As royalty is a tax and not consideration for services, the demand of service tax on royalty is not sustainable, according to the Customs, Excise and Service Tax Appellate Tribunal.
The demand pertained to the royalty that Oil and Natural Gas Corp. paid to the Tamil Nadu government for getting the right to use oil fields in certain districts of the state, for exploration and production of crude oil and natural gas.
The tax department had taken the stance that the state had issued a petroleum mining lease for the extraction of crude oil and natural gas in the allotted blocks, against a consideration which was payable by ONGC in the form of royalty and other charges.
The royalty was being paid to the state on a monthly basis, which as per the tax department, was leviable to a payment of service tax. The department maintained that ONGC had not discharged service tax on the royalty between April 2016 and June 2017.
This led the department to issue a notice against it, which contained a service tax demand to the tune of Rs 34.66 crore, along with interest and penalty.
However, the demand was challenged before the CESTAT.
The main issue that came up before the tribunal was whether the demand of service tax on the royalty paid to the government is sustainable or not.
In 1989, the Supreme Court had held that royalty is a tax. This decision was rendered by a seven-judge bench of the court.
However, in 2004, certain doubts were cast on this decision by a five-judge bench of the top court. The court had held that royalty is not a tax and that the seven-judge bench decision in this regard was a “typographical” or an inadvertent error.
Since there is an apparent conflict between the two apex court judgments, the question as to whether royalty is a tax or not has been referred to a nine-judge bench. This reference is still pending before the court.
Therefore, the tribunal said that as a principle of judicial discipline, the 1989 judgment must be followed because firstly, it is a seven-judge bench decision which holds primacy over a five-judge bench judgment; and secondly, there is no stay on the 1989 ruling.
It further held that royalty is akin to a regulatory fee and if the fee levied is entirely regulatory in nature and does not involve any element of compensatory nature, then such fee cannot be a consideration for a service.
Service tax on royalty, which is a tax in itself, is therefore not sustainable, the CESTAT held.
As a result, the notice containing the tax demand was set aside by the tribunal.