Per M. Ajit Kumar,

This appeal is filed by SIPCOT the appellant against Order in Original No. CHN-SVTAX-001-COM-115-2016-17 dated 31.03.2017 passed by the Principal Commissioner of Service Tax – I, Chennai (impugned order).

Factual Matrix

2. Brief facts of the case are that the appellant is engaged in establishing, developing, maintaining and managing industrial complexes at various placed in the State of Tamil Nadu. The appellant leases land to industries for 99 years. At the time of execution of the lease, each allottee must also enter into a water supply agreement and pay a one-time upfront charge equal to 50% of the capital cost of the water supply infrastructure. The appellant bears the remaining 50%. In addition, the allottee pays annual water charges based on actual consumption. The appellant treated the ‘development charges’ and upfront water-related infrastructure charges as “Construction Service”. Service tax was paid on 33% of the value after claiming 67% abatement under Notification No. 01/2006-ST dated 01.03.2006. It was alleged by the department as per Statement of Demand No. 70 of 2016 dated 13.10.2016 that for the period from October 2014 to September 2015, the ‘development charges’ and ‘50% of capital cost for water supply’ were taxable as “Support Services” under Section 65B(49) of the Finance Act, 1994, as stated in Show Cause Notice No. 36 of 2014 dated 12.11.2014. After due process, the Ld. Principal Commissioner while adjudicating the matter, dropped the demand pertaining to ‘development charges’ but confirmed the Service Tax demand on the ‘50% of capital cost for water supply’ as “Support Services,” under Section 65B(49) of the Finance Act, 1994, for the period October 2014 to September 2015. He also confirmed the demand for interest under Section 75 and imposed a penalty under Section 76(1). Hence this appeal.

3. The learned Advocates Shri G. Baskar and Shri R. Joseph Richard appeared for the appellant and Smt. G. Krupa, Ld. Authorized Representative appeared for the respondent.

Submissions made by the appellant

3.1 Shri G. Baskar the Ld. Counsel for the appellant submitted as under:

A. Revenue’s contention that the capital cost is determined based on kilolitres (KL) of water supplied is erroneous. The appellant collects 50% of the water supply capital cost upfront from the allottees to recover the cost of establishing water infrastructure facilities. This is separate from the periodic water charges, which the allottees have to pay and are levied based on actual consumption in KL.

B. The agreement expressly distinguishes the upfront capital cost of water supply from water charges based on consumption. Accordingly, Revenue’s conclusion that the 50% capital cost is determined by KL of water supplied is misconceived, and the resulting demand is legally unsustainable.

C. Revenue’s reliance on Jaisu Dredging & Shipping v. Commissioner of Central Excise, Rajkot [2013 (32) S.T.R. 107 (Tri.-Ahmd.)] to characterize SIPCOT’s activity as “infrastructural support” is misplaced. That decision concerned the levy of service tax on the supply of bunkers and barges, within a port, which is factually distinct from the present case. It therefore offers no valid basis for confirming service tax on the water supply capital cost.

D. Revenue’s contention that the capital cost collected towards water supply is not akin to the “upfront amount” contemplated by the exemption is untenable. Section 104 of the Finance Act, 1994 exempts a one-time upfront amount and expressly includes amounts described as “premium, salami, cost, price, development charge or by whatever name called.” The phrase “by whatever name called” must be given a broad construction so as to include all sums collected upfront.

E. On a plain reading of Section 104, the exemption extends to any amount paid once upfront, regardless of its label. By excluding the 50% water supply capital cost from this exemption, the impugned Order-in Original artificially narrows th