Bharat Aluminium Company Limited Vs Commissioner of Central Excise & CGST (Audit)(CESTAT Delhi)
Summary: CESTAT Delhi allowed Bharat Aluminium Company Limited’s appeal against an order confirming service tax of ₹7,29,52,576 and penalty under section 78 of the Finance Act for April 2016 to June 2017. The appellant purchased water from the Chhattisgarh Water Resources Department for its captive power plant at Korba, made its own arrangements to transport the water from the barrage and paid charges at government-prescribed rates. Its agreement required payment for at least 90% of the permitted quantity even where actual withdrawal was lower, without guaranteeing uninterrupted supply during force majeure events. The Department treated the arrangement as an assignment of the right to use natural resources and demanded tax under the reverse charge mechanism through a show cause notice dated 17 February 2022. Revenue relied on the minimum-payment condition, restrictions on withdrawal during reduced water levels and a departmental communication stating that the Chhattisgarh Irrigation Act did not provide for sale of water. It also alleged non-response to summons to support extended limitation.
The appellant contended that the arrangement involved sale of water rather than provision of a service, relying on Sasan Power Limited Vs Commissioner, Central Excise & CGST, Jabalpur and the subsequent National Aluminum Company Limited decision. It also relied on the exclusion of transfer of title from the definition of service, the negative-list treatment of trading in goods and, alternatively, the exemption for government services relating to municipal functions, including water supply for industrial and commercial purposes. Following Sasan Power, the Tribunal held that the agreement was essentially for sale of water and did not assign a right to use natural resources. It therefore set aside the demand on merits.
The Tribunal further held that any service tax paid under reverse charge would have been immediately available as CENVAT credit for payment of excise duty on the appellant’s final products, making the entire exercise revenue neutral. It also observed that, following the cessation of the CENVAT Credit Rules, the appellant would be entitled to cash refund of such tax under section 142 of the CGST Act, 2017. The demand consequently failed on limitation as well. The appeal was allowed on both grounds, and the impugned order was set aside with consequential relief.
Cases Discussed:
1. National Aluminum Company Limited Vs Commissioner of GST, Excise & Customs, Bhubaneswar (CESTAT Kolkata); Service Tax Appeal No. 75500 of 2022; Final Order No. 76921/2024; 03/09/2024. Cited by the appellant as a subsequent decision following Sasan Power on the non-taxability of water charges under an agreement for supply of water.
2. Sasan Power Limited Vs Commissioner, Central Excise & CGST, Jabalpur (CESTAT Delhi); 2024 (5) TMI 326; Final Order No. 55672/2024; 30/04/2024. Followed in holding that an agreement requiring an industrial consumer to draw and transport water at its own cost was essentially for supply of water, rather than assignment of a right to use natural resources.
FULL TEXT OF THE CESTAT DELHI ORDER
1. The order dated 25.04.2023 passed by the Commissioner (Audit) deciding the proposals made in the show cause notice dated 17.02.20221 covering the period April, 2016 to June, 2017 and confirming the demand of service tax of Rs.7,29,52,576/- under the proviso to section 73(1) of the Finance Act and penalty under section 78 of the Act is assailed by M/s Bharat Aluminum Company Limited2 in this appeal.
2. The appellant manufactures aluminum ingots, rods, billets, rolled aluminum sheets and coils and for this purpose set up a captive power plant located at BALCO Nagar, Korba, Chhattisgarh. The power plant needs substantial water and for this purpose it entered into an agreement with the Chhattisgarhi Water resources department for water from Huskdev Barrage. As per the agreement, the appellant had to make its own arrangements for construction of civil and mechanical works to carry the water from the barrage and had to pay water charges at the rates fixed by the Chhattisgarh Water Resources department from time to time. There was no guarantee on the part of the Government in continuity of supply of water in the event of any force majeure event. The appellant was required to pay water charges for at least 90% of the water allowed to be drawn even if it actual water drawn is less.
3. The Directorate General of GST Intelligence, Raipur3 investigated the appellant and the agreement which it had entered into with the State Government and it felt that the agreement was an agreement under which a State Government had assigned the right to use a natural resources, water to the appellant as per section 66D(a) (14) of the Act and was chargeable to service tax with effect from 01.04.2016. Further, it was felt that by virtue of Sr. No. 6 of Notification No. 13/2012-ST dated 20.06.2012, the liability to pay this tax was on the appellant to the extent of 100% under reverse charge mechanism. Since the appellant had not paid service tax, the SCN was issued demanding service tax along with interest and proposing to impose a penalty.
4. These proposals were confirmed by the Commissioner through the impugned order.
Submissions of the appellant
5. Learned counsel for the appellant made the following submissions:
(i) The agreement was, in essence, for supply of water by the Chhattisgarh Water Resources Department to the appellant and, therefore, it was a transaction of sale and not one of service. Reliance is placed on the decision of this Tribunal in the case of Sasan Power Limited vs. Commissioner, Central Excise & CGST, Jabalpur4;
(ii) The decision in Sasan Power was also followed by this Tribunal in National Aluminum Company Limited vs. Commissioner of GST, Excise & Customs, Bhubaneswar,5;
(iii) Water is treated as goods under that Act and is recognized commercial committee;
(iv) Section 65 B(44) of the Act expressly excludes a transfer of title in case from the definition of service;
(v) Trading of goods is also expressly covered by the negative list under section 66D of the Act;
(vi) Even if it is considered as a service, it is squarely covered by the Exemption Notification No. 25/2012-ST (Entry No. 39) which exempts any service provided by the Government or a local authority to business entities in relation to any of the functions entrusted to the municipality under Article 243(W) of the Constitution. Entry 5 of the Twelfth Schedule of the Constitution expressly includes water supply for domestic industrial and commercial purposes as a municipal function;
(vii) Extended period of limitation is not invokable in this case as an entire question is merely of interpretation and it cannot be said that the appellant had any intention to evade payment of service tax.
(viii) It is not also not invocable for the reason that the entire transaction is Revenue neutral as any service tax paid under reverse charge would have admissible to the appellant as CENVAT credit and thus extended period of limitation is not invocable. The entire demand is beyond the normal period of limitation.
(ix) In view of the above, the appeal may be allowed and the impugned order may be set aside.
Submission of Revenue
6. Learned authorized representative for the Revenue vehemently supported the impugned order and submitted as follows:
(i) The permission to the appellant to draw specific quantity of water against payment of water charges fixed from time to time is in essence, an agreement for right between the appellant and Chhattisgarh Water Resources Department. As per the terms and conditions of the agreement the appellant was required to pay water charges in respect of at least 90 per cent of the total quantum of water allowed to be drawn irrespective of actual quantity of water drawn if it is 90 %. This indicates that the charges payable by the appellant is not completely dependent on the water drawn and, therefore, it was not essentially a transaction of sale. It is also a condition in the agreement that if water level in the water body reduces the executive engineer would serve a notice consequent upon it which the appellant had to reduce the water consumption.
(ii) The engineer in chief, by letter dated 02.11.2017 informed that the water allotted by the State Government to the industry cannot be treated as sale of water as there is no provision of sale of water in Chhattisgarh Irrigation Act. And, therefore, the agreement is one of giving a right to the appellant to use a natural resources, namely water which is squarely covered as service under section 66D. The appellant had not paid service tax and had not respondent to the summons issued by the department. Therefore, it was more than a mere omission. Therefore, extended period of limitation is correctly invoked.
Findings
7. We have considered the submission advanced by both sides and perused the records.
8. Power plants and other large industries often need a continues supply of large quantity of water which cannot be met by the normal water supply systems. Therefore, they are entered into an agreement with the State Government authorities to draw water directly from the water body are reverse.
9. The short question is whether such agreements amounts to an agreement in which the State Government as assigned a right to use natural resources or such agreements are, essentially an agreement for sale of water. This question was decided by this Tribunal in Sasan Power Limited in which it was held that such agreements was essentially an agreement for supply of water and not merely an agreement for excess to water resource. Even in that case, the appellant had to draw the water from the water body and make arrangements to carry the water to its plant by itself. This decision was followed by this Tribunal in subsequent cases also. We find no reason to take a different view in this appeal. 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.
10. 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. Even if the demand is confirmed, the appellant was entitled to the CENVAT credit and since the CENVAT Credit Rules are no longer in force as per section 142 of CGST Act, 2017, the appellant will be entitled to cash refund of any service tax so paid.
11. In view of the above, we find that the demand cannot be sustained even on the ground of limitation. In view of the above, we allow the appeal both on merits and on limitation and set aside the impugned order with consequential relief to the appellant.
[Order pronounced on 14/10/2026]
Notes:
1 SCN
2 Appellant
3 DGGI
4 2024(5)TMI 326-CESTAT, NEW DELHI
5 FINAL ORDER NO. 76921 OF 2024
