Dr. Rachna Gupta, J
1. M/s J K Lakshmi Cement, the appellants are engaged in manufacture of cement. Appellants are also holding service tax registration for providing/
receiving of Transport of Goods by road/ GTA services, legal consultancy services, Manpower Recruitment/ Supply agency service, Works Contract
service, Renting of immovable property service, Intellectual Property rights other than copyright and other taxable services other than the 119 listed
etc. During the course of audit of records of appellants, it was observed that appellant has paid Royalty on excavation of natural resources in terms of
section 9 of Mines and minerals ( Development and Regulation) Act,1957. They have also discharged their service tax liability on it under reverse
charge mechanism. However, over and above the said royalty amount as was required to be paid for mining of any natural resource, the appellant has
paid sums @ 30% and 2% of the Royality amount to the state government on account of “District Mineral Foundation (DMFâ)€™ & “
National Mineral Exploration Trust (NMET) as provided under section 9B & 9C respectively of the said Act. Department observed that appellants
have failed to discharge their service tax liability on the said two amounts for which appellants were liable under Reverse Charge Mechanism. It was
observed that an amount of Rupees 19,94,78,400/- towards 30% of the royalty and an amount of Rupees 1,32,98,560/- towards 2% of the Royalty as
was paid by the appellant on account of DMF & NMET respectively, during the period from 01.04.2016 to 30.06.2017. But service tax accounting, to
Rupees 3,19,16,544/- was not paid under RCM.
2. Based on these observations the show cause notice bearing number148/2018-19 dated 11.03.2019 was served on the appellant proposing the
discovery of the aforesaid amount of Rs. 3,19,16,544/-along with proportionate interest and the appropriate penalties. The said proposal has been
confirmed vide order in original (O-I-O ) bearing number 0007 â€" 19â€"20 dated 31.01. 2020. Being aggrieved of the said order, the appellant is
before this Tribunal.
3. We have heard Mr. Ajay Prasad, ld. Counsel for the appellant and Mr. Manoj Kumar, ld. Authorised Representative for the Department.
4. Ld. Counsel for the appellant submitted that the main finding in the impugned order that the amounts paid by the appellants for the two trusts/ funds
were in the nature of royalty, is incorrect. ‘Royalty’ is the fee for the right to use minerals, including its exploration and evaluation. The
government grants a person mining rights which are basically right for exploration of minerals. This amounts to service being provided by the state to
the licensee which is leviable to service tax. The amount paid as ‘consideration’ for such service i.e. grant of such license to the state is called
as ‘Royalty’. It is mentioned that the appellants are paying service tax on the said amount of Royalty under reverse charge mechanism.
However, in case of payments to the DMF and the NMET there is no corresponding service provided to the appellants either by the state or by the
DMF or the NEMT, hence, those amounts do not qualify to be called as consideration for taxable service.
5. Ld. Counsel further submitted that the department has denied the benefit of notification number 25/2012 dated 20.06.2012, but the question of
examining eligibility to an exemption notification pre supposes levy in the first place. If the activity is outside the purview of service tax, the question of
an exemption notification being applicable to it or not, becomes irrelevant. Also the trust DMF & NEMT are not theâ €˜government’ or a ‘local
Authority’, in terms of clause 31 of section 65B of the Finance Act 1994 payment of tax under reverse charge mechanism is not applicable as per
Notification No.30/2012 dated 20.06.2012.
6. Ld. Counsel further submitted that the whole exercise is revenue neutral. Even if it is held that the appellants are liable to pay tax under RCM, they
would be eligible for cenvet credit of the whole amount, and no additional revenue would accrue to the government. Finally, it is mentioned that since
the demand per se is not sustainable, there is no question of payment of any interest nor of imposition of penalty. With these submissions the order
under challenge is [prayed to be set aside and the appeal is prayed to be allowed.
7. While rebutting these submissions Ld. Authorized representative ( AR) for the department submitted that the amounts paid to the District Mineral
Foundation (DMF) and to the National Mineral Exploration Trust (NMET) are akin toâ €˜Royalty’ and hence service tax is payable on these
payments also as is in the case of royalty. Hence, there is no infirmity in the order under challenge when the service tax demand qua the amount paid
to DMF & NMET is confirmed along with the interest. Since the non-payment of service tax resulted into evasion of revenue, penalty has also been
rightly Imposed. LD. AR has relied upon the decision in the case of Vikram Ispat vs commissioner of Central exercise, Mumbai-III reported in 2000
(120) E.L.T. 800.(Tri. LB) to impress upon that nature of tax cannot be determined by the measure thereof. With these submissions and denying all
the grounds raised by the appellant, for challenging the impugned order, the present appeal is prayed to be dismissed.
8. Having heard the rival contentions of both the parties and perusing the entire record of this appeal, we observe and hold as follows:
In the present case, the demand has been confirmed on the ground that the amounts, in addition to ‘Royalty’, paid by appellants to District
Mineral Foundation (DMF) and to National Mineral Exploration Trust (NMET) are also akin to ‘Royality’ on which service tax is payable.
9. We observe that ‘Royalty’ in respect of mining leases is levied and collected in terms of section 9 of the Mines and Minerals (Development
and Regulation), Act, 1957 (here and after referred as Mines Act). Section 9 of Mines act reads as follows:
Royalties in respect of mining leases-
(1) the holder of a mining lease, granted before the commencement of this act shall, notwithstanding anything contained in the instrument of lease or in
any law in force at such commencement, pay royalty in respect of any mineral removed or consumed by him or by his agent, Manager, Employee,
Contractor or Sub Lessee from the Le area after such commencement, at the rate for the time being specified in the second schedule in respect of
that mineral.
(2) the holder of a mining lease granted on or after the commencement of this act shall pay royalty in respect of any mineral removed or consumed by
him or by his agent, Manager, Employee, Contractor or Sub Lessee from the Le area after such commencement, at the rate for the time being
specified in the second schedule in respect of that mineral.
(2A) the holder of a mining lease whether granted before or after the commencement of the Mines and minerals (Development and Regulation)
Amendment act, 1972 shall not be liable to pay any royalty in respect of any coal consumed by a workman engaged in a call provided that such
consumption by the workmen does not exceed one-third of a tonne per month
(3) the central government may, by notification in the Official gazette, amend the second schedule so as to enhance or reduce the rate at which
royalty Shall be payable in respect of any mineral with effect from such date as maybe specified in the notification:
Provided that the central government shall not enhance the rate of royalty in respect of any mineral more than once during any period of three years.
10. The provision makes it clear that royalty is a payment to mineral rights holder, which generally is the government, from mineral producer, who is
mine Lessee, in consideration for the extraction of valuable and non-renewable natural resources. Levy of Royalty on minerals is otherwise a
universal concept based on the premise that the mineral resources are “wasting assetsâ€, “one-crop-product†or “once only endowmentâ€.
11. The honorable Supreme Court of India in the India Cement case 1989 titled as India Cement Ltd. vs. State of Tamil Nadu reported as 1989 SCR
(suppl.) (1) 62 SC ruled that royalty is tax, thereby preventing states from levying additional taxes or cesses on Royalty limiting the ability of state to
generate revenue from mining activities. The states are otherwise empowered to Levy taxes on mineral rights in terms of entry 50 of list II, the state
list. However, the year 2004 the five judge bench of the Apex court revisited the India Cement judgment while deciding the case titled as State of
West Bengal vs. Kesoram Industries Ltd. in Civil Appeal No. 1532 of 1993 decided on 15.01.2004 and stating that the India Cement judgment
suffered from a typographical error and the court had mistakenly written that “royalty is a tax†while meaning that “cess on royalty†is a tax.
This contradiction of verdict by two constitutional benches was referred to the larger bench of Supreme Court. The nine judge bench has decided the
reference in the case titled as Mineral Area Development Authority (MADA) vs. Steel Authority of India (SAIL) on 25th July 2024 declaring that
royalty on mining is not in nature of tax and thereby overruling the judgment of India Cement case.
12. It now stands established that royalty is not tax. It is the consideration in the nature of assignments of rights by the government paid by the Lessee
to use natural resources. The activity of assigning the mining rights is rendered by the government to the Lessee of said mine against payment
(royalty). The activity is nothing, but is a service rendered by government to the said lessee in terms of section 65B of the Finance act 1994 which
reads as follows:
(44) “service†means any activity carried out by a person for another for consideration, and includes a declared service, but shall not
include-
a) an activity which constitutes merely,-
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the
Constitution; or
(iii) a transaction in money or actionable claim;
b) a provision of service by an employee to the employer in the course of or in relation to his employment;
c) fees taken in any Court or tribunal established under any law for the time being in force
13. There is no denial that royalty is the consideration for the service rendered by government/mine owner/ service provider to the mine Lessee/
lease-holder, the service recipient, the appellants have been regularly paying service tax on Royalty under reverse charge mechanism in terms of
notification number 30/ 2012 dated 20.06. 2012.
14. The dispute is with respect to certain other amounts as a required to be paid by Lease-holder of the mines to DMF and NMET which are
calculated as a percentage of the said royalty paid by the appellants.
15. We observe that amount to DMF is paid in terms of section 9B of the Mines Act which reads as follows:
9B District Mineral Foundation-
(1) in any district affected by mining related operations, the state government shall, by notification, establish a trust, as a nonprofit body, to be called
the District Mineral Foundation.
(2) the object of the District Mineral Foundation Shall be to work for the interest and benefit of persons, and areas affected by mining related
operations in such manner as maybe prescribed by the state government.
(3) the composition and functions of District Mineral Foundation shall be such as may be prescribed by the state government
Provided that the central government may give directions regarding composition and utilization of funds by the District Mineral Foundation.
(4) to (6) -----------------------
The same is the position in respect of payments made to NMET under section 9C of the Mines Act.
16. The above provisions clarify that DMF and NMET are the trusts created by the state governments being different from the later. In the light of
above discussion, the question to be adjudicated for deciding service tax liability of the appellants towards the amount paid to both these trusts is:
“Whether DMF & NMET are also rendering any service to the appellants and that they are Governmental Authorities.â€
17. Foremost it can judicially be noticed that impact of mining can occur at local, regional, and global scales through direct and indirect mining
practices. Mining operations often result, insignificant, environmental impacts on local ecosystems and broader implications for planetary
environmental health. To accommodate mines and associated infrastructure, land is cleared extensively, consuming significant energy and water
resources, emitting, air, pollutants, and producing hazardous waste mining can cause erosion, loss of biodiversity, contamination of soil, groundwater,
and surface water due to chemicals from mining processes. These processes also affect the atmosphere through carbon emissions, which contributes
to climate change most of the mining methods, therefore have significant environmental and public health effects hence the mining companies are
required to follow, strict, environmental, and rehabilitation codes to ensure that the mined areas return to its original state.
18. In the year 1992, Rio Declaration on Environment and Development coined the concept ofâ €˜Sustainable Development’ of environment and
formulated guiding principles for the purpose, one of those principles is, “The Polluter Paysâ€. It was enacted to make the party responsible for
producing pollution, responsible for paying for the damage done to the natural environment. Thus, according to this, Principle, the cost of pollution
prevention is to be paid by the polluter. This principal is now universally accepted as environmental law not only by Organization for Economic, Co-
operation, and Development (OECD) and European Countries (EU), United Kingdom, United States of America, France, Canada, Australia but also
by India under the environment policy “Ecotaxâ€. This principle is based on the fact that as much as pollution is unavoidable, the person or industry
that is responsible for the pollution must pay some money for the rehabilitation of the polluted environment.
19. Reverting back to section 9B and section 9C of the Mines Act, as quoted above, we observe that the lease-holder/ the polluter is required to pay
an amount, equivalent to certain percentage of amount of royalty paid to the government/ lessor, to DMF & NMET requiring them to render them the
activity of rehabilitating, the area, and the people in and around the leased mine. As the lease-holder/ the polluter is liable to pay for such rehabilitation,
this observation is sufficient for us to hold that DMF & NMET have rendered such activity to the appellants which qualifies to be called as
“service†defined under section 65B(44) of the Finance Act 1994. Hence the amount paid to both these trusts is nothing but the consideration paid
for receiving the said service. Since DMF & NMET are the creations of the state government, as apparent from above quoted sections; 9B & 9C of
the Mines Act, both these trust are the ‘governmental authority’ in terms of clause 2(s) of notification number 25/ 2012 dated 20.06. 2012.
Resultantly the appellant is liable to pay service tax under reverse charge mechanism vis-Ã -vis the amounts paid to both these trusts in terms of
notification number 30/ 2012 dated 20.06. 2012.
20 In the light of the entire about discussion, since the question framed above is decided against the appellants, we do not find any infirmity in the
order, confirming the demand of service tax but for the reasons as discussed above. Resultantly the present appeal is hereby order to be dismissed.
[Pronounced in the open Court on 28/11/2024]
