2024 (4) TMI 1257 - HC - GST

Levy of GST on royalty and settlement amounts paid for mining rights particularly sand mining granted by the State Government - Discharge of taxable liability @ 5% through reverse charge mechanism - petitioner deposited the tax liability in Government treasury by reverse charge mechanism (RCM) at the same rate of tax as on supply of like goods involving transfer of title in goods - HELD THAT - While the transfer of right to enjoy the property under a mining lease commences from the specified day of commencement and the rights and interest in the minerals specified in the mining lease are transferred from the State Government to the lessee on the specified day of the commencement of the lease deed the lessee is required to pay royalty only upon exercise of minerals right that is removal or consumption of minerals. This gains importance as it resolves the issues raised by learned Senior Counsel for the petitioner in his submissions in terms D of paragraph 15 . Learned Senior Counsel for the petitioner has argued that merely because periodic payment of royalty is made post the commencement of GST the State would have no jurisdiction to impose GST because the taxable event has taken place prior to coming into force of GST. It is his submission that the petitioner was declared the highest bidder on 21.10.2014 in respect of auction of sand ghats for a period of five years advancing from 01.01.2015 to 31.12.2019. Learned Senior Counsel for the State has rightly submitted that the GST is payable on the payment of every installment of the settlement amount and in case where royalty on extracted quantity of sand is more than the settlement amount then the settle shall be liable to pay additional settlement amount. In view of the judgment of the Hon ble Supreme Court in MADA judgment 2024 (7) TMI 1390 - SUPREME COURT (LB) there is no iota of doubt that the transfer of interest in minerals is distinct from the exercise of minerals rights and the royalty is required to be paid only upon exercise of the mineral rights by the lessee. Classification of Services - Notification No. 11/2017-Central Tax (Rate); 27/2018-Central Tax (Rate) dated 31.12.2018 and Circular No. 164/2021 dated 06.10.2021 - HELD THAT - The Notification No. 11 of 2017 under serial no. 17 made the leasing or rental services with or without operator other than (i) (ii) (iii) and (iv) above taxable at the same rate of central tax as applicable on supply of like goods involving transfer of title in goods. The GST Council has been established as an Constitutional Body and the said GST Council in its 4th meeting held on 3rd and 4th November 2016 had decided that supply of services shall be generally taxed at the rate of 18%. In its 18th and 19th May 2019 meeting the GST Council while recommeding the rate schedule for services (5% 12% 18% and 28%) specifically recommeded that all the residuary services would attract GST at the rate of 18%. In these circumstances in our opinion the Appellate Authority on advance ruling has not committed any error taking a view with regard to the rate of tax for the period 01.07.2017 to 31.12.2018 at the rate of 18%. Transfer of Interest is Different from Exercise of Mineral Rights Royalty can be used as a Measure of Tax on Royalty - HELD THAT - The judgment of the Hon ble Supreme Court in MADA case has made it very clear that royalty is not a tax. It is a contractual consideration paid by the mining lessee to the lessor for enjoyment of minerals rights. Royalty becomes payable only upon exercise of minerals rights by the lessee that is removal or consumption of minerals. The transfer of interest in minerals is distinct from the exercise of the mineral rights and further it is evident that since royalty is determined on the basis of the mineral produce royalty can also be used as a measure to determine the tax on royalty. Notification No. 12 of 2017 imposes tax on the services covered under Head 99733. In the garb of a challenge to the order of Appellate Authority for Advance Ruling this Court would not allow the petitioners to contend that imposition of tax under head 99733 in the Notification No. 12 of 2017 is discriminatory for the reason that the licence to alcohol industry has been kept out of the purview of scope of supply of services. The contention is not well founded. Conclusion - Royalty is not a tax but a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights and compensation for loss of minerals; GST is leviable on the service component of royalty. There are no merit in any of the contentions of the learned Senior Counsel for the petitioner - application dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this batch of writ applications pertain primarily to the applicability and validity of Goods and Services Tax (GST) on royalty and settlement amounts paid for mining rights, particularly sand mining, granted by the State Government. The principal issues include:

• Whether the grant of mineral concessions or mining leases by the State Government amounts to a supply of service taxable under GST laws;
• Whether royalty paid under mining leases is a tax or a contractual consideration, and consequently, whether GST can be levied on such royalty;
• The constitutional validity of levying GST on mineral rights vis-`a-vis the exclusive legislative competence of States under Entry 50, List II of the Seventh Schedule of the Constitution of India;
• Whether Article 246A of the Constitution, with its non-obstante clause, overrides State legislative powers to impose GST on mineral rights;
• The classification and applicable rate of GST on services relating to grant of mineral rights, including the interpretation of Service Accounting Codes (SAC) and relevant notifications;
• The timing of the taxable event for GST purposes, especially in cases where mining rights were granted or contracts executed prior to the commencement of GST;
• The applicability of exemption notifications, specifically Serial No. 64 of Notification No. 12/2017, and whether such exemption covers the petitioner's transactions;
• The contention of discrimination in tax treatment between mining leases and other licenses such as liquor licenses;
• Whether the royalty comprises a composite charge including regulatory fees and service fees, and the implications thereof on GST liability;
• The procedural and jurisdictional aspects relating to advance ruling applications, appeals, and the scope of issues permissible before the Advance Ruling Authority and writ courts.

2. ISSUE-WISE DETAILED ANALYSIS

a) Whether Grant of Mineral Concessions is a Taxable Supply of Service under GST

Legal Framework and Precedents: Section 7(1)(a) of the CGST/BGST Act, 2017 defines "supply" to include leasing or licensing services. Notifications No. 11/2017 and 27/2018 classify licensing services for the right to use minerals under SAC 997337, taxable at 5% initially and 18% subsequently. Circular No. 164/2021 clarifies the rate of GST on such services. The MADA judgment by the Supreme Court elaborates on the nature of royalty and mineral rights.

Court's Interpretation and Reasoning: The Court held that leasing of government land for mining is a supply of service under GST. The petitioner's activity falls within licensing services for the right to use minerals (SAC 997337). The grant of mineral rights is a contractual arrangement involving consideration in the form of royalty or settlement amount, which qualifies as supply of service. The Court rejected the petitioner's contention that such grant is merely a statutory function without service element.

Key Evidence and Findings: The petitioner's agreements, tender documents, and payment schedules demonstrate the contractual nature of the grant. The petitioner accepted liability for GST payment at applicable rates in agreements and correspondence. The Advance Ruling Authority and Appellate Authority upheld the classification and rate.

Application of Law to Facts: The Court applied the inclusive definition of supply under Section 7 and relevant notifications to hold that grant of mining rights is a taxable service. The petitioner's reliance on the exemption for liquor licenses was rejected as a special dispensation not applicable to mining leases.

Treatment of Competing Arguments: The petitioner argued that mining leases are not services and that GST imposition violates constitutional provisions. The State and Union of India countered with statutory provisions, notifications, and GST Council recommendations. The Court found the State's submissions consistent with law and policy and rejected the petitioner's arguments.

Conclusion: The grant of mineral concessions/mining leases is a supply of service taxable under GST at 18% (9% CGST + 9% SGST) under SAC 997337.

b) Whether Royalty is a Tax or Contractual Consideration

Legal Framework and Precedents: The MADA judgment is pivotal, holding that royalty is not a tax but a contractual consideration paid for enjoyment of mineral rights and compensation for mineral value loss. Section 9 of the MMDR Act regulates royalty. The distinction between tax and fee for service/licensing is discussed in Liberty Cinema and other Supreme Court cases.

Court's Interpretation and Reasoning: The Court relied extensively on the MADA judgment, which concluded that royalty arises from contractual obligations and is distinct from sovereign tax. Royalty includes two components: (i) consideration for enjoyment of mineral rights (service element), and (ii) compensatory/regulatory fee for mineral depletion (non-service element). The Court rejected the petitioner's claim that royalty is wholly a tax and not subject to GST.

Key Evidence and Findings: The Court examined statutory provisions, the nature of mining leases, and judicial pronouncements. It noted that royalty is payable only upon exercise of mineral rights (i.e., extraction), distinct from transfer of rights. The petitioner's argument that GST cannot be levied on royalty as it is a tax was negated by the Supreme Court's clear distinction.

Application of Law to Facts: The Court applied the MADA principles to the petitioner's case, holding that royalty paid is consideration for a taxable service under GST. The compensatory fee component does not negate GST liability on the service portion.

Treatment of Competing Arguments: The petitioner's contention that royalty is a tax and exempt from GST was rejected. The State's argument that royalty is consideration for taxable service was accepted. The Court also rejected the petitioner's attempt to treat the entire royalty as regulatory fee exempt from GST.

Conclusion: Royalty is contractual consideration, not a tax, and is subject to GST on the service component.

c) Constitutional Validity of GST Levy on Mineral Rights

Legal Framework and Precedents: Entry 50, List II, Seventh Schedule grants States exclusive power to tax mineral rights. Article 246A, inserted by the 101st Amendment, empowers Centre and States to levy GST with a non-obstante clause overriding Articles 246 and 254. The MADA judgment discusses the scope and interplay of these provisions.

Court's Interpretation and Reasoning: The Court held that Article 246A is a special provision empowering both Centre and States to levy GST, harmonizing with State powers under Entry 50. The non-obstante clause does not render Entry 50 otiose but coexists with GST powers. The Court rejected the petitioner's submission that GST levy on mineral rights is ultra vires State legislative competence.

Key Evidence and Findings: The Court analyzed constitutional provisions, the MADA judgment, and legislative history. It emphasized the doctrine of fiscal federalism and the need to harmonize entries to avoid rendering any provision nugatory.

Application of Law to Facts: The Court concluded that GST can be levied concurrently on mineral rights, consistent with constitutional provisions and the MADA judgment.

Treatment of Competing Arguments: The petitioner argued exclusivity of State power and invalidity of GST levy; the State and Union argued constitutional validity of GST under Article 246A. The Court sided with the latter.

Conclusion: GST levy on mineral rights is constitutionally valid under Article 246A and harmonizes with State powers under Entry 50.

d) Classification and Rate of GST on Mining Rights Services

Legal Framework and Precedents: Notifications No. 11/2017 and 27/2018 classify licensing services for mineral rights under SAC 997337. Circular No. 164/2021 clarifies rate applicability. The GST Council's recommendations fix the standard rate at 18% for residuary services.

Court's Interpretation and Reasoning: The Court upheld the classification of petitioner's services under SAC 997337. It accepted the Advance Ruling Authority's and Appellate Authority's findings that GST rate is 5% up to 31.12.2018 and 18% thereafter. The Court rejected the petitioner's contention that administrative circulars cannot fix tax rates but noted that notifications and Council recommendations support the rate.

Key Evidence and Findings: Notifications, circulars, and rulings were examined. The petitioner's acceptance of classification and rate in earlier proceedings was noted.

Application of Law to Facts: The Court applied the statutory framework and held the rate of 18% applicable post 01.01.2019. Earlier 5% rate was applicable as per notification.

Treatment of Competing Arguments: The petitioner challenged classification and rate; the State relied on notifications and Council recommendations. The Court found the State's position legally sound.

Conclusion: The services are correctly classified under SAC 997337 and taxable at 5% initially and 18% subsequently.

e) Timing of Taxable Event and Retroactive Application of GST

Legal Framework and Precedents: The taxable event must occur on or after the date the tax law comes into force (Govind Saran, Collector of Central Excise v. Vazir Sultan Tobacco). The execution of contract is the taxable event for transfer of rights (20th Century Finance). MADA judgment clarifies transfer of mineral rights and exercise of rights.

Court's Interpretation and Reasoning: The Court rejected the petitioner's argument that GST cannot be levied on payments made post-GST commencement if the rights were granted earlier. It held that yearly agreements and extensions post-01.07.2017 are not mere formalities but create fresh taxable events. Extensions are continuations, not renewals, but payments made post-GST commencement attract GST.

Key Evidence and Findings: The petitioner's in-principle sanction and agreements dated before GST commencement were analyzed. The Court found that annual agreements and extensions bind the parties and constitute taxable events.

Application of Law to Facts: GST applies to payments made after GST commencement, even if rights were initially granted earlier.

Treatment of Competing Arguments: The petitioner argued for exemption based on timing; the State argued for taxability on payments post-GST. The Court agreed with the State.

Conclusion: GST is payable on settlement amounts paid post-01.07.2017 regardless of initial grant date.

f) Applicability of Exemption Notification No. 12/2017 Serial No. 64

Legal Framework and Precedents: Serial No. 64 exempts services by government by assignment of right to use natural resources assigned before 01.04.2016, applicable only to one-time charge payable upfront or in installments.

Court's Interpretation and Reasoning: The Court held that the petitioner's yearly agreements and work orders issued post-2016 do not qualify for exemption. The exemption applies only to rights assigned before 01.04.2016 and to one-time charges, not recurring royalties or settlement amounts.

Key Evidence and Findings: The petitioner's multiple yearly agreements and work orders were found to break the continuity of assignment before 2016. The exemption was thus inapplicable.

Application of Law to Facts: The petitioner's transactions fall outside the exemption scope.

Treatment of Competing Arguments: The petitioner claimed exemption; the State denied applicability. The Court agreed with the State.

Conclusion: Exemption under Serial No. 64 is not available to the petitioner.

g) Discrimination Argument Comparing Mining and Liquor Licenses

Legal Framework and Precedents: Equal treatment under Article 14 requires intelligible differentia with rational nexus. Notification No. 25/2019 exempts liquor licenses from GST as neither supply of goods nor services.

Court's Interpretation and Reasoning: The Court rejected the petitioner's claim that mining leases and liquor licenses form the same class and should be treated alike. The liquor license exemption is a special dispensation by the GST Council, not a precedent for mining leases. The Court held that the classification is reasonable and justified.

Key Evidence and Findings: The GST Council's special exemption for liquor licenses and the absence of similar exemption for mining leases were noted.

Application of Law to Facts: The petitioner's claim of discrimination was rejected.

Treatment of Competing Arguments: The petitioner argued for parity; the State relied on GST Council's special dispensation. The Court sided with the State.

Conclusion: No discrimination is established; mining leases are taxable while liquor licenses enjoy special exemption.

h) Composite Nature of Royalty (Regulatory Fee and Service Fee)

Legal Framework and Precedents: MADA judgment distinguishes between compensatory/regulatory fees and service fees. The Supreme Court in Liberty Cinema and other cases clarified that license fees may not be fees for services.

Court's Interpretation and Reasoning: The Court held that although royalty has two components, GST applies to the service component. The absence of statutory mechanism to segregate the components does not exempt the entire royalty from GST. The petitioner's claim that the entire royalty is regulatory and thus non-taxable was rejected.

Key Evidence and Findings: The Court relied on statutory provisions and judicial precedents to reject the petitioner's composite charge argument.

Application of Law to Facts: GST applies to the service portion of royalty.

Treatment of Competing Arguments: The petitioner's composite charge argument was rejected.

Conclusion: Royalty's service component is taxable under GST.

i) Procedural and Jurisdictional Aspects Regarding Advance Ruling and Appeals

Legal Framework and Precedents: Section 97 of CGST Act provides for advance ruling on specific questions. Appeals lie before Appellate Authority for Advance Ruling. Res judicata and waiver principles apply unless jurisdictional or pure legal questions arise.

Court's Interpretation and Reasoning: The Court held that the petitioner sought advance ruling only on classification and rate, not on taxability or exemption. The petitioner did not appeal against the Advance Ruling Authority's order but challenged the Appellate Authority's order in writ jurisdiction. The Court noted the petitioner's shift in stand and held that issues beyond scope of advance ruling cannot be raised later. However, jurisdictional questions and pure legal issues can be agitated.

Key Evidence and Findings: The Court examined pleadings, orders, and procedural history.

Application of Law to Facts: The Court restricted the petitioner from raising issues not before the advance ruling authorities but allowed jurisdictional and constitutional questions.

Treatment of Competing Arguments: The petitioner argued for broader scope; the State urged adherence to procedural limits. The Court balanced these views.

Conclusion: Advance ruling scope is limited; petitioner's challenge beyond classification and rate is not maintainable.

3. SIGNIFICANT HOLDINGS

"The grant of mineral concessions/mining leases is a supply of service taxable under GST at 18% (9% CGST + 9% SGST) under Service Accounting Code 997337."

"Royalty is not a tax but a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights and compensation for loss of minerals; GST is leviable on the service component of royalty."

"Article 246A of the Constitution, containing a non-obstante clause, empowers both the Centre and States to levy GST on goods and services, harmonizing with the exclusive State power under Entry 50, List II to tax mineral rights."

"The taxable event for GST purposes is the payment of settlement amounts or royalties post commencement of GST, notwithstanding the initial grant of rights prior to GST."

"Exemption under Serial No. 64 of Notification No. 12/2017 is restricted to assignments of rights before 01.04.2016 and one-time charges; it does not cover recurring payments or assignments made post that date."

"No discrimination exists between mining leases and liquor licenses; the special exemption granted to liquor licenses by GST Council does not extend to mining leases."

"The petitioner's attempt to raise issues beyond classification and rate before the Advance Ruling Authority is impermissible; however, jurisdictional and pure legal questions may be agitated in writ jurisdiction."