Service Tax Treatment of Compensation under Coal Mines (Special Provisions) Act: Analysis of CESTAT Kolkata Decision in MNH Shakti Limited Vs Commissioner

Background of the Dispute

The case of MNH Shakti Limited Vs Commissioner before CESTAT Kolkata revolved around whether compensation received under a statute, following cancellation of coal block allocations, can be subjected to service tax as consideration for “tolerating an act” under the Finance Act, 1994.

MNH Shakti Limited is a joint venture of Mahanadi Coal Fields Ltd, Neyeveli Lignite Corporation and Hindalco Industries Ltd., formed for mining and selling coal. In 2005, coal blocks were allocated to the assessee by the Government of India.

However, by judgment dated 24 September 2014, the Hon’ble Supreme Court cancelled various coal block allocations, including those granted to the assessee. These cancelled coal blocks were later re-allotted to new entities.

Between the date of original allocation and the Supreme Court’s cancellation, the assessee and other similarly placed allottees had invested substantial sums in developing the coal mines. To address the financial impact of the cancellation on these earlier allottees, Parliament enacted:

  • Coal Mines (Special Provisions) Act, 2015 (CMSPA); and
  • Coal Mines (Special Provisions) Rules, 2015.

Under Section 9 of CMSPA, a portion of the proceeds collected from the new allottees was earmarked to be paid as compensation to the previous allottees. The assessee received such compensation routed through the Government.

The dispute arose when the Revenue authorities sought to levy service tax on this compensation, alleging it was consideration for the assessee “tolerating” cancellation of coal blocks.

Department’s Stand and Show Cause Notice

A show cause notice dated 18.10.2019 was issued by the DG, GSTI, Bhubaneswar. The central allegation was:

  • By accepting the cancellation of coal blocks by the Ministry of Coal and receiving compensation under CMSPA, the assessee had effectively “tolerated the act of cancellation”.
  • This, according to the Department, constituted a taxable service under:
    • Section 65B(44) (definition of “service”),
    • Section 65B(22), and
    • Section 66E(e) (declared service of agreeing to the obligation to tolerate an act or a situation) of the Finance Act, 1994.

Demands and Proposals in the SCN

The show cause notice proposed:

  • Demand of service tax, Swachh Bharat Cess and Krishi Kalyan Cess on the compensation amount under the proviso to Section 73(1) (extended period of limitation),
  • Interest under Section 75, and
  • Penalties under Sections 76, 77 and 78 of the Finance Act, 1994.

After adjudication, the Commissioner passed an order confirming:

  1. Service tax demand of Rs. 2,59,77,000/-,
  2. Swachh Bharat Cess of Rs. 9,27,750/-,
  3. Krishi Kalyan Cess of Rs. 9,27,750/-,

aggregating to Rs. 2,78,32,500/-, along with:

  • Interest under Section 75;
  • Penalty of Rs. 10,000/- under Section 77(2);
  • Penalty equal to the tax amount (Rs. 2,78,32,500/-) under Section 78(1) for alleged willful suppression and intent to evade tax, with an option for reduced penalty if paid within 30 days.

The assessee challenged this order before CESTAT Kolkata.

Assessee’s Key Arguments

Counsel for the assessee contested the taxability of the compensation and the imposition of penalties on multiple grounds.

1. Cancellation and Compensation Were Purely Statutory