Tax liability on royalty paid for water supply deemed taxable under GST. Applicant subject to reverse charge mechanism.

The case involved determining the tax liability on royalty paid by an applicant to a municipal corporation for supplying treated water. The authority held that the royalty was taxable under GST as consideration for the license to sell water. The tax was to be paid by the applicant under the reverse charge mechanism, and the applicant was entitled to claim Input Tax Credit subject to specified conditions.

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Issues Involved:
1. Tax liability on royalty paid by the applicant to Nagpur Municipal Corporation (NMC) for supplying "Tertiary Treated Water" (TTW) to Mahagenco.
2. Determination of whether the tax is to be paid by NMC under forward charge or by the applicant under reverse charge.
3. Entitlement of the applicant to Input Tax Credit (ITC) if tax is to be paid.

Detailed Analysis:

Issue 1: Tax Liability on Royalty

The applicant, M/s. Nagpur Waste Water Management Private Limited, operates a Sewage Treatment Plant (STP) under a contract with NMC and supplies TTW to Mahagenco. The applicant pays royalty to NMC for the right to sell TTW. The applicant contends that this royalty is not liable to GST as it is a reduction in consideration payable by NMC, constituting a revenue-sharing model.

However, the authority finds that the royalty paid is for the right to sell treated water, which is a taxable supply of services under GST. The royalty is a consideration for the license granted by NMC to the applicant to sell TTW. The supply of such rights is a service provided by NMC to the applicant, and the royalty paid is based on the quantity of TTW sold. Therefore, the royalty is liable to GST under the GST Act.

Issue 2: Payment of Tax under Forward Charge or Reverse Charge

The authority refers to Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, which specifies that services supplied by the Central Government, State Government, Union Territory, or local authority to a business entity are subject to tax under the reverse charge mechanism (RCM). Since NMC is a local authority, the liability to pay tax on the royalty lies with the applicant under RCM, not with NMC.

Issue 3: Entitlement to Input Tax Credit (ITC)

The applicant inquires about the eligibility for ITC if the tax on royalty is paid under RCM. The authority refers to Sections 16 to 21 of the CGST Act, which govern the conditions and eligibility for ITC. The applicant, being a recipient of services in the form of rights transferred by NMC, is liable to pay tax under RCM and can avail ITC subject to the fulfillment of conditions specified in the GST Act. The ITC is available if the inputs are used in the course or furtherance of business and the supplier is making outward taxable supplies.

Conclusion:

Order:

1. The royalty paid by the applicant to NMC for supplying TTW to Mahagenco is liable to tax under the GST Law.
2. The tax on the royalty is to be paid by the applicant under the reverse charge mechanism (RCM).
3. The applicant is entitled to Input Tax Credit (ITC) subject to the fulfillment of conditions under Sections 16 to 21 of the CGST/MGST Act, 2017.

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