One-Time Water Infrastructure Charges on Long-Term Industrial Leases Not Taxable as Support Services: CESTAT

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand raised against State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT), ruling that the one-time amount collected from industrial allottees towards water supply infrastructure qualifies for exemption under Section 104 of the Finance Act, 1994. The bench of Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that no service tax is leviable on one-time upfront amounts collected by state industrial development corporations in relation to long-term leases of industrial plots during the specified period. The provision covers such payments “by whatever name called.” SIPCOT, a Tamil Nadu government undertaking engaged in establishing and managing industrial complexes, leases industrial plots to industries for a period of 99 years. As part of the allotment process, industrial units are required to enter into a separate water supply agreement and pay a one-time upfront charge equivalent to 50% of the capital cost incurred for creating water supply infrastructure. The remaining cost is borne by SIPCOT. Annual water charges are separately collected based on actual consumption. The corporation had treated development charges and upfront water infrastructure charges as taxable under the category of “Construction Service” and paid service tax after availing the prescribed abatement. However, the tax department later alleged that these receipts were taxable as “Support Services” under Section 65B(49) of the Finance Act, 1994. While adjudicating the matter, the Principal Commissioner dropped the demand relating to development charges but confirmed service tax on the amount collected towards 50% of the capital cost of water supply infrastructure. Interest and penalty were also imposed. SIPCOT challenged this order before the Tribunal. SIPCOT’s Arguments SIPCOT contended that the amount recovered represented a contribution towards the cost of establishing water infrastructure and was entirely different from water charges collected based on actual consumption. According to the corporation, the department had incorrectly assumed that the capital cost was linked to the quantity of water supplied. The appellant further argued that Section 104 of the Finance Act grants exemption to one-time upfront amounts collected by state industrial development corporations for long-term leases, irrespective of the nomenclature used. The provision expressly covers amounts described as premium, salami, cost, price, development charge, or “by whatever name called.” Therefore, the upfront water infrastructure charge should also qualify for exemption. SIPCOT also pointed out that for earlier periods, similar service tax demands on the same water capital cost had already been dropped by departmental adjudication orders issued in December 2021 after considering the benefit of Section 104. The Revenue argued that water supply constituted an essential infrastructural service provided to industrial units and that SIPCOT recovered consideration for this activity. According to the department, the capital cost contribution was linked to the water supply arrangement and therefore amounted to taxable consideration for a service. The Tribunal observed that the disputed amount was a one-time upfront fee collected from lessee-allottees for establishing water supply infrastructure in connection with the industrial plots leased by SIPCOT. The Bench noted that an earlier round of litigation involving similar demands had been remanded by CESTAT, after which the Principal Commissioner examined the issue afresh and, through Order Nos. 50 to 56/2021 dated December 24, 2021, dropped the service tax demands on the water capital cost by extending the benefit of Section 104. The Bench also relied on the findings recorded in the 2021 adjudication order, which specifically held that the water capital cost was a one-time amount forming part of a 99-year lease arrangement and was therefore eligible for exemption under Section 104. A significant aspect of the ruling was the Tribunal’s observation that the department itself had already taken a favourable view on the same issue for earlier periods and no appeal against that decision had been brought to its notice. Consequently, the department could not adopt a contrary position for the subsequent period without justification. Setting aside the impugned order, CESTAT held that the service tax demand on the 50% water supply capital cost could not be sustained. Since the demand itself was unsustainable, the associated interest and penalty were also held to be not recoverable. The appeal filed by SIPCOT was accordingly allowed with consequential relief. Case Details Case Title: State Industries Promotion Corporation Of Tamil Nadu Ltd. (SIPCOT) Versus Commissioner of GST & Central Excise Citation: JURISHOUR-1579-CES-2026(CHE) Case No.: Service Tax Appeal No. 41395 of 2017 Date: 10.06.2026 Counsel For Appellant: G. Baskar, and Shri R. Joseph Richard, Advocates Counsel For Respondent: G. Krupa, Authorised Representative Click Here To Read Order Read More: Demurrage Charges and Dispatch Money Not Taxable as ‘Port Services’: CESTAT

One-Time Water Infrastructure Charges on Long-Term Industrial Leases Not Taxable as Support Services: CESTAT

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