Municipal Water Services Exempt Under Mega Exemption Notification: CESTAT

The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of Rs. 14.19 lakh along with interest and penalties, holding that services relating to operation and maintenance of drinking water facilities for municipal authorities fall within the scope of exempt public utility services. The bench of P.K. Choudhary (Judicial Member) also held that the department could not invoke the extended limitation period where the facts were already known from earlier proceedings. The dispute arose from services provided under contracts entered into with Jal Kal Vibhag of Nagar Nigam, Lucknow and Nagar Nigam, Kanpur for operation and maintenance of High Quality Treated Drinking Water (RO) Plants. Under the contractual arrangement, drinking water plants had been installed at different locations for public supply, with potable water and electricity being provided free of cost by the municipal authorities for running these facilities. The operator was compensated at fixed rates under the work orders. The service tax department initiated proceedings based on third-party information received from the Income Tax Department for financial year 2016-17. It alleged that the receipts earned under these contracts were liable to service tax and that the service provider had failed to obtain service tax registration. A show cause notice dated October 6, 2021 was issued demanding service tax amounting to ₹14,19,157 along with interest and penalties. The adjudicating authority subsequently confirmed the tax demand and imposed multiple penalties under Sections 77 and 78 of the Finance Act. The matter was challenged before the appellate authorities. During arguments before the Tribunal, it was submitted that the demand for financial year 2016-17 was time-barred because the department had already issued an earlier show cause notice for the preceding year, namely financial year 2015-16, on the same factual basis. The appellant argued that once the department was already aware of the activities undertaken, it could not again invoke the extended period by alleging suppression or concealment of facts. Reliance was placed on Supreme Court decisions including Nizam Sugar Factory v. CCE and Caprihans India Ltd. v. CCE. After examining the records, CESTAT noted that in the appellant's own case for the immediately preceding year, the Commissioner (Appeals) had already concluded that consideration received from Nagar Nigam authorities qualified for exemption under Entry No. 25 of Mega Exemption Notification No. 25/2012-ST. The Tribunal observed that the work essentially related to operation of Nalkoops and supply of water, with consideration being prescribed on a per-unit operational basis. The Tribunal reproduced Entry No. 25 of Notification No. 25/2012-ST, which grants exemption to services provided to government or local authorities in relation to functions ordinarily entrusted to municipalities, including water supply, public health and sanitation. Relying on this exemption entry, the Tribunal held that the services in question directly pertained to municipal water supply and therefore were entitled to exemption from service tax. The Bench concluded that the consideration received under the contracts could not be subjected to tax. On limitation as well, the Tribunal ruled in favour of the appellant. It observed that the extended period could not be invoked because the department had already been aware of the same activities and had issued a previous show cause notice on identical facts for the earlier period. Therefore, allegations of suppression or concealment could not be sustained. Accordingly, CESTAT set aside the impugned orders and allowed the appeal both on merits and on limitation grounds. The ruling reinforces that services integrally connected with municipal water supply functions can receive the benefit of exemption and also reiterates the principle that the department cannot repeatedly invoke the extended limitation period where facts are already within its knowledge. Case Details Case Title: M/s Arjita Tripathi Versus Commissioner of Central Excise & CGST, Lucknow Citation: JURISHOUR-1414-HC-2026(Ker) Case No.: Service Tax Appeal No.70132 of 2026 Date: 26.05.2026 Counsel For Appellant: Dushyant Kumar, Advocate Counsel For Respondent: Abhishek Mukherjee, Authorized Representative Click Here To Read Order Read More: CESTAT Quashes Rs. 3.60 Crore Excise Demand; R. 8(3A)-Based Recovery Held Unsustainable

Municipal Water Services Exempt Under Mega Exemption Notification: CESTAT

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