The Chennai bench of the Customs, Excise And Service Tax Appellate Tribunal (CESTAT) has held that service tax is not leviable on royalty as it is tax and not consideration for Services. M/s.ONGC, Karaikkal is paying royalty for assigning the rights to use oil blocks.
The appellant viz., M/s.Oil and Natural Gas Corporation is engaged in activities of exploration and production of crude oil and natural gas from various oil fields located in different areas of Nagapattinam, Cuddalur, Tiruvarur, Tanjore and Ramnad Districts of Tamil Nadu. The appellant holds service tax registration for discharging service tax on various taxable services.
On gathering intelligence that the appellant has not paid the appropriate service tax on the amount of consideration, in the form of Royalty paid to Government of Tamil Nadu, for assignment of right to use for exploration and production of crude oil/natural gas, the officers of the Directorate General of Goods and Service Tax, Zonal Unit, Bangalore initiated investigation. Summons was issued to furnish documents and statements were recorded.
The department viewed that the natural resources are the properties of the State, which can either be utilized by the State for the welfare of the public or the rights over such resources, can be assigned to any person for consideration. The consideration for assigning the right to use of natural resources (grant of license) is determined by taking into account terms of the contract, period of usage, quantum of benefits, etc.
On perusal of the Petroleum Mining Lease issued by Government of Tamil Nadu, it appeared that Government has issued the Petroleum Mining Lease under Rule 5(i)(ii) read with Rule 12 of the Petroleum & Natural Gas Rules, 1959 for extraction of crude oil and natural gas in the allotted blocks as against the consideration which is paid or payable by appellant in the form or royalty, PEL/PML, dead rent and surface rent.
Accordingly, M/s.ONGC, Karaikkal is paying royalty, PEL/PML, dead rent and surface rent to the Government of Tamil Nadu, in lieu of consideration for assigning the rights to use oil blocks. M/s.ONGC, Karaikkal is also paying dead rent in the form of royalty in cases where no production activities are being carried out in any allotted oil fields.
It was argued by the department that the assignment of the right to use oil fields (natural resources) provided by the Government of Tamil Nadu to M/s. ONGC Karaikal for exploration and production of crude oil and natural gas in lieu consideration is not covered under the Negative List of services under Section 66D of the Finance Act, 1994 and that assignment of right to use for exploration and production of crude oil and gas for consideration by the Government of Tamil Nadu is an act of ‘service’ as per Section 65B (44) of the Finance Act, 1994 and squarely covered under the phrase ‘any service’ used in the definition.
It was submitted that service tax is leviable only where there is a service for consideration. In the absence of consideration, a charge of Service Tax cannot be fructified. It was submitted that the payment of royalty is like tax and not a consideration for any services, unlike as alluded to by the Impugned Order. Accordingly, any demand for service tax on the royalty paid to the State Government cannot be sustained.
As per Sl. No.61 of the negative list, as introduced by notification 22/2016-ST w.e.f. 13.4.2016, the exemption is from payment of service tax for assignment of the right to use natural resources granted before 1.4.2016. So also, if the charges are to be paid at one time, (in full or in instalments) the exemption is applicable. It is the case of the department that as the royalty is paid periodically, the exemption is not applicable.
A two-member bench of Ms Sulekha Beevi C S, Member (Judicial) and Mr Vasa Seshagiri Rao, Member (Technical)observed that the payment of royalty is a regulation of checking the over-exploitation of the resources of our mother earth. Being dominantly like regulatory fees, royalty does not fit into the definition of consideration for services provided, as under the service tax law.
“Though it is contended by the department that the activity of ‘grant of lease’ for mining right falls within the definition of service under Section 65B (44), the demand is raised alleging that it falls within Sl. No.61 (introduced w.e.f 13.4.2016) and that the activity is an assignment of the right to use natural resources.”, the bench viewed.
The demand raised is indeed based on Sl. No.61 of the exemption notification. The argument put forward by the Ld. Counsel that the liability is derived based on an exemption notification and not the charging provision is not without substance. The CESTAT held that the demand for service tax cannot be sustained and set aside the impugned order.
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