2025 (6) TMI 1879 - AT - Service Tax

Classification of service - Renting of Immovable Property or not - grant of mining rights by Government - taxability of Government service as per Section 66D (a) of the Negative List - time limitation - HELD THAT - Reference made to the decision of the Nine Judge Bench of the Apex Court in Mineral Area Development Authority versus Steel Authority of India 2024 (7) TMI 1390 - SUPREME COURT (LB) . The issue related to the true nature of royalty determined under the provisions of the MMDR Act and it was observed that royalty is a consideration paid by mining lessee to the lesser for enjoyment of mineral rights and to compensate for the loss of value of minerals suffered by the owner of the minerals. Further the liability to pay royalty arises out of the contractual conditions of the mining lease. Through the mining lease the government parts with its exclusive privilege over mineral rights. A consideration paid under a contract to the State Government for acquiring exclusive privileges cannot be termed as an impost and therefore held that both royalty and dead rent do not fulfil the characteristics of tax or impost. The issue of limitation has also been decided by the Principal Bench in favour of the appellant that the assessee being the Department of State of Rajasthan the allegation that they have wilfully and deliberately suppressed the facts is without any basis. Moreover the clarification issued by the Board that grant of mining rights is not Support Service and, therefore the demand raised by invoking the extended period cannot sustain. In the present case the entire demand is for the extended period which in view of the observations made by the Principal Bench needs to be set aside. Conclusion - The impugned order being contrary to the decision of the Principal Bench and also not in consonance with the clarification issued by the CBEC which has been followed by the other Commissionerates the same needs to be set aside. Appeal allowed.

The core legal questions considered by the Tribunal were:

1. Whether the grant of mining rights by the Government under the statutory regime constitutes a taxable service under the category of "Renting of Immovable Property Service" as defined under Section 65B(41) and declared under Section 66E of the Finance Act, 1994.

2. Whether the service of granting mining leases falls within the definition of "Support Service" as per Section 66D(a) read with Section 65B(49) and thus liable to service tax under the forward charge mechanism.

3. The applicability of the Negative List provisions under Section 66D(a) to Government services involving grant of mining rights, especially in light of the amendments post 01.04.2016.

4. The correctness of the Revenue's demand for service tax, interest, and penalty on royalty and dead rent collected by the Government Department for the period 01.04.2013 to 31.03.2016.

5. The issue of limitation and whether the extended period demand raised by the Revenue is sustainable.

Issue-wise Detailed Analysis:

1. Classification of Grant of Mining Rights as "Renting of Immovable Property Service" and Taxability under Service Tax Law

The relevant legal framework includes Section 65B(41) defining "Renting of Immovable Property Service" and Section 66E declaring it a taxable service under the Finance Act, 1994. The service tax liability depends on whether the grant of mining rights by the Government can be classified as renting of immovable property.

The Tribunal relied heavily on the decision of the Principal Bench of the Tribunal in a batch of appeals including the present issue, where it was held that the grant of mining rights under the Mines and Minerals (Development and Regulation) Act, 1957 and the Rajasthan Minor Mineral Concession Rules, 1986 is an exercise of sovereign rights by the State and not a commercial renting activity. The lease agreements and charges (royalty and dead rent) are statutorily prescribed, with no scope for negotiation by either party. The Board's Circular dated 20.06.2012 ("Taxation of Service: An Education Guide") clarifies that such grants do not constitute "Support Services" and are not taxable.

The Court noted that royalty and dead rent are statutory considerations paid for the exclusive privilege to mine minerals, which are State-owned, and thus the service is not akin to ordinary renting of immovable property for commercial purposes. This distinction was pivotal in the Court's reasoning.

The Revenue's contrary view that such grants are taxable as renting of immovable property was rejected on the basis that the activity is not a mere renting service but a sovereign function.

2. Whether Grant of Mining Rights Falls Within "Support Services" and Impact of Amendments Post 01.04.2016

Section 66D(a) initially included "Support Services" in the Negative List, which exempted certain Government services from tax. The definition of "support service" under Section 65B(49) was analyzed in detail. The definition consists of three parts: the "means part" listing specific services, a "middle part" describing the class of services that can be outsourced by entities, and an "includes part" listing further services such as renting of immovable property.

The Tribunal interpreted the definition to mean that "support services" are those services which business entities ordinarily perform themselves but may outsource. Renting of immovable property as a support service would apply only to services that fit this category, such as renting vacant land or buildings for commercial purposes. However, the grant of mining rights is an exclusive sovereign function that cannot be performed by private entities and thus does not fall within the ambit of "support services."

Further, the amendment in Section 66D(a) effective 01.04.2016 removed the words "support services" and replaced them with "any service," and the liability to pay service tax was shifted to the service recipient under the Reverse Charge Mechanism. However, the Service Tax Rules and Notifications continued to treat "Renting of Immovable Property" under the forward charge mechanism. This inconsistency was highlighted by the appellant's counsel to demonstrate the untenability of the Revenue's demand on a reverse charge basis post-2016 while claiming forward charge liability pre-2016.

The Tribunal accepted the appellant's argument that since there was no change in law regarding liability to pay service tax on renting of immovable property, the Revenue could not demand tax on forward charge basis for the pre-2016 period and on reverse charge basis for the post-2016 period on the same service. This supported the conclusion that mining leases do not constitute "support services."

3. Applicability of Negative List and Board's Clarifications

The Tribunal emphasized the binding nature of the Board's Circular dated 20.06.2012, which clarifies that grant of mining rights is not a "support service" and thus exempt under the Negative List till 31.03.2016. The Revenue's reliance on the Rajasthan High Court decision in Udaipur Chambers of Commerce and Industry was distinguished since that case dealt with demands raised post-2016 under the Reverse Charge Mechanism and did not consider the "support services" definition or the Board's Circular.

The Tribunal also noted that the Supreme Court had stayed recovery of service tax on such demands post-2016, further weakening the Revenue's position.

4. Nature of Royalty and Dead Rent as Consideration

The Tribunal referred to the recent Nine Judge Bench decision of the Apex Court in Mineral Area Development Authority versus Steel Authority of India (2024), which clarified that royalty is a consideration paid for enjoyment of mineral rights and compensation for loss of mineral value. It is contractual and not a tax or impost. This supports the view that royalty and dead rent payments are not taxable service consideration but statutory dues for sovereign privileges.

5. Issue of Limitation and Extended Period Demand

The Tribunal upheld the Principal Bench's finding that the appellant, being a Government Department, did not wilfully suppress facts and thus the extended period demand is not sustainable. The Board's clarifications and settled legal position preclude invoking extended period provisions for the demand raised.

6. Treatment of Conflicting Authorities and Precedents

The Tribunal followed the Principal Bench's decision, which had settled the issue in favor of the appellant, and noted that the Revenue had not challenged that decision. The consistency of the Principal Bench's ruling with the Board's Circular and the Apex Court's recent pronouncements was highlighted. The Revenue's reliance on the High Court decision was distinguished on facts and law, and the Supreme Court's stay order was noted.

Conclusions

The Tribunal concluded that the impugned order imposing service tax, interest, and penalty on royalty and dead rent collected for grant of mining leases under the category of "Renting of Immovable Property Service" is unsustainable. The grant of mining rights is an exercise of sovereign authority and does not constitute a taxable "support service." The demand raised under the extended period is barred by limitation. The Revenue's inconsistent approach in applying forward and reverse charge mechanisms is untenable. The impugned order is set aside, and the appeal is allowed.

Significant Holdings:

"The act of entering into a lease agreement for grant of mining rights arises out of statute, namely, Mines and Minerals (Regulation and Development) Act, 1957 as well as the Rajasthan Minor Minerals Concession Rules, 1986. No amount other than the charges specified in the Acts/Rules can be collected. The conditions that can be incorporated in the agreement are also prescribed by giving a Modal Agreement. The assessee who is the service provider thus has no say in the terms and the conditions of the agreement or on the charges that may be collected from the lessee. For that matter, the lessee who is the service recipient also has no say as to the terms or the consideration that has to be paid. Everything flows from the statute. The clarification issued by the Board under the new Tax regime w.e.f. 01.07.2012 explaining the application of definition of "support services" lays down that services provided by Government in the nature of grant of mining rights or licensing rights does not fall within the meaning of "support services" and is not taxable service. The circular / clarification / instructions issued by the Board are binding on the Revenue."

"The activity of lease of land solely for mining purposes is in the nature of exercise of sovereign right and is not a service that entities can carry out by themselves. The service of renting of immovable property would fall within the definition of "support service" only if such services fit into the middle part of the definition."

"The intention to omit the word 'support services' and substitute the word 'any service' wherein the liability is always cast upon the service recipient is to sort out the confusion created by the definition of 'support service' and to retain the sanctity of negative list which comprises of services rendered for the public by Government and local authority."

"Royalty is a consideration paid by mining lessee to the lesser for enjoyment of mineral rights and to compensate for the loss of value of minerals, suffered by the owner of the minerals. Further, the liability to pay royalty arises out of the contractual conditions of the mining lease. Through the mining lease, the government parts with its exclusive privilege over mineral rights. A consideration paid under a contract to the State Government for acquiring exclusive privileges cannot be termed as an impost and therefore held that both royalty and dead rent do not fulfil the characteristics of tax or impost."

"The impugned order being contrary to the decision of the Principal Bench and also not in consonance with the clarification issued by the CBEC which has been followed by the other Commissionerates, the same needs to be set aside."

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