One-time upfront lease-linked infrastructure charges were exempt from service tax, with related interest and penalty also set aside.

50% of the capital cost collected upfront for water supply infrastructure in respect of 99-year industrial plot leases was treated as a one-time upfront amount covered by the Section 104 exemption for long-term industrial leases. Because the same component had earlier been dropped on identical reasoning and that departmental position was not shown to have been challenged, the service tax demand for the present period could not be sustained. The consequential interest and penalty demands also failed and were set aside.

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Issues: Whether the 50% of capital cost collected upfront towards water supply infrastructure from allottee-lessees was liable to service tax as a taxable service, or whether it fell within the exemption for one-time upfront amounts under Section 104 of the Finance Act, 1994.

Analysis: The amount was found to be an upfront fee collected for setting up water supply infrastructure for industrial plots leased for 99 years. The legal framework under Section 104 exempts service tax on one-time upfront amounts, by whatever name called, received by a State Government industrial development corporation or undertaking in respect of long-term leases of thirty years or more for industrial plots. The demand on the same component had already been dropped for an earlier period on the same reasoning, and that decision had not been shown to have been challenged. In view of that binding departmental determination, the contrary demand for the present period could not be sustained. As the tax demand failed, the connected demand for interest and penalty also did not survive.

Conclusion: The 50% water supply capital cost was held to be exempt as a one-time upfront amount under Section 104 of the Finance Act, 1994, and the service tax demand, interest and penalty were set aside in favour of the assessee.

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