NIL Value Invoices Can't Disguise Overburden Disposal As Sale To Avoid Service Tax: CESTAT New Delhi

On 20 August, the New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that lifting and disposal of mining overburden cannot be treated as a sale merely because invoices were issued, where the transaction involved no sale price or consideration.

Judicial Member Binu Tamta and Technical Member P.V. Subba Rao found that the arrangement between Northern Core Drilling Pvt. Ltd. and Jindal Saw Ltd. (JSL) involved the provision of a taxable service, upheld the service tax demand, and dismissed both appeals. The Bench observed:

“We are, therefore of the view that the transaction between JSL and the appellant is not one of 'sale' and the invoices issued are nothing, but as known under the Income Tax law, an accounting jugglery. The invoices are merely a camouflage to hide the activity of 'service'. The lifting and disposal of overburden by the appellant is a commercial transaction and in the normal routine there cannot be any dealing without any price/consideration. In the commercial world, the say is, nothing is free.”

Northern Core Drilling Pvt. Ltd. was authorised by JSL to dispose of overburden accumulated in its mining area. Under the mining rules, JSL was responsible for removing the overburden. Northern Core was also authorised to obtain a Short Term Permit from the Mining Department and pay the applicable royalty.

The Department demanded service tax on the ground that Northern Core was providing a service to JSL by removing the overburden. Northern Core contended that it had purchased the boulders from JSL and subsequently sold them to its own customers. It therefore argued that the transaction constituted a sale rather than a service.

The Tribunal rejected this contention, observing that a sale cannot exist without a price. It noted that the invoices issued by JSL did not mention any sale price, as the columns relating to the rate and value were blank. Northern Core had also admitted that JSL provided the overburden free of cost.

Further, the Bench held that the amounts Northern Core received from its customers upon the subsequent sale of boulders could be treated as consideration for the service it provided to JSL for disposing of the overburden. It noted that the amounts represented, in substance, the consideration that Northern Core should have received from JSL and therefore formed part of the taxable value under Section 67 of the Finance Act, 1994, which governs the valuation of taxable services.

On the issue of service tax on royalty and permit fees, the Tribunal referred to the Supreme Court's ruling in Mineral Area Development Authority v. Steel Authority of India and observed that royalty paid in respect of mining constitutes contractual consideration for the enjoyment of mineral rights rather than a tax. It therefore rejected the objection that levying service tax on royalty amounted to double taxation.

It also held that royalty paid on a per-metric-ton basis for removing overburden was not covered by the exemption available for one-time charges for the assignment of the right to use natural resources. It consequently upheld the service tax liability on royalty paid towards the removal of overburden.

The Bench further upheld the invocation of the extended period of limitation, observing that Northern Core had suppressed the true nature of its relationship and transaction with JSL and that the invoices relied upon were merely a camouflage.

Accordingly, the CESTAT upheld the orders confirming the service tax demand and dismissed both appeals.

Appearances: B. L. Narasimhan and Shreya Khunteta, Advocates for the Appellant; S. K. Meena, Authorised Representative for the Revenue.