2024 (9) TMI 1824 - AT - Service Tax

Water supply charges paid to State not subject to service tax for impugned period; penalty held not imposable

M/s National Aluminium Company Limited Versus Commissioner of GST, Excise & Customs, Bhubaneswar

CESTAT held that water charges paid to the State for supply of water are not liable to service tax for the impugned period and, consequently, no penalty ... Levy of service tax - water charges paid by the appellant to the Government of Odisha for supply of water against charges/consideration at a specified rate - levy of penalty - HELD THAT:- The present issue has been settled by this Tribunal in the case of Paradeep Phosphates Limited [2024 (6) TMI 1410 - CESTAT KOLKATA], wherein this Tribunal has observed that 'the payment made by the appellant for water charges, is not liable to be service tax during the impugned period for allocation/auction of natural resources. We, therefore, hold that the appellant is not liable to pay the service tax on water charges paid by them.' As this issue has been examined by this Tribunal in the case of Sasan Power Limited Vs. Commissioner of CGST & Excise, Jabbalpur [2024 (5) TMI 326 - CESTAT NEW DELHI], which is followed by this Tribunal in the case of Paradeep Phosphates Limited [2024 (6) TMI 1410 - CESTAT KOLKATA], it is held that the issue is no more res integra and the water charges paid by the appellant is not liable to pay service tax during the impugned period for allocation/auction of natural resources. Therefore, no service tax is payable by the appellant. Consequently, no penalty is imposable on the appellant. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts paid to the State for supply of water pursuant to a long-term agreement constitute consideration for 'allocation/auction of natural resources' within the meaning of Section 65B(44) of the Finance Act, 1994, thereby attracting service tax for the period 01.04.2016 to 30.06.2017. 2. Whether an agreement that fixes water charges on the basis of volume drawn, requires the user to make its own drawal arrangements, and disclaims guarantee of uninterrupted supply, amounts to assignment of a right to use a natural resource or instead constitutes supply of water for consideration. 3. Consequentially, whether any penalty can be imposed where service tax demand based on the foregoing classification is set aside. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification under Section 65B(44) (allocation/auction of natural resources) Legal framework: Section 65B(44) of the Finance Act, 1994 encompasses the category 'allocation/auction of natural resources' as a taxable service; applicability depends on whether the transaction amounts to allocation/auction of a natural resource. Precedent treatment: The Tribunal has previously examined identical factual and legal questions in earlier orders (specifically decisions referred to as Sasan Power Limited and Paradeep Phosphates Limited) and treated analogous agreements as not falling within 'allocation/auction of natural resources.' Those decisions are followed. Interpretation and reasoning: The Tribunal focused on the substance of the contractual arrangement between State and user. Relevant contractual features include: (a) charges fixed on basis of actual quantity of water drawn (per cubic meter rate); (b) obligation on the user to make its own drawal arrangements at its cost; (c) provision for water charges and additional local levies; (d) contractual allocation for reduction/shortage and express disclaimer of guarantee for uninterrupted supply (force majeure). Those features indicate a transaction for supply of water rather than an assignment or grant of a proprietary right in the natural resource. The agreement contemplates supply on measured consumption terms, not conferral of exclusive or transferrable rights to the resource. Ratio vs. Obiter: The Tribunal's conclusion that such agreements constitute supply of water and not allocation/auction of a natural resource is treated as ratio in the present decision, being the determinative legal principle applied to dispose of the appeal; the Tribunal expressly follows the reasoning in the cited prior decisions. Conclusion: Amounts paid under the described agreement do not fall within 'allocation/auction of natural resources' under Section 65B(44) and therefore do not attract service tax for the impugned period. Issue 2 - Characterisation of the agreement: supply of water versus assignment of right to use natural resources Legal framework: Distinction turns on whether the agreement confers a right to exploit/use the natural water resource as a resource allocation (taxable) or merely provides a supply/service (non-taxable under the allocation rubric). Precedent treatment: The Tribunal's prior analysis (as followed) in Sasan Power Limited treated comparable agreements as contracts for supply rather than grants of use-rights; that approach is applied and followed here. Interpretation and reasoning: The Tribunal identified substantive indicia of a supply contract: measurement-based payment (per cubic meter), user's obligation to arrange drawal infrastructure, the government's non-assumption of liability for interruptions, and contractual provisions for shortage/reduction in supply. Those indicia demonstrate the State was supplying water as a service/commodity, not assigning an exploitable right in the natural resource. The absence of conferral of exclusive usage rights or a transferable entitlement to the resource reinforced the supply characterisation. Ratio vs. Obiter: The determination that the specific contractual features transform the transaction into a supply of water (and negate classification as assignment of a right to use a natural resource) is relied upon as the operative ratio; any broader comments about other forms of arrangements are obiter and not necessary to the disposition. Conclusion: The agreement is one for supply of water and not an instrument effecting allocation/assignment of a natural resource; consequently, payments thereunder are not chargeable to service tax under the allocation/auction head. Issue 3 - Consequences for demand, extended limitation invocation, and penalty Legal framework: If the underlying classification does not attract service tax, any demand, including those raised invoking extended limitation, lacks a taxable foundation; penalties predicated on a valid tax demand cannot be sustained. Precedent treatment: The Tribunal followed earlier decisions that set aside service tax demands and consequential penalties where the arrangement was re-characterised as supply of water. Interpretation and reasoning: Having determined the payments are not taxable as allocation/auction of natural resources, the demand for service tax for the impugned period cannot be maintained. As penalty liability flows from an unsustainable tax demand, imposition of penalty is likewise not tenable. Ratio vs. Obiter: The conclusion that no penalty is imposable when the tax demand is set aside is a necessary corollary (ratio) of the primary finding; ancillary remarks about limitation procedures are obiter unless separately litigated. Conclusion: The impugned demand for service tax is set aside and, accordingly, no penalty is imposable; the appeal is allowed with consequential relief, following the Tribunal's prior decisions on identical issues. Cross-References 1. The Tribunal expressly follows its prior reasoning in Sasan Power Limited and Paradeep Phosphates Limited on the core classification issue; those prior decisions are treated as binding precedent for the facts and legal question considered here. 2. The classification analysis (Issue 1) and the contractual characterisation (Issue 2) are interdependent: the factual findings about the agreement's terms drive the legal conclusion that the transaction is supply of water and not allocation/auction of a natural resource, which in turn determines the outcome on demand and penalty (Issue 3).