Royalty is not a tax but a contractual payment

The Hon’ble Chhattisgarh High Court in M/S. MAHESH SHARMA VERSUS THE UNION OF INDIA, THE COMMISSIONER OF CENTRAL TAX, GOODS AND SERVICE TAX, GST RAIPUR, THE SUPERINTENDENT CENTRAL GST RANGE-IV, BILASPUR. - 2024 (9) TMI 1388 - CHHATTISGARH HIGH COURT dismissed the writ petition challenging the Show Cause Notice (“SCN”) demanding service tax on royalty. The court relied on the Supreme Court’s ruling in MINERAL AREA DEVELOPMENT AUTHORITY & ANR. VERSUS M/S STEEL AUTHORITY OF INDIA & ANR ETC. - 2024 (7) TMI 1390 - SUPREME COURT (LB) and held that royalty is not a tax but a contractual payment.

Facts:

Mr. Mahesh Sharma (“the Petitioner”), challenged the SCN dated October 20, 2021 (“the Impugned SCN”), issued by Revenue Department (“the Respondent”), wherein the demand was made from the Petitioner to deposit the service tax of Rs. 36,000/-including (Swachchha Bharat Cess and Krishi Kalyan Cess) which was recoverable under Section 73 (1) of the Finance Act, 1994(“the Finance Act”) read with Section 174 of Central Goods and Services Tax Act, 2017(“the CGST Act”).

The Impugned Notice was followed by another notice dated February 23, 2024 by which the Petitioner was called upon for personal hearing before the authorities, in pursuance of the Impugned SCN.

The Petitioner contended that he is not liable to pay Service Tax on royalty as the royalty is the tax and therefore, there cannot be tax upon the tax which is in violation of the Finance Act.

Hence, aggrieved by the Impugned Order, the Petitioner filed the present writ petition before the Hon’ble High Court?

Issue:

Whether royalty is tax?

Held:

The Hon’ble Chhattisgarh High Court in M/S. MAHESH SHARMA VERSUS THE UNION OF INDIA, THE COMMISSIONER OF CENTRAL TAX, GOODS AND SERVICE TAX, GST RAIPUR, THE SUPERINTENDENT CENTRAL GST RANGE-IV, BILASPUR. - 2024 (9) TMI 1388 - CHHATTISGARH HIGH COURTheld as under:

• Relied on, the case of MINERAL AREA DEVELOPMENT AUTHORITY & ANR. VERSUS M/S STEEL AUTHORITY OF INDIA & ANR ETC. - 2024 (7) TMI 1390 - SUPREME COURT (LB)wherein the Apex Courtcategorically held that royalty is not a tax but a contractual consideration paid by a lessee to the lessor for enjoyment of the right. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
• Held that, the writ petition is disposed of and the Impugned Order lost its efficacy as the date mentioned in the notice was already expired. Therefore, the Petitioner was directed to appear before the authority concerned on August 28, 2024 and then the authority concerned after giving the proper opportunity of hearing to the Petitioner, decide the case in accordance with law.

Our Comments:

In a pari materia case, the Hon’ble Apex Court in the case of MINERAL AREA DEVELOPMENT AUTHORITY & ANR. VERSUS M/S STEEL AUTHORITY OF INDIA & ANR ETC. - 2024 (7) TMI 1390 - SUPREME COURT (LB)held that,royalty is not within the nature of a tax as it is a contractual consideration paid by the lesssee to the lessor and royalty does not fulfil the characteristics of tax. In the said case the judgment of INDIA CEMENT LIMITED VERSUS STATE OF TAMIL NADU - 1989 (10) TMI 53 - SUPREME COURTholding royalty to be a tax was overruled.

The Hon’ble Supreme Court’s decision serves as a binding precedent, ensuring that royalty payments remain liable to taxation unless expressly exempted by law. This judgment aligns with precedents.

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