In Service Tax Appeal No. 52226 OF 2019- CESTAT- Allocation of area development charges by State Government not taxable as service: CESTAT (Delhi)
Members Dilip Gupta (President) & Hemambika R. Priya (Technical) [24-04-2023]

Read Order: The Madhya Pradesh State Mining Corporation Limited v. Pr. Commissioner, CGST & Central Excise

Chahat Varma

New Delhi, May 4, 2023: The Principal bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that while the allocation of area development charges by the State Government may be considered as income for M/s. Madhya Pradesh State Mining Development Corporation (appellant), it cannot be treated as consideration for a service.

The appellant was granted mining rights by the Madhya Pradesh State Government to mine sand, rock, phosphate, flag stone, and coal. The appellant paid royalty to the State Government in exchange for these rights. The mining operations were conducted by the appellant either directly or through contractors. The appellant had filed an appeal against an order passed by the Principal Commissioner, CGST and Central Excise, Bhopal, which confirmed the demand of service tax, interest and penalty by invoking the extended period of limitation under the proviso to section 73(1) of the Finance Act.

The two-member bench headed by Dilip Gupta (President), held the demand for service tax to be unsustainable, by placing reliance on South Eastern Coalfields Ltd v. Commissioner of Central Excise and Service Tax [LQ/CESTAT/2020/346], wherein it has been held that liquidated damages recovered as a result of a breach or non-performance of a contract cannot be considered as payment for any services rendered, but are in the nature of deterrent imposed so that such a breach or non-performance is not repeated.

The bench further observed that, “Thus, for the purpose of levying service tax, the taxable event is construed as the time when the service is provided or agreed to be provided. Thus, in order to determine whether levy of tax is applicable on a particular activity, it is necessary to determine the point of time when such activity is provided or agreed to be provided. In the present case, the agreement between the appellant and State Government for grant of mining rights was executed on 02.01.2016 and on this date, the transactions involving assignment of right to use natural resource was not taxable.”