Coal Mining Activity is ‘Manufacture’, Not Service: CESTAT Sets Aside ₹352 Crore Service Tax Demand [Read Order]

The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the activity of coal mining and related operations amounts to manufacture and is not liable to service tax under mining services.

EMTA Coal Limited, the appellant, is engaged in production of coal from mines allotted to various State power utilities. These utilities formed joint venture companies with the appellant for mining operations. The mining leases were granted to the joint venture companies while the appellant carried out activities such as drilling, extraction, sizing, processing and dispatch of coal. The coal produced was supplied to power utilities and central excise duty was paid on such production.

The department issued show cause notices alleging that the appellant was providing “mining services” to the joint venture companies and demanded service tax amounting to about Rs. 352 crore along with interest and penalties. The adjudicating authority confirmed the demand, and the appellant approached the Tribunal.

The appellant’s counsel argued that the entire activity undertaken by them amounted to manufacture of coal. They argued that central excise duty had already been paid on the same activity, and service tax cannot be levied again. It was also argued that the activities were part of a joint venture arrangement, and there was no service provider and service recipient relationship.

The revenue counsel argued that the appellant and the joint venture companies are separate legal entities. They argued that the mining leases were in the name of joint venture companies, and the appellant was only providing mining services for consideration. The revenue relied on the provisions relating to mining services to justify the demand of service tax.

The two-member bench comprising Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) observed that the activities of drilling, extraction, crushing, sizing, and dispatch of coal form a continuous process which results in manufacture of coal. It observed that such processes are incidental and necessary to make coal marketable.

The tribunal further observed that excise duty had been paid and accepted by the department on the same activity. It explained that once an activity is treated as manufacture, it cannot be taxed again as a service. The tribunal also observed that the appellant was a co-venturer in the joint venture and the work done was in furtherance of the joint venture business, not as a service provided to another entity.

The tribunal pointed out that for levy of service tax, there must be a clear service provider and service recipient relationship along with consideration, which was not established in this case. In view of these findings, the tribunal set aside the demand of service tax along with interest and penalties. The appeal filed by the appellant was allowed.

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