The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) quashed service tax demand and held that the exploration and production of crude oil and natural gas from various oil fields.
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.
It appeared to the department 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 a 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.
The counsel for the appellant submitted that service tax is leviable only where there is a service for a consideration. In the absence of consideration, charge of Service Tax cannot be fructified. It was the submission of the Appellant that there is no consideration involved in the present transactions in as much as the Appellant has not paid any consideration to the Government to warrant provisions of the Finance Act to be triggered.
According to Section 65B (44) of the Finance Act, 1994, ‘service’ encompasses any activity carried out by one person for another for consideration, including declared services. In the negative list system, all services, except those specified in the negative list, are subject to service tax. Government-provided services fall under clause (a) of Section 66D, which designates services by the government or local authority as non-taxable.
A Two-Member Bench comprising Sulekha Beevi C.S. ( Judicial Member ) and Vasa Seshagiri Rao ( Technical Member ) observed that “The liability to pay royalty is fixed by the enactment. The amount of Royalty to be paid is determined on the basis of the well head prices. The royalty to be paid differs periodically. In order to collect royalty, a method is provided by the Act. The payment on the basis of well head prices is a measure for collection of the royalty. The provisions contained in the ORD Act, 1948 read with P & NG Rules, 1959 enables us to draw a strong inference that royalty is more of a regulatory fee than compensatory.”
Quashing the service tax demand, the Bench further held that the amount of royalty to be paid though differs periodically, in our view the payment of royalty is a regulation of checking the over exploitation of the resources of our mother earth. Being dominantly in the nature of regulatory fee, royalty does not fit into the definition of consideration for services provided, as under the service tax law.
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