Service tax on water-drawal charges rejected where payment was for quantified supply, not a taxable service or resource assignment.

Water charges paid for permission to draw from a natural source were treated as consideration for supply of water on a quantified, rate-based basis, with the recipient making its own arrangements for drawal and consumption. On that substance, the arrangement was held not to be a mere assignment of a right to use natural resources and not to involve a taxable service within the category relied on by the department. Service tax was therefore not leviable on the water charges, and the penalty under Section 78 of the Finance Act, 1994 could not be sustained.

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Issues: Whether service tax was leviable on water charges paid for permission to draw water from a natural source, and whether the penalty imposed under Section 78 of the Finance Act, 1994 was sustainable.

Analysis: The agreement was examined on its substance and was found to be for supply of water on a quantified, rate-based consideration, with the appellant making its own arrangements for drawal and consumption. The Tribunal followed its earlier view that such an arrangement is not a mere assignment of a right to use natural resources and that no service is provided where the consideration is linked to the volume of water drawn. The reasoning also supported the conclusion that the transaction did not fall within the taxable category relied upon by the department.

Conclusion: Service tax was not leviable on the water charges, and the penalty could not be sustained.

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