TAXABILITY OF MINING SERVICES

[Dr. Sanjiv Agarwal]

Service tax has been imposed on Mining Services i.e., services outsourced for mining of minerals, oil or gas by the Finance Act, 2007 as a separate taxable service with effect from a 1st June, 2007 vide Notification No. 23/2007-ST dated 22.05.2007. The gross amount charged by or gross consideration received by any person being service provider from any other person in relation to mining services of minerals, oil or gas shall be chargeable to service tax.

Meaning of Mining

The term ‘mining’ has not been defined in Finance Act, 1994 (as amended).

According to section 12(1)(e) of Mines Act, 1952, mining means the process or business of making or working of mines vide section 3(1)(j) of Mines Act, 1952.

Mine means any excavation where any operation for the purpose of searching for or obtaining minerals has been or its being carried on and includes –

   (i)  All borings, bore holes, oil wells and accessory crude conditioning plants, including the pipe conveying mineral oil within the oilfields.

  (ii)  All shafts, in or adjacent to and belonging to a mine, whether in the course of being sunk or not.

(iii)  All levels and inclined planes in the course of being driven.

(iv)  All open cast workings.

  (v)  All conveyors or aerial ropeways provided for the bringing into or removal from a mine of minerals or other articles or for the removal of refuse therefrom.

(vi)  All adits, levels, planes, machinery, works, railways, tramways and sidings in or adjacent to and belonging to a mine.

(vii)  All protective works being carried out in or adjacent to a mine.

(viii) All workshops and stores situated within the precincts of a mine and under the same management and used primarily for the purpose connected with that mine or a number of mines under the same management.

(ix)  All power stations, transformer sub-station, converter stations, rectifier stations and accumulator storage stations for supplying electricity solely or mainly for the purpose of working the mine or a number of mines under the same management.

  (x)  Any premises for the time being used for depositing sand or other material for use in a mine or for depositing refuse from a mine or in which any operations in connection with such, sand, refuse or other material is being carried on, being premises exclusively occupied by the owner of the mine.

(xi)  Any premises in or adjacent to and belonging to a mine on which any process ancillary to the getting, dressing or preparation for sale of minerals or of coke is being carried on. [Mines Act, 1952] 

        The word ‘mine’ includes quarries. The word ‘mine’ has been defined in the Mines Act, 1923 to mean any excavation where any operation for the purpose of searching for or obtaining materials has been or is being carried on and includes all works, machinery, tramways and sidings, whether above or below ground in or adjacent to or belonging to a mine. State of Maharashtra v. Mohanlal, AIR 1966 SC 189, 192. [Minimum Wages Act, (11 of 1948), Section 2(b)(i), Sch., Part I, Item 12]

Taxable Service

Taxable service has been defined in Section 65(105)(zzzy) to mean any service provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas.

According to the aforesaid definition, what is taxable is the services of mining in relation to mineral, oil or gas. This would mean that mining of items or articles or goods other than mineral, oil or gas would not be subject to levy of service tax.

The essential conditions for being a taxable service in relation to mining of mineral, oil or gas are as follows —

(a)   Service should be provided or to be provided by any person to any other person.

(b)   Service should be of mining or in relation thereto.

(c)   Service of mining should be of mineral, oil or gas (and nothing else).

(d)   Service will include exploitation of mineral, oil or gas (post exploration activities).

The subject matter of mining must relate to any of the following items –

(a)   Mineral,

(b)   Oil

(c)   Gas.

That would be imply that liquids are not covered and non-mineral items such as stone, sand, sand stone, marble etc. will also not be covered in the scope of taxable services. In minerals, both mineral and mineral ores would be covered.

The taxable services of ‘mining’ is different from ‘survey and exploration of mineral services’ as in the former case, post exploration (exploitation) activities are covered and the latter covers only exploration and survey, which is generally carried out to before undertaking mining activities. With this service, now both, exploration and exploitation of mineral, oil and gases will be comprehensively covered. The exploitation of mineral services may not fall appropriately into business auxiliary services in view of the specific category of taxable service. 

In Ores India Pvt. Ltd. v. CCE & ST, Bhuvneshwar II 2007 -TMI - 2787 – (CESTAT, KOLKATA), it has been held that service tax on mining activity arises from 1.6.2007 only.

In Aryan Energy Pvt. Ltd. v. Commissioner of Customs & Central Excise, Hyderabad I, ; 2008 -TMI - 32177 – (CESTAT BANGLORE), it has been held that beneficiation of coal is definitely a part of mining activity and as such washing of coal shall be liable to Service Tax w.e..f 1.6.2007 under mining services.

In M Ramakrishna Reddy v. CCE & C 2008 -TMI - 32677 – (CESTAT, BANGALORE), where assessee was required to remove over burden and also to excavate ‘barytes are’, work undertaken by it was held as mining of minerals and was not liable to service tax prior to 1.6.2007.

 In CCE, Belgaum v SVM Nett Project Solutions Pvt Ltd 2009 -TMI - 75385 – (CESTAT, BANGALORE), it was held that raising of iron ore from mines, processing and supply of ores to the principal is an activity undertaken under mining service brought under service tax w.e.f. 1.6.2007 and service tax in not payable under business auxiliary services,.

CBEC Clarification

CBEC has vide Circular No. 334/1/2007-TRU dated 28.2.2007 clarified as follows –

Mining Service [section 65(105)(zzzy)]: Presently, geological, geophysical or other prospecting, surface or sub-surface surveying or map-making services relating to location or exploration of deposits of mineral, oil or gas are leviable to service tax under “survey and exploration of mineral service” [section 65(105)(zzv)]. Services such as —

•      site formation and clearance, and excavation and earth moving, drilling wells for production/exploitation of hydrocarbons (development drilling)

•      well testing and analysis services

•      Sub-contracted services such as deploying workers and machinery for extraction/breaking of rocks into stones, sieving, grading, etc.

•      outsourced services,

Provided for mining are individually classified under the appropriate taxable service. Services provided in relation to mining of mineral, oil and gas are comprehensively covered under this proposed service. With this, services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net.

The trend is to outsource part or whole of the mining activities. Since exploration and mining of mineral, oil or gas are comprehensively brought under the service tax, field formations may undertake necessary action.

CBEC has vided Circular No. 232/2/2006-CX4 dated 12.11.2007 clarified about applicability of service tax on activities undertaken at mines prior to Finance Act 2007. Accordingly, the mining sector (such as the coal mines, mining of ores, etc.) mainly receive the following types of services, mostly on contract basis:—

(i)    Excavation/drilling and removal of the overburdens (i.e. stratum, layer of mud, boulders, etc, that needs to be removed during or prior to extraction of coal/minerals).

(ii)    Coal cutting or mineral extraction and lifting them up to the pithead.

(iii)   Handling and transportation of coal/mineral from pithead to a specified location within the mine/factory or for transportation outside the mines.

Excavation/drilling and removal of the overburdens

These activities are essentially in the nature of site formation, clearance, excavation and earth moving. As clarified earlier vide Circular B1/6/2005-TRU dated 27.07.2005 (para 6.2)), the definition of site formation and clearance, excavation and earthmoving and demolition service is an inclusive definition and activities specifically mentioned are indicative and not exhaustive. Prior to construction of buildings, factory or any civil structure, activity of mining or clearance, excavation and earth moving or levelling are normally undertaken for a consideration to make the land suitable for such activities. Such services include blasting and rock removal work, clearance of underground, drilling and boring, overburden removal and other development and preparation services of mineral properties and site, and other similar excavating and earth moving services. Hence, these activities are taxable under the category of site formation and clearance, excavation and earthmoving and demolition service w.e.f. 16.6.2005.

Coal cutting or mineral extraction and lifting them up to the pithead

These activities are essential integral processes and are part of mining operations. As stated earlier, mining activity has been made taxable by legislation under the Finance Act, 2007 (w.e.f.01.06.2007). Prior to this date, such activities, being part of mining operations itself are not subjected to service tax. Therefore, no service tax is leviable on such activities prior to the said date.

Handling and transportation of coal/mineral from pithead to a specified location within the mine/factory or for transportation outside the mine:

These activities are post-mining activities and are chargeable to service tax under the relevant taxable services, i.e., “Cargo Handling service” and “Goods Transport by Road”. However, in case, such transportation is undertaken by mechanical systems, such as conveyor belt system, ropeway system, merry-go-round systems etc., and the same is not transported by road, no service tax would be chargeable. Service tax is, however, chargeable under cargo handling service, even if the loading, unloading and similar activities are done using mechanical systems.

Person Liable

Any person providing taxable services to any other person in relation to mining services shall be liable to pay service tax.