2019 (4) TMI 1449 - AAR - GST

AAR rules royalty on mining leases as licensing services under GST, DMF, NMET contributions subject to reverse charge.

In Re: NMDC Limited

The Authority for Advance Rulings (AAR) determined that the royalty paid by NMDC Limited for mining leases falls under the classification of licensing ... Classification of service - royalty paid in respect of mining lease - whether classified under 'Licensing for the right to use minerals including its exploration and evaluation falling under the heading 9973 attracting GST at the same rate of tax as applicable on supply of like goods involving transfer of title in goods'? - HELD THAT:- There is no ambiguity that M/s NMDC pays royalty for its business of iron ore extraction and also pays to both the trusts i.e. DMF and NMET in the course of furtherance of this business only. By no stretch of imagination, this can be treated as donation. In case of failure to contribute to the above trusts, the business/rights of iron ore extraction would legally get hampered. Whereas, donations are always voluntary here in the instant case there is compulsory payment to both the trusts in proportion to the amount of royalty. Thus there hardly remains any doubt that the contributions paid by M/s NMDC to both the trusts are amounts being paid in the course of furtherance of its business activities only. The way in which a Collector of a District enters into an agreement/contract to gain royalty from mining lease of the Government land, in the same way he enters into an agreement with NMDC to make it contribute to both the trusts in addition to royalty. Thus both the trusts uphold parallel rights on ownership rights on Government land with regard to royalty of mining lease. Accordingly, owing to above discussions it gets concluded that the contribution made by M/s NMDC to DMF and NMET merits treatment as mining royalty in the course or furtherance of business of M/s NMDC. Liability to pay tax - contributions made to District Mineral Foundation (DMF) and National Mineral Exploration trust (NMET) as per MMDR Act, 1957 - HELD THAT:- The above mentioned activities are compulsorily to be performed by both the trusts which have been enumerated under Article 243G and 243W of the Indian Constitution to be performed by Panchayats and Municipalities respectively. Thus in terms of section 2(69) of GST Act, both DMF and NMET qualify being treated as local authority and on the basis of state Notification No. 13/2017 dated 28-06-2017 there arises the liability of payment of GST upon M/s NMDC, on the contributions made of DMF and NMET under reverse charge basis. Issues Involved:1. Classification of royalty paid in respect of mining lease under GST.2. Determination of GST liability on contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET).Issue-wise Detailed Analysis:1. Classification of Royalty Paid in Respect of Mining Lease:The applicant, NMDC Limited, sought clarification on whether the royalty paid for mining leases can be classified under 'Licensing services for the right to use minerals including its exploration and evaluation' under heading 9973, attracting GST at the same rate as applicable on the supply of like goods involving transfer of title in goods.The applicant argued that royalty is a periodic payment made for the right to extract minerals and should be classified under licensing services. They cited various judicial decisions, including the Supreme Court judgment in India Cement Ltd. v. State of Tamil Nadu, where royalty was discussed as a payment based on the quantity of minerals extracted.The applicant also referred to the Sectoral FAQs published by CBEC and the Haryana Authority for Advance Ruling in the case of M/s. Pioneer Partners, which held that royalty paid towards mining rights is taxable under reverse charge at the same rate as the extracted goods.The Authority for Advance Rulings (AAR) concluded that the royalty paid by NMDC falls under the sub-heading 997337, 'Licensing services for the right to use minerals including its exploration and evaluation,' as per entry no. 17 of Notification No. 11/2017 - Central Tax (Rate), dated 28.06.2017. This classification attracts GST at the same rate as applicable for the supply of like goods involving transfer of title in goods, under reverse charge basis.2. Determination of GST Liability on Contributions to DMF and NMET:The applicant sought clarification on whether statutory contributions made to DMF and NMET as per the Mines and Minerals (Development & Regulation) Act, 1957, amount to 'Supply' and whether they are liable for GST under reverse charge.The applicant contended that contributions to DMF and NMET are not in the course of business and should not be considered as supply. They argued that these contributions are for public welfare and do not constitute a quid pro quo arrangement. They also stated that DMF and NMET are non-profit bodies and do not fall within the definition of 'Government' or 'local authority' under the CGST Act.The AAR analyzed the provisions of Section 2(17) defining 'business' and concluded that NMDC's activities, including the payment of royalty and contributions to DMF and NMET, are in the course of furtherance of business. They emphasized that these contributions are mandatory and linked to the mining operations, thus qualifying as business activities.The AAR further examined the definitions and functions of local authorities under Section 2(69) of the GST Act and the activities of DMF and NMET. They found that the activities undertaken by these trusts align with those specified in the 11th and 12th schedules of the Indian Constitution, which are responsibilities of Panchayats and Municipalities.Consequently, the AAR ruled that DMF and NMET qualify as local authorities, and contributions made to them by NMDC are liable for GST under reverse charge basis, as per Notification No. 13/2017 - Central Tax (Rate), dated 28.06.2017.Order:The AAR concluded that:1. The royalty paid by NMDC in respect of mining lease is classifiable under sub-heading 997337, attracting GST at the same rate as applicable for the supply of like goods involving transfer of title in goods, under reverse charge basis.2. Contributions made to DMF and NMET by NMDC as per the MMDR Act, 1957, are liable to GST under reverse charge basis.