Order Date – 09 January 2024

Parties: M/s.Oil and Natural Gas Corporation Ltd. Vs The Commissioner of GST& Central Excise

Facts –

• The Appellant, M/s. Oil and Natural Gas Corporation Ltd., is engaged in activities of exploration and production of crude oil and natural gas from various oil fields located in different areas of Tamil Nadu.
• A show cause notice was issued consequent to an investigation proposing to demand the short paid service tax along with interest and for imposing penalties on the ground that the appellant had not discharged service tax on the royalty paid by them to the Government of Tamil Nadu during the period April 2016 to June 2017.

Issue –

• Whether the appellant is required to discharge service tax on royalty paid by them to the Government of Tamil?

Order –

• The Tribunal observed that the adjudicating authority in para 22 of the Order-in-Original has examined the provisions of law and held that the assignment of right to use for exploration and production of crude oil and gas for consideration by the Government of Tamil Nadu is an act of ‘service’ as per Section 65B (44) of the Finance Act, 1994 and squarely covered under the phrase ‘any service’ used in the definition.
• Hence, the right to use of oil fields (natural resources) provided by the Government of Tamil Nadu to M/s. ONGC, Karaikal for exploration and production of crude oil/natural gas on a consideration is not covered under the Negative List of services under Section 66D of the Finance Act, 1994.
• In the present case, even though the liability to pay royalty is fixed by a statute, the royalty is paid on the basis of the quantity of oil/natural gas extracted. The ‘royalty’, in the present case, even if in the nature of regulatory fee or license fee contain a part which is compensatory nature. It thus acquires a hybrid nature.
• The provisions contained in the ORD Act, 1948 read with P & NG Rules, 1959 enabled to draw a strong inference that royalty is more of a regulatory fee than compensatory. The amount of royalty to be paid though differs periodically, 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 regulatory fee, royalty does not fit into the definition of consideration for services provided, as under the service tax law.
• Further, Rule 17 prohibits transfer of assignment. The said Rule would bring out that the underlying nature of the document issued by the Government to appellant is ‘lease’ and not ‘assignment’. Hence it was held that the demand of service tax cannot sustain and requires to be set aside.