2024 (9) TMI 1826 - AT - Service Tax

No service tax on water supplied by State government; demand set aside, appeal allowed and no penalty imposed

CESTAT KOLKATA - AT held that no service tax is payable by the appellant on water supplied by the State government, following the Tribunal's earlier ... Levy of Service Tax - supply of water by the Government of Odisha to the appellant - HELD THAT:- The said issue has already been examined by this Tribunal in the case of M/s. National Aluminium Company Ltd. v. Commissioner of GST, Excise & Customs, Bhubaneswar [2024 (9) TMI 1824 - CESTAT KOLKATA], wherein it has been observed that 'no service tax is payable by the appellant.' As the issue is no more res integra, the appellant is not liable to pay Service Tax on the amount paid for supply of water by the Government of Odisha to the appellant. In these circumstances, the demand confirmed by way of the impugned order set aside - also, no penalty is imposable on the appellant in the facts and circumstances of the case. The appeal filed by the appellant is allowed, by setting aside the impugned order. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts paid to the State for supply of water from a government water source fall within 'allocation/auction of natural resources' under Section 65B(44) of the Finance Act, 1994 such that service tax is payable for the period in question. 2. Whether penalty can be imposed in respect of any service tax demand found to be leviable on the water charges. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of water charges as 'allocation/auction of natural resources' Legal framework: Section 65B(44) of the Finance Act, 1994 (definition category for 'allocation/auction of natural resources') and the service tax levy effective from 01.04.2016 on services falling under that category. Precedent treatment: The Tribunal examined and followed prior decisions, notably the reasoning in the Sasan Power Limited decision and the subsequent Paradeep Phosphates decision which applied Sasan. The Tribunal expressly treated those decisions as binding precedent for the present issue and held the matter to be no longer res integra. Interpretation and reasoning: The Court analysed the terms of the agreement for supply of water and identified key indicia showing the contract was for supply of water rather than an assignment of rights in the natural resource. Relevant factors considered were: (a) charges paid on the basis of volume of water actually drawn (per cubic meter), (b) rates fixed by the Water Department and stipulated in the agreement, (c) requirement on the recipient to make its own arrangements for drawal at its cost, (d) absence of any guarantee of uninterrupted supply and non-liability of the government for non-supply or inadequate supply including force majeure provisions, and (e) contractual provisions addressing reduction or shortage of supply. Those features were held to demonstrate a service of supply of water, not a grant of rights to use or exploit the natural resource. Ratio vs. Obiter: The Tribunal treated the core proposition-that payments made for supply of water under such an agreement do not constitute 'allocation/auction of natural resources' and therefore are not taxable under Section 65B(44)-as ratio decidendi. Observations about the specific contractual clauses and factual matrix (e.g., requirement to make drawal arrangements, volume-based charging, force majeure allocation of risk) are applied directly to the legal conclusion and form part of the ratio in the context of similar agreements. Statements addressing broader policy or hypothetical variations of contract terms not present in the case are obiter. Conclusions: Applying the Sasan Power reasoning (as followed in Paradeep Phosphates), the Tribunal concluded that the amounts paid for water supply by the State were not taxable as 'allocation/auction of natural resources' during the impugned period. The demand for service tax on those water charges was therefore set aside. Issue 2 - Liability for penalty Legal framework: Penalty provisions connected to confirmed service tax demands under the relevant law as applicable to the period. Precedent treatment: The Tribunal applied the same line of precedent and reasoning which resulted in no service tax liability; hence penal consequences premised on a tax demand were considered in that light. Interpretation and reasoning: Because the substantive tax demand in respect of the water charges was held to be untenable (not falling within the definition of allocation/auction of natural resources), imposition of penalty in respect of that demand could not be sustained. The Tribunal treated penalty liability as consequential on the correctness of the tax demand. Ratio vs. Obiter: The conclusion that penalty is not imposable where the foundational tax demand is quashed is ratio in the present facts. Any wider remarks about circumstances in which penalty might be sustainible notwithstanding set-aside of a tax demand would be obiter. Conclusions: No penalty was imposable on the appellant in the facts and circumstances of the case; consequential relief flowing from setting aside the tax demand was granted. Cross-references and final determination 1. The Tribunal treated the Sasan Power decision as authoritative and followed it in line with Paradeep Phosphates, holding the issue no longer res integra and thereby applying the same legal test to the present agreement. 2. Applying that test, the Tribunal concluded (a) that the contractual and factual matrix evidenced an agreement for supply of water and not an assignment of rights in a natural resource, (b) that payments made on the basis of volume drawn at prescribed rates did not amount to consideration for allocation/auction of natural resources under Section 65B(44), and (c) that no service tax or penalty was payable; the impugned order confirming demand and penalty was set aside and the appeal allowed with consequential relief.