Grant of Mining Rights is Exercise of Sovereign Function, Covered Under Negative List: CESTAT [Read Order]

In a recent ruling, the Principal Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that grant of mining rights by the Government was an exercise of sovereign function and was covered under the Negative List, and hence not liable to service tax.

The Mining Engineer was a Government authority responsible for granting mining leases for extraction of minerals in Bharatpur district. The appellant collected royalty and dead rent from the lease holders at rates fixed under law.

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The department issued a show cause notice alleging that by granting mining leases, the appellant was providing a taxable service in the nature of renting of immovable property. On this basis, service tax demand along with interest and penalty was confirmed by the adjudicating authority. Aggrieved by the order, the appellant approached the Tribunal.

The appellant argued that grant of mining rights was not a commercial activity but a statutory function performed by the State in exercise of sovereign powers. They argued that such activity cannot be treated as a support service or renting service, as private entities cannot grant mining rights. The appellant also argued that the issue was already decided in its favour in earlier Tribunal orders.

The revenue counsel argued that renting of immovable property was included within taxable services and that allowing use of land for mining amounted to renting. The department relied on the impugned order but accepted that earlier Tribunal decisions had took a different view.

The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that grant of mining rights flowed directly from statute and was not an activity which can be carried out by private entities. The tribunal observed that the definition of support services applied only to activities which business entities can normally perform themselves or outsource.

The tribunal explained that leasing land only for mining purpose was closely linked to the sovereign function of regulating mineral resources. It pointed out that even though renting of immovable property appeared in the inclusive part of the definition, such renting must be commercial in nature. Grant of mining rights did not fall in that category.

Based on this, the tribunal holded that grant of mining rights was a sovereign function covered under the Negative List and not liable to service tax. The impugned order was set aside and the appeal was allowed.

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