A bench of Justice A.K. Mathur and Justice Markandey Katju held that such charges levied by a state were merely a 'fee' that cannot be termed as a 'tax'.

The verdict came on an appeal filed by the Centre challenging an Allahabad High Court judgment upholding the recovery proceedings initiated by the Jal Sansthan (Uttar Pradesh government) against the Divisional Manager Northern Railway, Allahabad, for recovery of Rs 26.23 lakh as water and sewer charges during 1994-99. The High Court had dismissed the Centre's plea.

"In substance what is being charged is a fee for supply of water as well as maintenance of sewerage system. Therefore, in our opinion, such service charges are a fee," the bench said, clarifying that this was beyond the scope of Article 285 of the Constitution allowing exemption from paying tax on the property of the Centra1government.

The SC said: "Jal Sansthan is not charging any tax on the property of the Union. What is being charged is a fee for the services rendered to the Union through the Railways...Railways cannot take this service from the Jal Sansthan without paying the charges for the same."

The Railways had contended that it was holding the Centre's property for which service charges were not payable as the same was in the nature of tax. On the other hand, the Jal Sansthan said water and sewer charges were only a 'fee' for services rendered by it.