Tenant along with Rent- (AAR – MAHARASHTRA)

#GSTCase-71-Renting of Immovable Property-GST applicable on Electricity and Water Charges collected from Tenant along with Rent

                                                                                                                                                By CA Arpit Haldia

 

E-Square Leisure (P.) Ltd. [2019] 104 taxmann.com 121 (AAR – MAHARASHTRA)

 

  1. Query

Query 1: Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actual?

 Query 2: In case GST is levied, what is the rate of GST applicable on the said reimbursement of expenses.

 

  1. Facts

Applicant intends to enter in to a contractual agreement with the lessee for leasing of the immovable property for rent for theatre. The applicant intends to provide utilities, such as electricity, for theatre and for any signage of lessee installed at the complex/facade of the complex through power Supply Company and running of DG and HVAC sets and potable water and RO treated water through facilities installed in the complex.

The utility charges such as electricity charges including cost of DG and HVAC for electricity consumed would be recovered from lessee based on the reading shown in the sub-meter provided by the applicant, so also the consumption of potable water and RO treated as water charges would be recovered based on reading shown in the water meter installed for the purpose.

 

  1. Contention of the Applicant

Query 1: Whether GST is leviable on reimbursement of expenses from the lessee by the lessor at actual?

Applicant is of the view that reimbursement of water charges, electricity charges, is nothing but repayment of certain expenses incurred by a person on behalf of other and they do not have character of supply as defined under the GST Act. Alternatively, applicant is of the view that the reimbursement of expenses by them can qualify as an expense incurred as a ‘Pure Agent’ and would not be considered in the value of supply for the levy of tax.

Applicant has relied upon Rotex Logistics Pvt. Ltd. 20O8 (9) TMI 123 CESTAT Bangalore), Anandram developers Pvt. Ltd [2017(6) G.S.T.L. 75 (Tri. -chennai), S. K. Education Pvt. Limited [2017 (6) G.S.T.L. 70 (Tri. – Del.), Sercon India Pvt. Ltd. [2013 (30) S.T.R. 454 (Del.).

 

  • GST cannot be levied on electricity being a State Subject

It is pertinent to note that Entry no. 53 i.e. Taxes on the consumption or sale of electricity’ is continued even after the Constitution of India was amended [vide Constitution (One Hundred and First Amendment) Act, 2016. Effectively, this means that electricity remains a subject matter of State and cannot be subject to GST.

 

  • Applicant is acting as a pure agent and covered under the provisions of Rule 33 of CGST Rules, 2017
S. No. Conditions Remark
1. The contractual agreement by the supplier with the recipient to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both.” The contractual agreement is entered in between the E-Square Leisure Pvt. Ltd and Carnival Films Pvt. Ltd. for renting of property
2. Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account We would like to refer para 8(i) of the agreement of E-Square Leisure Pvt. Ltd and Carnival Films Pvt. Ltd ‘Electricity charges (including running cost of DG & HVAC) for electricity consumed in the Theatre and for any Signage of the Lessee installed at the Complex/fagade of the Complex shall be reimbursed by the Lessee based on the reading shown in the sub-meter/ BTU provided by the Lessor at the Multiplex, at such rate (which shall be arrived at by diving the total electricity bill by the number of units measured excluding any late payment charges) as may be charged by the electricity /power supply, company.

 

Given this, to compute the consumption, the Company has installed Siemens technology for recovery of the electricity charges based on respective consumption.

3. The pure agent does not use the goods or services so procured in his own interest.” The electricity charges are to be recovered on the basis of Actual usage of the lessee. It is to be noted that invoice is not yet raised on Lessee.
4. Neither holds nor intends to hold any title to the goods or services so procured or supplied as pure agent of the recipient of supply What constitutes as a title in goods is not defined GST law. In the ordinary parlance, title means the ownership.

 

• It is important to note that, electricity or other connections are generally registered in the name of the owner. At the time of renting, right to use electricity is implied right given to the lessee.

 

• In the instant case as tenant uses the electricity, the supplier ‘Neither holds nor intends to hold any title to the goods or services so procured’. Para 2.5 – 2.16 of the original submission of Interpretation of Law And / Or Facts’ has detailed discussion in this regard.

5. The supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient; As the agreement clearly mentioned the fact that electricity used is collected from the lessee it could be construed that, E-Square Leisure Pvt. Ltd. makes the payment of electricity charges on behalf of Carnival Films Pvt. Ltd. It is to be noted that invoice is yet to be raised on Lessee.
6. he payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service Invoice is yet to be raised on Lessee.
7. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account The contractual agreement is entered in between lessee and lessor for renting of property and not providing electricity.

• There are two supplies, i.e. one of renting of property and another or providing electricity. Thus charges for electricity are in addition to the renting of immovable property service provided.

 

Query 2: Rate at which tax is leviable on reimbursement of Expenses –Whether GST is levied at the rate as applicable to expenses reimbursed or GST could be levied at the rate as applicable to renting of immovable property.

 

Supply of Electricity and water can be treated as Independent Supply. It is well settled through a Plethora of judgements from Apex Court that electricity is ‘goods”. Judgements relied upon: Madhya Pradesh Electricity Board, Jabalpur [2002- TIOL-226-SC-CT LB], National Thermal Power Corpn. Ltd (2002-TIOL-107-SC-CT), M/S ICC Reality (India) Pvt Ltd. (2013-TIOL-1751-CESTAI-MUM). Further, electricity charges are not liable to Service Tax has been upheld in numerous earlier judgments [refer ICC Reality (India) Pvt. Ltd v. CCE (2013) 32 STR 427 (Tri-Mum), EON Hinjewadi infra. Pvt. Ltd (2012 TIOL-1688-CESTAT-Mum)]. Therefore, it could be construed that electricity is separate independent supply and does not constitute the part of renting contract. Electricity is an “exempt supply” covered under HSN 2716 00 00 Notification No. 1/2017-Central Tax (Rate).

Alternatively, it could be constructed that, GST rate applicable to reimbursement of expenses is the rate as applicable to principle supply which in present case is renting of immovable property. However, said rate is applicable subject to the condition that service provided is naturally bundled to each other hence it could be construed that only the expenses which are naturally bundled are liable for GST at a rate applicable to Principle Supply. Hence reimbursement towards the expenses which are capable of differential treatment and can be provided separately like cooking fuel could not be covered under Composite supply.

 

  1. Observation by AAR

 

  • Transaction covered under Renting of immovable property

Applicant has agreed to lease out theatre to lessee. As per entry no. 5 (a) of Schedule II – Activities of Transaction to be treated as supply of Goods or supply of Services; renting of immovable property is a supply of services and liable to tax under the provisions of GST Act.

 

  • Renting of theatre would not be organic unless accompanied by Power and Water

Theatre business will not be organic unless it is accompanied with supply of power and water. The utilities such as electricity, supply and water supply are basic amenities subject to which competent authority will not issue ‘No objection Certificate’ to conduct business of running a theatre.

 

  • Applicant engaged in Providing two or more taxable services and Renting of Immovable property being the principal supply

Applicant is providing more than two services such as renting of immovable property, supply of power through DG set and water through RO besides cooking fuel. Renting of immovable property would be the main supply and provision of other utilities such as electricity, and water supply, fuel etc. would be in the nature of ancillary supply which help in better enjoyment of the main supply that is Theatre.

We must accept as a matter of fact all provision of services as envisaged by the contract are interdependent and if one or more is removed the nature of supply would be affected. Therefore, utility charges in the nature of electricity charges and water reimbursed by the applicant from lessee forms part of composite supply.

 

  • Whether Applicant is acting as a pure Agent

The applicant has installed main electric connection and has different sub connections at each location for reading actual consumption of electricity. Applicant has also installed DG sets for generation of electricity in case of power failure. The water required is also provided through RO system. All these goes to show that these supplies are on their own account and is for effective enjoyment of activities related to the Theatre.

Further, we find that the provision of supply is made by the applicant to comply with the mandatory requirements of the local body and the Licensing Authority under Cinema Act and Cinema Rules 3 to operate the Theatre.

Further, from the terms of the agreement and the transaction, we do not find any authorization, obtained by the applicant from the recipient of the services, to act as pure agent and to make payment to third parties.

In view of the above, we accept the contention of the jurisdictional officer that the applicant has failed to establish themselves as a pure agent as defined under the GST Valuation Rules and therefore the expenditure or cost incurred by the applicant and subsequent reimbursement thereof cannot be excluded from the value of supply.

 

  1. Held

Query 1: GST is leviable on reimbursement of expenses from the lessee by the lessor at actuals.

Query 2:  As the reimbursement of the expenses constitute composite supply GST would be payable at a rate as applicable to the principal supply.

 

  1. Comment

It has to be said that the given judgement covers an issue which has been at the centre stage for disputes since the service tax regime. The applicant in the instant case had relied upon decisions of service tax regime. AAR did not provide any reason why rationale laid down in the judgements was not applicable in the instant case.

AAR has failed to consider the submissions in detail why applicant is not a pure agent even though a sub-meter has been installed by the applicant for electricity and water charges. The specific reasons which could be culled out and which may in other cases impact the treatment of such charges is as follows:

Reason 1: Applicant has leased out the immovable property for being used as a theatre and theatre business will not be organic unless it is accompanied with supply of power and water

Reason 2: The utilities such as electricity, supply and water supply are basic amenities subject to which competent authority will not issue ‘No objection Certificate’ to conduct business of running a theatre.

Reason 3: The applicant has installed the main electric connection and has different sub connections at each location for reading actual consumption of electricity. Applicant has also installed the DG sets for generation of electricity in case of power failure. The water required is also provided through RO system. All these goes to show that these supplies are on their own account and is for effective enjoyment of activities related to the Theatre.

Reason 4: AAR found that provision of supply of electricity and water made by the applicant to comply with the mandatory requirements of the local body and the Licensing Authority under Cinema Act and Cinema Rules 3 to operate the Theatre.

All the four reasons as cited above formed the crux of the decision and on a closer look, all four relate to running of the cinema business which is not related to the applicant who is only renting out the immovable property. All the four reasons are relevant from the point of the person who is running the theatre because running a theatre requires electricity and water. ‘No objection certificate’ would be obtained by the person intending to run the cinema and not by the person renting out the immovable property. Therefore, provision of water and electricity being a mandatory requirement has to be seen from the point of view of the person running the cinema and not from the person renting out the immovable property. It as not mandatory from the point of view of the person giving the property on rent to provide electricity and water but was mandatory from the point of view of the person running the cinema to provide water and electricity. The service of renting would have been complete without the provision of water and electricity.

 

  • Issues raised by the Applicant remained unanswered-Pure Agent, Electricity being a State Subject and thus out of ambit of GST and Electricity Charges being treated as Separate Supply

The issue regarding electricity remains a subject matter of State and cannot be subject to GST and electricity charges are not liable to Service Tax has been upheld in numerous earlier judgments [refer ICC Reality (India) Pvt. Ltd v. CCE (2013) 32 STR 427 (Tri-Mum), EON Hinjewadi infra. Pvt. Ltd (2012 TIOL-1688-CESTAT-Mum) remained unanswered by the AAR and AAR rerached to judgement in summary manner.

AAR could have detailed out whether by installing a sub-meter, whether there could be a pure agent relationship between the landlord and the tenant wherein even after installing the sub-meter, is the landlord who is responsible for paying the rent and landlord is enjoying the ownership of the electricity as without services of electricity rendered, it would be virtually impossible to rent out the building. The applicant in the submission has very aptly highlighted what is meant by the term ownership and unless until the issue about ownership is clarified, there seems to be a dilemma over the definition of pure agent.

The issue is AAR has not given the rationale for arriving at the conclusion. Not that the conclusion might have been the same or different but summarily rejecting the detailed submission of the applicant, dilutes the effectiveness of the decision. It’s the right time for the government to come out with a clarification on the issue and more importantly clear clarification on the issue.

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