Water Supply Agreement Is Sale Of Water, Not Taxable Service: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has recently ruled that an agreement allowing an industrial unit to draw water directly from a water body can constitute a sale of water rather than an assignment of the right to use natural resources.

The tribunal set aside a service tax demand of ₹7.29 crore against Bharat Aluminium Company Limited (BALCO), holding that the agreement was for the sale of water.

A bench comprising Officiating President Rachna Gupta and Technical Member P.V. Subba Rao held that the agreement between BALCO and the Chhattisgarh Water Resources Department was essentially for the supply of water.

The tribunal observed, “Accordingly, we hold that the agreement is one of sale of water and not of assignment of right to use natural resources. Therefore, the demand cannot be sustain and deserves to be set aside on merits.”

BALCO manufactures aluminium ingots, rods, billets, rolled aluminium sheets and coils. Its captive power plant at BALCO Nagar in Korba, Chhattisgarh, requires substantial quantities of water.

The company entered into an agreement with the Chhattisgarh Water Resources Department to draw water from a barrage. It had to arrange the civil and mechanical infrastructure needed to transport the water to its plant and pay charges at rates fixed by the department. The agreement also required BALCO to pay for at least 90% of the permitted quantity, even if it drew less water.

The Directorate General of GST Intelligence, Raipur, investigated the arrangement and treated it as an assignment of the right to use a natural resource. The department considered it taxable from April 1, 2016, and sought to recover service tax under the reverse charge mechanism. Under this arrangement, BALCO was liable to pay the entire tax.

A show-cause notice covering April 2016 to June 2017 proposed a service tax demand of ₹7,29,52,576, along with interest and penalty. The Commissioner of CGST and Central Excise, Indore, confirmed the demand, prompting BALCO to appeal before the tribunal.

BALCO argued that the agreement was essentially for the sale of water, not a service involving the assignment of a right to use natural resources. It contended that water was treated as goods and that the transfer of title in goods was excluded from the definition of service under Section 65B(44) of the Finance Act, 1994.

The company also argued that even if the arrangement were treated as a service, it qualified for exemption under Notification No. 25/2012-ST. It challenged the extended period of limitation, contending that the dispute involved a question of interpretation.

BALCO further argued that the transaction was revenue-neutral. Any service tax paid under reverse charge, it submitted, could have been claimed as CENVAT credit and used to pay central excise duty on its final products.

The Revenue maintained that the agreement gave BALCO the right to use a natural resource in return for water charges. It argued that the requirement to pay for at least 90% of the permitted quantity, irrespective of actual consumption, showed that the arrangement was not simply a sale of water.

The tribunal noted that power plants and other large industries often need quantities of water that normal supply systems cannot meet. They therefore enter into agreements with State Government authorities to draw water directly from water bodies and arrange for its transportation to their facilities.

The tribunal relied on its earlier ruling in Sasan Power Limited, which held that such agreements were essentially for the supply of water rather than merely granting access to a water resource. It noted that this view had been followed in subsequent cases and found no reason to take a different position in BALCO's case.

The tribunal also held that the transaction was revenue-neutral. Had BALCO paid service tax under reverse charge, it could have immediately claimed CENVAT credit and used it to discharge central excise duty on its final products. It observed:

“Even otherwise, had the appellant paid any service tax under reverse charge mechanism, it could have immediately availed CENVAT credit of the service tax so paid and utilized it to pay the central excise duty on its final products. Therefore, the entire exercise is revenue neutral.”, it ruled.

The tribunal further observed that BALCO would be entitled to a cash refund of any service tax paid. It noted that the CENVAT Credit Rules were no longer in force and referred to Section 142 of the Central Goods and Services Tax Act, 2017.

Allowing the appeal on both merits and limitation, the tribunal set aside the order confirming the demand and granted consequential relief to BALCO.

For Appellant: Advocate Udit Jain

For Respondent: Mayank Gupta, Authorised Representative