In recent times, we have seen a spate of notices on the above subject proposing the huge demands. On the ground realities of being able to survive for some involved in this sector is itself in question.
In terms of Notification No. 30/2012-ST dated 20.06.2012 read with amended Notification No. 7/2015-ST dated 01.03.2015 Central Government imposed the service tax on mining royalty under reverse charge. Under reverse charge, business houses have to pay Service Tax on the amount of mining royalty paid to the Government.
Many taxpayers have not paid the service tax on mining royalty under reverse charge as there are perennial issues to be resolved to levy the service tax even though the levy itself is gone 2 years back. All the mining companies, Government Corporations engaged in mining are paying huge royalties to the Government for running quarrying operations. The service tax anti-evasion Department, Directorate General of Intelligence investigated the cases and issuing the show cause notices There are various contentious issues in the case of Levy of Service Tax on mining royalty:-
- Royalty is not a payment in respect of any taxable service at all and it is imposed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (hereinafter referred to as the ‘Act’) in respect of any mineral “removed or consumed” by the holder of a mining lease from the leased area, at the rate specified in the Second Schedule. Clearly, therefore, royalty is a price of winning minerals from the land and represents the State’s share in such minerals and that there is no element or provision of any service by the State in this respect and the levy of Service Tax is clearly ultra vires the Act.
- It cannot be treated in the case of mining royalty that the government carried out an activity for another for consideration to treat these payments as consideration for “service” in terms of Section 65B(44) of the Finance Act, 1994.
- The question of mining royalty whether a tax or not is pending before the larger Bench of nine Judges of the Supreme Court in the case of Mineral Area Development Authority & Ors. Steel Authority of India & Ors. , (2011) 4 SCC 450. If the Supreme Court holds that mining royalty itself is tax/duty there would not be service tax again on mining royalty as the tax cannot be imposed on it. Further, once it is tax, it cannot be said to be a service simultaneously.
- Seven Judges Bench of the Supreme Court in the case of India Cement Ltd. & Ors. v. State of Tamil Nadu & Others, (1990) 1 SCC 12 has already held that mining royalty is a tax. Therefore again service tax cannot be imposed on mining royalty.
- Another argument & question is that can service tax be levied on the consideration paid for the activity of ‘transfer of benefits over land’. Mining royalty is paid for receiving benefits over land/mine/quarry. It is settled the position of law that ‘Transfer of land’ also includes the transfer of benefits arising out of the land.
- In the following judgments, it was held that ‘land’ includes rights in or over land, benefits to arise out of the land.
1. Safiya Bee Mohd. Vajahath Hussain – (2011) 2 SCC 94,
2. Apex Court in the case of Pradeep Oil Corporation Municipal Corporation of Delhi – (2011) 5 SCC 270
3. N. Chandrashekar v. State of Karnataka – (2006) 3 SCC 208
4. Dena Bank B.B.P. Parekh & Co. – (2000) 5 SCC 694.
- From the above decisions, it can be concluded that the word ‘land’ not just includes full title in land but also rights which gives benefits associated with it. This would be true for a longer period ( over a year) contract for exploitation.
- The definition of “Service’ as defined in Section 65B(44) of the Finance Act, 1994 is reproduced are as follows:-
“service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
(a) an activity which constitutes merely,—
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution, or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
- From the combined reading of judgments of the Supreme Court and “service” definition, it is clear that definition excludes the transfer of title in the land which includes not only land but also rights over the land. Subject transaction-transfer of the title of rights over the mine for mining activity it also construes transfer of title in immovable property accordingly excluded from the definition of service and hence service tax will not apply on the subject transaction.
- Service Tax cannot be imposed on the grant of “profit a prendre” which is a transaction in immovable property.
- Meaning of ‘profit a prendre’ A profit a prendre is a right to take something off another person’s land. It may be more fully defined as a right to enter another’s land to take some profit of the soil, or a portion of the soil itself, for the use of the owner of the right. The term ‘profit a prendre’ is used in contradistinction to the term ‘profit a prendre’, which signified a benefit which had’ to be rendered by the possessor of land after it had come into his possession. A profit a prendre is a servitude.
- A profit a prendre is a benefit arising out of the land, an interest in the land, and, in view of Section 3(26) of the General Clauses Act, it is immovable property within the meaning of the Transfer of Property Act. Therefore there is no sale or service element in this transaction. In this regard wishes to rely on the following decisions:-
1. Titaghur Paper Mills Co. Ltd.(1985) 60 STC 213;
2. Anand Behera v. State of Orissa AIR 1958 SC 532
3. State of Andhra Pradesh Vs M/s. ITC 2014-TIOL-2367-HC-AP-CT.
- Transaction in immovable properties governed by Transfer of Property Act, 1882, it is in the purview of State legislature not by Centre & Finance Act, 1994, therefore, service tax cannot be imposed.
- All of the above issues have not been raised before judgment in the case of Udaipur Chambers of Commerce and Industry v. Union of India, rendered in D.B. Civil Writ Petition No. 14578 of 2016 [2018 (8) G.S.T.L. 470 (RaJ.)]. Therefore in our opinion, this judgment is not authoritative judgment & hence will not stand further judicial review.
All of the above arguments are possible & plausible ones. As the stakes involved are huge, they would have serious ramifications on the mining sector. Further, the service tax payments made now would become a cost as credit cannot be availed. I hope this article enlightens the critical issues involved in the present case and given way forward to contest the issue on merits.
(For feedback: firstname.lastname@example.org, email@example.com)