TaxTMI 
TaxTMI 
2024 (1) TMI 640
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....ht to use for exploration and production of crude oil/natural gas, the officers of the Directorate General of Goods and Service Tax, Zonal Unit, Bangalore initiated investigation. Summons was issued to furnish documents and statements were recorded. 1.2 It appeared to the department that the natural resources are the properties of the State, which can either be utilized by the State for the welfare of the public or the rights over such resources, can be assigned to any person for a consideration. The consideration for assigning the right to use of natural resources (grant of license) is determined by taking into account terms of the contract, period of usage, quantum of benefits, etc. On perusal of the Petroleum Mining Lease issued by Government of Tamil Nadu, it appeared that Government has issued the Petroleum Mining Lease under Rule 5(i)(ii) read with Rule 12 of the Petroleum & Natural Gas Rules, 1959 for extraction of crude oil and natural gas in the allotted blocks as against the consideration which is paid or payable by appellant in the form or royalty, PEL/PML, dead rent and surface rent. Accordingly, M/s.ONGC, Karaikkal is paying royalty, PEL/PML, dead rent and surface r....
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....rity by way of right to use any natural resource where such right to use was assigned by the Government or the local authority before the 1st April', 2016; Provided that the exemption shall apply only to Service Tax payable on one-time charge payable, in full upfront or in instalments, for assignment of right to use such natural resource.'' 1.2.4. From the above, it appeared that the exemption has been given to services in respect of assignment of right to use natural resources which have been granted by the Government/Local Authority before 1.4.2016. However, the exemption is limited to one time charges (whether paid in full or in installments) for assignment of right to use such natural resource. In other words, the periodic charges/payments made by the business entities to Government or a local authority have been kept out of the exemption and thus, would be taxable. In the present case, M/s.ONGC, Karaikal are paying the royalty to the Government of Tamil Nadu on monthly basis depending upon the sale quantity of crude oil and gas produced from the oil fields allocated by the Government and hence the royalty payable by appellant on monthly basis is not exempted from payment of....
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....ne, 2017 under proviso to sub-Section (1) of Section 73 of the Finance Act, 1994; (iii) I order that M/s.ONGC shall pay the interest at appropriate rates on the service tax amount demanded as in Sl No (ii) above under Section 75 of the Finance Act, 1994; (iv) I impose penalty of Rs.1,50,00,000/- (Rupees one crore and fifty lakhs only) on them under Sec.76 of the Finance Act, 1994. (v) I also impose penalty of Rs.10,000/- (Rupees Ten thousand only) for contravening various provisions of the Act and rules made hereunder Section 77(2) of the Finance Act, 1994; and (vi) I refrain from imposing any penalty on them under Sec.78 of the Finance Act, 1994." SUBMISSIONS OF PARTIES: 2. The Ld. Counsel Shri. Sujit Ghosh appeared and argued for the appellant. The oral and written arguments put forward are summarized as under: 2.1 The Adjudicating Authority has held that the Appellant is liable to pay Service Tax on a reverse charge basis for royalty amounts paid to the Government, pursuant to mining lease entered with the Appellant since grant of mining lease by the State Government falls squarely within the scope of 'service' under Section 65B (44) ....
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....pon the public authority. 2.6. It is trite law that for a levy of tax to be valid, four essential components, namely (a) taxable event, (b) taxable person, (c) rate of tax and (d) measure of tax, ought to be present. 2.7 It is submitted that features of royalty charged under the Oilfields (Regulation and Development) Act, 1948 squarely falls within the ambit of tax for the following reasons: (a) Royalty is a special impost under the ORD Act and therefore covered under the definition of 'tax' in Article 366(28) of the Constitution of India. The nomenclature of the impost being 'royalty' has no bearing upon the true nature of the levy, which is in the nature of tax. (b) Payment of royalty is a compulsory extraction from the licensee under the statute after the license is granted under Section 6A of the ORD Act read with Rule 14 of the PNG Rules and not a consideration towards any service rendered by the State Government. The royalty collected is not for endowment of any special benefit or grant of any service. (c) Section 6A of the ORD Act fulfils the essential components of taxation viz - (i) Taxable Event - Grant of mining lease is a distin....
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.... substance which determines the nature of the levy. Further, it is submitted that it is well settled that characteristics of 'Tax' in its wider sense includes all imposts. 2.11 Royalty on minerals extracted was also held to be an 'impost' in the nature of tax. [Refer Laddu Mal and Ors. v. State of Bihar AIR 1965 Pat 491. 2.12 From the entries of Schedule VII, it is evident that various compulsory imposts of varying nomenclature (such as duty, revenue, toll, etc.) have been contemplated by the Constitution of India and the nomenclature adopted to denote such an impost has no bearing upon the true nature of such an impost, which is in the nature of tax. 2.13 Accordingly, it is submitted that the observations of the Ld. Adjudicating Authority are wholly contrary to the settled law and thereby cannot be sustained. Without Prejudice, the Ld. Adjudicating Authority as well as this Ld. Tribunal is bound by the decision of India Cements v. State of Tamil Nadu AIR 1990 SC 85 wherein it was held that royalty is in the nature of tax. 2.14 It is submitted that the Impugned Order at Para 29 has relied upon various High Court decisions and held that right to receive royalty is a m....
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....y as well as this Tribunal is bound by the decision of India Cements (supra) which holds that royalty is in the nature of tax. 2.18 In fact, in a very recent decision rendered by the Hon'ble Supreme Court on 06.09.2023 by a division bench of Hon'ble Mr. Justice Vikram Nath and Hon'ble Mr. Justice Ahsanuddin Amanullah in the case of Union Territory of Ladakh v. Jammu and Kashmir National Conference and Anr. Civil Appeal No. 5707 of 2023 at para 35, it was held by the Hon'ble Supreme Court that courts shall decide matters on the basis of the law as it stands and not wait for the outcome of the review/reference. It is not open for Courts to refuse to follow any decision by stating that it has been doubted by a later co-ordinate Bench. 2.19 As such therefore, it is submitted that the decision of the Hon'ble Supreme Court in the case of India Cements (supra) wherein it is held that royalty is in the nature of tax is good law, and the same is binding on this Hon'ble Tribunal unless it is stayed or set aside. As such therefore, any reliance on the decision of the Kesoram Industries (supra) cannot be countenanced. B. Assuming without admitting that royalty is not in the nature of ....
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.... List I with respect to regulation and development under the control of the State. As such therefore, the grant of mining lease under the ORD Act is squarely a regulatory function of the State Government and cannot be said to germinate any contractual relationship between the Appellant and the State Government. Accordingly, the amount of royalty paid to the State Government is a regulatory fee paid to the State Government. 2.23 It is further submitted that Article 110 and Article 199 of the Constitution of India makes a distinction between fee for services and fee for licenses. This by itself demonstrates that even under the Constitution both the two terms, i.e., fee for license and fee for services, are two distinct concepts. This aspect was brought out by the Hon'ble Supreme Court in Corporation of Calcutta and Anr v. Liberty Cinema AIR 1965 SC 1107. 2.24 Licencing as a concept could be adopted by a State either to raise revenue or to regulate trade. The charges collected could further be regulatory in nature or compensatory in character. As such therefore, fees for licenses cannot ipso fact mean that it is a fee for services. Further, where the charges are regulatory in na....
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....e of Tamil Nadu under the ORD Act is a service of assignment of right to use natural resource. 2.27 From a perusal of the Impugned Order, it is clear that the Ld. Adjudicating Authority has imposed service tax by holding that the grant of mining lease is an assignment of right to use oilfield, which is a taxable service under the Finance Act. Further this aspect of the transaction of assignment of right to use natural resource, appeared to be predicated on the fact that royalty is a consideration for the taxable service of assignment of right to use natural resource. A brief of the various findings of the Ld. Adjudicating Authority qua assignment of right to use natural resource is hereunder: (a) ... it is seen that the natural resources are the properties of the State which can either by utilized by the State for the welfare of the public or the rights over such resources can be assigned to any person for a consideration. [Para 19 of the Impugned Order at Page no. 127 of the Appeal Memo] (b) ... 'The assignment of right to use for exploration and production of crude oil and gas for consideration by the Government of Tamil Nadu is an act of 'service' as per Sec....
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....subject notice.' [Para 25 of the Impugned Order at Page No. 129 of the Appeal Memo]. (e) ... 'Thus, assignment of rights over the properties for a certain amount of consideration in the name or royalty meets the characteristics of a consideration' [Para 27 of the Impugned Order at Page No. 131 and 132 of the Appeal Memo] 2.28 On a bare perusal of the findings hereinabove, it is clear that the Ld. Adjudicating Authority is emphasising on the fact that the 'assignment of right to use' for exploration and production of crude oil and gas for consideration by the Government of Tamil Nadu is an act of 'service'. Accordingly, if the Appellant is able to establish that the present transaction does not involve assignment of right to use natural resources, then the charge of tax will also fail. The grant of mining lease is not assignment of right as understood by law, for the following reasons. 2.29 It is submitted that in law the term 'assignment' is understood as a situation where the assignor parts with the whole property and the assignee stands, for all intents and purposes, in the place of an assignor. It is therefore distinct from a lease wherein one transfers or grants ....
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....DA, along with Rule 29, 32 and 31 of PNG Rules, it is clear that the Government continues to exercise control over the licensee and such control clearly goes to show that the Government has not parted with the whole property and the assignee does not stand, for all intent and purposes in the place of the assignor, such that this transaction can be treated as a transaction of 'assignment'. That apart, the aspect of retaining of reversionary interest by the Government is demonstrated in view of Rule 17 of the PNG Rules in as much as the Appellant is not permitted to assign or transfer the mining lease granted by the State Government. 2.35 Furthermore, the Appellant is never the owner of any oil or natural gas that is extracted from the land allocated to the Appellant. The Government is the owner of any oil or natural gas that is extracted and has the right to regulate the distribution of such oil or natural gas. Moreover, the methodology of pricing, distribution and discounts are determined by the Government and the Appellant has no rights over it. Reliance in this regard is placed upon the decision of the Hon'ble Supreme Court in the case of Reliance Natural Resources Ltd v. Reli....
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....hich is well before the introduction of the levy on 01.04.2016. In other words, the taxable event occurred prior to the introduction of the levy. 2.40 It is trite law that if the taxable event has occurred prior to the introduction of the levy, no service tax can be levied merely because payment was made subsequent to the introduction of the levy. [Refer Petronet LNG Ltd. v Commissioner of Service Tax, New Delhi 2016 (46) STR 513 (Tri-Del) para 36 and Reliance Industries Ltd. v Comm. Of C. Ex and ST, LTU Mumbai 2016 (44) STR 82 (Tri-Mumbai), para 11 and Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 4 SCC 435. As such therefore, in as much as the taxable event of grant of mining lease has occurred on 06.08.2009 which is prior to the introduction of levy, no service tax can be levied on the royalty payments made by the Appellant to the State Government for the period of April 2016 to June 2017. E. The Ld. Adjudicating Authority has sought to create a charge of tax on the basis of a delegated legislation even when the substantive provisions of law do not levy service tax on royalty payments made for assignment of right which has occurred prior to the 01.04.2016. 2.41 It is furt....
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....s. 2.45 It is submitted that taxation of mineral rights is the imminent domain of the State Government and accordingly, no service tax (which is a levy by the Central Government) can be levied on the royalty payments made to the State Government. 2.46 It is submitted that from a bare perusal of the Constitutional scheme, it is evident that the power of the State Government to levy tax on mineral rights emanates from Entry 50 of List II, which has no corresponding entry in List-I. Accordingly, it is only the State Government that has the power to levy taxes on mineral rights and the Central Government is prohibited from entering into this domain. Once a subject matter is within the exclusive competence of the State Legislature, it represents a prohibited field for the Union. 2.47 The Ld. Counsel put forward arguments to set aside the penalties. It is submitted that being interpretational in nature, the appellant cannot be saddled with the guilt of intent to evade payment of service tax. The Ld. Counsel prayed that appeal may be allowed. 3. We have had the advantage of hearing the submissions made by the Ld. Special Counsel, Shri. Dr. S. Subramanian, IRS (Chief Commission....
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....amil Nadu is an act of 'service' as per Section 65B (44) of the Finance Act, 1994 and squarely covered under the phrase 'any service' used in the definition. Further, the right to use of oil fields (natural resources) provided by the Government of Tamil Nadu to M/s.ONGC, Karaikal for exploration and production of crude oil/natural gas on a consideration is not covered under the Negative List of services under Section 66D of the Finance Act, 1994. 3.4 In para 23 of the impugned order, the adjudicating authority has held that even prior to 1.4.2016, the exemption is limited to one time charges (whether paid in full or in instalments) for assignment of right to use such natural resource. In other words, the periodic charges/payments made by the business entities to Government or a local authority have been kept out of the exemption and thus would be taxable. It was further observed that Central Board of Excise and Customs vide Circular No.192/02/2016-ST dated 13.4.2016 has clarified that Service Tax is applicable on the amount of royalty paid or payable to the Government for assignment of rights to use of natural resources. 3.5 As regards the contention of appellant that mining ....
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....ollows: "the collection of royalties and the levy and collection of fees or taxes, in respect of mineral oils mined, quarried, excavated or collected. 3.8 The adjudicating authority has rightly held that if the Act considered Royalty as 'taxes', the word 'royalty' should not have appeared in the said clause, alternatively, it would be merged in the word 'taxes'. Thus, just because the Act under which Royalty is collected has provisions for charging, granting exemption and penalty by way of imprisonment, the Royalty payment cannot be equated to 'Tax' for the aforesaid reasons. Hence, royalty paid by the Appellants is not a 'tax' and it is to be construed as a 'consideration' paid for deriving the benefits from the oil fields allocated by Government by way of lease agreements. 3.9 The Hon'ble Courts in the following cases have held that right to receive royalty is a mineral right and cannot be considered as tax. Bherulal vs. State of Rajasthan & Anr; AIR 1956 Rajasthan 161-162; Dr. S.S. Sharma & Anr. V.State of Pb & Ors., AIR 1969 Pb.79 at 84 Shaurashtra Cement & Chemicals India Ltd vs Union of India & Anr., AIR 1983 Orissa 210 and Hingir Rampur Coal Compan....
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....to cause the likely embarrassment and have adverse effect on the subsequent judicial pronouncements which would follow India Cement Ltd.'s case''. In view of the specific finding by the Hon'ble Supreme Court in the case of Kesoram that royalty is not tax, the contention raised by the appellant is not sustainable. 3.12. In this regard the adjudicating authority in para 31 of the impugned order has discussed in detail the legal position and arrived at a finding stating that the issue of payment of royalty and payment of service tax on such royalty was extensively dealt in the case of Udaipur Chamber of Commerce and Industry vs. UOI reported in 2018 (8) G.S.T.L 170 (Raj) wherein the Hon'ble Court vide paras 20 to 23 held that the royalty paid by them to the State Government in terms of the provisions of Mining act, 1957 is in the nature of 'consideration' and had further held that the Notification 22/2016 dt. 13.4.2016 is not in conflict with the enabling Act, the Finance Act, 1994. The ratio in the case of Udaipur Chamber of Commerce & Industry would be therefore applicable. It is also submitted that by Constitution (Amendment) Act, 2003 a new entry "92 c" was inserted in the List....
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....e time charges, in full upfront or in instalments, for assignment of right to use such natural resources for the period before 1.4.2016. So the one-time charge should be fixed which has to be paid as full upfront or in instalments. In the instant case, the royalty is on a fixed percentage of well head prices. So royalty varies from month to month. Hence the same cannot be equated with one time charges. The department has filed an appeal against the decision of Tribunal in the case of Petonet LNG Ltd., (supra) relied by the appellant. The Hon'ble Supreme Court vacated the stay and also directed that the respondent refund the amount collected. Hence the issue has not reached finality. The case of Reliance Industries Ltd., is also clearly distinguishable as the same dealt the issue of introduction of new levy and when payment of service tax was received after the introduction of the new levy. In the case on hand, royalty is being paid as a percentage of well head prices which varies from time to time. Therefore, it is submitted that the case laws mentioned are not relevant to the issue. 3.16. It is submitted that the adjudicating authority vide para 34 of the impugned Order-in-Orig....
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.... the Government for assigning the rights to use of natural resources is taxable? Answer: The Government provides license to various companies including Public Sector Undertakings for exploration of natural resources like oil, hydrocarbons, iron ore, manganese, etc. For having assigned the rights to use the natural resources, the license companies are required to pay consideration in the form of annual license fee, lease charges, royalty, etc. to the Government. The activity of assignment of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism." 3.19. The aforesaid principle of payment of tax under reverse charge has been adopted under the GST regime in line with the erstwhile service tax regime, wherein vide F.No.334/8/2016-TRU inter-alia in Sl.No.5, the government has clarified that the consideration paid for provision of service by Government or a local authority is subject to Service Tax by a business entity located in the taxable territory. 3.20. The adjudicating authority vide Para 35 of the impugned Orde....
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....rtment filed additional written submissions on 18.9.2023. The written submissions on behalf of appellant was filed on 03.10.2023. 5. The main issue for analysis is whether the demand of service tax on the Royalty paid by appellant to Government is sustainable or not. 5.1. The foremost contention raised by the Ld.Counsel for appellant is that Royalty is in the nature of tax and is not a consideration for services. The issue as to whether royalty is a tax, was considered by the Hon'ble Supreme Court in the case of India Cement Ltd vs. State of Tamil Nadu 1990 AIR 85 (decided on 25.10.1989) and held that royalty is a tax. The said decision is rendered by seven judges bench of the Hon'ble Supreme Court. 5.2. Later, in the case of State of West Bengal vs Kesoram Industries Ltd & Ors. AIR 2005 S.C. 1646 (decided on 15.1.2004) the decision rendered in the case of India Cement Ltd (Supra) was doubted. The Ld. Special Counsel appearing for department has relied on this judgment rendered by five judges bench decision to argue that royalty is not a tax. 5.3. It is brought to our notice that the issue whether royalty by itself is a tax has now been referred to nine judges bench in ....
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....les of High Courts refusing deference to judgements of this Court on the score that a later Coordinate Bench has doubted its correctness. In this regard, we lay down the position in law. We make it absolutely clear that the High Courts will proceed to decide matters on the basis of the law as it stands. It is not open, unless specifically directed by this Court, to await an outcome of a reference or a review petition, as the case may be. It is also not open to a High Court to refuse to follow a judgement by stating that it has been doubted by a later Coordinate Bench. In any case, when faced with conflicting judgements by Benches of equal strength of this Court, it is the earlier one which is to be followed by the High Courts, as held by a 5-Judge Bench in National Insurance Company Limited vs Pranay Sethi, (2017) 16 SCC 680. The High Courts, of course, will do so with careful regard to the facts and circumstances of the case before it." 5.7. Although the reference of the issue as to whether royalty is a tax has been made on 30.3.2011, there has been no outcome yet. By judicial discipline, we, therefore have to follow the decision passed by the seven judges' bench in the case of....
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.... (A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who received any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Explanation 2. - For the purposes of this Chapter, - (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct person. Explanation 3. - A person carrying on a business through a branch or agency or representational office in any territory shall b....
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....mpts certain taxable services from service tax. Later, the Notification no.22/2016-ST dt.13.4.2016, brought forth an amendment in the mega exemption Notification no.25/2012-ST by inserting sl.no.61. 5.11.3. The present SCN proposing to demand service tax has been issued by department pursuant to the introduction of sl.no.61 by Notification no.22/2016-ST dt.13.4.2016. The relevant part of notification reads as under: "6. Invoking powers under sub-section (1) of Section 93 of the Act of 1994 and in supersession of Notification No. 12/2012-S.T., dated 17-3-2012, the Government of India issued and published a Notification No. 25/2012-S.T., dated 20-6-2012 exempting certain taxable services from service tax. By another Notification No. 22/2016-S.T., dated 13-4-2016, the Government of India on being satisfied that it would be necessary in public interest to further amend the notification dated 20-6-2012, brought certain amendments, relevant from that, is as follows: - "Services provided by Government or a local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the 1....
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....vice tax for assignment of right to use natural resources granted before 1.4.2016. So also, if the charges are to be paid as one time, (in full or in instalments) the exemption is applicable. It is the case of department that as the royalty is paid periodically, the exemption is not applicable. 6.2 Section 66D (a) (iv) of the Finance Act, 1994 as amended w.e.f. 13.4.2016 is as under: " (a) Services by Government or a Local authority excluding the following services to the extent they are not covered elsewhere --- (i) services by the Department of Posts by way of Speed post, Express parcel post, Life insurance and Agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a part or an airport (iii) transport of goods or passengers; or (iv) Any service, other than services covered under clauses (i) to (iii) above, provided to business entities." 6.3 From the above, any service provided by government/local authority to business entities; if it does not fall within clauses (i) to (iii) will not be covered by exemption of the negative list. The vie....
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....for the right to extract the crude oil and natural gas. Even if a license fee or regulatory fee, if the fee levied is entirely regulatory in nature and does not involve any element of compensatory nature, such fee cannot be said to fall within the definition of consideration, for service. In the present case, even though the liability to pay royalty is fixed by a statute, the royalty is paid on the basis of the quantity of oil/natural gas extracted. We, then have to say that 'royalty', in the present case, even if in the nature of regulatory fee or license fee contain a part which is compensatory nature. It thus acquires a hybrid nature. When regulatory part of the fee can be kept outside the purview of 'consideration', the compensatory part of the fee would have an element of quid pro quo, so as to fall within the purview of 'consideration' for service. The question then is how to carve out the element of compensatory part from the royalty paid. The Finance Act, 1994 does not provide for a mechanism to levy service tax on an amount which has the characters of both regulatory fee, as well as compensatory fee. 6.6 Let us proceed to examine whether the dominant part is regulatory ....
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....: The licensee or the lessee shall not assign or transfer his right, title and interest, in respect of the license or the lessee or in respect of the land or mineral underlying the ocean within the territorial waters or the continental shelf of India covered by such license or lease granted by the Central Government, without the consent in writing of the Central Government and in the case of land covered by a license or lease granted by the State Government, without the consent in writing of the Central Government being first obtained through the State Government. 32-A. Penalties: (1) If the holder of a Petroleum Exploration License or Mining Lease or his transferee or assignee falls, without sufficient cause, to furnish the information or returns or acts in any manner in contravention of sub-rule (2) of rule 14, rule 19 and rule 24, or to allow any authorised person as provided in Rule 32 to enter into and inspect any oil well or gas well or any drilled hole or information well in the process of drilling, he shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to one thousand rupees or with both. (....
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....d conditions mentioned in the Annexures 1 & 11 of this order." 8. The document is in the nature of 'Lease' and not 'assignment of right to use'. Further, Rule 17 prohibits transfer of assignment. The said Rule would bring out that the underlying nature of the document issued by the Government to appellant is 'lease' and not 'assignment'. A right created under a lease agreement is different from an 'assignment' of right to use'. Sl.No.61 of the Mega Exemption notification uses the words 'assignment of right to use'. It appears that the SCN and the impugned order has attempted to fit in the impugned activity into sl.no.61 of Mega exemption, as introduced by the amendment notification no.22/2016-ST dt.13.4.2016. This transition of the document from 'lease' to 'assignment' acquires significance for the reason that, if the document is to be construed as lease, the activity is likely to fall under 'Renting of Immovable Property Services.' In the case of renting of immovable property services, the liability to pay service tax is on forward charges basis, even if the services are provided by government to business entities. The document explicitly is a grant of mining lease. We find no ....