Delhi HC Quashes GST on Licence Fees: Key Insights for Businesses

Delhi HC Quashes GST Levy on Licence Fees Collected by Electricity Regulatory Commissions

The Delhi High Court has ruled that GST levy on licence fees collected by Electricity Regulatory Commissions (ERCs) is invalid, safeguarding their quasi-judicial roles and regulatory functions. This landmark judgment provides critical relief to statutory bodies like the Central Electricity Regulatory Commission (CERC) and the Delhi Electricity Regulatory Commission (DERC).

The Case in Focus

The judgment, delivered by a division bench of Justices Yashwant Verma and Harish Vaidyanathan Shankar on January 15, 2025, addressed two petitions filed by CERC and DERC. These petitions challenged the validity of Show Cause Notices (SCNs) issued by the Directorate General of GST Intelligence (DGGI).

Tax authorities argued that the regulatory and adjudicatory functions of these commissions should be treated separately, with revenue earned from regulatory activities liable to GST under the CGST and IGST Acts.

However, the court held that the issuance of licences for electricity transmission or distribution is not a business activity but a statutory duty performed by quasi-judicial bodies under the Electricity Act.

Key Observations of the Court

1. Nature of the Functions:
   The court underscored that regulatory functions performed by ERCs are statutory obligations, not business activities. It rejected the argument that revenue from these activities should attract GST.
2. Electricity as a Natural Resource:
   Electricity is a natural resource vested in the State. Licensing for its transmission or distribution extends the regulatory mandate of ERCs rather than constituting a trade or business.
3. Exemption Cannot Be Overridden:
   The court emphasized that a notification under the GST Act cannot override or expand the scope of exemptions granted under the parent legislation.
4. SCNs Deemed Invalid:
   The SCNs issued to CERC and DERC were deemed to lack legal standing, as they infringed upon the fundamental understanding of regulatory functions under the Electricity Act.

Broader Implications for Businesses

1. Precedent for Regulatory Bodies:
   This judgment provides a strong precedent for other regulatory bodies performing statutory duties, ensuring that they remain exempt from GST.
2. Relief for the Power Sector:
   Electricity Regulatory Commissions across India, such as the U.P. Electricity Regulatory Commission (UPERC), can rely on this judgment to challenge similar GST demands, as seen in the Allahabad High Court’s earlier stay.
3. Protection of Quasi-Judicial Roles:
   The ruling reinforces the separation between regulatory and business activities, ensuring that statutory commissions are not burdened with unwarranted tax liabilities.

Relevant Case Laws

• Delhi High Court (2025): GST on licence fees collected by CERC and DERC was invalidated.
• Allahabad High Court (2024): Granted a stay on GST demands for licence fees collected by UPERC.

Actionable Steps for Businesses

1. Review GST Compliance:
   Businesses engaged with regulatory commissions should reassess their GST compliance in light of this ruling.
2. Legal Consultation:
   Regulatory bodies and affected stakeholders should consult legal experts to address any SCNs or disputes under the CGST and IGST Acts.
3. Monitor Similar Cases:
   Stay updated on similar rulings to leverage legal precedents for ongoing disputes.

Conclusion:

The Delhi HC’s decision to quash the GST levy on licence fees is a significant win for regulatory commissions, emphasizing their statutory obligations and quasi-judicial roles. This judgment not only provides clarity on the scope of GST applicability but also protects the integrity of regulatory functions essential for governance and public welfare.