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2019 (10) TMI 865 - AAR - GSTClassification of services - 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? - statutory contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) as per MMDR Act, 1957 - supply or not - reverse charge mechanism. HELD THAT - The payment of royalty is for license given to extract minerals and the amount of royalty paid is based on the quantum of mineral extracted. Hence it is covered under Service Accounting Code 997337 -Licensing services for the right 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. 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. 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 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 - The applicant, therefore, is in receipt of supply of service on account of leasing of land by the government. Since the transaction of the applicant is not leasing of goods but license to extract and use mineral ore which involved the leasing of land, the transaction is covered under the residual entry (viii) of Serial Number 17 of Notification No. 11/2017 - Central Tax (Rate) dated 28.06.2017 as amended by the Notification No. 27/2018 - Central Tax (Rate) dated 31.12.2018 and is taxable at 9% CGST. Reverse charge mechanism - statutory contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) as per MMDR Act, 1957 - HELD THAT - 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. Valuation of taxable supply - HELD THAT - Plain reading of Section 15 of the CGST / SGST Act along with Rule 27, shows that any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient is includible. Further, in section 15(2) of the CGST Act, it is clearly seen that any amount of any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than the GST related Acts are includible in the value of supply. There is no doubt that the amount payable to DMF and NMET are on account of supply made and are directly linked to the royalty payable and also computed as a fixed percentage of royalty. The service is a single service, 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.
Issues Involved:
1. Classification of royalty paid in respect of Mining Lease. 2. Liability of statutory contributions to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) under GST. 3. Determination of whether royalty is considered "Supply" under GST. 4. Rate of tax applicable on the supply of licensing services for the right to use minerals. 5. Liability to pay tax under the reverse charge mechanism. Detailed Analysis: 1. Classification of Royalty Paid in Respect of Mining Lease: The applicant sought to classify the royalty paid for a mining lease under the heading 9973, specifically under "Licensing services for the right to use minerals including its exploration and evaluation." The Authority agreed with the applicant’s view, stating that the royalty payment is indeed for the licensing services for the right to use minerals, which falls under Service Accounting Code 997337. This classification is supported by the CBEC's sectoral FAQ, which treats royalty payments as consideration for licensing services for the exploration of natural resources. 2. Liability of Statutory Contributions to DMF and NMET Under GST: The applicant argued that contributions to DMF and NMET do not constitute a "Supply" and should not be liable for GST under the reverse charge mechanism. However, the Authority ruled that these contributions are part of the consideration payable for the licensing services for the right to use minerals. The contributions are directly linked to the royalty payments and are necessary for obtaining the mining lease. Therefore, they are included in the value of the supply of services and are subject to GST. 3. Determination of Whether Royalty is Considered "Supply" Under GST: The applicant contended that royalty payments are not a supply under GST, arguing that they are a "profit a prendre" and not taxable. The Authority rejected this argument, stating that the royalty is paid for the extraction and usage of mineral ore, making it a consideration for the service obtained. The Authority referenced Section 9 of the Mines and Mineral (Development and Regulation) Act, 1957, which mandates royalty payments for minerals removed or consumed, thus classifying it as a supply under GST. 4. Rate of Tax Applicable on the Supply of Licensing Services for the Right to Use Minerals: The Authority examined various notifications and amendments to determine the applicable tax rate. Initially, the royalty was taxable at the same rate as the extracted mineral ore. However, after amendments to Notification No. 11/2017 - Central Tax (Rate), the tax rate for such services was fixed at 9% CGST and 9% SGST from January 1, 2019, under the residual entry of Serial No. 17. 5. Liability to Pay Tax Under the Reverse Charge Mechanism: The Authority confirmed that the liability to pay tax on the supply of licensing services for the right to use minerals, including DMF and NMET contributions, falls on the recipient under the reverse charge mechanism. This is in accordance with Notification No. 13/2017 - Central Tax (Rate), which stipulates that services supplied by the government to a business entity are taxable under reverse charge. Ruling: 1. The royalty paid for the mining lease is classified under SAC 997337 and is taxable at the rate applicable to the supply of like goods involving transfer of title in goods until December 31, 2018, and at 9% CGST and 9% SGST from January 1, 2019. 2. Statutory contributions to DMF and NMET are part of the consideration for the licensing services for the right to use minerals. 3. The value of the supply of licensing services includes royalty, DMF, and NMET contributions. 4. The liability to pay tax on these services is on the recipient under the reverse charge mechanism.
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