Supply of water, not assignment of resource rights, governed industrial reservoir use and defeated service tax demand.

An agreement allowing industrial drawing of water from a Government reservoir, read with the Madhya Pradesh irrigation law and rules, was held to be a regulated supply of water rather than an assignment of the right to use a natural resource. The arrangement required the user to make its own conveyance and civil arrangements, dealt with shortage and force majeure, and charged consideration by quantity drawn, but did not transfer effective control over the resource. The deemed-sale argument under Article 366(29A) was rejected, and the service-tax provisions and claimed exemption were held inapplicable. The demand and penalties were therefore unsustainable.

---

---

Issues: Whether the agreement for drawing water from the reservoir constituted supply of water or assignment of the right to use a natural resource, and consequently whether the water charges were liable to service tax.

Analysis: The agreement, read with Section 40 of the Madhya Pradesh Irrigation Act, 1931 and Rule 71A of the Madhya Pradesh Irrigation Rules, 1974, permitted the appellant to draw water from the Government source for industrial use on payment of charges linked to the quantity drawn. The arrangement required the appellant to make its own conveyance and civil arrangements, contemplated shortage and force majeure, and repeatedly described the transaction as supply of water. On this construction, the Government did not transfer an independent right to use natural resources; it merely supplied water under a regulated permission scheme. The deemed-sale argument under Article 366(29A) of the Constitution of India was rejected, and the cited exemption and service-tax provisions were found inapplicable because the underlying activity was not a taxable assignment of rights.

Conclusion: The agreement was for supply of water and not for assignment of the right to use natural resources. No service tax was payable on the water charges, and the demand and penalties could not be sustained.

Final Conclusion: The impugned order was set aside because the transaction was held to be a supply of water under the governing irrigation framework, not a taxable service of assigning the right to use water resources.

Ratio Decidendi: Where a Government water arrangement under the relevant irrigation law permits industrial drawing of water for consideration based on quantity drawn, without transfer of effective control over the resource, the transaction is supply of water and not assignment of the right to use a natural resource.

---