TaxTMI 
TaxTMI 
2019 (10) TMI 865
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....r 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 involving transfer of title in goods? b) Whether statutory contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) as per MMDR Act, 1957 amounts to "Supply" and whether the same is liable for GST under reverse charge. 3. The applicant furnishes some facts relevant to the stated activity:- a. The applicant states that they are a State-controlled mineral producer of Government of India. It is owned by the Government of India and is under the administrative control of the Ministry of Steel. It has operations in Karnataka, Chhattisgarh and Madhya Pradesh. b. Since its inception they are engaged in the exploration of wide range of minerals including iron ore, copper, rock phosphate, limes stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite, beach sands, etc. The applicant also operates Donimalai Iron Ore Mine in Donimalai in Ballari District and also operates a pellet plant adjacent to Donimali Iron Ore Mine in Kar....
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....so been discussed in the judgement in an incidental manner. Although royalty has not been defined explicitly, the Supreme Court held that royalty is separate and distinct from land revenue and that it is not related to land as a unit. On the other hand, royalty is payable on a proportion of the minerals extracted and it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity of the mineral extracted. d. The applicant also mentions the sectoral FAQ published by the CBEC wherein it is categorically stated that Royalty payment is made towards Licensing services for exploration of natural resources. The extract of the same is as under: "The Government provides license to various companies including Public Sector Undertakings for exploration of natural resources like oil, hydrocarbons, iron ore, manganese, etc. For having assigned the rights to use the natural resources, the licensee companies are required to pay consideration in the form of annual license fee, lease charges, royalty, etc. to the Government. The activity of assignment of rights to use natural resources is treated as supply of serv....
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....sources by the lessee. In any case, it cannot be considered as payment made for renting of immovable property. The payment of royalty is a statutory levy as per MMDR Act and the same is as well categorically emphasised in the Mining Lease Agreement. Therefore, it is against Licensing Services by the Government for right to extract minerals. j. The applicant states that since the services are covered under the Service Code Classification 997337, reference was made to Notification No. 11/2017 - Central Tax (Rate) dated June 28th, 2017. Heading 9973 covers the various types of leasing, rental, licensing services. The group under the heading 99737 largely appears to cover right to use intangible property. Entry No. 997337 covers the licensing services for the right to use minerals including its exploration and evaluation. k. The applicant states that it is pertinent to note that for every entry for the Heading in Notification No. 11/2017, the last description of service in the heading states "Other than the above". This means any service at 6-digit level of the annexure not specified in the 4-digit level in Notification will fall in the residual clause of that particu....
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....sult only if all the following conditions are satisfied:- i. There is a supply in terms of Section 7 ii. The supply is in the course of or furtherance of business iii. The supply is not exempt under section 7(2) or section 11(1). f. The assessee argues that in order to determine whether tax is payable on payment to District Mineral Foundation following has to be tested:- i. Whether there is supply of goods or services by the trust to which such payment is made ii. If at all there is a supply, whether such supply is in the course of or furtherance of business of the trust? iii. Whether such supply is exempt under Section 7(2) or Section 11(1)? 7. The applicant states 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 to work for the interest and benefit of persons, and areas affected by mining related operations. 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. ....
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....ere must be specific activities for a consideration. 11.2 Royalty is "profit a pendre", that is share of profit received from land which is not taxable under GST. Sharing of profit will not be a supply from one person to another subject to the levy of GST. 11.3 As per Section 9 of Mines and Minerals (Development & Regulation) Act, 1957, Royalty is required to be paid @ certain percentage of average sale price on ad valorem basis. Therefore royalty is in the nature of sharing of profit arising out of such rights in immovable property. 11.4 The applicant has placed reliance on the decision of Apex Court in the case of Titaghur Paper Mills Company v. State of Orissa and Other [1985- VIL - 01-SC] = 1985 (3) TMI 226 - SUPREME COURT wherein it was held that,- "The subject matter of a profit a prendre, namely the substance which the owner of the right is by virtue of the right entitled to tax, may consist of animals, including fish and fowl, which are on the land, or of vegetable matter growing or deposited on the land by some agency other than that of man, or of any part of the soil itself, including mineral accretions to the soil by natural forces. The right may extend....
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....dition to the right to enter upon the land for the above purpose, there are other important rights flowing from the bamboo contract which we have already summarized earlier and which make it clear that what the bamboo contract granted was a benefit to arise out of land which is an interest in immovable property. The attempt on the part of the State Government and the officers its Sales Tax Department to bring to tax the amounts payable under the bamboo contract was, therefore, not only unconstitutional but ultra vires the Orissa Act." 12. The applicant has also taken reliance on the judgment of the Andhra Pradesh High Court in the case of Andhra Pradesh Paper Mills [1988-VIL-01-AP] = 1988 (2) TMI 453 - ANDHRA PRADESH HIGH COURT and in the case of Bhadrachalam Paper Boards Division [2014 0VIL-369-AP] = 2014 (12) TMI 998 - ANDHRA PRADESH HIGH COURT. 13. Placing reliance on the above judgements, the applicant states that the Apex Court has held that such profit is in the nature of "Profit a Prendre" and cannot be viewed as "sale" and not subject to VAT. Drawing similar analogy from the above, Royalty paid to the Central Government based on certain percentage of average sal....
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....owards mining rights of "stone boulders" taxable at 5% under reverse charge. Based on the above, the applicant submits that the entries prescribing the rate of tax for service 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 residual entry "leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), and (v) above" with applicable tax rate as the same rate as applicable in 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. Since Iron ore attracts 5% GST Rate, royalty paid for mining Iron Ore will attract 5% GST Rate. 17. The applicant has submitted that Section 9B and 9C of MMDR Act, 1957 mandates that NMDC shall contribute 30% of royalty to District Mineral Foundation and 2% of Royalty to National Mineral Exploration Trust. The applicant submits that in no manner such contribution made to DMF/NMET can be regarded as payment towards service by way of royalty or right t....
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....as well as the additional submissions made by Sri. K Sivarajan, CA, during the personal hearing. We also considered the issues involved on which advance ruling is sought by the applicant and relevant facts. At the outset, we would like to state that the provisions of both the CGST Act and the KGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the KGST Act. 20.1 The arguments made by the applicant and the documents in support of the claims were verified and the following are noted: 20.2 Regarding the additional issue raised by the applicant after the filing of the application, that the royalty is profit a prendre and hence not liable to tax under the GST Act cannot be accepted for the following reasons:- (a) The Lease is for mining of minerals and the main product of the 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 o....
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.... Hence, royalty amounts to the consideration payable by the applicant for the activity undertaken by him and is a supply. 20.3 Regarding the nature of supply, the royalty payment is clearly towards the licensing services for exploration of natural resources. The consideration is payable in the form or royalty and the activity of assignment of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism. 21. Regarding the classification of service received by the applicant the following points are noted: 21.1 The Annexure to Notification No. 11/2017 - Central Tax (Rate) dated 28.06.2017, which prescribes the Service Accounting Code for each type of services, details 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 Licensing serv....
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....nse fee, lease charges, royalty, etc. to the Government. The activity of assignment of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism." 21.4 Therefore, the payment of royalty is for license given to extract minerals and the amount of 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. 22. Regarding the rate of tax applicable on the above supply, Notification No. 11/ 2017 - Central Tax (Rate) dated 28.06.2017 is verified and found that the entries related to SAC 9973 are as under: Sl.No. Chapter, Section or Heading Description of Service Rate (percent) Condition 17 Heading 9973 (Leasing or rental services, with or without operator) (i) ........................ (ii) ................ ....
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....s purchased or leased prior to 1st July, 2017 65 percent of the rate of central tax as applicable on supply of like goods involving transfer of title in goods Note: Nothing contained in this entry shall apply on or after 1st July, 2020. - (vii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v) and (vi) above. Same rate of central tax as applicable on supply of like goods involving transfer of title in goods - 35 Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 9 - 22.2 Serial no. 17 of Notification no. 11/2017 - Central Tax (Rate) dated 28.06.2017 was further amended by Notification No. 1/2018 - Central Tax (Rate) dated 25-01-2018 and after the amendment the entries look as under: SI. No Chapter, Section or Heading Description of Service Rate (percent) Condition 17 Heading 9973 (Leasing or rental services, with or without operator) (i) ......................... (ii) .....................
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.... (vi) Leasing of motor vehicles purchased or leased prior to 1st July, 2017 65 percent of the rate of central tax as applicable on supply of like goods involving transfer of title in goods Note: Nothing contained in this entry shall apply on or after 1st July, 2020. - (vii) Time charter of vessels for transport of goods 2.5 Provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers and tankers) has not been taken (please refer to Explanation no. (iv) (viia) Leasing or renting of goods Same rate of central tax as applicable on supply of like goods involving transfer of title in goods - (viii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v), (vi), (vii) and (viia) above. 9 - 35 Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 9 - 22.4 Coming to the issue whether the license to extract mineral ore and als....
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....x, Notification No. 13/2017 - Central Tax (Rate) dated 28.06.2017 stipulates at Serial No. 5, that the tax leviable under section 9 of the CGST Act shall be paid on reverse charge basis by the recipient of such services, and the entry reads as under: SI.No. Category of Supply of Services Supplier of Service Recipient of Service 5 Services supplied by the Central Government, State Government, Union Territory or Local Authority to a business entity, excluding - (1) renting of immovable property, and (2) services specified below - (i) services by Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government, Union Territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transportation of goods or passengers Central Government, State Government or Union Territory or local authority; Any business entity located in the taxable territory Since the transaction is between the State Government and the applicant and the services are supplied....
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.... "9C. National Mineral Exploration Trust.- (1) The Central Government shall, by notification, establish a Trust, as a non-profit body, to be called the National Mineral Exploration Trust (2) The object of the Trust shall be to use the funds accrued to the Trust for the purposes of regional and detailed exploration in such manner as may be prescribed by the Central Government. (3) The composition and functions of the Trust shall be such as may be prescribed by the Central Government. (4) The holder of a mining lease or a prospecting licence-cum-mining lease shall pay to the Trust, a sum equivalent to two percent of the royalty paid in terms of the Second Schedule, in such manner as may be prescribed by the Central Government. 24.3 On perusal of the above sections related to DMF and NMET, it is seen that both these payments are payable by a lessee in addition to the royalty and both the calculations are made on the basis of royalty. 24.4 Section 15 of the CGST Act, 2017 which is related to the determination of the value of supply reads as under,- "15. Value of taxable supply (1) The value of a supply of goods or services or both shal....
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....value of supply. There is no doubt that the amount payable to DMF and NMET are on account of supply made and are directly linked to the royalty payable and also computed as a fixed percentage of royalty. 24.6 Further, it is also an admitted fact by the applicant that in case of non-payment of DMF and NMET, the mineral permits would not be issued to the applicant and hence he would not be able to use the mineral ore and thus there would be no supply at all. Though the ultimate beneficiaries are the trusts set up by the State Government and Central Government respectively, it is, like royalty, payable under the same Act. The fact that payments are made to different persons does not mean that they are different suppliers, as the amounts paid are classified on the basis of the purpose for which the amounts are applied. The service provided is only the license to extract mineral ore and also the right to use such minerals extracted is a single service where the consideration is payable under three heads and in case any one of the payments is not made, the service provider, that is the Government would not issue the permit to use the mineral ore so extracted. Hence it forms the value ....