GST differential tax recovery restrained for mineral rights exploration licensing services under Section 73 CGST Act

HC granted interim relief in GST differential tax recovery case involving licensing services for mineral rights exploration under Service Code 9973. The court issued notice to respondents and restrained revenue authorities from taking coercive recovery action regarding differential tax demand covering period July 2017 to December 2018. The dispute concerns validity of SCN under Section 73 CGST Act and retrospective application of CBIC circular dated October 2021. Matter listed for further hearing alongside related petition.

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Issues Involved:
1. Validity of the Show Cause Notice issued under Section 73 of the CGST Act.
2. Application of tax rate on royalty payments for the period from 1-7-2017 to 31-12-2018.
3. Retrospective application of the Circular dated 6-10-2021 issued by the Ministry of Finance.
4. Interpretation of relevant entries and notifications under the CGST Act and Rules.
5. Legal precedents and principles regarding the effective date of tax notifications.

Detailed Analysis:

1. Validity of the Show Cause Notice issued under Section 73 of the CGST Act:
The petitioner challenged the Show Cause Notice dated 27-12-2023 issued under Section 73 of the CGST Act, arguing that it was based on a Circular dated 6-10-2021, which retrospectively applied a tax rate of 18% on royalty payments. The petitioner contended that the Circular was issued without proper legal basis and contradicted settled principles of law.

2. Application of tax rate on royalty payments for the period from 1-7-2017 to 31-12-2018:
The petitioner argued that the applicable tax rate for the period in question was 5% (CGST = 2.5% + OGST = 2.5%), based on the residuary entry under Sl. No. 17 of Heading 9973 (Leasing or rental services, with or without operator). The petitioner had paid GST on royalty at this rate and contended that the demand for an 18% tax rate was unjustified.

3. Retrospective application of the Circular dated 6-10-2021 issued by the Ministry of Finance:
The petitioner contended that the Circular dated 6-10-2021, which clarified that the tax rate on royalty payments should be 18%, could not be applied retrospectively. The petitioner cited legal precedents, including Union of India v. Ganesh Das Bhojraj and Associated Cement Co. Ltd. v. State of Karnataka, to argue that a notification or circular cannot have retrospective effect unless explicitly stated.

4. Interpretation of relevant entries and notifications under the CGST Act and Rules:
The petitioner provided a detailed analysis of the relevant entries and notifications, arguing that the residuary entry under Sl. No. 17 of Heading 9973 should apply, which specified a tax rate of 5%. The petitioner also referenced various notifications and amendments, including Notification No. 11/2017-Central Tax (Rate) and Notification No. 31/2017-Central Tax (Rate), to support their argument.

5. Legal precedents and principles regarding the effective date of tax notifications:
The petitioner cited several legal precedents to support their argument that the effective date of a tax notification is the date of its publication in the Official Gazette. They argued that the tax rate of 18% could only be applied from 1-1-2019, the date of the relevant notification's publication, and not retrospectively.

Court's Observations and Order:
The court noted that the Circular dated 6-10-2021 was the basis for the Show Cause Notice and that the clarification was issued pursuant to the GST Council's recommendation. The court acknowledged the petitioner's argument that a substantive right cannot be jeopardized by retrospective fiscal laws. The court found that a prima facie case was made out by the petitioner, demonstrating that the transactions fell within the scope of the residuary entry with a tax rate of 5%.

The court directed that no coercive action for recovery of the differential tax demand should be taken until the next hearing date. The court admitted the writ petition and issued a notice to the opposite parties, directing them to file counter affidavits.

Conclusion:
The court's judgment focused on the validity of the Show Cause Notice, the applicable tax rate on royalty payments, and the retrospective application of the Circular. The court found merit in the petitioner's arguments and provided interim relief by staying the recovery of the differential tax demand. The matter was admitted for further consideration, with notices issued to the respondents.

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