The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has clarified that royalty amounts withheld by state authorities from contractors for mineral procurement under statutory forms do not constitute taxable services under the reverse charge mechanism. The Tribunal set aside demands based solely on balance sheet entries, reinforcing that mere accounting entries without corroborative evidence cannot trigger service tax liability.
Background & Facts
The Dispute
The appellants, M/s. J.K. Engicon Private Limited and M/s. J.K. & BSECPL (JV), are works contractors engaged in road and bridge construction under contracts awarded by the Bihar State Road Development Corporation Limited (BSRDC). They acted as sub-contractors to Gawar Construction Limited. During the financial years 2016-17 and 2017-18, the Revenue Department issued Show Cause Notices (SCNs) alleging that the appellants were liable to pay service tax under the reverse charge mechanism (RCM) on amounts recorded in their balance sheets as "Royalty on Mineral".
Key Facts
- The appellants did not hold any mining license or permit from any state authority.
- They purchased stone chips and sand from licensed mineral vendors who were legally obligated to pay royalty to the Bihar government.
- Under Rule 40(10) of the Bihar Minor Mineral Concession Rules, 1972, BSRDC withheld a portion of the contractors’ invoices equivalent to the royalty due on minerals used in construction.
- The withheld amounts were not paid by the appellants; they were retained by BSRDC until the vendors submitted Form M (affidavit) and Form N (particulars) certifying lawful procurement from licensed vendors.
- Once Forms M and N were submitted, the withheld amounts were released to the contractors.
- The balance sheet entries of Rs. 1,04,00,677 (for J.K. & BSECPL JV) and Rs. 24,40,966 (for J.K. Engicon) reflected these withheld amounts, not actual royalty payments by the appellants.
- The appellants submitted sample Forms M and N as evidence, demonstrating that royalty liability rested solely with the mineral vendors.
Procedural History
- 2016-17 & 2017-18: Financial years under scrutiny; works contract services rendered.
- 22.10.2021: SCN issued to both appellants alleging service tax liability under RCM on royalty amounts.
- 21.04.2022: Supplementary SCN issued to J.K. & BSECPL (JV).
- 13.12.2023: Commissioner (Appeals), Patna, confirmed the demand with interest and penalty.
- 21.12.2023: Commissioner (Appeals) confirmed demand for J.K. & BSECPL (JV).
- 11.06.2026: Hearing before CESTAT, Kolkata.
- 15.06.2026: Final order passed by CESTAT.
The Parties' Positions
Appellants: Argued that no service was rendered by the government to them; royalty was withheld by BSRDC as a statutory mechanism to ensure compliance by mineral vendors. They had no mining rights, made no royalty payments, and relied on the exemption for works contracts under Notification No. 25/2012-ST. They further contended that the SCN was time-barred as it was issued more than five years after the relevant period.
Respondent (Revenue): Contended that the balance sheet entries of "Royalty on Mineral" indicated payment of royalty by the appellants, triggering RCM liability under Section 66D of the Finance Act, 1994, as amended with effect from 01.04.2016.
Relief Sought
The appellants sought quashing of the impugned orders dated 13.12.2023 and 21.12.2023, cancellation of the service tax demand of Rs. 15,60,102 and Rs. 3,66,145 respectively, along with interest and penalty, on grounds of non-taxability and limitation.
The Legal Issue
The central question was whether the amount withheld by the Bihar State Road Development Corporation from contractors under Rule 40(10) of the Bihar Minor Mineral Concession Rules, 1972, constitutes a payment of royalty by the contractor for the purpose of attracting service tax under the reverse charge mechanism, and whether a demand based solely on balance sheet entries without independent evidence can invoke the extended period of limitation.
Arguments Presented
For the Appellant
The appellants relied on Rule 40(10) of the Bihar Minor Mineral Concession Rules, 1972, to demonstrate that royalty liability rests with the licensed mineral vendors, not the contractors. They submitted that the balance sheet entries reflected withheld invoice amounts, not actual payments. They cited multiple CESTAT judgments - including M/s. Munna Construction v. Commissioner of C.Ex. & S.T., M/s. Arya Logistics v. Commissioner of C.Ex. & S.T., and M/s. Balajee Machinery v. Commissioner of C.G.S.T. & Excise - to establish that demands based solely on balance sheet or Form 26AS data, without corroborative evidence of taxable service, are unsustainable. They emphasized their bona fide belief that no service tax was payable, given the statutory framework and exemption for works contracts.
For the Respondent
The Revenue contended that the entry of "Royalty on Mineral" in the balance sheet indicated that the appellants had incurred royalty expenses, thereby triggering RCM liability under the amended Section 66D. It argued that the nature of the transaction was not properly explained and that the appellants failed to prove the absence of a service rendered by the government. The Revenue did not produce any evidence linking the appellants to a mining license or direct royalty payment.
The Court's Analysis
The Tribunal conducted a detailed examination of the statutory framework under the Bihar Minor Mineral Concession Rules, 1972, and the service tax provisions. It observed that the Revenue’s entire case rested on a mechanical interpretation of balance sheet entries, without any inquiry into the nature of the transaction or verification of whether the appellants held mining rights.
"The SCN is totally silent as to what kind of License was obtained by the appellant from which authority. It is also silent as to how such Royalties were being paid by the appellant."
The Tribunal noted that Rule 40(10) explicitly places the obligation to pay royalty on the licensed mineral vendors, not the works contractors. The withheld amounts were a mechanism to ensure compliance by vendors, not a payment by the contractor. The Tribunal accepted the appellants’ documentary evidence, including Forms M and N, as conclusive proof that the royalty liability was not theirs.
The Tribunal further held that the extended period of limitation under Section 73(1) of the Finance Act, 1994, could not be invoked because the Revenue failed to establish suppression of facts. The demand was based entirely on unverified balance sheet data, which the Tribunal has consistently held to be insufficient for invoking extended limitation.
"Mere reliance on 26AS / Balance Sheet, without any corroborative evidence, for issuing of Show Cause Notice is not legally sustainable for extended period and the demand would be hit by time bar."
The Tribunal relied on its own prior decision in Tabassum Enterprises v. C, CGST & CX and judgments from Ahmedabad and Allahabad benches, which held that Form 26AS and income tax data cannot substitute for evidence of taxable service under service tax law. The Tribunal concluded that the Revenue had not discharged its burden of proving either the existence of a taxable service or suppression of facts.
The Verdict
The appeals were allowed. The impugned orders dated 13.12.2023 and 21.12.2023 were set aside. The service tax demands of Rs. 15,60,102 and Rs. 3,66,145, along with interest and penalty, were cancelled. The appellants were granted consequential relief as per law. The Tribunal held that the extended period of limitation was not invocable due to lack of evidence of suppression, and the demand was time-barred.
What This Means For Similar Cases
Withheld Royalty Amounts Are Not Taxable Under RCM
- Practitioners must distinguish between actual royalty payments by licensees and statutory withholdings by government authorities from contractors.
- In road and infrastructure projects, where state agencies withhold royalty amounts under mineral rules, service tax liability under RCM does not arise for contractors.
- The burden lies on the Revenue to prove that the taxpayer is the actual recipient of a service from the government, not merely the beneficiary of a statutory compliance mechanism.
Balance Sheet Entries Alone Cannot Sustain Extended Limitation
- Revenue authorities cannot rely on balance sheet entries, Form 26AS, or income tax data to initiate service tax proceedings without independent verification.
- CESTAT has consistently held that such mechanical reliance is legally unsustainable and triggers limitation defenses.
- Practitioners should raise limitation as a primary defense in cases where the Revenue’s demand is based on accounting entries without corroborative evidence.
Works Contract Exemption Remains Valid for Sub-Contractors
- Notification No. 25/2012-ST continues to exempt works contracts for roads and bridges, including those undertaken by sub-contractors.
- Even if RCM were applicable, the exemption would override it, provided the nature of the service is correctly classified.
- Taxpayers must maintain clear documentation linking their work to exempted categories and ensure compliance with statutory forms like M and N to reinforce their position.
