2017 (10) TMI 975 - HC - Service Tax

Mining lease - levy of service tax - royalty - whether the royalty under the Act of 1957 is a consideration or not and further if that is consideration , then what would be the effect pertaining to payment of service tax? Held that - the royalty is nothing but a consideration to have mining operations in the leased area on execution of a mining lease. It is a part of agreement arrived between the parties to have lease of a mining area to undertaking mining operations. The royalty being consideration certainly places assignment of right to use natural resources deposited in the leased area as a service as defined under Section 65-B(44) of the Act of 1994, according to which, any activity carried out by a person for another for consideration is a service - the notification dated 13.4.2016 is not at all in conflict with its enabling Act i.e. the Finance Act, 1994 and the same does not suffer from any illegality. There is no transfer of immovable property too as the lease granted is only to excavate mineral from the leased area and that activity at the most can be physical transfer of property by its renting as prescribed under Section 65(90a) of the Act of 1994, but not the transfer of title in immovable property. Section 65(90a) pertains to transfer of immovable property by renting and that includes leasing of immovable property for use in furtherance of business and commerce. The absence of the word title in this provision is quite important and that indicates the entire activity as transfer of possession of the immovable property for its use or consumption by way of renting, letting, leasing, licencing or by other similar arrangements, as the case may be. The exclusion under Section 65-B(44) is for transfer of title in immovable property, which is conspicuously absent in the grant of lease for mining operations. The tile of the mining area admittedly retains with the State even on execution of mining lease to excavate mineral from the leased area. Petition dismissed - decided against petitioner.

Issues Involved:
1. Applicability of service tax on yearly installments due after April 1, 2016, for the assignment of the right to use any natural resource, specifically a mining lease.
2. Legality of the notification dated 13.4.2016 and its clarification regarding the levy of service tax on mining royalties.
3. Definition and applicability of "service" and "declared service" under the Finance Act, 1994.
4. Whether the grant of a mining lease constitutes a "service" or "declared service."
5. Whether royalty payments are considered "consideration" under the Finance Act, 1994.
6. Whether the assignment of the right to use natural resources can be categorized under the exclusion of transfer of title in goods or immovable property.

Issue-wise Detailed Analysis:

1. Applicability of Service Tax on Yearly Installments:
The court examined whether service tax is applicable on yearly installments due after April 1, 2016, for the assignment of the right to use any natural resource, specifically a mining lease. The notification No.25/2012-ST dated 20.6.2012, read with notification No.22/2016 dated 13.4.2016, was scrutinized. The court noted that the notification exempted one-time charges for assignments made before April 1, 2016, but not periodic payments.

2. Legality of the Notification Dated 13.4.2016:
The petitioners argued that the notification dated 13.4.2016 and its clarification were ultra-vires to the enabling Act, i.e., the Finance Act, 1994. They contended that the grant of a mining lease is neither a service nor a declared service. The court, however, found that the notification was consistent with the Act and did not suffer from any illegality.

3. Definition and Applicability of "Service" and "Declared Service":
The court referred to Section 65-B(44) of the Finance Act, 1994, which defines "service" as any activity carried out by a person for another for consideration. The court also examined Section 66-E, which lists "declared services." The court concluded that the assignment of the right to use natural resources falls under the definition of "service."

4. Whether the Grant of a Mining Lease Constitutes a "Service" or "Declared Service":
The petitioners argued that the grant of a mining lease is an assignment of rights and not a service. The court, however, determined that the grant of a mining lease is a service as it involves the assignment of the right to use natural resources for consideration (royalty payments).

5. Whether Royalty Payments are Considered "Consideration":
The court analyzed the concept of "consideration" under Section 2(d) of the Indian Contract Act, 1872. It concluded that royalty payments are indeed consideration for the grant of a mining lease. This consideration makes the assignment of the right to use natural resources a service under Section 65-B(44) of the Finance Act, 1994.

6. Whether the Assignment of the Right to Use Natural Resources Falls Under Exclusion:
The petitioners argued that the assignment should be excluded as it involves the transfer of title in goods or immovable property. The court found that the assignment of the right to use natural resources does not constitute a transfer of title in goods or immovable property. The lease grants the right to extract minerals but does not transfer ownership of the land or minerals.

Conclusion:
The court dismissed the petitions, holding that the notification dated 13.4.2016 is valid and that the assignment of the right to use natural resources, specifically through mining leases, constitutes a service subject to service tax. The royalty payments made by the lessees are considered consideration for the service provided by the government.

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