CASE STUDY

BRIEF FACTS OF THE CASE:

M/s Shree Ganesh Lime (hereinafter referred to as Appellant) was served with show cause notice alleging that the appellant have failed to pay service tax under reverse charge mechanism on the taxable services received by them from the government/local authority and contravened the provisions of Section 68, 69, 70 of the Finance Act 1994 read with Rules 4,6 and 7 of the Service Tax Rules, 1994. Thus, amount was recoverable along with interest and penalty under Section 77 and 78 of the Finance Act 1994. The noticee submitted a detailed reply against the impugned show cause notice. However, the contentions were not accepted the demand was confirmed by the adjudicating authority as well as Commissioner Appeals. Aggreived, the appellant preferred the appeal before the Hon’ble CESTAT.
CA Pradeep Jain, authorised representative of the appellant appeared for the personal hearing to present the submissions and relevant explanations on behalf of the appellant: -
Hence, based on above contentions the impugned order deserves to be set aside.

Submissions by Appellant:

The appellant submits that the service tax is not payable on royalty if the lease agreement is entered prior to 01/04/2016. This is because these services were covered in negative list section 66D of chapter V of Finance Act, 1994 prior to this date. In this regard, attention is drawn to which prescribes the negative list. This section upto 31/03/2016 read as follows: -

"66D The negative list shall comprise of the following services, namely:-
(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere-
(i) services by the Department of Posts by way of speed post, express post, life insurance services provided to a person other than Government;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers; or
(iv) Support services, other than services covered under clauses (i) to (i) above, provided to business entities"
With effect from 01/04/2016, clause (iv) of sub-section (a) of section 66D was amended and all services provided by the government to a business entity were excluded from the negative list of services. Thus, services rendered by the government to a business entity became chargeable to service tax with effect from 01.04.2016. Thus, the service tax was effective on all types of services provided by Government to business entities from this date. In the instant case, the lease deed was entered on 09.06.2004, that is before 01.04.2016. Thus, if the assignment of right to use natural resources is the event attracting service tax and if the said assignment is prior to 01/04/2016; no Service tax is payable as prior to this date, these services were covered in negative list. Therefore, the point of taxation/taxable event having occurred prior to 01.04.2016, the impugned demand of service tax on royalty is not sustainable and deserves to be set aside.
Reliance has been placed on hon’ble Delhi Tribunal in the case of The Principal Commissioner, CGST & Central Excise, Bhopal VERSUS M/s. S R Traders [Service Tax Appeal No. 54002 of 2018] and in case of M/s R.D. Clay Mines Private Limited vs. Commissioner (Appeals), Central Excise & CGST [Service Tax Appeal No. 55087 of 2023].

Judgement & Findings of the Hon’ble Tribunal:

The Hon’ble Tribunal observed and decided the matter in following manner:
It was held that as the date of lease agreement is essential to decide the issue whether the appellants are liable to pay service tax on payment of royalty under reverse charge mechanism in terms of Section 66D of Finance Act 1994.
Hence, the matter was remanded back to the adjudicating authority with the direction to the appellant to file lease agreement before the adjudicating authority and thereafter adjudicating authority shall examine the issue on merits and pass an appropriate order in accordance with law.

AUTHOR’s COMMENT:

The matter of tax on royalty on mining has been a hot topic in the area of litigation. The contention draws support from the Supreme Court’s nine-judge Bench ruling in Mineral Area Development Authority v. Steel Authority of India [(2024) 21 Centax 378 (S.C.)], delivered on 25.07.2024, which held by an 8:1 majority that royalty payable under the Mines and Minerals (Development and Regulation) Act, 1957 is not a tax. However, since the case pertained to a different factual matrix, namely, whether the State or the Centre has the power to tax royalty, the matter of whether royalty is tax or not did not attain finality. In this regard, the matter is still sub judice, as the issue is pending before the Supreme Court in Udaipur Chambers of Commerce and Industry v. Union of India [2018 (10) G.S.T.L. J167 (S.C.)]. Therefore, the question of whether royalty is tax or not is still remains unanswered. Even in many cases, CESTAT is adjourning the matter on this issue.
Another important aspect in this is in cases where the lease deed has been entered into prior to 01.04.2016, the point of taxation falls before the said date and, hence, the transaction is not taxable under the reverse charge mechanism. In this regard, the lease agreement assumes significance, as the date of the lease agreement is essential for determining the applicability of service tax.
As the appellants were contending that the matter was pending before the Apex Court, most of the appellants did not take the plea of the point of taxation and did not furnish a copy of the lease agreement at the lower stages. However, it is pertinent to note that, in cases where the Show Cause Notice itself acknowledges the lease agreement number, which clearly specifies the year of the lease agreement, the appellant can also plead that the date of the lease agreement is undisputed, as the same is acknowledged by the Show Cause Notice itself. The CESTAT is giving relief in such cases.
Therefore, where the Show Cause Notice itself refers to and acknowledges the lease agreement and its particulars, the appellant may contend that the date of the lease agreement cannot subsequently be treated as a disputed or unsubstantiated fact merely because a copy of the agreement was not furnished at the lower stage.
However, in cases where the lease deed is not mentioned in the Show Cause Notice, the Tribunals can take the following approaches. In some cases, the matter is remanded back to the adjudicating authority to examine the lease deed, holding that the lease agreement forms the essential part around which the entire case now revolves. In some cases, including one of the cases pleaded by us, the Bench has asked the appellant to file a separate application for admission of the additional evidence, which will thereafter be considered.
While in other cases, the tribunal has remanded the matter to adjudication officer to examine the lease deed agreement and then give relief to taxpayer.
Lastly, in some cases, the Bench has also taken the view that if the appellant is taking contention of lease deed agreement, then he will surrender his right of contention that the matter is pending before Apex Court. As well as the contention that appellant was under a bona fide belief that the matter would be decided in its favour, as the issue of whether royalty is tax or not is pending before the Apex Court, and therefore, the extended period of limitation cannot be invoked. The bench maintained that if he surrenders these contentions then the matter can be taken up and it will be decided on the basis of lease deed agrreemnt.
One more important aspect in relation to this is the recent amendment introduced through the Mines and Minerals (Development and Regulation) Amendment Act, 2026. The amendment was considered necessary mainly because, following the Supreme Court’s 2024 judgment in Mineral Area Development Authority v. SAIL, questions arose regarding the extent of the States’ power to impose taxes, cess and other levies on mineral rights and mineral-bearing lands. Different States could potentially impose different kinds of mineral-related levies, creating uncertainty, additional costs and differing fiscal burdens for the mining industry. The amendment therefore seeks to bring greater uniformity and predictability by allowing State levies in this area only subject to conditions and restrictions prescribed by the Central Government.
The MMDR Amendment Act, 2026 mainly seeks to regulate the power of States to impose taxes, cess or other levies on mineral rights and mineral-bearing lands. Under the new Section 9D, States cannot impose such levies except in accordance with the conditions or restrictions prescribed by the Central Government. The Act also provides that certain unpaid or unrecovered past levies will be treated as invalid, although amounts already paid or recovered will generally not be refunded merely because of the amendment.
However, it is important to distinguish this from royalty and GST/Service Tax under RCM. The amendment primarily concerns the tax, cess or levy imposed by the State on mineral rights or mineral-bearing land, and does not by itself settle whether royalty is taxable under GST/Service Tax under reverse charge.
To conclude, two consequences flow from this legislative acknowledgment:
First, if grant of mining rights is not a commercial supply but an exercise of the State’s sovereign function, the State Government cannot be treated as a taxable supplier under Section 7(1)(a) of the CGST Act. The 2026 amendment supports the view that grant of mineral concessions is a sovereign regulatory function, rather than a normal business activity.
Second, since the issue of service tax on royalty under RCM is still pending before the Supreme Court, the 2026 amendment further shows that the field of mineral-related levies requires a careful and regulated approach. Therefore, GST on royalty should not be mechanically demanded, particularly from unregistered mining lease holders, while the larger legal issue remains sub judice.

CA Pradeep Jain_

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PJ case study/2026-27/12

CASE STUDY

BRIEF FACTS OF THE CASE:

Submissions by Appellant:

Judgement & Findings of the Hon’ble Tribunal:

AUTHOR’s COMMENT:

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