The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld a service tax demand of ₹2.50 lakh, along with interest and penalties, against a mining lease holder, ruling that royalty paid to the State Government for the grant of mining rights is liable to service tax under the Reverse Charge Mechanism (RCM) for the post-1 April 2016 period.
The bench of Sanjiv Srivastava (Technical Member) observed that the benefit of the Small Service Provider (SSP) exemption under Notification No. 33/2012-ST is not available where the tax liability arises under reverse charge.
The appellant, an individual engaged in sand and stone mining in Uttar Pradesh, had obtained a mining lease from the State Government and paid royalty for the extraction of minerals. During an investigation, the department found that the appellant had paid royalty of ₹16.67 lakh during FY 2016-17 but had neither obtained service tax registration nor discharged service tax under the reverse charge mechanism on the royalty payments. The department consequently issued a show cause notice demanding service tax of ₹2,50,080, together with interest and penalties for failure to register, file returns, and pay tax.
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Although the matter had earlier been remanded for fresh adjudication by the Commissioner (Appeals), the demand was again confirmed, leading to the present appeal before the Tribunal.
The appellant contended that royalty is a statutory levy and not consideration for any service. It was argued that there is no service provider–service recipient relationship between the State Government and the mining lessee, making the levy of service tax unsustainable.
The appellant further submitted that the grant of mining leases is a sovereign function of the State. Royalty cannot be subjected to service tax merely because it is paid to the Government. The demand was barred by limitation since there was no suppression of facts. The appellant was entitled to the threshold exemption available under Notification No. 33/2012-ST. The adjudicating authorities had passed the orders mechanically without properly considering the submissions.
Rejecting these contentions, CESTAT relied heavily on the nine-judge Constitution Bench decision of the Supreme Court in Mineral Area Development Authority v. Steel Authority of India, wherein the Court held that royalty is not a tax but contractual consideration payable by the mining lessee to the lessor for enjoyment of mineral rights.
The Tribunal observed that after 1 April 2016, amendments to the service tax regime brought services provided by the Government to business entities within the tax net, making assignment of the right to use natural resources a taxable service.
It further noted that CBIC Circular No. 192/02/2016-ST clearly clarifies that any activity undertaken by the Government against consideration constitutes a taxable service, irrespective of whether such activity is statutory in nature or the payment is described as royalty, licence fee, or otherwise.
The Tribunal held that Notification No. 30/2012-ST, as amended, specifically casts the obligation to pay service tax on the recipient under the Reverse Charge Mechanism where services are provided by the Government.
Accordingly, the mining lessee, being the recipient of the right to use natural resources, was liable to discharge service tax on the royalty paid to the State Government. Since the dispute related to the period after 1 April 2016, earlier decisions concerning the pre-amendment period were held to be inapplicable.
The appellant also sought the benefit of the Small Service Provider exemption under Notification No. 33/2012-ST on the ground that the taxable value was below the prescribed threshold.
The Tribunal rejected this argument, observing that the exemption applies only to taxable services provided by a service provider and not to liabilities discharged under the reverse charge mechanism. It further noted that the notification itself expressly excludes services where tax is payable under Section 68(2) of the Finance Act, 1994. Therefore, the appellant could not claim the exemption even if the turnover was below the threshold limit.
On the issue of limitation, the Tribunal held that the appellant had failed to obtain registration, pay service tax, or file statutory ST-3 returns despite clear legal provisions and CBIC’s contemporaneous clarification issued in April 2016.
The Tribunal observed that these were not merely procedural lapses but amounted to deliberate suppression of facts with the intention to evade payment of service tax. Consequently, invocation of the extended period under Section 73 of the Finance Act, 1994 was held to be valid.
As the extended period was rightly invoked, the Tribunal also upheld the penalty under Section 78 for suppression of facts, along with penalties under Sections 77(1) and 77(2) for failure to obtain registration and file returns.
In an unusual observation, the Tribunal noted that one of the judicial precedents cited by the appellant could not be traced and referred to the Supreme Court’s recent decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., which cautioned against citing AI-generated or hallucinated judicial precedents without verification. The Tribunal reproduced the Supreme Court’s warning that reliance on fake or non-existent authorities undermines the integrity of judicial proceedings and must be treated with zero tolerance.
Dismissing the appeal, the CESTAT affirmed the service tax demand of ₹2,50,080, upheld the recovery of applicable interest, and sustained all penalties imposed under Sections 77 and 78 of the Finance Act, 1994, holding that royalty paid for mining rights after 1 April 2016 constitutes consideration for a taxable service provided by the Government and is liable to service tax under the Reverse Charge Mechanism.
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