Royalty and production-level payments under pre-1 April 2016 agreements are not taxable under reverse charge.

The appellant was engaged in exploration and production of Coal Bed Methane pursuant to an agreement dated 26 July 2002 with the Ministry of Petroleum and Natural Gas, Government of India.

Under the agreement, it was required to pay royalty to the Government of West Bengal and Production Level Payment (PLP) to the Government of India for extraction of natural resources.

The Department alleged that these payments made during April 2016 to June 2017 were liable to service tax under the Reverse Charge Mechanism, following the amendment effective from 1 April 2016 by which services provided by the Government to a business entity became taxable.

The Principal Commissioner confirmed a service-tax demand of ₹2,67,34,898, along with interest and penalties, and appropriated the amount deposited by the appellant under protest.

The appellant challenged the order before the Tribunal, relying principally on The Principal Commissioner, CGST & Central Excise, Bhopal v. M/s. S.R. Traders, Final Order No. 50660 of 2023.

Whether royalty paid to the Government of West Bengal and PLP paid to the Government of India under the agreement dated 26 July 2002 were liable to service tax under the Reverse Charge Mechanism during April 2016 to June 2017?

Whether the amendment to Section 66D(a)(iv) of the Finance Act, 1994, effective from 1 April 2016, could retrospectively render taxable payments made pursuant to an agreement under which the right to extract natural resources had been granted before that date?

Section 66B of the Finance Act, 1994 levied service tax on taxable services “provided or agreed to be provided”; accordingly, taxability is determined with reference to the time when the service is provided or agreed to be provided.

Before 1 April 2016, Section 66D(a) placed services provided by the Government or a local authority in the negative list, subject to specified exceptions, including only certain support services provided to business entities.

With effect from 1 April 2016, “support services” in Section 66D(a)(iv) was replaced by “any service,” making Government services to business entities taxable prospectively.

The Tribunal relied on Madhya Pradesh State Mining Corporation Ltd. v. Principal Commissioner, CGST & Central Excise, Bhopal, holding that the taxable event is the provision or agreement to provide the service, and that a pre-1 April 2016 agreement granting the right to use natural resources remained governed by the earlier non-taxable regime.

It also followed S.R. Traders, which held that the Point of Taxation Rules determine when tax is payable and do not determine whether the underlying service is taxable.

The Tribunal treated the relevant taxable activity as the grant or assignment of the right to extract and use natural resources, rather than the dates on which royalty or PLP instalments were subsequently paid.

Since the appellant’s agreement was executed on 26 July 2002, the Government service or right-assignment was provided or agreed to be provided before 1 April 2016, when such Government services were covered by the negative list.

The subsequent amendment to Section 66D(a)(iv) therefore could not make the pre-existing contractual transaction taxable merely because payments fell due after 1 April 2016.

The Department’s reliance on the Point of Taxation Rules and the CBEC clarification concerning periodic payments was rejected because those provisions regulate the timing of payment of tax and cannot independently create taxability where the taxable event occurred under the earlier regime.

Applying the ratio of S.R. Traders and Madhya Pradesh State Mining Corporation, the Tribunal concluded that the post-1 April 2016 royalty and PLP payments retained their character as consideration under a pre-existing, non-taxable agreement.

The impugned Order-in-Original confirming the demand, interest and penalties was set aside.

The appeal was allowed with consequential relief in accordance with law.