Privity of Contract and Zero Rated Supply under Section 16 IGST - APHC Comments
The APHC in its recent decision in SEIL India v. PCCT Guntur (2026-VIL-03-AP) opined on the critical relation between the doctrine of 'privity of contract' and how it plays into whether a supply constitutes as an export under Section 16 of the IGST Act.
Facts of the Case
The Petitioner (SEIL) is an ‘independent power producer’ which utilizes ‘supercritical’ thermal power generators to supply electricity to its purchasers. In course of its business, it also purchases various goods including coal, capital goods and other inputs.
The Petitioner’s case is concerned with the implications of two contracts, which include the supply of electricity to the Bangladesh Power Development Board (Bangladesh Board) directly, and the supply of electricity to Power Trading Corporation India Ltd (PTC), which further supplies electricity to the Bangladesh Board (BB).
PTC also entered into a contract with Menakshi Energy Ltd. (MEL), for the supply of power to Bangladesh Board. However, owing to MEL’s incapacity to meet PTC’s demands, as stipulated in the contract, PTC entered into a power purchase agreement with SEIL on 3/02/22 and SEIL was also substituted in the power purchase agreement, entered into between PTC and BB.
There were thus three contracts that were entered into by SEIL for the supply of electricity to Bangladesh Board.
1. SEIL and Bangladesh Board – for direct supply of electricity to the Board
2. SEIL and PTC for supply to Bangladesh Board
3. SEIL and PTC vide PPA dt. 3/02/22 in lieu of the PPA entered into with MEL
SEIL claimed ITC refund for the tax paid on inputs in furtherance of export of electricity and in calculating the turnover u/s 54, SEIL also included the turnover from the supply made to PTC in furtherance of its PPA with the Bangladesh Board. The refund was partly allowed, as it was held that the supply of electricity to PTC constitutes a domestic supply and thus falls outside the ambit of Section 16 of the IGST Act.
Grounds of Refusal
The ITC Refund was disallowed on the following grounds: -
1. The supply to PTC was made in the domestic tariff area and that thus it meets the criteria for being designated as ‘zero rated supply’. Turnover from such domestic supply was also improperly included in the refund claimed u/s 16(3) r/w 54.
2. The turnover from the supply of electricity would have to be excluded as no IPC is to be availed on the inputs utilized in the domestic supply of electricity as per Rule 89(4)(E)
3. There is no merit in the argument that the export transactions undertaken in addition to the domestic supply to PTC forms as part of composite supply. They have been rendered separately and cannot be constituted as export.
The Petitioner, aggrieved by this order, preferred an appeal to the Appellate Authority which also came to be dismissed. Aggrieved, the Petitioner preferred a writ as the GSTAT was not functioning.
Issues Raised
The Petitioner raised a singular, but primarily central issue – Whether the supply of electricity to the Board (BB) on account of contracts between SEIL, PTC and BB count as ‘zero-rated’ supply entitling the petitioner tor a refund
Rival Contentions
The Petitioner contended that previous decisions of the Court have established that in the absence of privity of contract, both transactions will be construed as ‘independent.’ (Serajuddin v. State of Orissa - 1975-VIL-05-SC-CB) In the present case, there exists a privity of contract between SEIL, PTC and BB evidenced by the minutes of the meeting dt. 16/11/2021. It was also argued that clause 10 of the agreement, states that BB can terminate the contract if PTC fails to commence supply from the power generation station of SEIL. The PPA between PTC and SEIL is thus intertwined with the PPA between PTC and BB, making the independent transaction theory unworkable. There is a difference in the definition of ‘export of goods’ u/s 2(5) and ‘export of services’ u/s 2(6) of the IGST Act. The latter is only concerned with ‘taking goods out of India to a place outside India’, while the former requires compliance with the enumerated conditions one of which is ‘place of supply of service must be outside India’. Thus, supply within India, which results in goods being taken out of India would also constitute an export u/s 2(5) r/w 16.
The Respondents submitted that supply of electricity was within the domestic tariff area and the transfer of electricity was also situated in India. If principle in Serajudin (supra) would be applicable, only such supply which caused the movement of electricity outside India would constitute as ‘zero-rated’ supply.
Observations of the Court
The Court has, basing its decision on the Constitution Bench judgement in the case of State of Travancore-Cochin v. Shanmugha Vilas Cashewnut Factory (1953-VIL-01-SC), has held that supply by SEIL to PTC forms a separate supply, and the ‘export’ of electricity by PTC to BB cannot be treated as an integrated transaction with SEIL. There is no privity of contract in this case.
In the Travancore-Cochin Case (supra), the Constitution Bench of the Apex Court laid down the following three principles concerning the exemption under Art. 286(1) of the Constitution
1. Sales by export and purchases by import fall within Art. 286(1)
2. The last purchase of goods made by the exporter for the purpose of exporting them to implement orders already received from a foreign buyer is not within the exception created by clause (1)(b). It is argued that such a sale cannot be disassociated from the export and without which it cannot be effectuated, thus the sale and export were integrated. But, such a purchase is only an act preparatory to export and cannot be regarded as an act done “in the course of the export of the goods outside the territory of India.” It is important to distinguish the contract of sale which has its object the exportation of goods from other contracts of sale in relation to the same goods, which are the not the direct cause of the shipment.
3. In respect of the import, there were two forms of import that were effectuated. First, the intermediaries facilitated contract with the appellants and took commission on the supply. In this case, the intermediaries were mere agents and so privity of contract was between the African Parties and the appellants. Second, where the intermediary indented the goods on their own accordance and then sold it as the principal themselves, the Court held that the intermediary is the purchaser and sold the goods as the principal therefore there was no privity of contract between the African Party and the appellant.
On this ground, the Court held that procurement for the purpose of export electricity to BB by PTC from SEIL would not constitute the former contract, and thus in the absence of ‘privity’ of contract, the supply to PTC by SEIL would not constitute as ‘export’.