TaxTMI 
TaxTMI 
2019 (9) TMI 695
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....h, for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST or MP GST Act would be mentioned as being under the GST Act. 3. BRIEF FACTS OF THE CASE: 3.1 M/s. NMDC Limited (hereinafter referred to as 'the Applicant'), having their registered office at NMDC Limited, Majhgawan, Diamond Mining Project ,488001 and are registered with the GSTN holding GSTIN 23AAACN7325A2Z2. 3.2 The Applicant is engaged in mining and sale of "rough diamonds". 3.3 Thus the Applicant have approached the Authority for limited and specific ruling about clarification on classification of royalty payments to Government in respect of Mining lease under "Licensing services for Right to use minerals falling under the heading 9973"and determination of the liability to pay tax on contributions made to District Mineral Foundation (DMF) and National Mineral Exploration trust (NMET) as per MMDR Act, 1957. 4. QUESTIONS RAISED BEFORE THE AUTHORITHY:- The following questions have been posted before the Authority:- 4.1. Whether royalty paid in respect of Mining Lease can be classified under "Licensing services for the right to use minerals including its exploratio....
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....rvices for the right to use minerals including its exploration and evaluation" falling under the heading 9973 attracting GST at the same rate of tax as applicable on supply of like goods. VI) Further, Section 9B and 9C of Mines and Minerals (Development & Regulation) Act, 1957 mandates that NMDC shall contribute 30% of royalty to District Mineral Foundation and 2% of Royalty to National Mineral Exploration Trust. In this regard, the Applicant seeks clarifications whether such statutory contributions made amounts to "Supply" and whether the same is liable for GST under reverse charge. 5.5 Admissibility of Application As per Section 97(2) of CGST Act, advance ruling can be sought for following question under GST: (a) classification of any goods or services or both; Based on above, the Applicant requests to admit its application in respect of clarification sought on classification of service by way of royalty paid in respect of Mining Lease. Further, as per Section 97(2) of CGST Act, 2017, advance ruling can be sought for following questions under GST: (e) determination of the liability to pay tax on any goods or services or both; ....
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....anager, employee, contractor or sub-lessee] from the leased area after such commencement, at the rate for the time being specified in the Second Schedule in respect of that minerals" 6. Further as per Section 9(2) of MMDR Act, "The holder of a mining lease granted on or after the commencement of this Act shall pay royalty in respect of any 1 [mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee] from the leased area at the rate for the time being specified in the Second Schedule in respect of that mineral". 7. The term 'Royalty' is not defined in MMDR Act. However, the meaning of the word royalty has been considered in some judicial decisions. Many of these judicial decisions have been summed up in the judgement delivered by the Supreme Court in the case of the India Cement Ltd., etc. v. State of Tamil Nadu, etc. (AIR 1990 SC 85) = 1989 (10) TMI 53 - SUPREME COURT. The case was primarily on the legality of the cess on royalty. However, the meaning and concept of royalty has also been discussed in the judgement in an incidental manner. Although royalty has not been explicitly defined, the Supreme Court held that royalty is se....
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....e grantor of a patent, mining lease, etc., and payable proportionately to the use made of such right" * * The New Oxford Illustrated Dictionary (Vol. 2, P.1478) (USU pi); "Royal Prerogative or privilege of licence to work minerals, etc" * * An Introduction to Mineral Economics - by Dr. K.K. Chatterjee "Royalty means dues payable to a land owner for mining rights" 13. Without prejudice to the above, the Applicant would like to draw reference to the meaning of the expression 'renting' in common parlance which indicates 'allowing', 'permitting or granting access', 'use', 'entry', 'occupation' 'use or any such facility' which infers the enjoyment of immoveable property on 'as is' basis. The expression 'renting' cannot be extended to activities like 'exploration', 'extraction' etc. Therefore, mining land which is used for purpose of extraction of minerals and by which the immoveable property cannot be used on "as is" basis, will not fall within the ambit of 'renting of immovable property'. 14. Upon harmonious reading from the above, what is intended to be transferred is the right and title to the interest over immoveable property (i.e. mineral).....
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....rvice code 9973 does not specifically cover the Licensing services for the right to use minerals including its exploration and evaluation and therefore it will be covered under the residuary entry "leasing or rental services, with or without the operator, other than (i), (ii), (iii), (iv) and (v) above", with applicable tax rate as the same rate of tax as applicable on the supply of like goods involving transfer of title in goods. Accordingly, in such cases, the relevant tax rate as applicable on the underlying natural resource would be applicable on the amount of royalty paid. 23. The Applicant wishes to quote the recent decision by Haryana Authority for Advance Ruling in the case of M/s. Poineer Partners, wherein it was held that Royalty paid towards mining rights of 'stone boulders' taxable at 5% under 'reverse charge'. The extract of the relevant para in stated below: "the services for the right to use minerals including its exploration and evaluation, as per sr. No 257 of the annexure appended to notification no. 11/2017- CT (Rate), dated 28.06.2017 is included in group 99733 under heading 9973. Hence, it attracts the same rate of tax as on supply of like goods inv....
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....ation as per Rule 4 of the said rules is as under: "The Trust shall prepare schemes and plans as per guidelines of the Pradhan Mantri Khanij Kshetra Kalyan Yojna (PMKKKY) and instructions issued by the State Government from time to time to ensure their implementation for the development of mining affected areas." 28. As per Notification 13/2017 Central tax (Rate), Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the specified services are chargeable to tax under reverse charge. Therefore, the Applicant wishes to seek clarification on liability to pay tax under reverse charge on such contribution made to the funds. 29. In this regard the Applicant would like to quote Section 7 of CGST Act, 2017. As per Section 7, supply includes: "(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business" 30. Therefore, it is to be noted that liability to pay will result only if all the following conditions are satisfied: ....
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....t with the control or management of a municipal or local fund; (d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006; (e) a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution; (f) a Development Board constituted under article 371 of the Constitution; or (g) a Regional Council constituted under article 371A of the Constitution; 36. It is submitted that, an autonomous trust set up for an independent purpose do not fall under the definition of Government or local authority. At the max such trust may fall under the definition of Governmental Authority which is defined in Explanation of Section 2(16) of IGST Act. The same is stated below for your reference. the expression "governmental authority" means an authority or a board or any other body,- (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with ninety per cent or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution. 37. Based on above, the Applicant wishes....
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....re is a supply in terms of Section 7 * * The supply is in the course of or furtherance of business * * The supply is not exempt under Section 7(2) or Section 11(1) 45. In order to determine whether tax is payable on payment made to NMET, following has to be tested: * * Whether there is supply of goods or service by the trust to which such payment is made * * If at all there is a supply, whether such supply is in the course of or furtherance of business of the trust? * * Whether such supply is exempt under Section 7(2) or Section 11(1) 46. The Applicant would like to state that there is no supply made by the trust to the Applicant in return of payment made to such trust (i.e., as a quid pro quo for the service received). As stated above, the objective of the trust is exploration of minerals that would facilitate high growth in the mining sector. There is no service/supply made to the payee. The payment made by the Applicant is purely in the nature of contribution and cannot be regarded as consideration. 47. Further, as seen in Section 7, one also has to evaluate whether the supplier is in the course of business. It is pertinent t....
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....to the submission given in our Application, the Applicant wishes to quote the recent decision by Haryana Authority for Advance Ruling in the case of M/s. Pioneer Partners, wherein it was held that Royalty paid towards mining rights of 'stone boulders' taxable at 5% under 'reverse charge'. The extract of the relevant para in stated below: "the services for the right to use minerals including its exploration and evaluation, as per sr. No 257of the annexure appended to notification no. 11/2017-CT (Rate), dated 28.06.2017 is included in group 99733 under heading 9973. Hence, it attracts the same rate of tax as on supply of like goods involving transfer of title in goods. As per notification no. 1/2017-CT (Rate), dated 28.06.2017 under the CGST Act, 2017 and the corresponding State Tax notification under HGST Act. 2017, Schedule I the stone boulders extracted by the applicant attract 5%GST (2.5 % CGST + 2.5% HGST) as covered under HSN 2516 (At Sr. No. 124 of the notification)." Based on the above, the Applicant wishes to submit that the entries prescribing the rate of tax for the service code 9973 does not specifically cover the Licensing services for the right to use minera....
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....bed by the Central Government. Ihe funds accumulated with the NMET will be utilised to step up the exploration activities. 7. The Applicant would like to state that in the said rules for DMF and NMET. the collections are defined as 'contribution" as against consideration. Also, in no manner such contribution made to DMF/NMET can be regarded as payment towards service by way of royalty or right to use minerals. Had such contribution been towards mining rights, the same would have been retained by State Government. The said sum is towards benefit of the interest and benefit of persons and areas affected by mining related operations, exploration activities and cannot be considered as consideration towards mining right. 8. In order to tax a particular transaction as "Supply'' under Section 7 of CGST Act. there should be supply of goods or services agreed to be made for a consideration. In the instant case, supply of service is missing and therefore the main test of levy of tax under Section 7 is not satisfied. No liability under Reverse charge 9. Without prejudice to the above, assuming but not admitting that there is a service provided by the trust in lieu of contribution ....
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....ty 14. Further, we would like to state that Section 15 of CGST Act, 2017 does not mention to include value paid to third party in the transaction value of supply. In this regard, we would like to quote clause (b) of Section 15; "Value of supply shall include any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;" 15. In the instant case, the Government is not liable to incur the cost of development of people near mining area. The cost has to be borne by mining lease holder. There is no diversion of cost by supplier of royalty service to the recipient i.e. lessee. At, the first place contribution to trusts is not for obtaining mining rights but is towards interest and benefit of affected people and for exploration activities. Therefore, the payment made to trust cannot be linked to mining rights and cannot be included in the valuation of royalty. 16. Further, it is submitted that even the Sectoral FAQs only talk about royalty paid under "Licensing services for the right to use minerals including its e....
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....mining is the mineral ore. The extraction of mineral ore being the main activity and product and the royalty is paid on the activity of extraction and usage of the mineral ore so extracted, this does not amount to an additional benefit out of the main transaction being something else and hence the royalty would not amount to profit a prendre. The judgments relied upon by the applicant have no application to the transactions of the applicant as the main activity is extraction of mineral ore for which royalty is paid. Regarding classification of services, the following points are noted: a. The Annexure to the Notification No. 11/2017 - Central Tax (Rate) dated 28.06.2017 which prescribed the Service Accounting Code for each type of service gives the following services which are relevant to the transaction of the applicant. They are: Heading 9973 Leasing or rental services with or without operator Group 99731 Leasing or rental services concerning machinery and equipment with or without operator Group 99732 Leasing or rental services concerning other goods Group 99733 Leasing services for the right to use intellectual property and similar products Since th....
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....l Government, State Government, Union territory or local authority Any business entity located in the taxable territory. 7.8 Since the transaction is between the State Government and the applicant and the services are supplied by the state government to the applicant which is a business entity, and the transaction being a supply not covered under the exception, the applicant being the recipient of such service shall have to pay tax on the said supply under reverse charge mechanism as per Notification No. 13/2017 - Central Tax (Rate) dated 28.06.2017. Now, coming to the second issue of taxability of the contributions made to District Mineral Foundation (DMF) and the National Mineral Exploration Trust (NMDF), we note that: 7.9 The first question is whether such activity is liable to GST in the first place or not. In order for an activity to be charged to tax, it must fall within the meaning of "supply' as defined by Section 7 of the CGST Act, 2017. That, the Section 7 makes it clear that any activity shall be called supply only if it fulfills two important conditions: A) It should be in the course of or furtherance of business B) It should be for a consi....
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....d by a race club by way of totalisator or a license to book maker in such club; and (i) Any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities; In view of above, the applicant's first contention that these are trusts set up by an Act and are working for non-profit purposes is not relevant. This is because the term 'business' includes any trade, commerce etc. 'whether or not it is for a pecuniary benefit" in terms of Section 2(17). 7.13 But before even judging whether activities undertaken by the DMF and NMET are for business purposes or not. we have to understand that the underlying service is not actually being provided by these trusts, but rather the payments made to these trusts is nothing but addition to royalty itself. That is to say, such payments are part of the original supply itself. The original supply, i.e. the mining rights given by the Central Government to the applicant was for a consideration payable in the form of royalty. It can be seen that the payments made to the DMF and the NMET are also part of the same royalty, and consideration paid in respect ....
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....tributions are described as being 'in addition to' the payment of royalty, which itself is "in respect of the mining rights. As such, therefore, such amounts are paid in respect of mining rights and the said supply is already deemed to be taxable under reverse charge basis. 7.18 Further support for this view comes from the intent behind the contributions to be made to these trusts. The intention behind setting up these trusts is to rehabilitate the affected areas and the affected people as a result of the mining operations being carried out. Had the government not started these trusts, the onus of rehabilitation would tall on the government itself, and as such would result in an additional cost directly related to royalty. By way of such contributions, the government has transferred such responsibility and cost thereof to the recipient, i.e. the applicant in this case. It should be seen that under regular valuation rules of GST, if any amount which the supplier is liable to pay has been incurred by the recipient, then such amount would also be added to the value of supply. While there is no legal liability on the government in this case, the intent behind such contribution is th....