Agreement For Supply Of Water Is Not Covered Under Right To Use Natural Resources; CESTAT Quashes Rs. 10 Crores Service Tax Demand

The Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the agreement executed between the appellant and the government is for the supply of water, for which charges are paid by the appellant on the basis of the volume of water drawn, and it is not a case of the assignment of the right to use natural resources by the government.

The bench of Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) has observed that the agreement was for the supply of water by the government to the appellant and is not for the assignment of any right to the appellant to use the natural resources of the government.

The appellant is in the business of generating electricity. It established a 3960 MW ultra-mega power project in village Sidhikhurd, District Singrauli, in the State of Madhya Pradesh. The appellant entered into an agreement with the Water Resources Department of the Government of Madhya Pradesh for the draw of water from the Rihand Reservoir for use by the appellant in its power plant for 30 years.

As per the agreement, the appellant became entitled to draw a specified quantity of water from the Rihand Reservoir in lieu of water charges at rates fixed by the Water Department from time to time. At the time of execution of the agreement, the charges were specified at Rs. 5.50 per cubic meter. The appellant was required to make its own arrangements for civil works for the purpose of drawing water, and the Water Department was also required to give prior notice to the appellant in case of an anticipated shortage in the supply of water.

The appellant made payment of Rs. 60,19,94,250/- for the period of April 2016 to June 2017 to the Water Department for the drawl of water.

The appellant contended that the water charges did not constitute consideration for any service, and they were in the form of a water tax and cess collected by the Water Department.

A show cause notice dated October 20, 2021 was issued to the appellant, demanding a service tax of Rs. 8,98,36,065 for the period from April 2016 to June 2017 on the charges paid by the appellant to the Water Department with interest and penalties.

The Commissioner confirmed the demand for service tax with interest and imposed penalties on the appellant. The Commissioner noticed that the basic issue that arose was whether the Government of Madhya Pradesh had provided taxable service of assignment of the right to use natural resources, i.e., water from the Rihand Reservoir, to the appellant as per the agreement or was it a supply of water by the government to the appellant.

The appellant contended that the agreement is for the supply of water and not for the assignment of the right to use natural resources by the department to the appellant. The intention is clear from the clauses of the agreement. Service tax is not applicable to the water charges paid by the appellant to the department in lieu of the supply of water under the agreement.

The department contended that access to the natural water source, namely Rihan Reservoir, has been permitted by the Government of Madhya Pradesh to the appellant, and the drawl of a specified quantity of water has been allowed for non-irrigation purposes for a specified period for which monetary consideration is charged in the form of water charges. The machinery and equipment required for the drawl of water and arrangements like pipe lines for its conveyance up to their plant have been installed by the appellant. Hence, it is not a supply of water by the government to the appellant, but a supply of water by the appellant to themselves after the government has assigned the right to use the water to the appellant. The claim of the appellant for exemption under the Exemption Notification is not correct. The government has not provided the service of supplying water. The service provided by the government to the appellant is the assignment of the right to use natural water resources, which is a taxable service w.e.f. April 1, 2016.

The tribunal, while allowing the appeal, held that the agreement is for the supply of water and not mere access to a water source.

The CESTAT held that no service was provided by the government to the appellant.

Counsel For Appellant: Prakash Shah

Counsel For Respondent: S.K. Meena

Case Title: Sasan Power Limited Versus Commissioner, Central Excise & Central Goods and Services Tax

Case No.: Service Tax Appeal No. 53679 of 2023

Click Here To Read The Order