No TCS Obligation on Compounding Fees and Fines from Illegal Mining
Reference: Section 206C(1C) read with Section 2(47) of the IT Act; Section 23A of the MMDR Act, 1957
Assessment Year: 2018-19
Status: In Favor of Assessee (SLP Dismissed)
1. The Core Dispute: Penalties vs. Commercial Rights
The assessee, a District Mining Officer (DMO), was subjected to a TDS survey where the Revenue found that Tax Collected at Source (TCS) was not collected on compounding fees and fines recovered from illegal miners and transporters.
Revenue’s Stand: The Assessing Officer (AO) argued that illegal mining involves a “transfer of right or interest” in the mineral/land. Therefore, any money recovered (even as a fine) should be treated as consideration for that transfer, triggering Section 206C(1C) (TCS @ 2% on mining contracts).
Assessee’s Stand: The DMO contended that compounding fees are penalties for offences under the Mines and Minerals (Development and Regulation) Act (MMDR). Since there was no legal lease, license, or contract, there was no taxable “transfer” to the illegal miners.
2. Legal Analysis: Strict Interpretation of Fiscal Statutes
The Chhattisgarh High Court, and subsequently the Supreme Court (dismissing the SLP), focused on the specific wording of Section 206C(1C).
I. Scope of “Licensee or Lessee”
Section 206C(1C) mandates tax collection from a person who is granted a lease/license or with whom a contract is entered.
The Finding: Illegal miners are offenders, not “lessees” or “licensees.” They have no contractual relationship with the State. A penalty to settle a criminal offence cannot be recharacterized as a commercial “royalty” or “lease rent.”
II. Distinction between Royalty and Compounding Fee
Under Section 23A of the MMDR Act, a compounding fee is a penal exaction to avoid prosecution.
The Ruling: “Royalty” and “Compounding Fee” are mutually exclusive. Royalty is the price for the legal extraction of minerals. A compounding fee is a fine for illegal extraction. Tax laws cannot be extended by implication to cover fines as if they were business consideration.
III. No “Transfer” under Section 2(47)
The Revenue’s attempt to use the definition of “transfer” under Section 2(47) was rejected. Since the DMO never intended to transfer a right to the illegal miner (the activity being a crime), the receipt of a fine does not amount to a capital gain or a business transfer.
3. Final Ruling: Order of Assessment Set Aside
The High Court held that the DMO cannot be treated as an “assessee-in-default” for failing to collect TCS on penal sums.
Verdict: Section 206C(1C) does not apply to compounding fees or fines.
Outcome: The Supreme Court dismissed the Revenue’s Special Leave Petition (SLP), confirming that without a legislative mandate, penal receipts cannot be subjected to TCS.
Key Takeaways for Government Departments
Nature of Receipt: Always distinguish between Revenue Receipts (Royalty, Rent, Fees) and Penal Receipts (Fines, Compounding Charges). Only the former typically attracts TDS/TCS.
Definition of Buyer: For Section 206C to apply, there must be a “buyer” or “licensee.” An offender caught by the law does not fall into these categories.
Strict Construction: Taxing authorities cannot “assume” a deficiency in the law or add words to include illegal activities under commercial tax heads unless specifically mentioned (like taxing illegal income).