Royalty is not a tax but a contractual payment: Chhattisgarh HC

Mahesh Sharma Vs Union of India (Chhattisgarh High Court)

Chhattisgarh High Court, in Mahesh Sharma v. Union of India (WPT No. 151 of 2024), dismissed a writ petition challenging a Show Cause Notice (SCN) demanding service tax on royalty payments. The petitioner, Mahesh Sharma, argued that royalty constitutes a tax and, therefore, should not be subject to additional taxation under the Finance Act, 1994. The Revenue Department issued an SCN on October 20, 2021, demanding service tax of ₹36,000, including Swachh Bharat Cess and Krishi Kalyan Cess. This was followed by a notice on February 23, 2024, summoning Sharma for a personal hearing. Relying on the Supreme Court’s ruling in Mineral Area Development Authority v. Steel Authority of India (2024), the High Court held that royalty is a contractual payment, not a tax, and dismissed the petition. The Court referenced the Supreme Court’s clarification that royalty is a consideration paid by a lessee to a lessor for the right to extract minerals and does not possess the characteristics of a tax. It emphasized that payments made to the government cannot be deemed taxes merely because their recovery is treated as arrears under statute. Consequently, the High Court ruled that Sharma must present his case before the concerned authority, with the authority instructed to decide the matter in accordance with the law after granting him a proper hearing. This judgment reaffirms that royalty payments remain subject to taxation unless explicitly exempted by law.