2024 (5) TMI 326 - AT - Service Tax

Levy of service tax - water charges paid by the appellant to the department in lieu of supply of water under the Agreement dated 05.01.2013 - transfer of right to use the water by the Government to the appellant - deemed sale - HELD THAT - A perusal of the Agreement executed between the government of Madhya Pradesh and the appellant would indicate that the appellant had applied to the government for permission to draw water from the Rihand Reservoir for use in the power project and the government had agreed to grant the said permission on certain terms and conditions in consideration of the appellant making payment to the government. The said permission was granted for a term of 30 years subject to the provisions of the Madhya Pradesh Irrigation Act 1931 and the Madhya Pradesh Irrigation Rules 1974 as is clear from clause 1 of the Agreement. The Title of the Agreement shows that it was for supply of water to the industrial power plant. The appellant was required to pay water charges to the government for the water drawn by it from the government water source at the rates fixed by the Water Department which would be Rs. 5.50/- per cubic meter. In addition, the appellant was also required to pay local fund cess or any other tax as may be fixed by the government. The appellant was required to make its own arrangement at its own cost for drawl of water from the water resource of the government to the plant - The appellant has to pay water rates/water charges depending on the quantity of water drawn by the appellant. The Agreement also deals with a situation where there can be reduction or shortage in the water supply. This clearly means that the Agreement is for supply of water and not mere access to water source. It is, therefore, more than apparent 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. The appellant is justified in asserting that the Agreement executed between the appellant and the government is for supply of water for which charges are paid by the appellant on the basis of volume of water drawn and it is not a case of assignment of right to use natural resources of the government - no service was provided by the government to the appellant. The impugned order, therefore, deserves to be set aside on this ground alone. Appeal allowed.

Issues Involved:
1. Whether the water charges paid by the appellant to the Water Department constitute consideration for taxable services or are they water tax and cess.
2. Whether the Agreement dated 05.01.2013 is for the supply of water or for the assignment of the right to use natural resources.
3. Applicability of service tax on charges paid for water drawl under the Agreement.
4. Validity of invoking the extended period for demand and imposition of penalties.

Summary:

Issue 1: Consideration for Taxable Services or Water Tax and Cess
The appellant argued that the water charges paid to the Water Department were in the form of water tax and cess and did not constitute consideration for any service. The Commissioner, however, determined that the charges were for the taxable service of assignment of the right to use natural resources.

Issue 2: Agreement for Supply of Water or Assignment of Right to Use Natural Resources
The appellant contended that the Agreement dated 05.01.2013 was for the supply of water, not for the assignment of the right to use natural resources. The Commissioner disagreed, stating that the Government had merely permitted access to the water source, and the appellant was responsible for the drawl and conveyance of water, thus constituting a taxable service.

Issue 3: Applicability of Service Tax
The Commissioner confirmed the demand for service tax, citing the expanded scope of taxable services provided by the Government u/s 65B(25) of the Finance Act, 1994, effective from 01.04.2016. The appellant argued that the Agreement, executed before this date, should not be subject to service tax. The Tribunal found that the Agreement was indeed for the supply of water, not for the assignment of the right to use natural resources, and thus no service tax was applicable.

Issue 4: Extended Period and Penalties
The appellant challenged the invocation of the extended period for demand and the imposition of penalties u/s 77 and 78 of the Finance Act. The Tribunal, having found that no taxable service was provided, set aside the demand and penalties.

Conclusion:
The Tribunal concluded that the Agreement was for the supply of water, and no service tax was applicable. The impugned order dated 30.11.2022 was set aside, and the appeal was allowed.

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