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TMI Blog2025 (1) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by M/s Prism Johnson Ltd. [PJL] to assail the demand of service tax of Rs.11,25,04,719/- with interest and penalties under Sections 77 and 78 (1) of the Finance Act, 1994 [The Finance Act]. 3. Service Tax Appeal No. 51737 of 2021 is filed on him under Section 78A of the Finance Act. 4. Service Tax Appeal No. 51738 of 2021 is filed by Shri Ashish Hinger [Ashish] Function Head Finance to assail penalty of Rs. 1,00,000/- imposed on him under Section 78A of the Finance Act. 5. Service Tax Appeal No. 51739 of 2021 is filed by Shrawan Kumar Pathak [Shrawan] the mine owner, to assail penalties of Rs. 10,000/- under Section 77(1)(c) and Rs.10,000/- under Section 77(2) of the Finance Act [The Finance Act The Finance Act. 6. Service Tax Appeal No. 51740 of 2021 is filed by Manish Bhatia [Manish] Chief Finance Officer of PJL to assail penalty of Rs. 1,00,000/- imposed on him under Section 78A of the Finance Act. 7. Excise Appeal No. 51730 of 2021 is filed by PJL to assail the denial of CENVAT credit of Rs. 7,70,01,957/- and order for its recovery along with interest under Rule 14 of CENVAT Credit Rules, 2004[CCR] and imposition of an equal amount as penalty under Rule 15(2) of CC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount that he has already taken or proposes to take as consideration from the transferee. (b) the transfer of the mining lease is to be made to a person or body directly undertaking mining operations. (2) Without prejudice to the above provisions, the lessee / lessees may, subject to the conditions specified in the proviso to Rule 35 of said Rules transfer this lease or any right, title or interest therein to a person holding a certificate of approval and an income tax clearance certificate from the Income tax officer concerned on payment of a fee of rupees one hundred to the State Government. Provided that the lessee / lessees shall make available to the transferee the original or certified copies of all plans of abandoned working in the area and in a belt 65 metres wide & surrounding it. (Provided further that where the mortgage is an institution or a Bank or a cooperation specified in schedule V it shall not be necessary for any such a Institution or Bank or Co-operation to hold the said Certificate of Approval and the said income-lax clearance certificate.) (3) The State Government, may by order in writing determine the lease at any time if the lessee / lessees has / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices rendered by ART were not 'input services' as per Rule 2(l) of CCR for manufacture of cement and therefore, it is liable to be recovered under Rule14 of CCR read with Section 11A of the Excise Act. 20. In the impugned order, the Commissioner decided as follows: (i) PJL (Noticee No. 1 in SCN) undertook the mining operations for and on behalf of Shrawan (Noticee No. 5) at Ramasthan Mines and not for itself. (ii) PJL gave an amount of Rs. 6 crores to Shrawan merely as an advance against the assured future sale of limestone after its extraction. There was no sale of the entire limestone of the mine by Shrawan to PJL. It was purchased by issuing purchase orders periodically to Shrawan over 10 years who, in turn, issued bills or invoices for the limestone charging VAT thereon and the said sale took place after its delivery at the crushing side of PJL being a sale on FOR basis. (iii) PJL rendered taxable services of mining of limestone to Shrawan but had not paid appropriate service tax as per the Finance Act. (iv) Shrawan had not transferred his mining rights to PJL. In fact, two commercial transactions are involved in the case -one in which the PJL rendered minin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, no invoice was also raised by PJL; (v) Extended period of limitation was not correctly invoked because PJL was registered with the Central excise department for manufacture of cement was audited several times; (vi) In view of above the demand of service tax and interest and penalty cannot sustained; (vii) Consequently, the personal penalty imposed on Ashish, Manish and Pradeep also need to be set aside. Submissions on behalf of the Revenue 22. Learned special counsel for the department vehemently supported the impugned order and asserted as follows: (i) The uncontroverted facts of the case are that Shrawan was the mining lease holder of the mines and had mining and ownership right on the limestone excavated from it; (ii) PJL entered into agreement with Shrawan where PJL was required to undertake all activities related to excavation of limestone;(iii) Under another agreement Shrawan sold the entire limestone to PJL. This agreement also provided that PJL shall pay to Shrawan, the cost of limestone after deducting the expenses towards mining it; (iv) As per the third agreement known as commercial agreement as per which Rs. 6 crores shall be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd two others who acted as agents and PJL whereby the agents agreed to facilitate purchase of the land from owners of land by PJL.PJL got the limestone mined using the services of ART and used the limestone to manufacture cement. Therefore, according to the appellants, PJL had not rendered any services to Shrawan but it had rendered the services to itself because it was the captive mine of PJL and therefore, no service tax is payable. 26. The question, therefore, is whether PJL had mined the limestone for itself or it had rendered mining services to Shrawan. To answer this, we must first look at relevant legal provisions. As per article 246, Parliament can make laws with respect to Union List and the State can make laws with respect to State List. Regulation of Mines and Mineral development, to the extent to which such regulation and development, under the control of the Union is declared by Parliament by law to be in public interest, is included in Entry 54 of List I (Union List) of the Seventh Schedule. Regulation of mines and mineral development, subject to the provisions of List I (Union List), is included in Entry 23 of List II (State List) of the Seventh Schedule. 27. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the terms and conditions of a reconnaissance permit or of a prospecting licence or of a exploration licence or, as the case may be, of a mining lease, granted under this Act and the rules made thereunder: ******" 31. Sections 5 to 13 provide for various regulations and restrictions on mines and minerals. Section 14 takes quarry leases, mining leases or other mineral concessions in respect of minor minerals out of the ambit of sections 5 to 13. Section 15 places quarry leases, mining leased and other mineral concessions in respect of minor minerals squarely within the control of the State Government. 32. Sections 14 &15 read as follows: "14. Sections 5 to 13 not to apply to minor minerals.―The provisions of sections 5 to 13 (inclusive) shall not apply to quarry leases, mining leases or other mineral concessions in respect of minor minerals. 15. Power of State Governments to make rules in respect of minor minerals.―(1) The State Government may, by notification in the Official Gazette, make rules for, regulating the grant of quarryleases, mining leases or other mineral concessions in respect of minor minerals and for purposes connected therewith. *****" 33. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to company in the agreement). It reads as follows: "II B. APPOINTMENT AS OPERATOR LESSEE hereby appoint the Company, and declare that simultaneously upon execution of this Agreement, the Company shall be and become, the sole and exclusive operating and raising contractor for the Mining Area to exclusively carry out, inter-alia, mining operations in the Mining Area and to excavate / extract and / or remove Lime Stone from the Mining Area for and on behalf of LESSEE, for the entire balance lease period or period of ML Agreement including renewal thereof, whichever is higher or during such extended period thereafter as may be mutually agreed between the parties. The appointment shall be effective on and / or from the date of execution of this Agreement, without any further act, deed or documentation by and between the Company and LESSEE or any other person. The key terms and conditions forming the binding obligations of the Parties hereto, pertaining to the said operation and excavation arrangement are set out in ATTACHMENT 3 hereto which shall form an integral part and parcel of this Agreement. 38. Learned counsel for the appellant has also confirmed during hearing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of PJL issuing purchase orders and paying against individual invoices does not arise because it would have been the property of PJL and there would have been no occasion for Shrawan to sell it to PJL. We find, as a matter of fact, based on the documents available, that purchase orders were placed and invoices were issued for sale of limestone on FOR destination basis, the destination being the crushing plant of PJL. Therefore, the amount paid in advance under the Agreement can only be treated as an advance. 42. We have perused the invoices under which the limestone was sold to PJL which clearly show a far lower price than the market price, as discussed in the impugned order. The reason for this is evident. Had Shrawan mined the limestone and sold it to PJL, it would have had to incur costs of mining and it would have charged market price for the limestone. Had Shrawan paid PJL for its mining services also, it would have charged market price for the limestone. Instead of paying PJL for its services and charging market price for the limestone sold to PJL, Shrawan charged a far less than market price for the limestone. Thus, PJL received consideration for its services from S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with interest and penalties need to be sustained. 49. Pradeep was the Manager Accounts of PJL at the relevant time and hence was a key operator of the appellant firm and in the impugned order penalty has been imposed on him under Section 78A of the Finance Act. Section 78A is as follows: "SECTION 78A.Penalty for offences by director, etc., of company - Where a company has committed any of the following contraventions, namely :- (a) evasion of service tax; or (b) issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the Rules made under the provisions of this Chapter; or (c) availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the Rules made under the provisions of this Chapter; or (d) failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due, then any director, manager, secretary or other officer of such company, who at the time of such contravention was in charge of, and was responsible to, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id by ART on the invoices for services which it had rendered to PJL. The final product manufactured and cleared by PJL is Cement. It is the case of the Revenue that the services rendered by ART do not qualify as 'input services' for manufacture of cement. Therefore, such 'wrongly availed CENVAT credit' was denied and ordered to be recovered in the impugned order along with interest and penalties. Rule 2(l) of CCR, as it is stood during the relevant period, reads as follows: "(l) ―input service means any service, - (i) used by a provider of output service for providing an output service; or (ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor of PJL and provided services to PJL as such. This chain of services from ART to PJL and PJL to Shrawan comes to an end at with Shrawan who held the lease of mining and did not render any service to anybody else. Using the services of PJL (rendered through its sub-contractor ART), Shrawan raised limestone and sold it. The undisputed legal position is that limestone was not excisable and no duty was payable on it. Since no excise duty was payable, Shrawan could not take any CENVAT credit of any excise duty paid on inputs or service tax paid on input services. Such duties and service tax would be a cost to Shrawan. 60. Similarly, when Shrawan sold limestone to PJL, no duty was payable on it and PJL could not any CENVAT credit on it. The cement manufactured by PJL is an excisable product and PJL is entitled to take CENVAT credit of inputs and input services used in or in relation to manufacture of cement. The services rendered by ART to PJL were in relation to the services which PJL had rendered to Shrawan and the exempted goods limestone produced by Shrawan. The services rendered by ART clearly had no correlation to the manufacture of cement. Therefore, the finding in the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he excise part of the impugned order is concerned, PJL was registered with and it had been filing ER 1 returns and therefore, we find no ground to invoke extended period of limitation. Therefore, denial of CENVAT credit and order of its recovery under Rule 14 of CCR can only be confined to the normal period of limitation. The demand for extended period of limitation needs to be set aside. 65. Penalty under Section 11AC read with Rule 15 of CCR was also imposed in the impugned order for the same reason, i.e., PJL had not disclosed the details of services on which it had availed CENVAT credit in its ER-1 returns. The legal requirement to impose penalty under section 11ACof Excise Act is the same as the requirement to invoke extended period of limitation, i.e., the wrong availment of CENVAT credit is because of fraud or collusion or willful mis-statement or suppression of facts or violation of Act or Rules with intent to evade payment of duty. Since we have found that extended period of limitation was wrongly invoked, we also set aside the penalty imposed under Section 11AC of the Excise Act read with Rule 15 of CCR. 66. Pradeep, Manish and Ashish have assailed the penalties imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p, Manish and Ashish be accused of abetting issue of such an invoice. Clearly, the penalties imposed on them under Rule 26(2)(ii) of Excise Rules cannot be sustained and need to be set aside. 68. To sum up: a) Shrawan was and continued to be the lease holder of Ramasthan mines and this lease was neither consented to be transferred by the Government of MP, nor was it actually transferred to PJL. b) Under the Operator Agreement, PJL provided mining services to Shrawan. c) Instead of paying PJL for its services in cash, Shrawan paid for it by selling the limestone at a far below the market prices. d) The sale of the limestone for each consignment took place when PJL issued purchase orders and Shrawan supplied the limestone at the crushing site of the PJL. e) The amount paid in advance by PJL to Shrawan was only an advance and the purchase orders and invoices were issued later from time to time. f) PJL neither paid service tax on the services which it had rendered to Shrawan nor filed any return nor had it taken registration under service tax. It thus, suppressed these facts with an intent to evade paying service tax. g) Therefore, the demand of service tax , intere ..... 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