9911796707
TMI Blog2019 (10) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 Karnataka. 3. The applicant states that Government of Karnataka has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icitly, 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 services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 particular heading. l. The entries prescribing the rate of tax for the service code 9973 does not specifically cover the Licensing services for the right to use minerals including its explora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8. The applicant states that as seen in Section 7, whether the supply is in the course of business is to be evaluated. The Trust is a non-profit body organisation and not involved in the course of any business, trade or commerce. Based on the above, there is no supply made in terms of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls (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 to the taking of the whole of such animal or vegetable matters or merely a part of them. Rights have been established as profits a prendre to take acorns and beech mast, brakes, fern, heather and litter, thorns, turf and peat, boughs and branches of growing trees, rushes, fresh water fish, stone, sand and shing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sale price on ad valorem basis, is "profit a prendre' and no 'service' element is involved therein in the absence of any activity carried out by the Government. Accordingly, it can be said that service tax is not applicable on Royalty paid to the Government. 14. The applicant submits that the levy of GST on payment of royalty is bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to use minerals. Had such contribution been towards mining rights, the same would be 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. Further, the applicant states that in case the applicant fails to pay the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, 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 out of the main transaction being something else and hence the royalty would not amount to profit a prendre. The judgements relied 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. (b) Section 9(1) of Mines and Mineral (Development and Regulation) Act, 1957 (MMDR Act) is referred to as under: "The holder of a mining lease gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration 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 services for the right to use intellectual property and similar products The service received by the applicant is not covered under Group 9973 or Group 99732. We therefore look at the services covered under Group 99733 or else by any other group. 21.2 The Group 99733 consists of the following Headings Service Code (Tariff) Service Description 997331 Licensing services for the right to use computer software and databases 997332 Licensing services for the right to broadcast and show origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ................ (iii) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Same rate of central tax as on supply of like goods involving transfer of title in goods - (iv) ..................... (v) ........................ (vi) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv) and (v) above. Same rate of central tax as applicable on supply of like goods inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication 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) .......................... (iii) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Same rate of central tax as on supply of like goods involving transfer of title in goods - (iv) .................... (v) ................... (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 transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices (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 also the right to use such minerals extracted is a leasing or rental service, it is clear that what is supplied by the Government is the lease of the right to extract and use mineral ores and that is not covered by any specific entries in the serial no. 17 of the Notification and hence falls under the residual entry. Upto the amendment of Notification No. 11/2017 - Central Tax (Rate) dated 28.06.2017 by the Notification No. 27/2018 - Central Tax (Rate) dated 31.12.2018, the tax rate for the above service was fixed at the rate of tax which was applicable on supply of like goods involving transfer of title in goods. In this case there was a transfer of title in goods involved in the activities of the applicant and that was of the extracted mineral ore on which the royalty was paid and hence the tax rate applicable on the service is the same rate of tax as applicable on the mineral ore. In this regard we also draw attention to Entry 2(a) of Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rritory 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 by the State government to the applicant which is a business entity, and the transaction being a supply not covered under the exceptions, 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. 24. Regarding the issue of DMF and NMET Contribution, the following are observed: 24.1 Section 9B of the Mines and Minerals (Development and Regulation) Act, 1957 as amended from time to time reads as under:- "9B. District Mineral Foundation - (1) In any district affected by mining related operations, the State Government shall, by notification, establish a trust, as a non-profit body, to be called the District Mineral Foundation. (2) The object of the District Mineral Foundation shall be to work for the interest and benefit of persons, and areas affected by mining related operations in such manner as may be prescribed by the State Government. (3) The composition and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "15. Value of taxable supply (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. (2) The value of supply shall include,- (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; (b) 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; (c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of or before delivery of goods or supply of services; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms the value of the supply under Section 15 and the charges for DMF and NMET being compulsory payments, would only amount to application of the amounts paid and still would form the value of the taxable services. 24.7 It is also inferred that the service is a single service as discussed above, there are no separate service providers for royalty, DMF and NMET and in all cases the Government which has provided the license to mine mineral ore and permitted the use of such mineral ore mined would be the person who has provided the service. 25. In view of the foregoing, we rule as follows RULING 1. The royalty paid in respect of Mining Lease is a part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation falling under the Head 9973 which is taxable at the rate applicable on supply of like goods involving transfer of title in goods upto 31.12.2018 and taxable at 9% CGST and 9% SGST from 01.01.2019 onwards under the residual entries of Serial No. 17 of the Notification No. 11/2017-Central Tax dated 28.06.2017. 2. The statutory contribution made to District Mineral Foundation (DMF) and National Mineral Exploration Tru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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