Supreme Court upholds Setting Aside Service Tax Demands on Mining Operations and Site Formation Services unsustainable [Read Order]

The Supreme Court has confirmed the decision of the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) setting aside service tax demands raised on mining operations and site formation services, holding such demands unsustainable. The bench condoned the delay of 151 days.

The Department, following an audit, alleged that the company was liable to pay service tax under three heads: (i) Site Formation Service for the period June 2005 to May 2007, (ii) Mining Services on account of short payment for June 2007 to September 2008, and (iii) Mining Services again for the same period on account of undervaluation of service charges. A show cause notice was issued demanding over ₹11 crore in tax, interest, and penalties was adjudicated in 2012, confirming the full liability.

On appeal before the CESTAT, Core Minerals argued that its contracts with mine owners were composite in nature, covering mining as a whole, and could not be artificially split to impose tax separately on site formation activities.

The tribunal agreed, noting that site preparation activities were incidental to mining and could not be vivisected for levy prior to 1 June 2007, when “mining service” itself was brought under the tax net. Relying on Supreme Court and Tribunal precedents, the CESTAT held that the demand under “Site Formation Service” was unsustainable.

Regarding the allegation of short payment of service tax between 2007 and 2008, the Tribunal accepted the Chartered Accountant-certified reconciliation presented by the appellant, which demonstrated that the tax had been duly paid on a receipt basis in line with Rule 6 of the Service Tax Rules, 1994. It was also found that by the end of FY 2008-09, Core Minerals had discharged its entire service tax liability on the billed income, negating the Department’s claim.

On the charge of undervaluation, where the Department attempted to redetermine the taxable value by adopting the cost of mining expenses shown in the balance sheet, the Tribunal held that Section 67 of the Finance Act, 1994 clearly mandates that where consideration is in money, the gross amount charged is the taxable value.

Since the contracts involved monetary consideration only, revaluation on a cost basis was impermissible. The Tribunal observed that the Department’s approach resulted in overlapping demands and was contrary to statutory provisions and judicial precedent, including the Supreme Court’s ruling in Intercontinental Consultants & Technocrats.

Finally, the Revenue appealed before the apex court, where the Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan refused to interfere with the Tribunal’s findings, observing “We find no good reason to interfere with the impugned order dated 23-12-2024 passed by the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai.”

By upholding the CESTAT decisions, the Supreme Court has effectively ruled that service tax demands on mining operations and allied site formation services are unsustainable for the disputed periods.

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