Laying of pipelines for water supply by GWSSB -whether taxable under Commercial/Industrial Construction service

PJ/Case Laws/2010-11/1088

Case: M/s Dinesh Chandra Agarwal Infracon Pvt Ltd v/s Commissioner of Central Excise, Ahmedabad

Citation: 2010-TIOL-1413-CESTAT-AHM

Issue: - Whether laying of pipeline for supply of water to Gujarat Water Supply and Sewerage Board is a taxable service falling under Commercial or Industrial Construction service?

Brief Facts:- Appellant is registered with Service Tax department under the category of Goods Transport Agency services. Revenue received intelligence that appellants were providing taxable service of laying of long distance pipe lines for transfer of water in the State of Gujarat. As the appellant was not paying any service tax on the said service, investigations were conducted at their end. It was revealed that the appellant had been awarded the contract for laying long distance pipe lines for transfer of water in the State of Gujarat by M/s. Gujarat Water Supply and Sewerage Board, an independent body constituted under the Gujarat Water Supply and Sewerage Board Act, 1978. As the Revenue entertained a view that services being provided by the appellant to M/s. GWSSB were covered by the category of "Commercial or Industrial Construction Service", they carried on further investigation to find out the status of GWSSB. Statement of various persons were recorded during the course of investigations and on the basis of which proceedings were initiated against the appellant by way of issuance of show cause notice for the period June 2005 to March 2007 for recovery of service tax under the category of Commercial or Industrial Construction Services. Demand raised in the said show cause notice was confirmed by the Commissioner.

Statement of Shri B.K. Shingala, Chief Executive Engineer of GWSSB was wherein he had clarified that the said body is an establishment for rapid development and proper regulation of water supply and sewerage activity in the State of Gujarat, The source of water for supply by the said establishment is either its own in terms of Well/ Tube-well or stand purchased from Sardar Sarovar Narmada Nigam Limited (SSNNL), irrigation department or from M/s. Gujarat Water Infrastructure Limited (GWIL). In the pipeline project installed under the Sujalam Suflam Yojna, based on the Narmada canal, the water is either received from SSNNL or from GWIL and is purchased at the rate of Rs. 1 per 1000 liters. He further clarified that the rural and urban people of the state are the ultimate customers and the charges are being recovered at a very nominal subsidized rates as per norms of the Government of Gujarat fixed from time to time. The recovery from the rural people is at the rate of Rs. 14 per head annually, which keep on varying as per the new guidelines fixed by the Govt. of Gujarat. He also further disclosed the manner of grant of contracts etc. for laying of pipelines.

Revenue scrutinized the documents submitted by M/s, GWSSB and entertained a view that the said establishment was selling the water after purchasing the same from various sources and as such, pipe lines laid by the appellants were used for the Commerce or Industrial purposes. The Commissioner in his impugned order arrived at the findings that GWSSB is a Commercial concern. The Commissioner observed that the appellant who constructed the pipe lines is admittedly a commercial concern. The Commissioner has also upheld the invocation of longer period of limitation in the show cause notice by observing that there was mens-rea on the part of the assessee. Accordingly, he confirmed the demand and imposed penalties.

Hence, appellant is in appeal before the Tribunal.

Reasoning of the Judgment:- The Tribunal found that there is no dispute about the legal position that the category of service of "Commercial or Industrial Construction" creates liability to pay service tax on the construction activities if the pipelines or conduits are used or to be used primarily for Commerce or Industry. The Board Circular No. 116/10/2009-ST dated 15.09.2009 has clarified that canals constructed by the Government or under Government projects are not liable to service tax under Commercial or Industrial Construction service.

In fact the above legal position stands accepted by the Commissioner in his impugned order. However, he has held that GWSSB is engaged in the Commercial activities.

The Tribunal referred to the Gujarat Act under which the GWSSB has been constituted. The preamble of the said Act was perused. The Tribunal further noted the provisions of Section 14 of the said act which provides Duties and Functions of the Board.

The perusal of the above duties and functions of the Board clearly show that sale of water is not the primary function of the Board. It is also clear that the water purchased by the Board is being distributed to rural and urban areas for the purpose of irrigation and drinking at different rates which are subsidized and even the operating cost also does not stand recovered by them. To setup an establishment for water supply is a part of the duties and functions of the State to provide its citizens with a better living. In these circumstances, it cannot be held that laying of pipelines for the Board is for the purpose of undertaking any commercial activities by the Board, and the appellant would be covered by said services by making him liable to payment of service tax.

The Tribunal also took note of the Tribunal's decision in the case of M/s. Nagarjuna Construction vs. CCE, Hyderabad [2009-TIOL-1156-CESTAT-BANG] wherein it was held that GWSSB could not be treated as a commercial organization, selling drinking water to the community. This is a service sector establishment for fulfilling the needs of the people for this basic requirement. It was held that GWSSB primarily executes water supply and sewerage works for the benefit of both the rural and urban communities, excluding the municipal corporations. And the charges collected by then were nominal charge which was imposed by the State Government with a view to create a sense of responsibility and awareness towards the service amongst the people for its economic use.

The Tribunal held that the second limb of definition of Commercial or Industrial Construction service was not satisfied. It was held that the services provided by the appellants are not covered under the said services and no service tax is required to be levied. Accordingly, appeal with consequential relief to the appellants.

Decision: - Appeal allowed with consequential relief.

Comments:- This is landmark decision for Commercial construction activity. It has defined the meaning of “primarily”. If the building is used primarily for commerce or industry then it is taxable. This definition will give to new directions to litigation for Commercial construction services which are done for Government agencies or trusts.

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PJ/Case Laws/2010-11/1088

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