2025 (6) TMI 265 - AT - Service Tax

Liability of appellant to pay service tax on the charges collected from the member units for the activity of treatment of effluent water - Business Auxiliary services or not - HELD THAT - The Appellant is an entity created to construct and operate a Common Effluent Treatment Plant in accordance with the Guidelines of Ministry of Environment Forests Tamil Nadu Pollution Control Board and that all the Directors of the tanneries functioning at SIPCOT Perundurai are the members of this entity. The Original Adjudicating Authority has held that demand raised in this appeal was pertaining to Business Auxiliary Service and not club or association service to justify the denial of the benefit of the above exemption. However the common effluent treatment plant setup in order to collect and treat the effluent water and send back to treated water to the units collecting consideration satisfies the project referred to in the above statutory provision. Due to this retrospective exemption accorded for the setting up and operation of Common Effluent Treatment Plant the demand raised for service tax is not sustainable for the period upto 30.06.2012. Even for the period after from 01.07.2012 onwards the activity of the Appellant has been exempted from the levy of service tax vide Notification No. 8/2017-ST dated 20.02.2017. The activity of Common Effluent Water Treatment is exempted from payment of service tax in terms of Section 145 of the Finance Act 2012 retrospectively from 16.06.2005 onwards till 2012 and thereafter under exemption Notification No. 8/2012-ST dated 20.02.2017 from 01.07.2012 to 31.03.2015. Reference made to decision rendered in the case of M/s. Odyssey Organics Pvt. Ltd. Vs. Commissioner of Central Excise Raigad 2016 (11) TMI 584 - CESTAT MUMBAI wherein it was held that the treatment of effluent waste cannot be considered as processing of goods by any stretch of imagination and so not taxable under Business Auxiliary Service. Conclusion - The services rendered by entities operating government-subsidized common effluent treatment plants qualify as exempt club or association services under Section 145 and such activities do not fall within the ambit of Business Auxiliary Service for service tax purposes. The retrospective exemption and subsequent Notification No. 8/2017-ST shield such activities from service tax liability for the relevant periods. The appeal is allowed.

Summary

The core legal questions considered by the Tribunal revolve around the classification and taxability of services rendered by an entity operating a Common Effluent Treatment Plant (CETP) formed by member industrial units with government subsidies. Specifically, the issues are:

1. Whether the activity of treating effluent water by the appellant constitutes a taxable service under the Business Auxiliary Service category as alleged by the Department.

2. Whether the appellant is entitled to exemption under Section 145 of the Finance Act, 2012, which retrospectively exempts services provided by clubs or associations, including registered cooperative societies, in relation to projects involving common facilities for treatment and recycling of effluents and solid wastes funded by Central or State Government.

3. The applicability of Notification No. 8/2017-ST dated 20.02.2017, which exempts service tax on services by operators of Common Effluent Treatment Plants for a specified period.

4. The interpretation of the term "processing of goods" in the context of effluent treatment and whether such activity falls within the ambit of Business Auxiliary Service.

5. The legitimacy of the demand for service tax, interest, and penalties raised by the Department for the period from 01.04.2009 to 31.07.2014.

Issue-wise Detailed Analysis

1. Classification of Service and Taxability under Business Auxiliary Service

The Department contended that the appellant's activity of treating effluent water discharged by member tanneries amounted to Business Auxiliary Service under Section 65(19) of the Finance Act, 1994. The Department argued that the appellant, being a registered Private Limited Company and a commercial concern, was liable to pay service tax on the consideration received for treating effluent water, as the activity was neither exempted nor included in the negative list during the relevant period.

The Tribunal noted that the Department classified the service under the clause relating to 'production or processing of goods on behalf of a client' within Business Auxiliary Service. However, the appellant and the Tribunal referred to precedents clarifying that effluent treatment does not amount to processing of goods.

Relevant precedents include the decision in M/s. Odyssey Organics Pvt. Ltd. Vs. Commissioner of Central Excise, Raigad, where it was held that treatment of effluent waste cannot be considered processing of goods by any stretch of imagination and thus does not attract service tax under Business Auxiliary Service. The Tribunal also cited the CBEC letter dated 13.07.2007 clarifying that incineration/shredding of biomedical waste is not processing of goods, an analogy extended to effluent treatment.

Similarly, the decision in Butibori CETP Pvt. Ltd. Vs. Commissioner of Central Excise, Nagpur, held that service tax demand under Business Support Services for operating a CETP was unsustainable. The Tribunal emphasized that the CETP was funded by Central and State Governments, and retrospective amendments supported exemption.

The Tribunal applied these precedents to the facts, concluding that the appellant's activity does not fall within Business Auxiliary Service as processing of goods.

2. Applicability of Section 145 of the Finance Act, 2012

Section 145 validates the exemption granted retrospectively from 16.06.2005 for services provided by clubs or associations, including registered cooperative societies, in relation to "projects" defined as common facilities set up for treatment and recycling of effluents and solid wastes with financial assistance from Central or State Government.

The appellant argued that it was formed as a Private Limited Company by directors of member tanneries to operate a CETP funded by Central and State Government subsidies, thus qualifying as a "project" under Section 145. The Tribunal agreed, noting that the appellant's activity satisfied the statutory definition of a project and therefore the exemption applied retrospectively from 16.06.2005.

The Tribunal further observed that the Original Adjudicating Authority erred in denying the benefit of this exemption by classifying the service as Business Auxiliary Service rather than as services by a club or association in relation to a project.

3. Applicability of Notification No. 8/2017-ST dated 20.02.2017

This Notification exempts service tax payable on services by operators of Common Effluent Treatment Plants under Section 66B of the Finance Act, 1994 for the period from 01.07.2012 to 31.03.2015. The appellant contended that this Notification further exempts their activity for the period after 30.06.2012.

The Tribunal accepted this submission, holding that the appellant's service was exempted under this Notification for the relevant period post 01.07.2012. Thus, the demand for service tax for the period from 01.07.2012 to 31.07.2014 was also unsustainable.

4. Interpretation of "Processing of Goods" and Treatment of Competing Arguments

The Department maintained that the appellant's activity involved processing of goods on behalf of clients, justifying classification under Business Auxiliary Service. The appellant and Tribunal rejected this, relying on authoritative precedents and CBEC circulars clarifying that treatment of effluent water or waste does not constitute processing of goods.

The Tribunal underscored that the appellant's role was to treat and purify effluent water discharged by member units and return treated water, which is not processing of goods but an environmental service.

The Tribunal also noted that the appellant collected consideration based on output water delivered, which does not alter the nature of the service as exempt under the statutory provisions and Notifications.

5. Legitimacy of Demand for Service Tax, Interest, and Penalties

Given the retrospective exemption under Section 145 and the subsequent exemption Notification No. 8/2017-ST, the Tribunal concluded that the demand for service tax, interest, and penalties raised by the Department was not sustainable.

Furthermore, since the appellant succeeded on the merits regarding exemption, the Tribunal found it unnecessary to decide on issues related to limitation and the justifiability of penalties under Sections 76 and 78 of the Finance Act, 1994.

Significant Holdings

The Tribunal held:

"The common effluent treatment plant setup in order to collect and treat the effluent water and send back treated water to the units collecting consideration satisfies the project referred to in the above statutory provision [Section 145 of the Finance Act, 2012]. Due to this retrospective exemption accorded for the setting up and operation of Common Effluent Treatment Plant, the demand raised for service tax is not sustainable for the period up to 30.06.2012."

"The activity of Common Effluent Water Treatment is exempted from payment of service tax in terms of Section 145 of the Finance Act, 2012 retrospectively from 16.06.2005 onwards till 2012 and thereafter under exemption Notification No. 8/2017-ST dated 20.02.2017 from 01.07.2012 to 31.03.2015."

"The treatment of effluent waste cannot be considered as processing of goods by any stretch of imagination and so not taxable under Business Auxiliary Service."

"The Order-in-Original No. 13/2015 (ST-COMMR.) dated 16.07.2015 passed by the Commissioner of Central Excise, Salem is not sustainable and so, ordered to be set aside."

The Tribunal established the core principle that services rendered by entities operating government-subsidized common effluent treatment plants qualify as exempt "club or association" services under Section 145, and such activities do not fall within the ambit of Business Auxiliary Service for service tax purposes. The retrospective exemption and subsequent Notification No. 8/2017-ST shield such activities from service tax liability for the relevant periods.