Royalty is not a tax but a contractual payment

The Chhattisgarh High Court has dismissed a petition challenging a service tax demand on royalty payments. Citing a Supreme Court ruling, the court affirmed that royalty is a contractual payment between parties, not a tax itself. Consequently, the demand for service tax on royalty was upheld in principle, though the specific case was disposed of due to an expired notice date, with the petitioner directed to attend a new hearing.

The Hon'ble Chhattisgarh High Court in Mahesh Sharma v. Union of India [Writ Petition Tax No. 151 of 2024 dated August 02, 2024] dismissed the writ petition challenging the Show Cause Notice ("SCN") demanding service tax on royalty. The court relied on the Supreme Court's ruling in Mineral Area Development Authority v. Steel Authority of India [Civil Application Nos. 4056-4064 of 1999 dated July 25, 2024] and held that royalty is not a tax but a contractual payment.

Facts:

Mr. Mahesh Sharma ("the Petitioner"), challenged the SCN dated October 20, 2021 ("the Impugned SCN"), issued by Revenue Department ("the Respondent"), wherein the demand was made from the Petitioner to deposit the service tax of Rs. 36,000/-including (Swachchha Bharat Cess and Krishi Kalyan Cess) which was recoverable under Section 73 (1) of the Finance Act, 1994 ("the Finance Act") read with Section 174 of Central Goods and Services Tax Act, 2017 ("the CGST Act").

The Impugned Notice was followed by another notice dated February 23, 2024 by which the Petitioner was called upon for personal hearing before the authorities, in pursuance of the Impugned SCN.

The Petitioner contended that he is not liable to pay Service Tax on royalty as the royalty is the tax and therefore, there cannot be tax upon the tax which is in violation of the Finance Act.

Hence, aggrieved by the Impugned Order, the Petitioner filed the present writ petition before the Hon'ble High Court?

Issue:

Whether royalty is tax?

Held:

The Hon'ble Chhattisgarh High Court in WPT No. 151 of 2024 held as under:

• Relied on, the case of Mineral Area Development Authority v. Steel Authority of India [Civil Application Nos. 4056-4064 of 1999] wherein the Apex Courtcategorically held that royalty is not a tax but a contractual consideration paid by a lessee to the lessor for enjoyment of the right. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
• Held that, the writ petition is disposed of and the Impugned Order lost its efficacyas the date mentioned in the notice was already expired. Therefore, the Petitioner was directed to appear before the authority concerned on August 28, 2024 and then the authority concerned after giving the proper opportunity of hearing to the Petitioner, decide the case in accordance with law.

Our Comments:

In a pari materia case, the Hon'ble Apex Court in the case of Mineral Area Development Authority v. Steel Authority of India [Civil Application Nos. 4056-4064 of 1999 dated July 25, 2024] held that,royalty is not within the nature of a tax as it is a contractual consideration paid by the lesssee to the lessor and royalty does not fulfil the characteristics of tax. In the said case the judgment of India Cement Ltd. v. State of Tamil Nadu [(1990) 1 SCC 12]holding royalty to be a tax was overruled.

The Hon'ble Supreme Court's decision serves as a binding precedent, ensuring that royalty payments remain liable to taxation unless expressly exempted by law. This judgment aligns with precedents.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED