2019 (9) TMI 695 - AAR - GST

Classification of royalty payments - taxability - reverse charge mechanism - royalty payments to Government in respect of Mining lease under Licensing services for Right to use minerals falling under the heading 9973 - liability of tax - contributions made to District Mineral Foundation (DMF) and National Mineral Exploration trust (NMET) as per MMDR Act, 1957. HELD THAT - It is clear that the supply made by the government, i.e. the right to mine the resources is taxable under Section 9 of the Act and is within the meaning of the term supply as covered by Section 7. That, in order to classify as a supply, two important conditions are to be met. First, it should be in the course or furtherance of business. It must also be noted that as per Section 2(17), inter alia, any activity undertaken by the Central Government in which they are engaged as public authorities shall be deemed to be a business. Hence, the royalty received by the Government in lieu of the mining rights shall also be deemed to be for business purposes - Furthermore, this is a service which is provided by the Central Government to the applicant being a business entity, and is therefore liable to be paid by the recipient under reverse charge, in terms of Sr. No. 5 of Notification No. 13/2017 - CT (Rate) dated 28.06.2017. Hence, the said service is taxable under reverse charge basis. The services received by the applicant shall be classified under heading 997337. Whether the license to extract mineral ore and also the right to use such minerals extracted is a leasing or rental service? - HELD THAT - It is clear that what is supplied by the Government is the service by way of license 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- 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. Taxability of the contributions made to District Mineral Foundation (DMF) and the National Mineral Exploration Trust (NMDF) - HELD THAT - The money payable to the DMF and the NMET may be treated as nothing but royalty itself, since these contributions 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. Thus, the said contributions are nothing but additions to the royalty payable for the original supply itself, and is therefore liable to be added to the value of the original supply and treated accordingly for the purposes of GST.

Summary

Issues Involved:
1. Classification of royalty payments under "Licensing services for the right to use minerals."
2. Determination of GST liability on contributions to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET).

Detailed Analysis:

Issue 1: Classification of Royalty Payments

Arguments by the Applicant:
- The applicant, engaged in mining and sale of rough diamonds, sought clarification on whether royalty paid for mining leases falls under "Licensing services for the right to use minerals" under heading 9973.
- The applicant argued that royalty is a periodic payment for the right to extract minerals and should be classified under SAC 997337, attracting GST at the same rate as applicable on the supply of like goods.
- The applicant cited various judicial decisions and sectoral FAQs to support their claim that royalty payments are for licensing services.

Authority's Findings:
- The supply made by the government (right to mine resources) is taxable under Section 9 of the Act and falls within the meaning of 'supply' as per Section 7.
- The royalty received by the government is deemed to be for business purposes and is taxable under reverse charge as per Sr. No. 5 of Notification No. 13/2017 - CT (Rate).
- The service provided by the government is classified under heading 997337, which includes licensing services for the right to use minerals including exploration and evaluation.

Ruling:
- The service by way of granting a license to extract minerals shall be classified under Tariff Heading 99733.

Issue 2: GST Liability on Contributions to DMF and NMET

Arguments by the Applicant:
- The applicant sought clarification on whether contributions to DMF and NMET, mandated by the MMDR Act, 1957, amount to "Supply" and are liable for GST under reverse charge.
- The applicant argued that these contributions are not in the course of business and do not constitute a supply under Section 7 of the CGST Act.
- The applicant contended that DMF and NMET are non-profit bodies and do not fall under the definition of "Government" or "local authority," thus not liable for GST under reverse charge.

Authority's Findings:
- The authority noted that contributions to DMF and NMET are part of the original supply of mining rights and are considered as additional royalty.
- As per Sections 9B and 9C of the MMDR Act, these contributions are in addition to the royalty and are thus treated as part of the original consideration for the supply of mining rights.
- The authority referenced Section 7 of the CGST Act, which defines 'supply' and noted that contributions to DMF and NMET are in respect of the mining rights and are therefore taxable under reverse charge.

Ruling:
- Contributions to DMF and NMET are considered additions to the royalty payable for the original supply of mining rights and are liable to be added to the value of the original supply for GST purposes.

Conclusion:
- The classification of royalty payments falls under Tariff Heading 99733.
- Contributions to DMF and NMET are treated as additional royalty and are taxable under reverse charge as part of the original supply of mining rights.