Periodic royalty payments under pre-2016 mining leases are not taxable under reverse charge service tax provisions.

Usha Martin Limited was engaged in manufacturing and clearing iron and steel products from its Adityapur, Jharkhand facility.

It entered into a mining lease agreement with the State of Jharkhand on 16 August 2005 for extracting iron ore from Badajamda Iron Ore Mines for captive consumption, and made periodic royalty payments to the State Government under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957.

The Department issued a show-cause notice dated 24 January 2019, demanding Service Tax under the reverse-charge mechanism on royalty payments made during April 2016 to June 2017.

By Order-in-Original No. 03/S.Tax/Commissioner/2025 dated 28 January 2025, the Commissioner confirmed Service Tax of Rs.7,14,46,604, along with interest and penalty.

1. Whether periodic royalty payments made to the Government after 1 April 2016 were liable to Service Tax under the reverse-charge mechanism when the underlying mining lease and assignment of the right to use natural resources were granted under an agreement executed before 1 April 2016?

2. Whether the demand of Service Tax, interest and penalty was sustainable in view of the alleged revenue-neutrality of the transaction and the absence of suppression or intent to evade tax?

The Tribunal applied Section 66B of the Finance Act, 1994, under which Service Tax is levied on taxable services “provided or agreed to be provided”; accordingly, the taxable event is the time when the service is provided or agreed to be provided.

Prior to 1 April 2016, Section 66D(a)(iv) placed services provided by the Government or a local authority, other than specified exceptions, in the negative list; the amendment effective from 1 April 2016 substituted “support services” with “any service”, making Government services to business entities taxable prospectively.

Notification No. 30/2012-ST governed reverse-charge liability, while the Point of Taxation Rules determine the time for payment of tax and do not determine whether the underlying service is taxable.

The Tribunal relied on Madhya Pradesh State Mining Corporation Ltd. v. Principal Commissioner, CGST & Central Excise, 2023 (4) TMI 1075 (CESTAT New Delhi), and Principal Commissioner of CGST & Central Excise v. S.R. Traders, (2023) 9 Centax 407 (Tri. Delhi), affirmed by the Supreme Court at (2023) 9 Centax 408 (SC), holding that mining rights granted under agreements executed before 1 April 2016 were not rendered taxable merely because royalty or other periodic payments were made thereafter.

The Tribunal also followed CESC Ltd. v. Commissioner of Central Tax, CGST & Central Excise, Kolkata, 2025 (7) TMI 928 (CESTAT Kolkata), which adopted the same approach.

The Tribunal treated the execution of the mining lease on 16 August 2005 as the point at which the Government assigned the right to use the natural resource.

Since that taxable activity was provided or agreed to be provided before 1 April 2016, it was governed by the pre-amendment regime under which such Government services were covered by the negative list.

The subsequent payment of royalty after 1 April 2016 could not retrospectively convert the earlier assignment into a taxable service.

The Point of Taxation Rules were held irrelevant to the question of whether the service itself was taxable.

The Tribunal found the facts materially identical to the binding or consistently followed precedents and noted that the Revenue had produced no contrary decision.

It further observed that the entire quantity of extracted iron ore was used in the assessee’s manufacturing process and that any Service Tax paid would have been available as CENVAT credit, making the matter revenue-neutral and weakening the allegation of suppression or intent to evade tax.

The confirmed demand of Rs.7,14,46,604, along with interest, was set aside, and no penalty was held imposable.

The impugned Order-in-Original was consequently set aside and the appeal was allowed with consequential relief, if any.