GST on sand-mining royalty treated as consideration for licensing services; exemption claim and constitutional challenge rejected.

Royalty or settlement amounts paid for sand-mining rights are treated as consideration for licensing services and therefore fall within the GST concept of supply. The constitutional challenge based on Article 246A read with Entry 50 of List II was rejected because GST was held to operate harmoniously with the State's field over mineral rights. The claimed exemption under Notification No. 12/2017-Central Tax (Rate) was held inapplicable on the facts, as the agreement structure did not satisfy the exemption conditions, and the taxable event was found to arise when instalments became due and were paid during the GST regime.

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Issues: (i) Whether royalty or settlement amount paid for sand mining was consideration for a taxable supply of services under GST; (ii) Whether GST could be levied on the transaction under Article 246A notwithstanding Entry 50 of List II; (iii) Whether the claimed exemption under Notification No. 12/2017-Central Tax (Rate) applied and whether the taxable event occurred before the GST regime commenced.

Issue (i): Whether royalty or settlement amount paid for sand mining was consideration for a taxable supply of services under GST.

Analysis: The arrangement for grant of sand mining rights was held to fall within the statutory concept of supply, and the consideration paid to the State was treated as payment for licensing services for the right to use minerals including exploration and evaluation. The Court relied on the statutory scheme of GST, the classification entry for licensing services, and the binding effect of the later GST rate notifications and circular clarifying that such residuary services were taxable at the standard rate. It also noted that royalty is not a tax and that the transfer of mineral interest is distinct from the exercise of mineral rights for which royalty becomes payable.

Conclusion: The transaction was taxable and the levy under GST was upheld.

Issue (ii): Whether GST could be levied on the transaction under Article 246A notwithstanding Entry 50 of List II.

Analysis: The Court held that Article 246A is a special constitutional provision for GST and can operate harmoniously with the State's legislative field on mineral rights. The decision in the nine-judge bench ruling on royalty was read as recognising that royalty is a contractual consideration and that the State's power to tax mineral rights does not exclude GST on a supply-based levy. The challenge founded on exclusivity under Entry 50 was therefore rejected.

Conclusion: The constitutional challenge failed and the GST levy was sustained.

Issue (iii): Whether the claimed exemption under Notification No. 12/2017-Central Tax (Rate) applied and whether the taxable event occurred before the GST regime commenced.

Analysis: The Court held that the exemption for services by way of assignment of right to use natural resources assigned before 1 April 2016 did not apply on the facts, since separate yearly agreements and work orders were executed and the factual setting did not satisfy the exemption conditions. It further held that royalty became payable upon the actual exercise of mineral rights and, therefore, the taxable event occurred during the GST regime when the installments became due and were paid.

Conclusion: The exemption plea was rejected and the plea that the taxable event predated GST was negatived.

Final Conclusion: The writ petitions were found to be without merit, and the impugned GST demands and classifications were sustained, leaving the petitioners bound to pay GST on the royalty or settlement amounts in accordance with the applicable notifications.

Ratio Decidendi: Royalty paid for mining rights is a contractual consideration for the supply of licensing services under GST, and Article 246A permits such levy notwithstanding the State's power over mineral rights under Entry 50, subject to the applicable statutory classification and exemption conditions.

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