2019 (10) TMI 865 - AAR - GST

Mining Lease Royalty Taxation: SAC 997337, CGST, SGST Rates, DMF, NMET Contributions, Reverse Charge Mechanism

The royalty paid for a mining lease is classified under SAC 997337 and is taxable at the rate applicable to the supply of like goods until December 31, ... Royalty as consideration for licensing services for right to use minerals including exploration and evaluation - classification under Service Accounting Code 997337 - rate of tax as applicable on supply of like goods involving transfer of title in goods versus 9% residual rate - statutory contributions to District Mineral Foundation and National Mineral Exploration Trust forming part of value of supply - inclusion in value of supply under Section 15 - reverse charge liability for services supplied by Government to a business entity - rejection of 'profit a prendre' characterisation of royaltyRoyalty as consideration for licensing services for right to use minerals including exploration and evaluation - classification under Service Accounting Code 997337 - rejection of 'profit a prendre' characterisation of royalty - Royalty payable under a mining lease is a consideration for licensing services for the right to use minerals including exploration and evaluation and is not a 'profit a prendre' outside the ambit of GST. - HELD THAT: - The Authority held that royalty is payable in respect of minerals removed or consumed from the leased area and therefore constitutes consideration for the activity of extraction and use of mineral ore rather than an incidental profit a prendre. The Annexure to Notification No. 11/2017 indicates that licensing services for the right to use minerals, including its exploration and evaluation, fall under SAC 997337. The applicant's reliance on prior decisions characterising certain benefits as profit a prendre was found inapplicable because the primary activity and product here is extraction of mineral ore for which royalty is expressly payable under Section 9 of the MMDR Act. Consequently, royalty is a supply of service taxable under GST and classifiable under SAC 997337. [Paras 20, 21]Royalty is a taxable consideration for licensing services for the right to use minerals including exploration and evaluation and is not excluded as a profit a prendre.Rate of tax as applicable on supply of like goods involving transfer of title in goods versus 9% residual rate - classification under residual entries of Notification No. 11/2017 and subsequent amendments - The service of licensing the right to extract and use mineral ore falls under the residual entry of Heading 9973 and, therefore, attracts the tax rate applicable to like goods upto 31.12.2018 and 9% CGST/9% SGST from 01.01.2019 onwards. - HELD THAT: - The Authority examined Serial No.17 of Notification No.11/2017 and its amendments. The lease of the right to extract and use mineral ores is not covered by any specific sub-entries (i)-(v) and thus falls within the residual entry for leasing/rental services. Prior to the amendment by Notification No.27/2018 the residual entry attracted the same rate as applicable on supply of like goods involving transfer of title; after the amendment the transaction (being lease of land/right to extract minerals) falls under the residual item taxable at 9% CGST (and 9% SGST from 01.01.2019). The Authority also noted Entry 2(a) of Schedule II, confirming lease/licence of land is a supply of services. [Paras 22]The licensing service is taxable at the rate applicable on like goods upto 31.12.2018 and at 9% CGST (and 9% SGST from 01.01.2019) thereafter under the residual entries of Serial No.17 of Notification No.11/2017.Statutory contributions to District Mineral Foundation and National Mineral Exploration Trust forming part of value of supply - inclusion in value of supply under Section 15 - reverse charge liability for services supplied by Government to a business entity - Statutory contributions to DMF and NMET are part of the consideration for the licensing service, included in the value of supply, and the recipient (business entity) is liable to pay GST under reverse charge where the supplier is the Government. - HELD THAT: - Sections 9B and 9C of the MMDR Act mandate payments to DMF and NMET calculated as percentages of royalty. Under Section 15(2) of the CGST Act and Rule 27, amounts which the supplier is liable to pay in relation to a supply but which have been incurred by the recipient, and statutory duties/charges linked to the supply, are includible in the value of supply. The Authority found that royalty, DMF and NMET contributions constitute a single composite consideration for the licence to extract and use minerals because non-payment of any of these would prevent issuance of permits and thereby negate the supply. Further, Notification No.13/2017 places services supplied by Government to business entities (with specified exceptions) on reverse charge; since the licensing service is provided by the State Government to the applicant, the recipient must discharge tax on reverse charge basis. [Paras 23, 24]DMF and NMET contributions form part of the value of the licensing service and are taxable; the recipient (business entity) is liable to pay GST under reverse charge for services supplied by the Government.Final Conclusion: The Authority rules that (i) royalty payable under a mining lease is consideration for licensing services for the right to use minerals including exploration and evaluation (SAC 997337) and is taxable; (ii) such services were chargeable at the rate applicable to like goods upto 31.12.2018 and at 9% CGST (and 9% SGST from 01.01.2019) thereafter under the residual entries of Notification No.11/2017; (iii) statutory DMF and NMET contributions are part of the consideration and included in the value of the supply; and (iv) where the supplier is the Government and the recipient is a business entity, tax on these services is payable by the recipient under the reverse charge mechanism. Issues Involved:1. Classification of royalty paid in respect of Mining Lease.2. Liability of statutory contributions to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) under GST.3. Determination of whether royalty is considered 'Supply' under GST.4. Rate of tax applicable on the supply of licensing services for the right to use minerals.5. Liability to pay tax under the reverse charge mechanism.Detailed Analysis:1. Classification of Royalty Paid in Respect of Mining Lease:The applicant sought to classify the royalty paid for a mining lease under the heading 9973, specifically under 'Licensing services for the right to use minerals including its exploration and evaluation.' The Authority agreed with the applicant’s view, stating that the royalty payment is indeed for the licensing services for the right to use minerals, which falls under Service Accounting Code 997337. This classification is supported by the CBEC's sectoral FAQ, which treats royalty payments as consideration for licensing services for the exploration of natural resources.2. Liability of Statutory Contributions to DMF and NMET Under GST:The applicant argued that contributions to DMF and NMET do not constitute a 'Supply' and should not be liable for GST under the reverse charge mechanism. However, the Authority ruled that these contributions are part of the consideration payable for the licensing services for the right to use minerals. The contributions are directly linked to the royalty payments and are necessary for obtaining the mining lease. Therefore, they are included in the value of the supply of services and are subject to GST.3. Determination of Whether Royalty is Considered 'Supply' Under GST:The applicant contended that royalty payments are not a supply under GST, arguing that they are a 'profit a prendre' and not taxable. The Authority rejected this argument, stating that the royalty is paid for the extraction and usage of mineral ore, making it a consideration for the service obtained. The Authority referenced Section 9 of the Mines and Mineral (Development and Regulation) Act, 1957, which mandates royalty payments for minerals removed or consumed, thus classifying it as a supply under GST.4. Rate of Tax Applicable on the Supply of Licensing Services for the Right to Use Minerals:The Authority examined various notifications and amendments to determine the applicable tax rate. Initially, the royalty was taxable at the same rate as the extracted mineral ore. However, after amendments to Notification No. 11/2017 - Central Tax (Rate), the tax rate for such services was fixed at 9% CGST and 9% SGST from January 1, 2019, under the residual entry of Serial No. 17.5. Liability to Pay Tax Under the Reverse Charge Mechanism:The Authority confirmed that the liability to pay tax on the supply of licensing services for the right to use minerals, including DMF and NMET contributions, falls on the recipient under the reverse charge mechanism. This is in accordance with Notification No. 13/2017 - Central Tax (Rate), which stipulates that services supplied by the government to a business entity are taxable under reverse charge.Ruling:1. The royalty paid for the mining lease is classified under SAC 997337 and is taxable at the rate applicable to the supply of like goods involving transfer of title in goods until December 31, 2018, and at 9% CGST and 9% SGST from January 1, 2019.2. Statutory contributions to DMF and NMET are part of the consideration for the licensing services for the right to use minerals.3. The value of the supply of licensing services includes royalty, DMF, and NMET contributions.4. The liability to pay tax on these services is on the recipient under the reverse charge mechanism.