The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that the disposal of mining overburden by an entity authorised by a mining lease holder constitutes a taxable service rather than a sale of goods where the alleged sale invoices do not contain any sale price or consideration. The royalty paid to the Government of Rajasthan for removal of overburden was liable to service tax.
The Bench of Binu Tamta (Judicial Member) and P. V. Subba Rao (Technical Member) upheld service tax demands concerning royalty and permit fees paid to the Rajasthan Government for lifting overburden, as well as amounts received from the disposal and subsequent sale of the overburden.
The appellant/assessee was engaged in providing cargo handling services and supply of taxable goods and services. During an audit, the Department noticed that the company was paying royalty to the Government in connection with the use of natural resources. It also noticed income of ₹3,28,25,525 during 2015–16 from boulder sales pursuant to an agreement dated December 19, 2014 with Jindal Saw Ltd. (JSL).
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The overburden had accumulated in the mining lease area of JSL. Under the mining arrangements, JSL was responsible for removal of the overburden generated during mining operations. JSL, however, authorised the assessee to undertake its disposal and to obtain the necessary Short Term Permit (STP) from the Mining Department. The royalty associated with disposal of the overburden was also to be borne by assessee.
The Department took the view that the activity was not an independent sale of boulders but a service undertaken by assessee for JSL. Service tax demands were consequently raised for the relevant periods through show cause notices dated November 30, 2018 and October 23, 2019. The adjudicating authorities confirmed the demands, and the Commissioner (Appeals) rejected the company’s challenges.
The central question before CESTAT was whether the removal and disposal of overburden constituted a sale by Jindal Saw Ltd. to assessee or amounted to the rendering of a taxable service by assessee to JSL under Section 66E(e) of the Finance Act, 1994.
assessee argued that it was purchasing boulders from JSL and subsequently selling them to its customers. It relied on invoices issued by JSL and contended that the removal of the overburden took place after the invoices had been issued.
The company also argued that the absence of any payment by JSL did not necessarily mean that there was no sale, describing the arrangement as a commercial transaction between the parties. On the separate issue of royalty and permit fees, it contended that the relevant government service was received before April 1, 2016, when the applicable service tax provisions relating to government services were different.
The Tribunal rejected the company’s characterization of the transaction as a sale.
A significant factor was that the invoices relied upon by assessee did not contain any sale price. According to the Tribunal, the columns relating to “rate” and “value” were blank, and the company itself had admitted in its submissions that the invoices were NIL-rated and that the overburden was provided free of cost.
The Bench observed that a transaction cannot ordinarily be treated as a sale where there is no price or consideration for the alleged transfer. It referred to the ordinary meaning of “sale” and concluded that the transaction between JSL and assessee could not be regarded as a genuine sale merely because invoices had been issued.
The Tribunal went further and held that the invoices were effectively being used to disguise the underlying service arrangement. It observed that, under the mining laws, the responsibility for removing overburden rested with JSL as the mining lease holder. If JSL had directly hired assessee to perform that activity, service charges would ordinarily have been payable.
An important aspect of the ruling concerns the source of consideration for the service.
The assessee argued that it had not received any payment from JSL for removing the overburden. The Tribunal, however, examined the commercial substance of the arrangement and noted that the assessee subsequently sold the material to its own customers for consideration.
Applying what it described as the principle of “lifting the veil” to determine the true nature of the transaction, the Bench held that the amounts received by assessee from its customers represented consideration for the service rendered to JSL for disposal of the overburden.
Thus, although the immediate payment flowed from the customers to assessee, the Tribunal treated that amount as the consideration attributable to the overburden-disposal service provided to JSL.
The Tribunal consequently held that the amount charged by assessee from its customers formed part of the gross amount for valuation of the taxable service under Section 67 of the Finance Act, 1994.
The appellant also relied upon the definition of “service” under Section 65B(44), which required an activity to be carried out by one person for another for consideration.
The Tribunal accepted that, ordinarily, three elements were required: an activity, the activity being carried out by one person for another, and consideration for that activity. However, it rejected the argument that there was genuinely no consideration in the present case.
The Bench found it commercially incongruous that JSL would transfer the overburden free of cost while assessee would undertake its removal and disposal and then independently realise sale proceeds from customers.
According to the Tribunal, the actual commercial arrangement had to be examined rather than merely the form of the invoices. The customer payments were therefore treated as the consideration attributable to the service provided to JSL.
The assessee had relied upon a previous CESTAT decision concerning disposal of fly ash, where consideration received for fly ash was treated as consideration for sale rather than for provision of services.
The Bench declined to apply that line of reasoning to the present dispute. It noted that the fly ash cases arose in a different statutory and factual setting, including government notifications governing the supply and subsequent sale of fly ash.
The Tribunal also relied upon its earlier decision in Prism Johnson Ltd., where the issue was whether mining activity undertaken pursuant to an agreement constituted mining services for the licence holder. In that case, the Tribunal had concluded that the operator was functioning as a service provider. CESTAT held that the reasoning was applicable to the present dispute and supported the conclusion that assessee had provided services to JSL.
The second major issue concerned service tax on royalty and permit fees paid to the Government of Rajasthan for removal of overburden.
The Tribunal considered the Supreme Court’s nine-Judge Constitution Bench ruling in Mineral Area Development Authority v. Steel Authority of India, as referred to in the order. CESTAT noted the Supreme Court’s conclusion that royalty paid in respect of mining constitutes contractual consideration paid by a mining lessee to the lessor for enjoyment of mineral rights and is not itself a tax.
The Tribunal therefore found no merit in an argument that service tax would result in impermissible double taxation merely because royalty had already been paid.
The assessee had further argued that the service tax liability could not arise because the relevant government service was connected with arrangements entered into before April 1, 2016.
The Tribunal examined Section 66D and the exemption framework under Notification No. 25/2012-ST dated June 20, 2012, as subsequently amended by Notification No. 22/2016-ST dated April 13, 2016.
The Bench noted that the exemption relating to assignment of rights to use natural resources was confined to one-time charges, whether paid upfront or in instalments, where the right to use the natural resource had been assigned before April 1, 2016.
The royalty in the present case, however, was payable on a per-metric-ton basis for removal of overburden. The adjudicating authority had therefore concluded that the periodic royalty payments did not fall within the exemption.
CESTAT agreed with that interpretation and held that the grant of permission for removal of overburden constituted a service that was neither covered by the negative list nor exempt under the relevant notification.
The Tribunal also rejected the appellant’s challenge to invocation of the extended period of limitation.
The appellant had argued that the dispute involved interpretation of service tax law and that it had acted under a bona fide belief that the receipts from sale of the material did not represent consideration for any service.
The department contended that the relevant facts had come to light only during audit and that the appellant had not correctly disclosed the transactions in its ST-3 returns.
CESTAT held that the appellant had suppressed the true nature of its relationship and transaction with JSL. It specifically characterised the invoices relied upon by the appellant as a camouflage and concluded that the ingredients required for invoking the extended period under the proviso to Section 73(1) were satisfied.
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