Water charges under government agreement for power project constitute deemed sale, not taxable service

CESTAT NEW DELHI held that water charges paid by appellant to state government under 30-year agreement for drawing water from Rihand Reservoir for power project constituted deemed sale, not service provision. Court analyzed agreement terms showing appellant paid Rs. 5.50 per cubic meter based on actual water drawn, made own arrangements for water drawl, and faced potential supply reductions. Agreement was for water supply with volume-based charges rather than assignment of natural resource usage rights. Since no service was provided by government to appellant, service tax levy was inappropriate. Appeal allowed and impugned order set aside.

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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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