[By Lovish J Goyal]
The author is a student of NALSAR University of Law, Hyderabad.
Introduction
Electricity Regulatory Commission(s) (‘ERC’) are instrumental in shaping India’s electricity sector. They are established under various statutes to regulate the electricity sector in their jurisdictions. These statutory bodies are responsible for granting licenses and determining tariffs to ensure an uninterrupted and reliable electricity supply. ERC are also vested with quasi-judicial powers, which enable them to regulate the industry effectively.
However, the license fees collected by ERC on the grant of licenses have recently become a contentious issue due to Goods and Services Tax (‘GST’) authorities seeking to levy GST on such collections. A landmark development occurred when the Delhi High Court quashed the levy of GST on license fees collected by the Central Electricity Regulatory Commission (‘CERC’) and the Delhi Electricity Regulatory Commission (‘DERC’). Similar legal challenges are pending in various other High Courts. The legal questions about the problem become relevant in light of similar activities undertaken by similar statutory bodies. Different industries have various regulatory authorities regulating them, ranging from Pollution Control Boards to Education Boards through issuing licenses and collecting fees. There have been instances wherein GST has been levied on license fees collected by different statutory authorities. Thus, the answer to this question would have broad ramifications across industries. This makes it imperative to have a clear law laid down on this issue. The Delhi High Court judgment becomes vital in light of the significance of the subject matter of the case.
Judicial Development
The Delhi High Court, in the case of CERC v. Additional Director DGGI (‘Additional Director’), quashed the demand for GST, which was confirmed by the GST Department. The court based its decision on the finding that the ERC perform quasi-judicial functions. The court relied on the judgment of PTC India v. CERC (‘PTC’) to borrow the principle that the licensing function of CERC is a quasi-judicial function. Schedule III under the CGST Act provides that services by any court or tribunal established under any law for the time being in force shall not be treated as a supply. This makes the activities of any court or tribunal exempt from the levy of GST. It further held that these commissions primarily execute their statutory mandate and, therefore, should not be subjected to GST.
Furthermore, the court went into the contention of whether services rendered by these bodies are in furtherance of any business. An act has to be in furtherance of a business in order to make it exigible to GST. The court held that the power to regulate could not be considered akin to trade, commerce, manufacture, profession, and other activities enumerated in Section 2(17)(a), which defines “business.” Further, it holds that CERC is not akin to local authorities, Central Government, or State Government. Section 2(17)(i) makes any activity or transaction undertaken by the Central Government, a State Government, or any local authority as a public authority also constitute a business. Based on the aforementioned considerations, the High Court held that the licensing activities of CERC cannot be made exigible to GST. However, several questions remained unanswered during the course of this case.
The Unaddressed Questions
Whether granting licenses is a quasi-judicial function?
The court heavily relied on PTC to conclude that granting licenses is a quasi-judicial function performed by CERC without going into a critical examination of the underlying issues. However, the court failed to appreciate the context in which the decision in PTC was based. The case pertained to whether regulations framed by CERC to regulate the electricity industry can be challenged before the Appellate Tribunal for Electricity. In this context, the Apex Court in PTC held that framing of regulations cannot be challenged as it is a regulatory function;i however, granting a license is not a regulatory function but a quasi-judicial function and thus can be challenged. However, this judgment was in an administrative law context. It was, therefore, on the High Court in the case of Additional Director to determine whether a quasi-judicial authority for the purposes of administrative principles would also automatically become a quasi-judicial authority for taxation purposes. The High Court, rather than delving into this question, uncritically followed the law laid down in PTC.
A similar conundrum exists in the context of arbitration tribunals as well. In the case of Central Organisation for Railway Electrification v. ECI SPIC SMO MCML, the Apex Court considered an arbitration tribunal to be a quasi-judicial tribunal while arriving at the further conclusion of determining the legality of a Unilateral Arbitrator Appointment Clause. The case considered whether such clauses would allow impartial decision making on account of arbitration tribunals being quasi-judicial bodies. However, CBIC, vide Circular No. 193/03/2016 had already clarified that service tax was to be liable for services provided by an arbitral tribunal. Whereas Section 65B(44)(c) of the Finance Act 1994 also provided an exception to fees collected by courts or tribunals, still service tax used to be levied on the fees collected by the arbitration tribunals similar to the exception provided in CGST Act. Moreover, various arbitration centres across the country still charge GST on the arbitration fees collected by them. The situation becomes similar as much as classification of CERC and arbitration tribunals into quasi-judicial body is concerned. However, both these entities differ in the way they are treated under taxation laws after the decision in the case of Additional Director..This takes us back to the same question: can a quasi-judicial authority for administrative law purposes also be considered one for taxation purposes? Answering it becomes more imperative in light of the broad application of this legal question.
The purpose of quasi-judicial bodies in administrative laws is to extend the principles of natural justice to the decision-making of these bodies. This has been recurrently stated by the Apex Court in landmark cases such as the Province of Bombay v. Khushaldas Advani and AERA v. Delhi International Airport. However, the purpose of determining quasi-judicial bodies for taxation purposes is to exempt them from GST. Therefore, the extension of principles laid down in administrative law context to taxation laws becomes problematic.
Whether granting a license is in furtherance of business?
Another reasoning of the court to arrive at the conclusion was that the ERC were performing a statutory obligation, and the same was not in the furtherance of business. Firstly, it is pertinent to note that statutory obligations and business are not mutually exclusive. Organisations such as Oil and Natural Gas Corporation and State Bank of India are formed under statutes but still pay taxes, although they perform their economic activities to discharge their statutory obligation. Performing business itself is a part of their statutory obligation. Moreover, in the case of Mineral Area Development Authority v. Steel Authority of India Limited, the Apex Court allowed GST to be levied on royalties paid on mining leases. Providing mining leases is a part of a statutory obligation under the Mines and Minerals (Development and Regulation) Act 1957. Still, the leases were taxed despite it being a part of statutory obligations. This makes it clear that the discharge of a statutory obligation does not exempt an activity from GST.
The court further decided on whether licensing activity can be constituted as a part of business. The court held that granting licenses does not form a part of trade, commerce, or any of the elements mentioned under Section 2(17)(a) of the CGST Act.ii However, the court failed to appreciate that the same can be argued to form a part of an incidental activity to supply of electricity. Incidental activities are included under Section 2(17)(b) of the CGST Act to form a part of “business.” The Appellant Authority for Advance Ruling for Maharashtra has ruled that to make an incidental activity of an entity taxable, the entity need not be predominantly a business entity. The business entity under that decision was a charitable trust but was held to be exigible to GST for certain activities. Furthermore, the Department had classified the function of granting a license under the heading “support services to electricity, gas, and water distribution,” which has neither been challenged by the respondent nor negated by the court. Such support services can form incidental services and hence can come under the ambit of business.
Moreover, the activities of ERC were also argued to form a part of the activities being undertaken by a Central Government or a State Government. The High Court reasoned out that “local authority” has been defined as including Panchayats, municipalities, Cantonment Boards, Regional Councils, and authorities under Article 371, 371A, or 371J, which are essentially development boards.iii An authority under the Electricity Act would not be akin to these authorities. The High Court relied on the definition of “local authority” to further exclude CERC from the definition of a Central/ State Government. A pertinent point here can be that local authorities differ from Central/ State Governments in their purpose and their jurisdictioniv. Local authorities are primarily entrusted with the development of the municipal and providing basic amenities. Central/ State Governments, on the other hand, are entrusted with a wide variety of functions and need different bodies to discharge these functions, one of which is to regulate certain industries. Thus, the definition of ‘local authorities’ cannot be used as a yardstick to determine the nature and extent of the term ‘Central/ State Government.’
In the absence of the definition of the Central/ State Government, the General Clauses Act could have been referred. A reading of Section 3(8) of the General Clauses Act makes it abundantly clear that Central / State Government means the President / Governor and the officers subordinate to him while exercising the executive powers of the Union or the State. Electricity, being a subject matter in the Concurrent List, empowers the Central and State Governments to make laws regulating it. The statutory bodies under the Parent Acts of ERC are formed to exercise the executive functions vested under the said acts. The ERC, thus, squarely fall within the definition of Central/ State Government. Service Tax also used to be levied on such a fee, which was clarified vide Circular No. 192/02/2016 issued by CBIC. The circular clarified that Service Tax was liable to be paid on any payment in lieu of any permission or license granted by the Government or a local authority. Notification No. 13/2017 taxes any activity undertaken by the Central/ State Government except renting, posts, or services in relation to an aircraft or a vessel or transport of passengers. The activity of granting licenses does not form part of any of the exceptions in the said notification. Thus, the Government’s licensing function also became taxable through this notification.
Conclusion
The issue of GST applicability on license fees collected by ERC remains unresolved due to significant legal ambiguities. While the Delhi High Court’s decisionin Additional Director provides temporary relief by classifying ERCs as quasi-judicial bodies exempt from GST, several critical questions remain unanswered. The court’s reliance on PTC without a deeper analysis of its applicability in the context of taxation raises concerns. Additionally, the question of defining quasi-judicial bodies for taxation purposes becomes pertinent. Furthermore, the court’s conclusion that ERC do not operate “in furtherance of business” under Section 2(17) of the CGST Act is debatable. Licensing functions could arguably be considered incidental to the electricity supply business, making them taxable. The exclusion of ERC from the definition of Central/State Governments also warrants reconsideration, as they exercise executive functions under statutory authority.
Given the broader implications for other regulatory bodies across industries, a definitive legal precedent is essential. A thorough examination by the Supreme Court or legislative clarification is needed to resolve these uncertainties and ensure consistency in the taxation framework for statutory bodies engaged in licensing functions.