ONGC Not Liable To Pay Service Tax On Consideration For Right To Use Natural Resources: CESTAT

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that Oil and Natural Gas Corporation Ltd. (ONGC) is not liable to pay service tax on consideration for the right to use natural resources.

The bench of Sulekha Beevi C.S. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) has relied upon the view taken by the Supreme Court in Cements v. State of Tamil Nadu and held that in accordance with the view taken by the Hon'ble Supreme Court royalty is a tax and not a consideration for services. Therefore, the demand for service tax on royalty is not sustainable.

The appellant/assessee is in the business of exploring and producing crude oil and natural gas from various oil fields located in different areas of Nagapattinam, Cuddalur, Tiruvarur, Tanjore, and Ramnad Districts of Tamil Nadu. The appellant holds a service tax registration for discharging service tax on various taxable services.

As per the department, the appellant has not paid the appropriate service tax on the amount of consideration, in the form of royalty paid to the Government of Tamil Nadu, for the assignment of the right to use for exploration and production of crude oil and natural gas. The officers of the Directorate General of Goods and Service Tax, Zonal Unit, Bangalore, initiated an investigation. Summons were issued to furnish documents, and statements were recorded.

The issue raised was whether Service Tax is leviable on Royalty Payments made by the Appellant to the Government of Tamil Nadu for use of oil fields?

The department contended that the natural resources are the properties of the state, which can either be utilized by the state for the welfare of the public or that rights over resources can be assigned to any person for consideration. The consideration for assigning the right to use of natural resources (grant of license) is determined by taking into account the terms of the contract, period of usage, quantum of benefits, etc. On perusal of the Petroleum Mining Lease issued by the Government of Tamil Nadu, it appeared that the government has issued the lease for the extraction of crude oil and natural gas in the allotted blocks as against the consideration that is paid or payable by the appellant in the form of royalty, PEL/PML, dead rent, and surface rent.

As per Section 65B (44) of the Finance Act, 1994 ,'service' means any activity carried out by a person for another for a consideration, including the declared services. In the negative list system, all services, excluding those specified in the negative list, will be subject to service tax. The services provided by the government are contained in clause (a) of Section 66D, which specifies that the services provided by the government or local authority are non-taxable.

The appellant contended that the amount of Royalty paid by the Appellant is not a consideration for any service, but an amount in the nature of tax. Even if Royalty is assumed to not be in the nature of tax. even then,the grant of license by the State Government is not a service provided by the State Government but a discharge of its regulatory functions and the royalty payments under the Oilfields (Regulation and Development) Act, 1948 (ORD Act) are regulatory fees and not a consideration for a service.

The court held that the provisions contained in the ORD Act, 1948 read with P & NG Rules, 1959 indicate that royalty is more of a regulatory fee than compensatory. The amount of royalty to be paid though differs periodically, in our view the payment of royalty is a regulation of checking the over exploitation of the resources of our mother earth. Being dominantly in the nature of the regulatory fee, royalty does not fit into the definition of consideration for services provided, as under the service tax law.

The court held that the grant of a mining lease is in the nature of a lease and not assignment as contented by the Department. Rule 17 of the PNG Rules prohibits the transfer of assignments. Thus, the grant of a mining lease is in the nature of the lease agreement.

Counsel For Appellant: Sujit Ghosh, Shubh Dixit

Counsel For Respondent: Balasubramaniam

Case Title: M/s.Oil and Natural Gas Corporation Ltd. Versus The Commissioner of GST& Central Excise

Case No.: Service Tax Appeal No.41666 Of 2018

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