2025 (6) TMI 753 - HC - VAT / Sales Tax

Power of State of Tamil Nadu to collect tax on the electricity supplied and consumed through the inter-state open access systems/purchases through exchanges - When the Tamil Nadu Tax on Consumption or Sale and Electricity Tax Act 2003 was enacted without reference to the very concept of open access purchase and purchasers through IEX can the Government of Tamil Nadu still levy and collect tax in the absence of any subsequent amendment or not - levy of tax on captive generation and consumption - validity of impugned Government Order in G.O.Ms.No.121 dated 23.12.2010 - legality of collection of tax through the licensee due to the absence of a mechanism for assessing and collecting tax. Will the State of Tamil Nadu have the power to collect tax on the electricity supplied and consumed through the inter-state open access systems/purchases through exchanges? - HELD THAT - The consumption and sale of electrical energy cannot be separated meaning that in the case of an inter-State sale the State Government cannot impose tax by separating the incidence of consumption from sale. It should be a straightforward case of either consumption alone or a sale with consumption within the State. However there have been subsequent developments following the aforementioned judgments of the Hon ble Supreme Court of India. Notably the Constitution Bench did not consider the consumption of power through an open access system. Additionally the Indian Electricity Act 2003 came into force which effective from 02.06.2003 introduced the open access system for the first time. Open access is a regulatory framework that empowers eligible consumers to purchase open access electricity directly from the open market. This system breaks away from the traditional model where consumers are tied exclusively to local distribution companies like TANGEDCO. The objective is to make the market more competitive and to acquire energy at a lower cost with greater efficiency. The system is supervised by the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions with reference to the grid supply through the grid and its stability. Open access power can be obtained through short-term medium-term and long-term contracts with suppliers. Electricity is consistently held to be goods. There can be no iota of doubt that if person/concern buys power through these exchanges/open access system from another state then whether purchase supply or consumption all happen in the course of inter-state trade or commerce . Thus when the power of the State of Tamil Nadu to impose tax is circumscribed by the Article 269A then Section 3(1)(c) of the Act cannot be interpreted to empower the power of the State to impose tax on the ground that the consumption happens within the State of Tamil Nadu. Wth reference to consumption of electricity through open access system if it is through inter- State open access system which is in the course of inter-State trade or commerce there is no power vested with the State of Tamil Nadu to impose tax and Section 3(1)(c) of the Act cannot be read to include those transactions and though consumption can be an incidence if it happens in the course of an intra-state transaction. When the Tamil Nadu Tax on Consumption or Sale and Electricity Tax Act 2003 was enacted without reference to the very concept of open access purchase and purchasers through IEX can the Government of Tamil Nadu still levy and collect tax in the absence of any subsequent amendment? Can the Government of Tamil Nadu now collect tax on intra- State consumption of power procured through the open access system? - HELD THAT - It is evident that Section 3(1)(c) does not employ the term consumers in relation to the incidence of tax. Although individuals procuring power through the open access system fall within the definition of consumer the incidence of tax pertains to the electricity consumed during the previous month for own use . It is not the electricity consumed but the phrase for own use is specifically reiterated in Section 3(1)(c). If the interpretation suggested by the learned Additional Advocate General is accepted then the phrase for own use would become redundant. The Act specifically uses terminologies such as actual user of power which is defined under Section 2(1) to mean a user who is not a consumer but uses power from a captive generating plant. Therefore when these individuals purchase power through the open access system they fall within the definition of consumer. However when Section 3(1)(c) abandons the word consumer it contradicts itself by designating the incidence of tax as consumption for own use which only applies to captive generating plants and not to those who purchase power through the intra-State open access system. In light of this G.O.(Ms).No.55 Energy (D2) Department dated 20.10.2021 which aims to assign the collection of tax to the licensee namely TANGEDCO concerning the consumption of electricity purchased through open access from Indian Energy Exchange Limited or Power Exchange India Limited cannot be upheld as leviable under Section 3(1)(c) of the Act and is therefore quashed. Is the tax leviable on captive generation and consumption? - HELD THAT - By virtue of Section 3(1)(c) the captive generating plants are those that consume power for their own use and are thus covered under Section 3(1)(c). Accordingly the Government of Tamil Nadu is entitled to collect tax at the rate of Rs. 10 ps per unit and not more than Rs. 20 ps per unit as may be notified. Whether the impugned Government Order in G.O.Ms.No.121 dated 23.12.2010 is liable to be quashed? - Is the collection of tax through the licensee illegal due to the absence of a mechanism for assessing and collecting tax? - HELD THAT - When the government has the power to appoint Electricity Tax Inspecting Officers to inspect the petitioners regarding their returns that show the units of electricity supplied and the amount of electricity tax payable to the Director in the prescribed form and manner and when the Managing Director of TANGEDCO is appointed as the Director and when under Section 13 the Electricity Tax Inspecting Officer exercises necessary powers to carry out the purpose of the Act and the Rules it cannot be said that the impugned government order is in any way contrary to the provisions of the Act. The mechanism for filing returns including claiming any exemptions is available in the Act. Since electricity is supplied through a metering mechanism and only TANGEDCO officials visit every location to levy and collect electricity charges and inspect all other facilities the government order does not violate the provisions of the Act. As far as the Rules are concerned under Rule 6 every licensee or every person other than a licensee is supposed to credit such tax to the Government s treasury under the accounts mentioned therein. Rule 8 also enables the licensee to include the tax leviable under the Act as a separate item in the bill for the charges for the sale of electricity by him and shall recover the same from the consumer along with his charges for the sale of such electricity. In this regard the definition of consumer under the Act which was extracted supra includes the actual user of power or any other person who consumes the electricity generated by him. Therefore the provision also exists for including the Electricity Tax in the bill. A proper reading of the Act and the Rules will make it clear that concerning consumers the licensee namely TANGEDCO can include the tax in the bill and collect it as well. In fact the licensees can also file returns; therefore any refunds can be claimed as per the Act. A provision for appeal is also established. Conclusion - i) With reference to consumption of electricity through open access system if it is through inter- State open access system which is in the course of inter-State trade or commerce there is no power vested with the State of Tamil Nadu to impose tax and Section 3(1)(c) of the Act cannot be read to include those transactions and though consumption can be an incidence if it happens in the course of an intra-state transaction. ii) The Tamil Nadu Act 12/2003 as presently enacted does not encompass intra-State open access purchases or power exchange transactions. The Government Order G.O.Ms.No.55 dated 20.10.2021 attempting to levy tax on such consumption through TANGEDCO is quashed. iii) Tax on captive generating plants consuming electricity for own use is validly leviable under Section 3(1)(c) of Act 12/2003 and the State may collect such tax at prescribed rates. iv) The Government Order G.O.Ms.No.121 dated 23.12.2010 which designates collection authorities and empowers TANGEDCO and its officers to collect electricity tax on captive generation and consumption is upheld as valid and consistent with the Act and Rules. v) The mechanism for collection of electricity tax through licensees is lawful and the absence of a separate statutory procedure does not invalidate the collection process under the existing statutory framework. The impugned Government Orders in G.O.(Ms).No.55 Energy (D2) Department dated 20.10.2021 shall stand quashed - The G.O.Ms.No.121 Energy (B1) Department dated 23.12.2010 shall stand upheld - petition disposed off.

Summary

The core legal questions considered by the Court in this batch of writ petitions relate to the validity and scope of taxation imposed by the State of Tamil Nadu on electricity consumption, particularly addressing the following issues:

(i) Whether the State of Tamil Nadu has the power to collect tax on electricity supplied and consumed through inter-State open access systems or purchases through power exchanges such as the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL).

(ii) Whether the Tamil Nadu Tax on Consumption or Sale and Electricity Tax Act, 2003 (Act 12 of 2003), enacted without reference to the concept of open access and power purchases through exchanges, can be applied to levy and collect tax on intra-State consumption of electricity procured through open access systems.

(iii) Whether tax is leviable on captive generation and consumption of electricity under the said Act.

(iv) Whether the impugned Government Order G.O.Ms.No.121, dated 23.12.2010, which designates officers for collection of electricity tax, is liable to be quashed on grounds of procedural or substantive illegality.

(v) Whether the collection of tax through licensees such as TANGEDCO is illegal due to the absence of a statutory mechanism for assessing and collecting such tax.

Issue-wise Detailed Analysis:

(i) Power of the State to Collect Tax on Electricity Supplied and Consumed Through Inter-State Open Access Systems/Purchases Through Exchanges

The legal framework centers on Entry 53 of List II of the Seventh Schedule of the Constitution of India, which empowers States to levy tax on the consumption or sale of electricity. Section 3(1)(c) of Act 12/2003 imposes tax on electricity consumption by persons other than licensees, at rates notified by the Government.

The Court analyzed the nature of electricity as "goods" under Article 366(12) and judicial precedents, including a Constitution Bench judgment which held that electricity cannot be stored and that generation, sale, supply, and consumption occur simultaneously without any hiatus. This principle implies that consumption and sale are inseparable for taxation purposes.

However, the introduction of the Indian Electricity Act, 2003, and the concept of open access, permitting consumers to purchase electricity directly from generators or exchanges, complicates the traditional understanding. Open access allows consumers to procure electricity through inter-State transmission systems, with associated wheeling and transmission charges regulated by Central and State Commissions.

The Court noted the constitutional amendments via the One Hundred and First Amendment Act, 2016, adding Article 269A and modifying Article 286, which govern the levy and collection of Goods and Services Tax (GST) on inter-State supplies, including electricity. These provisions restrict States from imposing tax on supplies occurring outside their territory or in the course of inter-State trade or commerce.

Given that electricity purchased through exchanges like IEX is treated as an inter-State transaction, the Court held that the State of Tamil Nadu lacks the constitutional competence to levy tax on such inter-State electricity consumption, despite the consumption physically occurring within the State. The Court emphasized that Section 3(1)(c) of Act 12/2003 cannot be interpreted to override the constitutional restrictions imposed by Articles 269A and 286.

(ii) Applicability of Act 12/2003 to Open Access Purchases and Intra-State Consumption Without Subsequent Amendments

The Act 12/2003 was enacted prior to the Electricity Act, 2003, and before the open access regime was introduced. The Court acknowledged that tax statutes are generally technology-neutral and may apply to new forms of transactions arising after enactment, provided the language of the statute covers them clearly.

However, the Court found that Section 3(1)(c) specifically taxes consumption "for own use" by persons other than licensees, a phrase interpreted to apply primarily to captive generating plants. The term "consumer" is notably absent in this charging provision, indicating legislative intent to exclude open access consumers from this tax.

The Court held that the Government Order G.O.Ms.No.55, dated 20.10.2021, which directs TANGEDCO to collect tax on electricity procured through exchanges and open access, is not supported by the charging provisions of the Act and is therefore liable to be quashed. The Court left open the possibility for the State to amend the Act to expressly cover intra-State open access purchases if it so desires.

(iii) Levy of Tax on Captive Generation and Consumption

The Act defines "captive generating plant" as a power plant set up primarily for own use, with allowance for sale of surplus power. The definition of "consumer" includes persons supplied electricity by licensees or those consuming self-generated electricity.

Section 3(1)(c) imposes tax on consumption for own use by persons other than licensees, which includes captive generating plants. The Court affirmed that the State is entitled to levy and collect tax on captive generation and consumption at the prescribed rates (not less than Rs. 0.10 and not more than Rs. 0.20 per unit).

(iv) Validity of G.O.Ms.No.121, dated 23.12.2010

This Government Order designates various officers and officials of TANGEDCO and the Electricity Department as authorities for collection and inspection of electricity tax under Act 12/2003. The petitioners challenged this order on grounds that it contradicts the Act and Rules and lacks a proper mechanism for assessment and collection.

The Court examined the statutory provisions, including Sections 5 (registration), 7 (recovery as arrears), 8 (maintenance of accounts and returns), 9 (assessment procedure), 10 (appeal), 12 (appointment of inspecting officers), and 13 (powers of inspecting officers), along with the Rules framed under the Act.

It was held that the Act and Rules provide a comprehensive mechanism for levy, assessment, collection, and enforcement of electricity tax. Since TANGEDCO is the distribution licensee with access to metering data and billing infrastructure, it is appropriate and lawful for TANGEDCO and its officers to collect the tax. The Government Order does not violate the Act or Rules and is therefore upheld.

(v) Legality of Collection of Tax Through Licensee in Absence of a Statutory Mechanism

The Court rejected the contention that collection of tax through licensees is illegal due to lack of statutory procedure. The Act and Rules explicitly empower licensees to include electricity tax as a separate item in consumer bills and to recover the tax along with consumption charges. The statutory framework includes provisions for registration, accounting, assessment, inspection, and appeals, providing a valid mechanism for collection and enforcement.

Therefore, the collection of tax through TANGEDCO is lawful and consistent with the statutory scheme.

Significant Holdings and Core Principles:

"The taxing event is the consumption of energy. The source from which the electricity is acquired is altogether irrelevant." (Paragraph 48)

"Electricity is goods. It is capable of abstraction, consumption and use... electricity cannot be preserved or stored; generation, sale, supply, and consumption occur simultaneously without any hiatus." (Paragraph 50)

"Entry 53 should therefore be read as 'taxes on the consumption or sale for consumption of electricity'." (Paragraph 50)

"The State of Tamil Nadu lacks the power to impose tax on electricity procured through inter-State open access systems or exchanges, as such transactions fall within the domain of inter-State trade or commerce governed by Article 269A and Article 286 of the Constitution." (Paragraph 58)

"Section 3(1)(c) of Act 12/2003 does not cover consumers procuring electricity through open access or power exchanges; it is confined to captive generating plants consuming electricity for own use." (Paragraph 61)

"The Government Order G.O.Ms.No.121, dated 23.12.2010, is a valid delegation of authority to TANGEDCO and its officers to collect electricity tax under the Act and Rules, given their access to metering and billing data." (Paragraph 67)

"The collection of electricity tax through licensees is lawful and supported by the statutory provisions, including provisions for assessment, inspection, and appeals." (Paragraph 69)

Final Determinations:

(i) The State of Tamil Nadu does not have the constitutional or statutory power to levy and collect tax on electricity consumed through inter-State open access systems or purchased via power exchanges such as IEX or PXIL. Such transactions are inter-State supplies and fall under the exclusive jurisdiction of the Union under GST provisions.

(ii) The Tamil Nadu Act 12/2003, as presently enacted, does not encompass intra-State open access purchases or power exchange transactions. The Government Order G.O.Ms.No.55, dated 20.10.2021, attempting to levy tax on such consumption through TANGEDCO, is quashed.

(iii) Tax on captive generating plants consuming electricity for own use is validly leviable under Section 3(1)(c) of Act 12/2003, and the State may collect such tax at prescribed rates.

(iv) The Government Order G.O.Ms.No.121, dated 23.12.2010, which designates collection authorities and empowers TANGEDCO and its officers to collect electricity tax on captive generation and consumption, is upheld as valid and consistent with the Act and Rules.

(v) The mechanism for collection of electricity tax through licensees is lawful, and the absence of a separate statutory procedure does not invalidate the collection process under the existing statutory framework.