CESTAT Kolkata set aside service tax demands on alleged mineral royalty payments, citing lack of evidence and limitation

June 15, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has set aside service tax demands raised against M/s J.K. Engicon Private Limited and M/s J.K. & BSECPL (JV), holding that amounts reflected in their accounts as “Royalty on Mineral” were merely deductions withheld by government agencies and not royalty payments made for mining rights. The Tribunal also ruled that the demands were barred by limitation and lacked supporting evidence.

The dispute arose after the Service Tax Department scrutinized the appellants’ balance sheets for the financial year 2016-17 and noticed entries showing expenditure under the head “Royalty on Mineral”. Based on these entries, the department alleged that the contractors had received mining-related rights from the State Government and were therefore liable to pay service tax under the Reverse Charge Mechanism (RCM) on royalty payments. Show cause notices were subsequently issued demanding service tax, interest and penalties.

According to the department, following amendments made to Section 66D of the Finance Act, 1994 with effect from April 1, 2016, services provided by the government to business entities, including grant of mining rights, became taxable. The department contended that the appellants had incurred royalty expenditure and were consequently required to discharge service tax liability under the reverse charge provisions.

The contractors, however, strongly disputed the allegations. They argued that they were engaged in road and bridge construction activities, which enjoyed service tax exemption under Notification No. 25/2012-ST. They maintained that they had never obtained any mining lease, permit or licence from the State Government. Instead, they purchased stone chips, sand and other minerals from authorised suppliers who held the necessary mining permissions and were themselves responsible for payment of royalty to the mining authorities.

The appellants explained that under Rule 40(10) of the Bihar Minor Mineral Concession Rules, 1972, contractors executing government works are required to procure minerals only from authorised lessees, permit holders or registered dealers. To ensure compliance, government departments often withhold certain amounts from contractors’ bills until prescribed declarations in Form-M and Form-N are submitted establishing lawful procurement of minerals. The contractors argued that the amounts reflected in their books as “Royalty on Mineral” represented such temporary withholdings and not actual royalty payments to the government.

After examining the records, including sample Form-M and Form-N documents and statements showing deductions made by government departments, the Tribunal accepted the contractors’ explanation. Judicial Member R. Muralidhar observed that the show cause notices were completely silent on a crucial issue, namely what mining licence had allegedly been granted to the appellants and by which authority. The Tribunal noted that the Revenue failed to produce any evidence demonstrating that the contractors possessed mining rights or had made royalty payments in consideration of any mining lease.

The Tribunal emphasized that royalty is ordinarily payable by a licence holder who has been granted the right to extract minerals under a mining lease. In the present case, no such evidence existed. The order observed that “the Revenue has not brought in any evidence” showing that the appellants had obtained mining rights or were paying royalty as licence holders. It further held that the deductions shown in the accounts could not automatically be treated as royalty payments attracting service tax.

Referring to documentary evidence on record, the Tribunal found that the disputed amounts had merely been withheld by road construction authorities pending submission of statutory forms and were released once compliance requirements were fulfilled. Consequently, the bench concluded that the entries in the balance sheet did not establish any taxable service or liability under the reverse charge mechanism.

The Tribunal also found merit in the contractors’ limitation argument. It noted that the entire demand was based solely on balance sheet entries and that the department had conducted no independent investigation to verify the nature of the transactions. The show cause notices were issued several years after the relevant period and relied exclusively on financial records already available to the authorities. According to the Tribunal, mere reliance on balance sheet figures without corroborative evidence could not justify invocation of the extended limitation period.

Relying on earlier CESTAT decisions, including Tabassum Enterprises, Rishu Enterprise and Quest Engineers & Consultant Pvt. Ltd., the bench reiterated the settled legal principle that entries in Form 26AS, income tax records or balance sheets cannot by themselves establish service tax liability unless supported by independent evidence demonstrating the rendering of taxable services. The Tribunal observed that “mere entries in income tax returns or Form 26AS cannot, by themselves, establish liability under the Finance Act, 1994, unless corroborated by evidence demonstrating rendition of taxable service.”

Holding that the Revenue failed both on merits and on limitation, the Tribunal set aside the orders passed by the lower authorities and allowed both appeals. The appellants were granted consequential relief in accordance with law. The ruling is expected to provide important guidance for contractors facing tax demands based solely on accounting entries relating to royalty deductions or mineral procurement in public infrastructure projects.

Case Reference: M/s J.K. Engicon Pvt. Ltd. v. Commissioner of CGST & CX, Patna & M/s J.K. & BSECPL (JV) v. Commissioner of CGST & CX, Patna, Service Tax Appeal Nos. 75393 & 75451 of 2024