• Dated 03^rd April, 2026

Ancillary Services Essential to Electricity Transmission Exempt; Services with no Direct Nexus Taxable: CESTAT CHENNAI

BRIEF FACTS:

The Assessee received services relating to erection, commissioning, installation and dismantling of transmission towers, lines and substations, along with construction and allied works at substations (works contract services). It also availed manpower supply services for handling movement of men and materials and for safeguarding offices, stores and vehicles, and rent-a-cab services for official use.

Under the reverse charge mechanism effective from 01.07.2012, these services were considered liable to service tax in terms of Section 68(2) of the Finance Act, 1994 read with Notification No. 30/2012-ST. It was found that the Assessee had not obtained registration and had not paid service tax. During investigation, the authorised representative admitted non-registration and non-payment.

A show cause notice dated 17.07.2015 was issued proposing recovery of service tax along with interest and penalties under Sections 76, 77 and 78. The Adjudicating Authority confirmed the demand, appropriated the tax paid, and imposed penalties, leading to the present appeal.

ASSESSEE'S CONTENTION:

The Assessee contended that it is a Government-owned electricity transmission utility exclusively engaged in the transmission of electricity, which is a non-taxable activity under Section 66D(k) of the Finance Act, 1994 (Negative List). It was argued that the services received, namely works contract, manpower supply, and rent-a-cab, are integral and essential to the transmission of electricity and therefore qualify for exemption. The Assessee further submitted that the expressions "for" and "relating to" transmission have a wide scope, covering all ancillary and support services, and relied on judicial precedents which consistently hold that services connected with transmission or distribution of electricity are exempt from service tax. It was also pointed out that the appellant had voluntarily discharged the service tax liability, and hence imposition of penalties is unwarranted. Additionally, the demand was challenged on the ground of limitation, stating that the issue is interpretational in nature, the Assessee being a government entity, and there was no suppression of facts or mala fide intent.

DEPARTMENT'S CONTENTION:

The Department contended that the Assessee is liable to pay service tax under the reverse charge mechanism on services such as works contract, manpower supply, and rent-a-cab services. It was argued that, as per Section 66F(1) of the Finance Act, 1994, services used for providing a main service are not automatically exempt merely because the main service is exempt. The Department further submitted that works contract service is a declared taxable service and attracts tax liability under reverse charge. It was also contended that the exemption available for transmission of electricity does not extend to input or ancillary services received by the Assessee. Additionally, the Department argued that the circulars and judicial decisions relied upon by the Assessee pertain to the pre-negative list regime and are not applicable after 01.07.2012. Lastly, it was asserted that the Assessee failed to establish any bona fide belief, thereby justifying the invocation of the extended period of limitation.

DECISION:

The Tribunal held that transmission of electricity under Section 66D(k) is an activity-specific exemption, and such activity necessarily involves use of various direct and ancillary services. It was observed that services having a direct and proximate nexus with transmission of electricity would be covered within the scope of the exempt activity. Accordingly, Works contract services relating to erection, installation and construction of transmission infrastructure were held to be indispensable for transmission of electricity and not taxable, Manpower supply services used for operational support were also held to be integrally connected and not taxable. However, Rent-a-cab services for official use were held to lack a direct and proximate nexus with transmission of electricity and therefore not eligible for exemption.

On limitation, the Tribunal held that the issue involves interpretation of law and there was no evidence of suppression or intent to evade tax. Accordingly, invocation of extended limitation was not sustainable, and the demand relating to rent-a-cab service was held to be time-barred. The impugned order was set aside and the appeal was allowed with consequential relief.

BTA's COMMENT:

This ruling provides useful clarity on the scope of exemption available to electricity transmission utilities, especially in the context of services received under reverse charge. It confirms that exemption is not limited to the core activity of transmission alone, but can extend to services that are directly and closely connected with such activity. At the same time, the decision highlights that the benefit is not automatic for all services. A clear and direct nexus with the transmission function is essential, and services of a general or administrative nature may still remain taxable. Importantly, the ruling also reiterates that where the issue involves interpretation of law and there is no evidence of deliberate suppression, extended limitation cannot be invoked. This provides relief in cases where tax positions are taken based on a reasonable understanding of the law.

Case Reference: Tamil Nadu Transmission Corporation Ltd. V. Commissioner of GST & Central Excise, Service Tax Appeal No. 40323 of 2017 decided on 24.03.2026.

Author- Shristy Pathak

Edited by- Madhurima Bose