The Customs, Excise & Service Tax Appellate Tribunal has clarified that royalty and dead rent collected by state governments for granting mining leases do not constitute taxable services under the category of 'renting of immovable property'. This decision reaffirms that activities arising from sovereign functions under the Mines and Minerals (Development and Regulation) Act, 1957, fall outside the scope of service tax, even where statutory definitions appear broad.
Background & Facts
The Dispute
The appellant, the Department of Mines & Geology, Rajasthan, collects royalty and dead rent from mining lessees under mining leases granted pursuant to the Mines and Minerals (Development and Regulation) Act, 1957, and the Rajasthan Minor Mineral Concession Rules, 1986. The Department of Central Goods and Service Tax issued a show cause notice alleging that these payments constituted consideration for 'renting of immovable property', thereby attracting service tax under the Finance Act, 1994. The Commissioner confirmed a demand of ₹3,47,87,620/-, including interest and penalty.
Procedural History
- 23.10.2018: Show cause notice issued alleging service tax liability on royalty and dead rent under 'renting of immovable property'.
- 30.07.2019: Commissioner of CGST, Alwar, passed order confirming the demand.
- 2021: Tribunal in appellant’s own case (Final Order No. 52006-52027/2021) held that such payments are not taxable.
- 2025: Another bench of the Tribunal in Director vs Commissioner, Jodhpur reaffirmed the same position.
- 15.01.2026: Hearing held before the present bench.
- 23.01.2026: Final order passed allowing the appeal.
Relief Sought
The appellant sought cancellation of the demand, arguing that the collection of royalty and dead rent is an exercise of sovereign power under statutory mandates and not a commercial service. It further contended that the issue had already been settled in its favor by prior tribunal decisions.
The Legal Issue
The central question was whether the collection of royalty and dead rent for granting mining rights constitutes a taxable service under the category of 'renting of immovable property' within the definition of 'support services' under the Finance Act, 1994.
Arguments Presented
For the Appellant
The appellant relied on two key precedents: Final Order No. 52006-52027/2021 and Director vs Commissioner, Jodhpur (Final Order No. 50932/2025), both of which held that mining leases are not 'support services'. It argued that the grant of mining rights is an exclusive sovereign function under the MMDR Act, 1957, and cannot be performed by private entities. It further cited CBEC Circulars clarifying that such activities are excluded from the service tax net. The appellant emphasized that the lease deed is a statutory formality, not a commercial contract, and that the terms are dictated entirely by law.
For the Respondent
The respondent initially maintained that royalty and dead rent were payments for the use of land and thus fell within the 'includes' part of the definition of 'support services'. However, the Authorized Representative conceded that the matter had been decided in favor of the appellant in prior orders and did not press the argument.
The Court's Analysis
The Tribunal undertook a detailed statutory interpretation of the term 'support services' under Section 65B(44) of the Finance Act, 1994. It observed that the definition contains three parts: a 'means' part, a 'middle' part, and an 'includes' part. The critical limiting factor is the middle part, which restricts 'support services' to those 'comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing'.
"The activity of lease of land solely for mining purposes is in the nature of exercise of sovereign right and is not a service that entities can carry out by themselves."
The Tribunal held that mining rights cannot be granted by private parties; only the State can exercise this sovereign power. Therefore, even though 'renting of immovable property' appears in the 'includes' part, it cannot be taxed when it arises from a sovereign function. The Tribunal further noted that the legislative amendment effective 01.04.2016 - replacing 'support services' with 'any service' where liability is on the recipient - was intended to clarify, not expand, the scope of taxation. The fact that the Revenue issued notices to lessees under reverse charge after 2016, while continuing to charge service providers before that date, demonstrated an inconsistency inconsistent with the statutory intent to preserve the negative list.
The Tribunal also emphasized that the lease deed is not a commercial agreement but a statutory instrument. The amount, terms, and conditions are prescribed by law, leaving no room for negotiation. This further distinguishes it from commercial leasing.
The Verdict
The appellant won. The Tribunal held that the grant of mining rights through royalty and dead rent is not a taxable service under 'renting of immovable property' because it constitutes a sovereign function under the MMDR Act, 1957, and falls outside the scope of 'support services'. The impugned order was set aside and the demand cancelled.
What This Means For Similar Cases
Sovereign Functions Are Exempt from Service Tax
- Practitioners must distinguish between commercial leasing and statutory grant of rights under public law.
- Any demand for service tax on royalties, mining leases, or similar state-granted rights must be challenged on the ground of sovereign immunity.
- CBEC circulars and prior tribunal rulings on mining leases are binding precedents for similar cases.
Statutory Framework Overrides Commercial Analogy
- When a transaction is mandated by statute and leaves no discretion to parties, it cannot be treated as a commercial service.
- Courts and tribunals will look beyond the form of the transaction (e.g., 'lease deed') to its substance and legal origin.
- The presence of a lease agreement does not automatically trigger service tax liability if the underlying activity is statutory and non-commercial.
Reverse Charge Does Not Validate Taxability
- The shift to reverse charge after 01.04.2016 does not imply that the service was taxable earlier.
- Revenue cannot use changes in liability mechanism to retrospectively validate an unlawful demand.
- Practitioners should argue that inconsistent application of tax liability (forward vs reverse charge) undermines the legal certainty required under tax law.
