2019 (11) TMI 1327 - AAR - GST

Levy of GST - reverse charge mechanism - royalty paid/dead rent on account of mining rights - Applicant is in the business of mining/ quarrying of broken or crushed stone which is commonly used for concrete aggregates, for road metalling or for railways falling under HSN 2517 - rate of GST - HELD THAT - 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 form under reverse charge mechanism. The mining lease is governed by the AP Minor Minerals Concession Rules, 2017 (APMMCR). As per provisions of APMMCR, the applicant is required to pay dead rent or royalty (whichever is higher but not both). This activity of payment of dead rent or royalty is on supply of service (Licensing services for the right to use minerals including its exploration and evaluation) wherein the government of Andhra Pradesh is supplier and the applicant is recipient. The said service is classifiable under Licensing services for the right to use minerals including its exploration and evaluation at Serial No. 257, Heading 9973, Group 99733, sub heading 997337 of annexure Scheme of classification of Services to Notification No. 11/2017-CT (Rate) dated 28.06.2017 - the service undertaken by the applicant falls at item (viii) of serial no. 17 of notification no. 11/2017 dt 28-06-2017, further amended vide Notification No. 27/2018-Central Tax (Rate) dt 31-12-2018 and attracts 18% GST (9% CGST 9% SGST) w.e.f. 01.01.2019. The applicant is receiving leasing / licensing services from the government of Andhra Pradesh. Hence, provisions of reverse charge mechanism are applicable under the Notification No. 13/2017-CT (Rate), dated 28.06.2017 (as amended from time to time) of the CGST Act, 2017.

Summary

Issues:
1. Classification of royalty paid on account of mining rights under reverse charge mechanism.
2. Applicability and rate of GST on royalty/dead rent paid.

Analysis:
1. The applicant sought clarification on whether the royalty paid on mining rights is liable to tax under the reverse charge mechanism. The applicant argued that the payment of royalty to the government is for the right to use minerals, and hence, falls under the category of services as per Notification No. 11/2017-CT (Rate). The applicant contended that the charges paid for granting the right to use minerals attract GST at the rate applicable to the supply of such goods extracted through mining, which is 5% under CGST and APSGST combined for broken or crushed stone classified under Tariff Heading 2517.

2. The Authority found that the applicant, engaged in mining activities, is required to pay dead rent or royalty to the government under the AP Minor Minerals Concession Rules, 2017. This payment is considered a supply of services, specifically "Licensing services for the right to use minerals including its exploration and evaluation." The Authority determined that the applicant's activity falls under Heading 9973 of the GST classification, attracting 18% GST (9% CGST + 9% SGST) as per Notification No. 11/2017-CT (Rate). The reverse charge mechanism is applicable, as per Notification No. 13/2017-CT (Rate), making the applicant liable to discharge tax under this mechanism.

Conclusion:
The Authority ruled that the applicant's activity is classifiable under Heading 9973, specifically under item (viii) of serial no. 17 of Notification No. 11/2017, attracting 18% GST under the reverse charge mechanism. The ruling clarified the tax liability on the royalty paid for mining rights, providing a clear interpretation of the applicable GST rates and mechanisms for such transactions.