How long can powdered coffee remain fresh?
If, as you say, the coffee smelled ok, was stored dry, and showed no signs of deterioration (lumping, strange colours, etc.), it is perfectly safe to use.

The "Best before" date gives you the producer's idea of how long the coffee will last in its original packaging without losing too much of its taste, aroma, and visual appeal. There are also legal limits involved. So, using a product after its "Best before" date doesn't create a health hazard (provided the packaging isn't damaged, and the product is stored correctly)sup>*. 

In the context of your question, 4 months after the date isn't any problem at all, the different taste could just be due to loss of volatile aroma compounds, especially if the packaging was already opened.

Concerning your second question about using it with water. That's actually the standard way to drink it in Europe: just dissolve the amount you want in a cup of hot (not boiling) water, and add sugar and milk/cream to taste. Same as freshly brewed coffee (from ground beans) is prepared with hot water.


*: Note that a "Use by" date is different. That is used for fresh or pasteurised products that mostly need to be kept cool. Passed that "Use by" date, such products can be a health hazard, depending on how the product was stored and transported (usually there is a safety margin)