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2024 (1) TMI 640 - AT - Service TaxLevy of service tax - Royalty paid by appellant to Government - Demand under reverse charge mechanism Correctness of decision of the Hon’ble Supreme Court in the case of India Cements [1989 (10) TMI 53 - SUPREME COURT] wherein it was held that royalty is a tax was delivered by a seven member bench, whereas, Kesoram Industries judgement [2004 (1) TMI 71 - SUPREME COURT] was given by a five member bench and that the judgement of seven member bench is to be followed by five member bench. The five member bench of the Hon’ble Supreme Court in the case of State of West Bengal vs. Kesoram Industries Limited and Others, has clearly held that there was an error in the judgement which is attributable either to a stenographer’s devil or to sheer inadvertence. Whether Royalty is in the nature of tax and is not a consideration for services? - HELD THAT:- 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 [1989 (10) TMI 53 - SUPREME COURT] and held that royalty is a tax. The said decision is rendered by seven judges bench of the Hon’ble Supreme Court. Later, in the case of State of West Bengal vs Kesoram Industries Ltd & Ors. (decided on 15.1.2004) [2004 (1) TMI 71 - SUPREME COURT] the decision rendered in the case of India Cement Ltd 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 - 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 the case of Mineral Area Development [2011 (3) TMI 1554 - SUPREME COURT]. In a recent decision, the Hon’ble Apex Court in the case of RAJNISH KUMAR RAI VERSUS UNION OF INDIA & ORS. [2023 (9) TMI 1421 - SUPREME COURT], held that judicial proprietary does not allow to ignore the decision laid by the Court even though referred to larger bench. The ‘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. Whether the dominant part is regulatory or compensatory in nature? - HELD THAT:- The amount of Royalty to be paid is determined on the basis of the well head prices. The royalty to be paid differs periodically. In order to collect royalty, a method is provided by the Act. The payment on the basis of well head prices is a measure for collection of the royalty. The provisions contained in the ORD Act, 1948 read with P & NG Rules, 1959 enables us to draw a strong inference that royalty is more of a regulatory fee than compensatory. The amount of royalty to be paid though differs periodically, in our view the payment of royalty is a regulation of checking the over exploitation of the resources of our mother earth. Being dominantly in the nature of regulatory fee, royalty does not fit into the definition of consideration for services provided, as under the service tax law. 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’ - there are no reason to hold that it is an assignment of right to use of oil/natural gas. The activity impugned in the SCN is the ‘assignment of right to use’ which is not so as per the document issued by Government of Tamil Nadu to the appellant. The department does not have a case, that the activity falls within lease and that the royalty paid is rent. This is because, if so, the liability to discharge service tax would be on the government (being the service provider). The demand raised is indeed on the basis of Sl.No.61 of the exemption notification. Para 15 of the SCN also would show that the demand has been raised on the basis that the royalty which is paid periodically is not exempted from service tax. The argument put forward by the Ld. Counsel that the liability is derived on the basis of an exemption notification and not charging provision is not without substance. The demand of service tax cannot sustain and requires to be set aside - Appeal allowed.
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