2026 (2) TMI 16 - AT - Service Tax

Levy of service tax on government water charges denied where licencee arranges drawal at its own cost, appeal allowed

Levy of service tax was contested on charges paid to a government for supply of water under a renewal licence that required the licencee to arrange and ... Levy of Service tax on water charges paid to the Government of Odisha for supply of water against charges / consideration at a specified rate stipulated in the Renewal Agreement - agreement by providing license to draw the water. - HELD THAT:- As appellant is drawing water on its own use from the water resources of the Government to the plant in that circumstances the facts in the case of Sasan Power Ltd. [2024 (5) TMI 326 - CESTAT NEW DELHI] and the case in hand are identical. A perusal of Sasan Power clearly shows that even in that case, 'the appellant had applied to the government for permission to draw water from the Rihand Reservoir' and 'the government had agreed to grant the said permission on certain terms and conditions.' The Tribunal specifically noted that 'The appellant was required to make its own arrangement at its own cost for drawl of water from the water resource of the government to the plant' - which is identical to the present case. As it has already been held that no Service Tax is payable on the basis of agreement executed between the assessee and the Government of Odisha for supplying water for which was paid by the assessee on the basis of volume of water. In that circumstances we hold that no Service Tax is payable by the appellant. Consequently, no penalty can be imposed on the appellant. Thus, we set aside the impugned order and allow the appeal with consequential relief, if any. Issues: Whether service tax is leviable on charges paid to the State for supply of water from natural sources under an agreement providing for drawal at specified rates (i.e., whether the transaction is an allocation/auction of natural resources liable as a service or is supply of goods not leviable to service tax).Analysis: The issue turns on the characterisation of the agreement and the dominant nature of the transaction. Relevant legal framework includes Section 65B(44) and Section 78 of the Finance Act, 1994, Notification No.25/2012-ST (including the entries relied upon), and the State irrigation statute provisions governing permission to draw water. The agreement provides for payment at a fixed per-unit rate, payment based on actual quantity drawn, and the assessee making its own arrangements for drawal; these features indicate consideration directly proportional to volume received. Prior Tribunal decisions applying the dominant-nature test and examining near-identical factual patterns where permission to draw water was granted but charges were fixed per unit have treated such transactions as supply of water (goods) rather than a service of allocation/auction of natural resources. The exemption entries in Notification No.25/2012-ST and the position under state irrigation law were also considered.Conclusion: The transaction is a supply of water by the State measured by volume and not a taxable service of allocation/auction of natural resources; consequently service tax demand and penalty are not sustainable in favour of Revenue and are set aside in favour of the assessee.