CESTAT Kolkata Quashes Service Tax Demand Based On 'Royalty on Mineral' Entries In Contractors' Records

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Kolkata, has recently set aside service tax demands of about ₹19.26 lakh raised under the reverse charge mechanism against two road and bridge contractors.

The tribunal found that the Revenue failed to establish that they had obtained any mining rights or paid royalty pursuant to a mining licence.

The decision was delivered by Judicial Member R. Muralidhar, who allowed the appeals filed by J.K. Engicon Private Limited and J.K. & BSECPL (JV).

Observing that the Department had not produced evidence to support the foundation of the demand, the tribunal held:

"The Revenue has not brought in any evidence in this context. On this ground itself, the confirmed demand fails."

The dispute arose after the Department examined the contractors' records. It noticed amounts reflected under the head "Royalty on Mineral."

In one case, the Department relied on a balance sheet entry showing expenditure of about ₹1.04 crore. In the other, it relied on payment records reflecting an amount of about ₹24.41 lakh under the head of royalty.

Treating those amounts as royalty payments, the Department concluded that service tax was payable under the reverse charge mechanism. It subsequently issued notices invoking the extended limitation period.

The contractors were engaged in the execution of road and bridge construction works. They contended that they had never obtained any mining licence or mining rights from the State Government.

According to them, the amounts reflected in their accounts did not represent royalty paid for mining rights. Rather, they represented amounts withheld by government authorities from contractors' bills.

Those amounts were retained until Forms M and N, prescribed under the Bihar Minor Mineral Concession Rules, were furnished to demonstrate that minerals had been purchased from authorised licence holders.

Examining the nature of royalty payments in the mining sector, the Tribunal noted that royalty is collected when rights to mine minerals are conferred through a licence. The licence holder is then required to pay royalty in respect of minerals extracted under those rights.

The bench found that the show cause notices did not identify the nature of any licence allegedly obtained by the contractors. Nor did they specify the authority that granted such licence or the manner in which royalty had supposedly been paid.

The tribunal observed, "In the present case, the SCN is totally silent as to what kind of License was obtained by the appellant from which authority. It is also silent as to how such Royalties were being paid by the appellant."

The tribunal further found that the Department had not produced any material showing that either contractor had been granted mining rights. The documentary evidence placed on record supported the contractors' explanation that certain amounts had been withheld by government departments pending submission of Forms M and N.

Referring to one of the documents produced before it, the Tribunal recorded that ₹14.41 lakh had been withheld by the Road Works Division under the heading of royalty.

It ruled, "This cannot be viewed as Royalty payment by the appellant towards any License granted for Mining by the State Department."

After reviewing the records, the Tribunal concluded that the amounts accounted for as "Royalty on Mineral" represented withheld sums. They were not royalty paid pursuant to mining rights. The impugned orders were therefore set aside on merits.

The tribunal also ruled that the demands were time-barred. It noted that the notices had been issued on the basis of entries appearing in balance sheets and related records. No corroborative evidence establishing liability had been produced.

The bench found that the allegation of suppression had not been supported by evidence. It also noted that the contractors had produced material showing that no service tax was payable on the transactions in question.

Relying on its earlier decisions, the tribunal reiterated that mere reliance on balance sheet figures, Form 26AS data or similar financial records is insufficient. In the absence of supporting evidence, such material cannot sustain invocation of the extended period of limitation.

The appeals were consequently allowed with consequential relief in accordance with law.

For Appellant: Navin Kumar Agarwal, C.A.

For Respondent: Suman, Authorized Representative