The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a massive service tax demand of ₹347.87 crore raised against the Department of Mines and Geology, Rajasthan, holding that royalty and dead rent collected for grant of mining rights do not constitute taxable services under the category of “renting of immovable property” under the Finance Act, 1994. The Bench comprising Binu Tamta (Member – Judicial) and Hemambika R. Priya (Member – Technical) allowed the appeal filed by the Mining Engineer, Department of Mines and Geology, Rajasthan, and quashed the Order-in-Original dated 3 July 2019 passed by the Commissioner of CGST, Alwar, which had confirmed the demand along with interest and penalty.
The dispute arose from a show cause notice dated 23 October 2018, wherein the tax department alleged that royalty and dead rent collected by the State Government for grant of mining leases were essentially payments for allowing use of vacant land and therefore liable to service tax under the head “renting of immovable property”. Accepting this view, the adjudicating authority confirmed service tax demand of ₹3,47,87,620 along with interest and penalty.
Before the Tribunal, the appellant submitted that grant of mining leases is governed entirely by statutory frameworks such as the Mines and Minerals (Development and Regulation) Act, 1957 and the Rajasthan Minor Mineral Concession Rules, 1986. It was argued that royalty and dead rent are statutory levies fixed under these enactments and cannot be equated with commercial consideration for renting land. The appellant further contended that the issue was no longer res integra and had already been decided in its favour by the Tribunal in earlier proceedings.
The Tribunal agreed with the appellant and noted that mining rights are granted strictly in accordance with statutory provisions. Neither the State nor the lessee has any discretion with respect to the terms of the lease or the quantum of royalty and dead rent payable, as all such aspects flow directly from statute. The Bench emphasised that the grant of mining rights is an exercise of sovereign authority of the State and not a commercial activity akin to renting of immovable property.
Undertaking a detailed analysis of the definition of “support services” under the Finance Act, 1994, the Tribunal observed that although “renting of immovable property” finds mention in the inclusive part of the definition, it becomes taxable only when it constitutes a support service that business entities could otherwise perform themselves in the ordinary course of operations. Activities which can be rendered exclusively by the Government in exercise of its sovereign powers do not fall within this ambit.
The Bench noted that leasing of land solely for mining purposes arises from statute and represents exercise of sovereign rights, which private entities cannot perform on their own. Accordingly, such activity cannot be treated as a support service provided to business entities. The Tribunal also relied on clarifications issued by the Central Board of Excise and Customs (CBEC), which categorically state that grant of mining rights by the Government does not fall within the scope of taxable support services.
The Tribunal further pointed out a fundamental inconsistency in the Revenue’s approach. While service tax on renting of immovable property has always been payable by the service provider under the forward charge mechanism, the department attempted to shift the liability to service recipients under reverse charge after 1 April 2016, without any substantive change in the nature of the activity. This, according to the Tribunal, itself demonstrated that mining leases could not be treated as taxable renting services.
Placing reliance on its earlier decisions in the appellant’s own case as well as a co-ordinate Bench ruling in Director v. Commissioner, Jodhpur, the Tribunal reiterated that royalty and dead rent collected for mining leases are statutory imposts and not consideration for any taxable service. The Bench held that the observations and findings in those decisions squarely applied to the present case.
In conclusion, the Tribunal held that mining leases granted under statutory provisions cannot be classified as “renting of immovable property” or “support services” for the purpose of service tax. Consequently, the entire demand raised against the Department of Mines and Geology, Rajasthan, was held to be unsustainable. Accordingly, the CESTAT set aside the impugned Order-in-Original in its entirety and allowed the appeal, granting significant relief to the Rajasthan Government department and reaffirming that sovereign statutory functions cannot be subjected to service tax by artificially classifying them as commercial services.
Cause Title: Mining Engineer Versus Commissioner of CGST-Alwar
Case No: Service Tax Appeal No. 51807 Of 2021
Coram: Binu Tamta (Member – Judicial) and Hemambika R. Priya (Member – Technical)
