CESTAT Kolkata Holds No Service Tax On Pre-2016 Mining Rights, Sets Aside ₹89.13 Lakh Demand

On 4 August, the Kolkata Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that service tax cannot be levied on royalty paid for mining rights where the right to extract minerals was granted before 1 April 2016, even if the royalty was paid after that date.

A Bench comprising Judicial Member Justice R. Muralidhar and Technical Member K. Anpazhakan set aside the service tax demand of Rs. 89.13 lakh, along with interest and penalties, raised against Roy Engineers, a Bihar-based mining company. It held:

“...where the mining lease/assignment of the right to use natural resources was prior to 01.04.2016, Service tax cannot be fastened even if the consideration is paid thereafter...”

The dispute arose after the appellant participated in a government tender floated by the Mining Department of the Government of Bihar in January 2015. Following the tender process, the Government issued a Letter of Intent on 3 February 2015 granting the appellant mining rights over a 12.5-acre stone mine. The appellant later executed a formal mining lease on 29 August 2016, after service tax on the assignment of the right to use natural resources was introduced from 1 April 2016.

The Department alleged that since royalty payments of Rs. 5.94 crore were made after 1 April 2016, the appellant was liable to pay service tax of Rs. 89.13 lakh under the reverse charge mechanism. It also invoked the extended limitation period, alleging suppression of facts and intent to evade tax.

The appellant argued that the taxable event was the grant of mining rights on 3 February 2015, when such services were covered under the negative list under Section 66D of the Finance Act, 1994 (which specified services outside the service tax levy). It submitted that the execution of the lease deed in August 2016 merely implemented the earlier allotment and did not create a fresh taxable event.

Accepting the submission, the Tribunal held that the relevant date for determining taxability was the date on which the right to use natural resources was provided or agreed to be provided, and not the date on which the formal lease deed was executed. It observed that once the Government accepted the tender and issued the allotment letter on 3 February 2015, the assignment of mining rights had crystallised. It held that the subsequent execution of the lease deed only continued the earlier arrangement and could not change the taxability of the transaction.

The Bench further held that since the assignment of mining rights took place before 1 April 2016, when such services were covered under the negative list under Section 66D of the Finance Act, 1994, no service tax liability could arise merely because royalty payments continued after that date.

Rejecting the Department's reliance on the Point of Taxation Rules, it held that the Rules only provide the mechanism for collection of tax and cannot expand the charging provisions or make taxable a service that was not taxable on the date it was provided or agreed to be provided.

On limitation, it held that the demand for the period from April 2016 to June 2017 was raised through a show cause notice issued only on 20 October 2021, beyond the normal limitation period.

Noting that the taxability of royalty paid for mining rights was a highly debated legal issue during the relevant period and was subject to conflicting judicial decisions before the issue was examined by the Supreme Court in Mineral Area Development Authority v. Steel Authority of India Ltd, it held that such interpretational disputes cannot by themselves justify allegations of suppression, fraud or wilful misstatement.

The Tribunal also found that the appellant had obtained the mining lease through official allotment by the Government of Bihar, regularly paid royalty to the State Government and disclosed the relevant transactions in statutory VAT returns. It observed that the Department relied entirely on the appellant's own records while issuing the demand and there was no evidence of concealment or intent to evade tax. It held:

“In the present case since the right has crystallized on the date when the mining id assigned to the Appellant, in principle, that date is to be taken as the date of assignment of the mining rights to the Appellant”

Accordingly, the CESTAT held that the demand was barred by limitation and unsustainable on merits, and set aside the service tax demand of Rs. 89.13 lakh along with interest and penalties imposed under Sections 77 and 78 of the Finance Act, 1994, while allowing the appeal.

For Appellant: Smt. Shreya Mundhra, Advocate

For Respondent: Shri S. Dutta, Authorized Representative