The Appellate Authority for Advance Rulings, Telangana in the case of M/s. DUET INDIA HOTELS (HYDERABAD) PRIVATE LIMITED. vide AAAR. COM/10/2022, Order-in-Appeal No. AAAR/02/2025 dated 20.02.2025, ruled that electricity and water charges collected by the Lessor from the Lessee are subject to GST, as they form part of a composite supply where the principal supply is renting of immovable property. The GST @ 18% (i.e. same as rent) applies to the entire composite supply.

Facts of the case:  

In this case, the lessor “Duet India” is engaged in the business of running hotels. The Lessee i.e. The Curry House Food’s Private Limited, engaged in operating restaurant. Both parties entered into Leave and License Agreement, granting a license to use a specified area of the hotel for operating a restaurant.

In accordance to the agreement, Lessee has agreed to pay monthly licence fee as a consideration to the Lessor. In addition to the license fees, the Lessor is collecting other charges from the Lessee towards common facilities for security, cleaning of facade and common areas, i.e., entrance, etc. as per the agreement. These charges are being collected from the Lessee, in the ratio of the area of licensed premises to the total area. Further, the Lessor is also collecting electricity and water charges as per the actual meter readings.

Presently, the Lessor is charging GST @ 18% on licence fee. Space Rental, Common charges, electricity charges and water charges are payable by the Lessee. The Lessor is issuing separate invoices towards supply of renting of immovable property (‘space rental’) service and reimbursement of electricity and water charges.

The Lessee refused to pay GST on electricity and water charges, stating that these are reimbursements and do not qualify as a “supply” under GST. Even if considered a “supply,” electricity and water are exempt from GST.

The Lessor then filed application for obtaining the advance ruling before Telangana State Authority for Advance Ruling, However, Members of Advance Ruling Authority have expressed differing views and no uniform decision could be arrived at, the matter has been referred to the Appellate Authority, Telangana. 

Issue: Whether GST is applicable on electricity and water charges collected at actuals by the Lessor from the Lessee? If GST is applicable, what is the nature of the supply and the applicable GST rate?

AAAR’s Rulings: 

The AAAR, Telangana referred CBIC Circular No. 206/18/2023-GST dated 31.10.2023 and states that 

• If electricity and water are supplied along with renting of immovable property, it is treated as a composite supply.
• Renting of immovable property is the principal supply, making electricity and water ancillary.
• GST applies to the entire supply at the rate applicable to the principal supply (i.e., 18% GST on rent)

Further, in terms of Rule 33 of the CGST Rules, 2017 (i.e. Pure Agent) the AAAR stated that the Applicant i.e. Lessor does not acts as a pure agent because, Electricity and water are bundled with renting of the premises. Also, there is no authorization from Lessee to act as a pure agent. The sub-meter is not in Lessee’s name, so the Lessor is not acting on behalf of the Lessee.

For contention of lessee that Electricity and water are exempt under Notification No. 02/2017-CT (Rate), dt: 28.06.2017, the AAAR stated that only “Transmission & Distribution” of electricity is exempt under Notification No. 12/2017-CT (Rate), SI No. 25. Exemption is applicable only if the supplier is a licensed distributor or transmission entity under the Electricity Act, 2003. In the present case, the lessor is not a distribution/transmission licensee, so exemption does not apply. Since electricity and water form part of a composite supply, they are taxed at the rate of the principal supply (18% GST on rent).