SIPCOT Water Infrastructure Charges Exempt From Service Tax Under Section 104: CESTAT Chennai

On 10 June, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that the one-time amount collected by the State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT) from industrial allottees towards water supply infrastructure is exempt from Service Tax under Section 104 of the Finance Act, 1994.

Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar allowed SIPCOT's appeal and set aside the Service Tax demand, interest, and penalty imposed by the Department. The Bench held:

“Since the issue on merits, for the earlier period, has been decided by the Department itself in favour of the appellant, and the said decision is not stated to have been challenged in appeal, it binds the department and they are precluded from taking a different stand. The impugned order in the present proceedings cannot hence be sustained and is liable to be set aside on the same basis.”

SIPCOT establishes and manages industrial complexes in Tamil Nadu and grants long-term leases of industrial plots. It collects lease-related charges and also recovers a one-time amount equivalent to 50% of the capital cost incurred for developing water supply infrastructure.

The Department levied Service Tax on this amount by treating it as consideration for “Support Services” under Section 65B(49) of the Finance Act, 1994. It contended that SIPCOT provides essential infrastructure in the form of water supply to industrial units and that recovery of capital cost constituted taxable consideration.

SIPCOT argued that it collects the amount as a one-time upfront charge for creation of water infrastructure and distinguishes it from recurring water charges based on actual consumption. It also pointed out that the Department had dropped identical demands for earlier periods after granting exemption under Section 104 of the Finance Act.

The Tribunal held that SIPCOT collected the disputed amount as a one-time upfront fee for setting up water supply infrastructure for industrial plots leased for 99 years. It referred to the Department's Order-in-Original dated 24 December 2021 and noted that the Department had already examined the same issue and dropped the Service Tax demand on the 50% water capital cost after extending the exemption under Section 104 of the Finance Act.

The Bench also reproduced findings from the subsequent adjudication order, which confirmed that the water capital cost formed part of the long-term lease arrangement and qualified for exemption available to upfront amounts collected by State industrial development corporations.

Accordingly, the CESTAT allowed the appeal, holding that the Department cannot take a contrary stand on an issue already decided in the appellant's favour and set aside the demand along with consequential interest and penalty.

Appearance for the Appellants: Shri G. Baskar, and Shri R. Joseph Richard, Advocates 

Apeparance for the Respondents: Smt. G. Krupa, Authorised Representative