No Service Tax On Government-Supplied Water For Industrial Use: CESTAT Kolkata

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has clarified that service tax is not leviable on water charges paid to the Government of Odisha for the supply of water drawn from a natural source for industrial purposes. The Tribunal ruled that such transactions amount to the supply of water and not the grant of a taxable licensing service.

Bench comprising Judicial Member Ashok Jindal and Technical Member K. Anpazhakan, delivered the ruling in an appeal filed by Brahmani River Pellets, a manufacturer of iron ore pellets operating a plant in Odisha.

The dispute arose from a show-cause notice alleging that water charges paid for drawing water from the River Baitarani constituted consideration for the “allocation/auction of natural resources” and were therefore taxable under service tax with effect from 1 April 2016.

The Department relied on provisions of the Orissa Irrigation Act, relevant service tax notifications, and circulars to argue that the State Government had merely licensed the appellant to draw water, and the consideration paid was in the nature of license fees rather than payment for water.

The adjudicating authority confirmed the demand of service tax along with interest and penalty under Section 78 of the Finance Act, 1994. Subsequently, the Commissioner (Appeals) upheld it, prompting the present appeal.

The issue before the Tribunal was whether service tax could be levied on water charges paid to the Government of Odisha for the supply of water at specified rates under a license agreement.

Referring to Sasan Power Limited v. Commissioner [2024 (5) TMI 326], the Bench concluded that no service was provided by the Government and that service tax was not payable on the water charges. It observed that both cases were identical as in both cases the appellant had applied for permission to draw water from a natural source, and the Government granted permission on specified terms.

The Tribunal 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"

Accordingly, it set aside the impugned order and allowed the appeal, holding that no penalty could be imposed on the appellant.

For Appellant: Jnanesh Mohanty and Shreya Mundhra

For Respondent: S. Dutta