CESTAT: Allocation of Area Development Charges by State Government Cannot be Treated as Consideration Towards Service

CESTAT: Allocation of Area Development Charges by State Government Cannot be Treated as Consideration Towards Service

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Delhi by its division member bench of Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) has observed that the allocation of area development charges by the state government cannot be treated as consideration for service.

In the present case, the Appellant- M/s. Madhya Pradesh State Mining Development Corporation had filed an appeal to assail the order dated 27 March, 2019 passed by the Principal Commissioner, CGST and Central Excise, Bhopal confirming the demand of service tax with interest and penalty after invoking the extended the period of limitation contemplated under the proviso to section 73(1) of the Finance Act.

The appellant was granted rights to mine sand, rock, phosphate, flag stone, and coal by the Madhya Pradesh State Government. In lieu of these rights, the appellant was required to pay royalty to the State Government. The mining operations were carried out by the appellant either directly or through contractors for disposal of sand. In some cases, the appellant also formed joint ventures with the contractors to jointly undertake the mining operations.

Pursuant to audit objections, a show cause notice was issued to the appellant proposing a demand of service tax of Rs. 22,84,16,550/- with interest and penalty for the period from April 2013 to March 2017. This demand was confirmed by the impugned order.

The appellant had received area development charges from the state government to meet its administrative expenses. The amounts were paid pursuant to the order issued by the state government. The order has sought to tax these amounts by treating them as ‘consideration’ towards the provision of taxable service.

The issue raised was whether the demand pertained to the alleged short-payment of tax the extent of dead rent/surface rent paid by the appellant to the State Government, which was held to be taxable on reverse charge basis against the receipt of service concerning grant of mining rights.

In this regard, the bench observed that, for the purpose of levying service tax, the taxable event is construed as the time when the service is provided or agreed to be provided.

The bench opined that in order to determine whether levy of tax is applicable on a particular activity, it is necessary to determine the point of time when such activity is provided or agreed to be provided.

Averting to the present case, the CESTAT noted that the agreement between the appellant and State Government for grant of mining rights was executed on 2 January, 2016 and on this date, the transactions involving assignment of right to use natural resource was not taxable.

The bench on perusal of Section 66D of the Finance Act, as it existed prior to 1 April, 2016, observed that, “barring a few exceptions, all services provided by the Government were covered under the negative list and accordingly, not subjected to service tax.”

The bench explained that with effect from 1 April, 2016, Section 66D(a)(iv) of the Finance Act 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 1 April, 2016.

Applying the aforesaid interpretation to the present case, the CESTAT noted that the appellant had received services in relation to assignment of right to use natural resources from the State Government by virtue of the agreement dated 2 January, 2016 and, therefore, the provisions of service tax, as were in force prior to 1 April, 2016, were applicable. Grant of natural resources was not excluded from the scope of negative list prior to 1 April, 2016 hence, no tax implication could be fastened on the appellant for such period, the CESTAT held.

The next issue was regarding the fee paid to the Directors by the joint venture company.

In this connection, the CESTAT noted that the amount was only ‘held’ by the appellant on behalf of the joint venture/Directors and cannot be treated as income against provision of any service. Even otherwise, the transaction pertaining to this amount was between the joint venture company and the Directors and the appellant had no role to play, stated the bench.

The last issue was whether the appellant had provided any services to the State Government against the area development charges.

The CESTAT held that the appellant was entitled to 30 per cent of the area development charges received by the state government. The charges were paid to the appellant for meeting its administrative expenses, especially since the appellant is operating as a public-sector undertaking of the state government. There was no mention of any service that would be performed by the appellant in exchange for the amount.

The CESTAT concluded by holding that for a service to be taxable, it is necessary that there must be a service provider and service recipient relationship between the two parties.

The Appellant was represented by learned counsel Shri B.L. Narshiman assisted by Shri Kunal Aggarwal.

The Department was represented by learned authorized representative Dr. Radhe Tallo.