AUGUST 23, 2016

By R SenthilKumar, CA & V Sundararajan, CA

MINING operations cannot be carried out without license from the Government.

A moot question - Whether the royalty is in the nature of a tax?

In the case of State of Orissa and others v. M/s Steel Authority of India Ltd. (AIR 1998 SC 3052 ), the Apex Court opined that Section 9(1) of the MMDR Act, 1957 also contemplates the levy of royalty on the mineral consumed by the holder of a mining lease in the leased area, hence processing of mineral amounts to consumption and, therefore, the entire mineral is eligible to levy of royalty.

The Supreme Court, in India Cement Ltd. v. State of Tamilnadu and others (AIR 1990 SC 85) had held that royalty is a tax and its payment is for the use of land. The judgment had relied on the concept that royalty was attributed to the extracted mineral created due to interaction among land, capital and labour, each of which possesses some definite intrinsic economic value. In this sense, royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realised through sale by the lessee.

However, in the case of State of West Bengal v. Kesoram Ltd and others, SC, CA. No. 1532-1533 of 1993, Judgment dated 15th January, 2004 the Supreme Court had pronounced that Royalty is not a tax.

In terms of Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 the holder of mining lease shall pay royalty in respect of any mineral removed/consumed.

Royalty are periodical payments to be made by the lessee under his covenants in consideration of the various benefits which he is granted by the lessor (Gopaldas Bulakidas v. I.T. Commr 1951 Nag. 410, 1943 PC 153).

Excise duty on Royalty:

The department is of the view that as per the provisions of Section 4(1)(a) of the Central Excise Act, 1944, the assessee is required to pay Central Excise Duty on the transaction value. Since "Royalty is not in the nature of tax, it should be included in the assessable value of coal /Lignite for the purpose of payment of Central Excise Duty.

Two conflicting decisions were rendered in case of India Cement Ltd (supra) and Kesoram Industries (supra). The three Judge Bench in case of Mineral Area Development Authority made a request to the Hon'ble Chief Justice of India to constitute a Nine Judge Bench to answer the reference, whether the royalty is in the nature of a tax. The question whether the excise duty could be levied on the royalty is not crystallized. The matter is res integra.

Service tax on Royalty:

W.e.f. 01.04.2016 amendments have been made to levy Service Tax, under Reverse Charge Mechanism, on the Services provided by Government to Business Entities to bring Leasing of Natural Resources like Mining etc. in the Service Tax net. According to the Central Board of Excise and Customs, when the government grants license to a company to exploit a natural resource, it is a taxable service, and hence liable for service tax.

Circular No.192/02/2016 - Service Tax, Dated – April 13, 2016.

• It is clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or a local authority.

• Service Tax on taxes, cesses or duties

Taxes, cesses or duties levied are not consideration for any particular service as such and hence not leviable to Service Tax. These taxes, cesses or duties include excise duty, custom duty, Service Tax, State VAT, CST, Income tax, wealth tax, stamp duty, taxes on professions, trades, callings or employment, octroi, entertainment tax, luxury tax and property tax.

• Cenvat credit

Service Tax paid on royalty in respect of natural resources and any periodic payments shall be available as credit in the year in which the same is paid.

Tax planning:

Now, both excise duty and service tax are levied on the mineral royalties on the assumption that royalty is not in the nature of tax.

The authors are of the opinion that service tax paid on royalty can be availed as input service credit and can be utilized against the excise duty liability. However, if the company is exercising the option and charging concessional rate of excise duty then they cannot avail the credit of service tax paid on royalty. In such case the service tax paid under reverse charge will be included in the cost of production and VAT/CST has to be paid on the service tax portion also. Henceforth, the buyer of coal/Lignite should insist upon the supplier not to exercise concessional rate option and charge 6% Excise duty and avail service tax credit so as to reduce the tax burden.

Conclusion:

1. Transaction value is the price paid or payable for the goods at the time and place of removal, ‘by reason of, or in connection with sale', inclusive of all expenses but excluding taxes [section 4(3) (d) of Central Excise Act]. Transaction value does not include duty of excise, sales tax and any other taxes on goods.

As per the clarification issued, Taxes are not consideration for any particular service as such and hence not leviable to Service Tax.

From the combined reading of the transaction value and the above clarification it can be interpreted that, if the Supreme Court nine Judges Bench decides that royalty is in the nature of tax then both excise duty and service tax cannot be levied.

2. Model GST Law:

The Constitutional Amendment Bill has deleted only the VAT, Entry Tax and Entertainment Tax from the State List. The royalty on mineral is not subsumed. Industry would prefer bringing royalty on minerals and electricity also under GST to avoid cascading effect.