TMI Blog2019 (10) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... r any of the sub-entries (i) to (v) of Serial No. 17, it needs to be seen whether the same is covered under entry no. (vi) of Serial No. 17 attracting the tax rate which is same as that applicable on the supply of like goods involving transfer of title in goods or under the Serial No. 35 which is related to the other miscellaneous services including services nowhere else classified. 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? - HELD THAT:- 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 mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ORDER UNDER SECTION 98(4) OF THE CENTRAL GOODS SERVICES TAX ACT, 2017 AND UNDER 98(4) OF THE KARNATAKA GOODS SERVICES TAX ACT, 2017 1. M/s N.M.D.C Ltd, (called as the 'Applicant' hereinafter), Donimalai Township, Donimalai, Sandur Taluk, Ballari District, having GSTIN number 29AAACN7325A1ZR, has filed an application for Advance Ruling under Section 97 of CGST Act, 2017, KGST Act, 2017 IGST Act, 2017 in FORM GST ARA-01 discharging the fee of ₹ 5,000-00 each under the CGST Act and the KGST Act. 2. The Applicant is a Limited Company and is registered under the Goods and Services Act, 2017. The applicant has sought advance ruling in respect of the following question:- a) Whether the royalty paid in respect of Mining Lease can be classified as Licensing services for 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 wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se granted on or after the commencement of this Act shall pay royalty in respect of any [mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lease] from the leased area at the rate for the time being specified in the Second Schedule in respect of that mineral c. The term Royalty is not defined in the 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 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 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 contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable property . g. Upon harmonious reading from the above, what is intended to be transferred is the right and title to the interest over immovable property (i.e Mineral). Such an interest over immovable property cannot be equated with Renting of immovable property . h. Further, the applicant also quotes Section 65 (105) (zzz) of Finance Act, 1994, which defines immovable property in relation of Renting of immovable property . As per the said section, immovable property did not include vacant land solely used for agriculture, farming, forestry, animal husbandry, mining purposes. i. The applicant states that in a nutshell, that royalty is a charge by the owner of a mineral in consideration of the exploitation of mineral resources 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 Classificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 contributions made to the funds. d. The Assessee states that as per Section 7, supply includes,- (a) All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licensee, rental, lease or disposal made for a consideration by a person in the course or furtherance of business. e. Therefore, it is to be noted that liability to pay will result 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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, pay to the Trust, a sum equivalent to two percent of the royalty paid in terms of the Second Schedule. Hence the applicant seeks clarity on the liability to pay tax on the contribution made to the funds under reverse charge as the Trust is not a Government nor the transaction is a supply between the applicant and the Trust. 11. The applicant has added one more question to be ruled by the Authority as to whether the royalty paid is regarded as Supply in terms of Section 7 of the CGST Act, 2017 and argues as under: 11.1 As per the applicant the payment of royalty is not a supply under the GST and is not liable to GST. For a transaction to be supply of goods or services, there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment some part of the soil of that tenement or minerals under it or some part of its natural produce or the animals ferae nature existing upon it What is taken must be capable of ownership, for otherwise the right amounts to a mere easement. Clause (26) of section 3 of the General Clause Act, 1897 defines immovable property as including inter-alia benefit to arise out of land . The definition of immovable property in clause (f) of section 2 of the Registration Act, 1908 illustrates a benefit to arise out of land by stating that immovable property includes ...... rights to ways, lights, ferries, fisheries, or any other benefit to arise out of land. In addition 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 vire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the interest and benefit of persons, and areas affected by mining related operations and exploration activities. e. The payment towards DMF and NMET is purely in the nature of contribution and cannot be regarded as consideration; f. There is no supply made in terms of section 7 therefore liability to pay tax does not arise g. The trust established under section 9B and 9C of the MMDR Act does not fall under the definition of Government. 16. In addition to the above submission, the applicant has quoted the decision of the Haryana Authority on 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards 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. 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 exploration and evaluation . Contribution to DMF / NMET Trusts is not mentioned under such services in FAQ. Therefore the same is not liable to GST under reverse charge. 20. FINDINGS AND DISCUSSION We have considered the submissions made by the applicant in their application for advance ruling 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 argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tamil Nadu, etc. (AIR 1990 SC 85). 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 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. 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. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On a cursory glance, it is seen the nature of service received by the application is covered under the Service Accounting Code 997337 -Licensing services for the right to use minerals including its exploration and evaluation. The Government has been providing the service of licensing services for the right to use minerals after its exploration and evaluation to the applicant and applicant has to pay a consideration to the Government for the same. 21.3 Though it is not binding, the sectoral FAQ published by the CBEC, on which the applicant himself has placed reliance in their application, categorically state that Royalty payment made towards Licensing services for exploration of natural resources is treated as supply of services. 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 assignme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - Since the services covered under the license to extract mineral ore and also the right to use such minerals extracted is not covered under any of the sub-entries (i) to (v) of Serial No. 17, it needs to be seen whether the same is covered under entry no. (vi) of Serial No. 17 attracting the tax rate which is same as that applicable on the supply of like goods involving transfer of title in goods or under the Serial No. 35 which is related to the other miscellaneous services including services nowhere else classified. 22.1 Serial No. 17 is concerned the Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 was amended by Notification No. 31/2017 -Central Tax (Rate) dated 13.10.2017 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) ......................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject 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 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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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