2025 (6) TMI 441 - AT - Service Tax

Liability of appellant to pay service tax on the supply of water by the Government of Odisha - HELD THAT - The said issue has been examined by this Tribunal in the case of M/s Indian Oil Corporation Limited 2024 (10) TMI 1129 - CESTAT KOLKATA wherein this Tribunal has observed As issue has already been settled by the decision of this Trbunal for water supply by Government of Odisha the appellant is not liable to Service Tax. Conclusion - As the issue has been settled that for water supply given to the Government of Odisha the appellant is not liable to pay service tax following the decision of the of this Tribunal in the case of Indian Oil Corporation Limited the appellant is not liable to pay service tax on water supply to the Government of Odisha. Appeal allowed.

Summary

The core legal question considered by the Tribunal was whether the appellant was liable to pay service tax on the charges paid to the Government of Odisha for the supply of water used in the appellant's industrial operations during the period April 2016 to June 2017.

The Tribunal examined whether the supply of water by the Government of Odisha to the appellant constituted a taxable service under the Finance Act, 1994, specifically under the provisions relating to "allocation/auction of natural resources" as per Section 65B(44) and related notifications.

In addressing this issue, the Tribunal relied heavily on precedents, particularly the decision in the case of Indian Oil Corporation Limited vs. Commissioner of CGST & Central Excise, Bhubaneswar, and the case of Sasan Power Limited vs. Commissioner of CGST & Excise, Jabalpur. These cases had considered the nature of water supply agreements between private entities and the government and whether such transactions attract service tax.

The Tribunal noted that the appellant had entered into a formal agreement with the Government of Odisha for the supply of water from the Hirakud Reservoir, paying charges based on volume drawn, as per the Orissa Irrigation Rules, 1962. The charges were fixed and payable as a license fee or cess for water drawn from government sources.

During audit proceedings, it was observed that service tax was demanded on these water charges, treating the supply as a taxable service under the category of allocation or auction of natural resources effective from April 1, 2016. The appellant contested this demand, arguing that the supply of water was not a taxable service but a mere supply of a natural resource, and thus not subject to service tax.

The Tribunal's detailed analysis began with the legal framework under the Finance Act, 1994, particularly Section 65B(44), which defines "allocation or auction of natural resources" as a taxable service. The Tribunal examined whether the supply of water under the agreement amounted to such allocation or auction.

In the Indian Oil Corporation case, the Tribunal observed that the agreement for water supply was a contract for the supply of water at a fixed rate per cubic meter, with the appellant bearing the cost of drawing water and the government disclaiming any guarantee of uninterrupted supply. The agreement contemplated payment based on actual water drawn and included provisions for shortage or reduction in supply. This indicated a supply of water service rather than a mere grant of rights to use natural resources.

However, the Tribunal further held that the supply of water by the government under such an agreement did not amount to "allocation or auction of natural resources" but was a supply of water as a service. It emphasized that the agreement was for supply and not for assignment of rights to use the natural resource itself. Therefore, the supply was not taxable under the service tax provisions applicable to allocation or auction of natural resources.

The Tribunal also referenced the Sasan Power Limited decision, where similar facts were considered. There, the Tribunal held that the water charges paid to the government for supply of water to an industrial plant did not attract service tax. The reasoning was that the government did not provide a service in the nature of allocation or auction of natural resources but merely supplied water under an agreement. The charges were for water supplied and not for rights to use water as a natural resource.

The Tribunal rejected the Revenue's argument that the supply fell under the taxable category, reiterating that the agreement and the nature of charges clearly indicated supply of water and not grant of rights. It held that no service tax was payable on water charges paid by the appellant to the Government of Odisha during the disputed period.

In conclusion, the Tribunal set aside the impugned order confirming the demand of service tax and penalties, allowing the appeal. It held that the appellant was not liable to pay service tax on the water charges paid to the Government of Odisha for supply of water from the Hirakud Reservoir during April 2016 to June 2017.

Significant holdings include the Tribunal's clear statement that "the Agreement is for supply of water by the government to the appellant and is not for assignment of any right to the appellant to use the natural resources of the government," and that "no service was provided by the government to the appellant" in the context of allocation or auction of natural resources attracting service tax.

The Tribunal thus established the principle that payments made for water supply under such agreements with the government do not attract service tax under the category of allocation or auction of natural resources, provided the agreement is for supply of water and not for assignment of rights over the natural resource itself.

This decision aligns with earlier rulings and clarifies the tax treatment of water supply agreements between private industrial users and government authorities, ensuring that service tax is not levied on such water charges when they do not constitute allocation or auction of natural resources.