Telangana HC upholds Rs 21.88 crore VAT on discom line-extension charges as transfer of right to use goods
A Division Bench dismissed a challenge by Southern Power Distribution Company of Telangana to a 2009 assessment under Section 4(8) of the AP VAT Act on Rs 241.57 crore it collected from consumers. The order records that the company kept ownership and control of the poles, transformers and cables, yet holds that, viewed as a whole, the transaction transfers the right to use them.
A power distribution company collected Rs 241.57 crore between April 2005 and July 2008 from consumers who wanted new lines, poles and transformers. The State taxed that money as the price of letting them use the equipment. On 3 November 2026 the Telangana High Court agreed, upholding a Rs 21.88 crore VAT assessment.
A Division Bench of Acting Chief Justice P. Sam Koshy and Justice Narsing Rao Nandikonda dismissed the writ petition of M/s. Southern Power Distribution Company of Telangana Ltd. The order is written by Justice Narsing Rao Nandikonda. It was reserved on 3 March 2026 and pronounced on 3 November 2026.
The petition, W.P. No. 3356 of 2009, was filed under Article 226 of the Constitution. It challenged a VAT assessment of 3 January 2009 for April 2005 to July 2008, and a garnishee notice of 13 February 2009 sent to the company’s bankers.
An audit, a notice and a bank attachment
The company is a registered VAT dealer on the rolls of the Commercial Tax Officer, Khairatabad. Its monthly returns for the period disclosed output turnover of about Rs 25.6 crore and output tax of about Rs 1.13 crore.
On 24 May 2008 an officer audited its transactions. The audit found that, apart from supplying electricity, the company extended service lines for domestic, commercial and water-supply purposes and recovered the cost from consumers. Turnover from these schemes had not been declared.
A show-cause notice of 10 November 2008 proposed tax at 12.5 per cent under Section 4(8) of the Andhra Pradesh Value Added Tax Act, 2005 on Rs 241,57,35,483. The company replied on 18 December 2008, denying that any right to use goods was transferred.
The assessing authority rejected that reply on 3 January 2009 and fixed the tax at Rs 21.88 crore, payable in thirty days. A garnishee notice in Form VAT 206 followed on 13 February 2009, starting attachment through the company’s bankers.
What was collected, and from whom
The extension schemes involved supplying and erecting electric lines of suitable kV capacity, PFCC cables and distribution transformers, and laying underground cables. The cost was recovered under two heads, service line charges and development charges, in addition to the usual security deposit.
The State said the company did not usually recover these costs from ordinary domestic and commercial consumers. It did so for infrastructure built for real estate developments and other specified applicants, on land belonging to them and for their exclusive use.
One proceeding examined in the audit recorded Rs 99,20,500 collected from M/s. Fortune Infra Developers Private Limited. It stated that the company had supplied poles, transformers and cables and recovered their cost. The company told the auditor its other schemes were similar.
The company’s case
The company argued that Section 4(8) needs identifiable goods, a transfer of the right to use them to a lessee or licensee, and an effective right of use, and that none was present. Consumers were only recipients of electricity. Mr S. Suri Babu appeared for it.
The lines and cables, the company said, are attached to the earth and become immovable property. Ownership stays with the company, which also maintains and operates them. Consumers get no possession or exclusive control, and no agreement transfers any right.
Concrete poles, transformers, conductors, insulators and cables may be goods before they are built into the network, it said, but afterwards no right to use them is transferred. It cited a letter of 28 May 2008 to one consumer listing the materials for a service line.
It relied on Sections 42, 43 and 46 of the Electricity Act, 2003, which make developing the distribution system and recovering expenses a statutory function. The charges, it said, are set under the State Electricity Regulatory Commission’s framework and are not consideration for a transfer of goods.
The company said it had furnished details of the schemes sanctioned for the years 2005-06 to 2008-09 by a letter of 31 October 2008. The assessing authority, it said, still treated the charges as consideration for a transfer and split the turnover proportionately.
The company added that the assessment was the first of its kind and could lead to multiplicity of proceedings for other distribution companies.
The State’s case
The assessing authority, respondent 2, filed a counter affidavit. It first said the company had an appeal to the Appellate Deputy Commissioner under Section 31 of the AP VAT Act and should not have come to the High Court.
On merits, it said electricity is exempt, but the company carries on business, so an ancillary activity that meets a charging provision is taxable. Ownership, it said, is a bundle of rights, and transferring one of them, the right to use, is enough.
It said the applicants paid the full value of the goods and the infrastructure was used exclusively to supply them. An express agreement is not needed and profit motive is irrelevant. Tax was levied at 4 per cent or 12.5 per cent depending on the goods, and only on the goods identified in the proceedings.
Mr Swaroop Oorilla, Special Government Pleader for State Tax, appeared for the respondents.
The authorities cited
The company listed eight decisions, including Banda Tent House Association v. State of A.P., State of Tripura v. Tripura Bus Syndicate, Bharat Sanchar Nigam Limited v. Union of India and State of A.P. v. Rashtriya Ispat Nigam Limited.
The State relied on Viceroy Hotels Ltd. v. Commercial Tax Officer, a Division Bench ruling of the erstwhile Andhra Pradesh High Court, and the Supreme Court’s Great Eastern Shipping Co. Ltd. v. State of Karnataka. Both are extracted at length.
Parts of the order, including the company’s submissions at paragraphs 36 and 37, deal with hiring LCD projectors and audio-video equipment for events. That is the subject of Viceroy Hotels, not of the electricity connections in dispute.
The extracts from Great Eastern Shipping include its quotation of BSNL. There the Supreme Court said that, for a transfer of the right to use goods, the goods must be available at the time of transfer, deliverable, and delivered at some stage.
The judge summarised Viceroy Hotels as upholding tax where equipment was hired out with possession and control passing to the customer. He summarised Great Eastern Shipping as a charter of a vessel placed wholly at the charterer’s disposal.
Control stayed with the company
The court recorded its own findings from paragraph 47. The company, formerly the Central Power Distribution Company of Andhra Pradesh, was renamed after the State’s bifurcation. It supplied the poles, transformers and cables and recovered their cost.
The judges held that mere recovery of cost does not establish that the right to use goods was transferred. The equipment stayed under the company’s control and maintenance, and consumers could not interfere with it or run it themselves.
Continued ownership, control and responsibility for maintenance were, the court said, relevant factors in deciding whether the right to use passed to consumers. It then framed the issue:
“whether the installation and use of such equipment for supplying electricity, notwithstanding the recovery of its cost from the consumers, constitutes a transfer of the right to use goods within the meaning of Section 4(8) of the AP VAT Act” (para 58)
The Electricity Act and the supply terms
The court extracted Sections 42, 43(1), 43(2) and 46 of the Electricity Act, 2003. They require a licensee to maintain an efficient distribution system, give supply on application, provide lines where needed, and permit the Commission to authorise charging reasonable expenses for lines.
It then read Clauses 5.12.5, 5.12.6.1, 5.12.6.2 and 6.1 of the General Terms and Conditions of Supply. Meters and other equipment installed on a consumer’s premises remain the company’s property even if fixed or embedded. The consumer may not interfere with it and must pay for any damage.
The judges concluded from these provisions that the entire control over the equipment vests with the company. Interference or damage by a consumer could attract penal action under the Act.
Cost recovery as an ancillary activity
The court noted that the company itself provides infrastructure up to the substations and primary distribution lines. Beyond that point, for individual consumers and other applicants, particularly real estate and infrastructure projects, the cost was recovered from them.
It held that recovering the entire cost of the goods used to develop that infrastructure is an ancillary or subsidiary activity connected with the company’s principal business of supplying electricity.
How it reached a transfer
The order accepts that the consumer merely uses the infrastructure to receive electricity, and that this is not a transfer of ownership. It adds that control of the equipment continues with the company.
It then holds that the transaction as a whole is different:
“viewed in its entirety, establishes a transfer of the right to use the goods” (para 67)
In the absence of any transfer of ownership, the judges said, the transaction is a transfer of the right to use the goods and attracts tax under Section 4(8) at the applicable rates on the value recovered. The question was answered in favour of the State.
The judgment does not return to the company’s argument that the equipment, once embedded in the earth, is immovable property. It records the State’s objection about the alternative remedy of appeal but does not rule on it separately.
Order
The writ petition was dismissed, with no order as to costs. Miscellaneous applications pending in it were closed.
The Rs 21.88 crore assessment of 3 January 2009 under Section 4(8) of the AP VAT Act, on the value of goods recovered from consumers under service line and development charges, therefore stands. The order does not record any direction on the garnishee notice.