DRAFT CIRCULAR

Applicability of service tax on activities undertaken at open cast mines – reg

Coal mining and chrome mining involve ‘open cast working’ or ‘open cast mining’. As per the definition under ‘the Mining Act, 1952’ "open cast working means a quarry, that is to say, an excavation where any operation for the purposes of searching for or obtaining materials has been or is being carried on, not being a shaft or an excavation which extends below superjacent ground".

2. One of the important activities involved in open cast mining is removal of stratum (layer of mud, boulders etc that forms horizontal layer over the deposits of coal or chrome ore). The material so removed to expose the layer of mineral or ore is called as ‘overburden’. The overburden has to be necessarily removed and transported to some other part of the mines (for after the removal of ore/ coal, the overburden is required to be brought back to fill the gap created during mining). Thereafter, coal / mineral ore is extracted and brought at the pit-head. Later, these are shifted within or outside the mine. The coal companies and mining companies hire job workers, on contract, to undertake activities. These contracts may be for the following activities-

(a) Excavation/drilling and removal of the overburdens.

(b) Loading of coal/mineral ores and lifting them upto pithead.

(c) Transportation of coal/mineral from pit head to a specified location within the mine/factory or for transportation outside the mine / factory (to railway sidings etc.).

(d) Coal cutting/extraction activities.

3. A doubt has arisen that whether any of these activities fall under the purview of service tax under the taxable service of ‘site formation and clearance, excavation and earthmoving and demolition service’ or any other taxable service. It has been argued by the mining companies that the aforesaid taxable service covers activities that are essentially in the nature of preparatory service. Therefore, while removal of overburden may be such preparatory service in case of deep mining, (and thus, would fall under this definition) in case of open cast mining this process is not a preparatory activity but is an integral part of mining activity itself.

4. The issue has been examined. The taxable service, namely, ‘Site formation and clearance, excavation and earthmoving and demolition service’ covers the activities of site formation and clearance, excavation and earthmoving and demolition and includes,-

(a) Drilling, boring and core extraction service for construction, geophysical, geological or similar purposes; or

(b) Soil stabilization; or

(c) Horizontal drilling for the passage of cable or drain pipes; or

(d) Land reclamation work; or

(e) Contaminated top soil stripping work; or

(f) Demolition and wrecking of buildings, structure or road, but does not include such services provided in relation to agriculture, irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water resources and water bodies.

5. The scope of this service has been explained in earlier circular No. B1/6/2005-TRU dated 27.07.2005 (para 6.2). This taxable service covers certain activities like site formation and clearance, excavation and earthmoving and demolition. While site formation and clearance may be a preparatory activity, excavation and earthmoving activities need not be a preparatory activity. Therefore, the argument that the taxable service is limited to preparatory services does not stand the test of law. The definition of ‘open cast working’ (i.e. ‘open cast working means a quarry, that is to say an excavation where any operation for the purpose of searching for or obtaining material…………) itself calls the activity of open cast mining as ‘excavation’. Therefore, the activity of excavation/drilling and removal of overburden (whether or not containing traces of minerals) is taxable under the aforesaid taxable service.

6. Sometimes the mining companies award contract for open cast mining to outsiders. The contractor deploys workers and machinery for extraction/ breaking of coal, conversion of coal layers/starter into lump size etc. Taxable service, namely, ‘business auxiliary service’’ includes activities which are in the nature of ‘production or processing of goods for or on behalf of the client’ provide any such activity does not amount to ‘manufacture’ within the meaning of clause (f) of section 2 of the Central Excise Act, 1944. In the instant case the contractors undoubtedly produce coal for their clients, namely the coal companies. Further, extraction of coal is not a process amounting to manufacture within the meaning of section 2(f) of the Central Excise Act. Therefore, such an activity would fall under the purview of ‘business auxiliary service’.

7. Many a times coal companies award contract for loading of coal in tippers at pit head and unloading at the railway sidings. Similar contracts are also awarded to load and unload overburdens within the mines area. The job basically involves deployment of labour and pay loaders. The coal companies have claimed that the contract for loading coal and overburden does not fall under cargo handling services, as this involves simple loading, unloading of coal and overburden without involving packing, repacking and filling up container, etc. It is also argued that ‘overburden’ is not a cargo, as it has no value.

7.1 As per definition, ‘cargo handling service’ means loading, unloading packing or unpacking of cargo and includes cargo handling services provided for transportation in a special container or for non-containerized transportation, service provided by container freight terminal or any other freight terminals, for all modes of transport and cargo handling service incidental to transportation, but does not include handling of export cargo or passenger baggage or mere transportation of goods; The ‘taxable service’ means any service provided or to be provided to any person, by a cargo handling agency in relation to cargo handling services. Therefore, even simple loading and unloading of cargo falls under this category of service, so far as there is a contractual agreement and a consideration is paid for it. Secondly, dictionary meaning of cargo is ‘a load, a burden or a charge’. Therefore, the term cargo includes a load, whether or not it has a market value. Therefore, all such contracts for loading unloading falls under the taxable service.

8. After mining of coal, it is transported either within the mines premises (i.e. say from pithead to a designated storage place, from where the purchaser takes delivery thereof) or to outside (i.e. to railway sidings for unloading into railway wagons). It has been reported that in either case, no consignment note is issued as the transport is under full control of the mining companies. The ‘taxable service’ in case of transport of goods by road means ‘any service provided or to be provided to a customer, by a goods transport agency in relation to transport of goods by road’. Further as per the definition ‘goods transport agency’ means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called. The transport of coal in both the cases, within mines and outside mines is in the nature of transport of goods by road. Therefore, such movement of goods is covered under taxable service. As per rule 4B of the Service Tax Rules, 1994, any goods transport agency which provides service in relation to the transport of goods by road in a goods carriage shall issue a consignment note to the customer. In the instant case, if this requirement is not fulfilled, it can be called as a procedural infraction on the part of the Goods Transport Agency. However, such an infraction would not render the services, free of service tax.

9. Trade and field formations may be advised accordingly.

F.No. 23 2 / 2 /2006-CX.4

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