M/S Mahesh Sharma vs. The Union Of INDIA

Facts

The petitioner, M/s Mahesh Sharma A Proprietorship Concern, challenged a show cause notice dated 20.10.2021, and a subsequent notice dated 23.02.2024, issued by the respondents (Central GST authorities). The notices sought to recover service tax amounting to Rs. 36,000/-, including Swachh Bharat Cess and Krishi Kalyan Cess, under Section 73(1) of the Finance Act, 1994, read with Section 174 of the Central Goods and Service Tax Act, 2017. The petitioner's primary contention was that royalty is a tax, and therefore, levying tax on royalty would amount to taxing tax, which is illegal under the Finance Act, 1994. The respondents relied on a recent Supreme Court judgment.

Held

The Court held that the petitioner's contention that royalty is a tax cannot be appreciated in light of the Supreme Court's decision in Mineral Area Development Authority and Anr. v. Steel Authority of India and Anr. (2024 SCC online SC 1796). The Supreme Court, in its judgment, concluded that royalty is not a tax but rather a contractual consideration paid by a mining lessee to the lessor for the enjoyment of mineral rights. The liability to pay royalty arises from the contractual conditions of the mining lease, and payments made to the government are not deemed taxes merely because a statute provides for their recovery as arrears. The Court noted that the petitioner's counsel did not dispute this preposition of law. Since the show cause notice was issued on 20.10.2021 and the petitioner was called for a personal hearing, the petitioner's remedy lies in pursuing the case before the authorities. The Court directed the petitioner to appear before the authority concerned on 28/08/2024, who would then decide the case after providing a proper opportunity of hearing, in accordance with law. The notice dated 23.02.2024 was deemed to have lost its efficacy as the date mentioned therein had expired.

Key Issues

1. Whether royalty is a tax, and consequently, whether levying service tax on royalty is permissible under the Finance Act, 1994? (Question of law) The petitioner argued that royalty is a form of tax, and taxing it would constitute 'tax on tax', which is impermissible. The petitioner's contention was based on the understanding that royalty represents a levy by the government, and thus, further taxation on it is illegal. The respondents contended that the Hon'ble Supreme Court, in the recent case of Mineral Area Development Authority and Anr. v. Steel Authority of India and Anr. (2024 SCC online SC 1796), has definitively held that royalty is not a tax. They argued that this Supreme Court decision directly addresses and negates the petitioner's primary argument, making the present petition liable for dismissal or disposal in light of this binding precedent.