2024 (1) TMI 1018 - AT - Service Tax

Buyer not liable for service tax on royalty payments to state government under reverse charge mechanism

CESTAT Chennai held that appellant buyer of iron ore was not liable for service tax under reverse charge mechanism on royalty and forest development tax ... Levy of Service Tax - reverse charge mechanism - appellant has received any taxable service of lease of mine and assignment of right to use of natural resources from the State Government of Karnataka for mining of iron ore, on which the Royalty and Forest Development Tax/Fee or not - HELD THAT:- It is clear from Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 that the Royalty is to be paid by the holder of the mining lease. Therefore, the liability in respect of the payment of Royalty is fastened by law on the lease- holder and not on the buyers like the appellant. Sub- paragraph (F) below paragraph 5 of the Order of the Hon’ble Supreme Court dated 18.04.2013 in the case of Samaj Parivartana [2013 (4) TMI 954 - SUPREME COURT] merely lays down the manner in which the payment of these Royalties will be made. Sub-paragraph (F) stipulates that the buyer will make the payment of the Royalty, the liability of which lies primarily on the shoulders of the lease- holder. Merely because the payment is made by the buyer, it cannot automatically be said that the primary liability is on him, that any relatable services were received by him, or indeed that the leaseholder is absolved of liability - Accordingly, the payment of the Royalty being the primary obligation of the lease- holder, it cannot be said that the services, if any, relatable thereto, could have been rendered to the buyer (the Appellant) as the recipient of service. The payment of Royalty, FDT and other applicable taxes/charges by the buyers of the iron ores to the Monitoring Committee, as per the price of iron ore purchased in auction, would not be held to be liable to Service Tax and hence, the buyer i.e., the appellant herein, could not be held to be the service recipient from the State Government for the purposes of liability to Service Tax. Hence, there is no question of any liability to pay Service Tax on the lease of mines and right to use of natural resources under reverse charge mechanism. The said findings in the impugned order are therefore unsustainable in the eye of law. The demand of Service Tax as sustained in the impugned order is not sustainable, for which reason the same is set aside - appeal allowed. Issues Involved:1. Liability to pay Service Tax on Royalty and Forest Development Tax (FDT) under reverse charge mechanism.2. Applicability of Service Tax on the transaction of auction sale of iron ore.3. Role and definition of the Monitoring Committee in the context of Service Tax liability.Summary:Issue 1: Liability to pay Service Tax on Royalty and Forest Development Tax (FDT) under reverse charge mechanismThe assessee, engaged in the manufacture of iron and steel products, was audited by the Revenue, which observed that the assessee paid auction price of iron ore along with Royalty, Forest Development Tax, Sales Tax, Cess, and other charges. The Revenue assumed that these payments were for the services of assignment of right to use natural resources by the Government of Karnataka, thus liable for Service Tax under reverse charge mechanism. The original authority confirmed this view, demanding Service Tax of Rs. 5,00,33,713/- for the period from April 2016 to June 2017, along with interest and penalties under Section 78 of the Finance Act, 1994.Issue 2: Applicability of Service Tax on the transaction of auction sale of iron oreThe appellant contended that they were merely buyers of iron ore in an auction conducted by the Monitoring Committee, not holders of mining leases, and thus not liable for Royalty or Service Tax on Royalty. The Monitoring Committee, constituted by the Hon'ble Supreme Court, regulated the sale of iron ore and collected Royalty, FDT, and other taxes from buyers, remitting these to the Government. The appellant argued that the transaction was a sale, not a service, and referred to various Supreme Court orders and legal provisions to support their stance.Issue 3: Role and definition of the Monitoring Committee in the context of Service Tax liabilityThe Monitoring Committee, appointed by the Supreme Court, was responsible for regulating the sale of iron ore and collecting applicable taxes. The appellant argued that the Committee was not a government entity as per Section 65B(26A) of the Finance Act, 1994, and thus, Service Tax under reverse charge mechanism was not applicable. The Committee's role was to facilitate the auction process and ensure compliance with the Supreme Court's directions, not to provide taxable services.Judgment:The Tribunal found that the primary liability to pay Royalty under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957, rested with the holder of the mining lease, not the buyer. The Monitoring Committee's role was to collect and remit these taxes as per the Supreme Court's directions, which did not constitute a taxable service to the buyer. The Tribunal concluded that the payment of Royalty, FDT, and other charges by the appellant to the Monitoring Committee was not liable to Service Tax, setting aside the demand and allowing the appeal with consequential benefits.