2020 (9) TMI 589 - AAR - GST

GST Ruling: Licensing services for mineral rights in Gujarat taxed at 18% under SAC 997337

The Authority for Advance Ruling (AAR) determined that the service provided by the State of Gujarat to the applicant, involving licensing services for the ... Classification of Supply - services or not - rate of GST - mining lease for extracting “Stone along with associated minor minerals” - services provided by State of Gujarat to M/s Giriraj Quarry Works for which Royalty is being paid - N/N. 11/2017-CT (Rate) dated 28.06.2017 read with annexure attached to it - HELD THAT:- The applicant has obtained Government land on lease for quarrying BLACK TRAP Material and in turn applicant is required to pay Annual Rent deed or Royalty, whichever is higher, to the Government of Gujarat. The leasing of the Government land to the applicant is considered as supply of service, as per sub-section (1) of Section 7 of the CGST Act, 2017 - the activities mentioned in the Entry No. 2 of the Schedule II relate to the activities to be treated as supply of goods or supply of services with regard to the Land and Building - thus, leasing of the Government land to the applicant to carry out the activity of the quarrying, is a supply of service to the applicant. Classification of service received by the applicant Annexure to the Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017? - HELD THAT:- The nature of service received by the application is covered under the Service Accounting Code 9973 37 - Licensing services for the right to use minerals including its exploration and evaluation. The Government has been providing the service of licensing services for the right to use minerals after its exploration and evaluation to the applicant and applicant has to pay a consideration in the form of rent/ royalty to the Government for the same. The Sectoral FAQ published by the C.B.E. & C. in reply of Q. No. 30 of “Government Services” it is categorically state that royalty payment made towards Licensing services for exploration of natural resources is treated as supply of services. Therefore, payment of rent/royalty is for license given to extract minerals and the amount of rent/royalty paid is based on the quantum of mineral extracted. Hence it is covered under Service Accounting Code 997337 - Licensing services for the right to use minerals including its exploration and evaluation, as it is a license to extract mineral ore and also the right to use such minerals extracted. In the present case, the mining rights so granted are covered under the sub-heading 9973 37 that specifies - ‘Licensing services for the right to use minerals including its exploration and evaluation’. Whether the license to extract mineral and also the right to use such minerals extracted is a leasing or rental service? - HELD THAT:- It is clear that what is supplied by the Government is the lease of the right to extract and use mineral and that is not covered by any specific entries in the Serial No. 17 of the Notification and hence falls under the residual entry. We find that the applicant in its application has relied upon the notified rate against Sl. No. 17 of item (vi), as it stood prior to its amendment, for the entire period 1-7-2017 to 31-12-2018. Since, the service received by the applicant is not at all leasing of goods but rather “Licensing services for the right to use minerals including its exploration and evaluation”, the transaction is appropriately covered under the residual entry of Sl. No. ‘17’ of the aforesaid notification. The rate of GST applicable on lease of goods may have been prescribed as the rate of GST applicable to supply of like goods involving transfer of title over the goods but the rate of GST prescribed for lease of goods can’t be made applicable for leasing of mining area conferring the right to extract and appropriate the minerals. The lease by Government not being a lease of any goods, the conditional rate of tax applicable to sale of like goods cannot be imported for prescribing the rate of GST applicable to leasing of mining area - the amendments have been carried out vide the aforesaid notification No. 27/2018- CT (Rate) Dated 31.12.2018 to clarify the legislative intent as well as to resolve the unintended interpretations. It is well settled that the legislative intent cannot be defeated by adopting interpretations which is clearly against such interpretations. Thus, the activity undertaken by the applicant is classifiable under Heading 9973 (Leasing or rental services, with or without operator), as mentioned in the annexure at Serial No. 257 (Licensing services for the right to use minerals including its exploration and evaluation) sub-heading 997337 of Notification Number 11/2017-C.T. (Rate), dated 28-6-2017 - the activity undertaken by the applicant attracts 18% GST. Issues Involved:1. Classification of service for which royalty is being paid.2. Rate of GST on services provided by the State of Gujarat for which royalty is being paid.Issue-Wise Detailed Analysis:1. Classification of ServiceThe applicant, engaged in quarrying 'Black Trap' material, sought clarification on the classification of the service for which royalty is paid. The service is classified under Tariff Heading 2517, attracting GST at 5% on the supply of the product.The applicant argued that the service provided by the State of Gujarat could be classified under tariff 9973, specifically 997337, as “Licensing services for the right to use minerals including its exploration and evaluation.” This classification implies that the GST rate on such services should be the same as on the supply of like goods involving transfer of title in goods.The Authority for Advance Ruling (AAR) examined the applicant's lease agreement with the Government of Gujarat, which required the payment of an annual deed rent or royalty. The AAR referred to Notification No. 11/2017-Central Tax (Rate) and its annexure, which defines Service Accounting Codes (SAC) for various services. The relevant SAC for the service in question is 997337, which covers 'Licensing services for the right to use minerals including its exploration and evaluation.'The AAR confirmed that the nature of the service received by the applicant falls under SAC 997337. This classification is supported by the Sectoral FAQ published by the C.B.E. & C., which states that royalty payments for licensing services for the exploration of natural resources are treated as a supply of services.2. Rate of GST on Services Provided by the State of GujaratThe AAR analyzed the applicable GST rate based on the classification of the service. The service of licensing for the right to use minerals is covered under sub-heading 997337. The relevant entries in Notification No. 11/2017-Central Tax (Rate) and its subsequent amendments were examined to determine the applicable GST rate.Initially, the service was covered under the residual entry at Serial No. 17(vi), which prescribed the same rate of tax as on the supply of like goods involving the transfer of title in goods. However, subsequent amendments clarified that the rate of GST for such services should be 18% (9% CGST + 9% SGST).The AAR relied on the decision of the Hon’ble Supreme Court in W.P.I.L. Ltd. v. Commissioner of Central Excise, which held that clarificatory notifications have retrospective effect. Therefore, the amendments made by Notification No. 27/2018-Central Tax (Rate) to clarify the GST rate on licensing services for the right to use minerals are applicable retrospectively from the date of Notification No. 11/2017-Central Tax (Rate).The AAR concluded that the service provided by the State of Gujarat to the applicant, classified under SAC 997337, attracts an 18% GST rate from July 2017 onwards.Ruling:1. Classification of Service: The activity undertaken by the applicant is classifiable under Heading 9973 (Leasing or rental services, with or without operator), specifically under sub-heading 997337 as 'Licensing services for the right to use minerals including its exploration and evaluation.'2. Rate of GST: The service attracts an 18% GST rate (9% CGST + 9% SGST).