Royalty and Dead Rent Collected by State for Mining Rights Not Taxable as Services Under Finance Act: CESTAT [Read Order]

The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that royalty and dead rent collected by the State Government for granting mining rights do not amount to taxable services under the Finance Act, 1994.

The appellant, the Directorate of Petroleum, Government of Rajasthan, was involved in issuing petroleum exploration and mining licenses. For the period from April 1, 2013, to March 31, 2016, the department received a service tax demand of Rs. 1,657.71 crore, which included interest and penalties. The demand was raised on the ground that royalty and dead rent collected from licensees were taxable under the category of “Renting of Immovable Property Services” and “Support Services” provided by the government to business entities.

The appellant’s counsel argued that the grant of mining rights was carried out under statutory powers and was a sovereign function, not a commercial activity. It submitted that the royalty and dead rent amounts were fixed by law and not negotiable, and could not be treated as consideration for any service.

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They also relied on the CBEC Education Guide of 2012, which clarified that such activities by the government did not constitute a taxable service. They argued that the department’s own conduct showed inconsistency, initially treating the royalty as taxable on a forward charge basis and later shifting to reverse charge after April 1, 2016.

The revenue counsel argued that leasing land for mining purposes amounted to renting immovable property and therefore fell within the definition of declared services under the Finance Act. They relied on the Commissioner’s findings and also cited the Rajasthan High Court’s ruling in Udaipur Chamber of Commerce and Industry v. Union of India, which had upheld tax liability on similar royalty collections post-2016.

The appellant’s counsel responded that the Udaipur Chamber ruling pertained to lessees and did not apply to the government in its capacity as licensor. They also pointed out that no direct service was being rendered to the licensee and the activity was rooted entirely in statutory authority, not contract.

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The two-member bench comprising Justice Dilip Gupta, President (Judicial Member), and P. V. Subba Rao, Technical Member (Central Excise), agreed with the appellant’s position. It observed that the royalty and dead rent collected by the State were part of the statutory framework and stemmed from sovereign powers under the Mines and Minerals (Development and Regulation) Act, 1957.

The tribunal explained that such collections could not be equated with renting land or providing support services. It also highlighted that the CBEC’s own circulars supported the appellant’s view and that the revenue had failed to conduct proper verification or issue summons before confirming such a massive demand.

The CESTAT bench found that the service tax demand was unsustainable both on legal grounds and on procedural fairness. It held that the extended period of limitation could not be invoked, as there was no evidence of suppression or willful misstatement by the appellant.

The tribunal set aside the demand and allowed the appeal. It ruled that royalty and dead rent collected by the State Government for granting mining rights do not fall within the scope of taxable services under the Finance Act, and the issuance of the demand notice was not legally justified.

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