No Service Tax Applicable on compensation received for canceled allotment of coal mines: CESTAT

The Appellant herein is a company inter alia engaged in the business of manufacturing steel. The Appellant was allocated the Jitpur Coal Block/Mine at Jharkhand. The Hon’ble Supreme Court vide its order dated 24.09.2014, canceled the allotment of 203 coal mines, one of which was the Jitpur Coal Mine allocated to the Appellant.

Subsequently, the Coal Mines (Special Provisions) Act, 2015 (CMSPA) was passed, which inter alia provided for the manner of subsequent allocation of rights over the canceled coal mines.

Compensation in respect of land and mine infrastructure

As per the provisions of Section 16 of the CMSPA, at the time of re-allocation of the cancelled coal blocks to the successful bidder, the prior allottees were to be compensated for the transfer of the right, title and interest in the land and mine infrastructure to the successful bidder. Accordingly, the Appellant being a prior allottee, received an amount of Rs.22,72,64,253/- as compensation in respect of land and mine infrastructure.

Notice for discharge of Service Tax on compensation for canceled allotment of coal mines

The Appellant was issued a Show Cause Notice dated 03.04.2019, alleging that it had tolerated the act of cancellation of the coal blocks by the Ministry of Commerce, Government of India, in lieu of which it received compensation, on which it was liable to discharge Service Tax.

It was alleged that the service rendered by the Appellant was that of ‘agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act’, which was a declared service under Section 66E(e) of the Finance Act, 1994.

Order was passed against the confirming the appellant confirming demand raised in the Show Cause Notice, inter alia on the ground that the Appellant had tolerated the act of cancellation of the coal mine and received the amount of compensation in lieu thereof, which was covered by the definition of ‘service’ in Section 65B(44) read with Section 65B(22) and Section 66E(e) of the Finance Act, 1994.

Discussion by CESTAT

Defining Act of tolerance

The question of tolerating something and receiving compensation for such tolerance pre-supposes that:

a) the person had a choice to tolerate or not;
b) the person chose to tolerate;
c) such tolerance was for consideration as per an agreement (written or otherwise) to tolerate;
d) the tolerance was a taxable service.

Appellant had no choice of tolerance

None of the above elements are present in the case under consideration. The Appellant had no choice of tolerating cancellation or not. The Appellant has not chosen to tolerate the cancellation. The cancellation was in pursuance of the order of the Hon’ble Supreme Court and not as a result of a contract to tolerate cancellation. There was no consideration for tolerating the cancellation, only compensation provided for statutorily for the investment made in the mines by the Appellant.

CESTAT Order

This is like compensation when one’s land is acquired by the Government in public interest

This case is not even a case of payment under a contract. Both the cancellation of the allocation of the blocks and the receipt of compensation are by operation of law. They are like the receipt of a compensation when one’s land is acquired by the Government in public interest or the payment to a Government employee of an amount equal to the salary for unused leave at the time of his/her retirement. It is unthinkable to say that the land-owner has tolerated the acquisition of his land as per an agreement and charge Service Tax on the compensation. Equally unthinkable is to say that the Government employee has tolerated the non-sanction of leave during his service as per an agreement and in consideration, received the leave encashment at the time of retirement and to charge Service Tax on the amount received as leave encashment. These, cannot be called taxable services of tolerating a situation by any stretch of imagination. No Service Tax can be levied on the amounts received by the Appellant as compensation.