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2019 (10) TMI 1091 - AAR - GSTClassification of supply - supply of goods or service? - royalty payments in respect of quarrying /mining lease as per the MMDR Act read with the KMMC Rules - quarrying / mining royalty - whether royalty payment in respect of quarrying/mining lease as per the MMDR Act read with KMMC Rules is in the nature of Licensing services for the right to use minerals 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 or renting of immovable property under the heading 9972 attracting GST at the rate of 18% or residual entry other services nowhere else classified-999799? - applicability of GST - Reverse charge mechanism - contributions to DMF as per the MMDR Act read with KDMF Rules. HELD THAT - The applicant has obtained Government land on lease for quarrying Building Stone and in turn applicant pays Royalty along with payment made to District Mineral Foundation of the district and National Mineral Exploration Trust as specified by the Government. The leasing of the Government land to the applicant is considered as supply of service as per sub section (1) of section 7 of the CGST/ KGST Act 2017 - from the leasing of the Government land to the applicant to carry out the activity of the mining is a supply of service to the applicant. Whether the amount paid as royalty and amount paid to the District Mineral Foundation of the district and amount paid to the National Mineral Exploration are to be included in the value of the service provided? - HELD THAT - The value of the taxable supply of service includes the amount paid as taxes, duties, cesses, fees and charges levied under any law. Therefore the royalty paid @ ₹ 60 per MT of building stones as per the Mines and Minerals (Development Regulation) Act, 1957 (MMDR Act) read with Karnataka Minor Mineral Concession Rules, 1994 (KMMC Rules) and amount paid to District Mineral Foundation (DMF) equal to 30% of royalty as per the MMDR Act read with Karnataka District Mineral Foundation Rules, 2016 (KDMF Rules) to the Government are to be included in the value of the service provided to the applicant as these payment are made under the statutory requirements of the Mines and Minerals (Development and Regulation) Act, 1957 which is taxable under GST. The applicability of GST rate for the aforementioned service is based on the classification of service. In the present case, the mining rights so granted is covered under the sub heading 997337 that specifies - Licensing services for the right to use minerals including its exploration and evaluation . Rate of tax applicable on the above supply N/N. 11/2017-Central Tax (Rate) dated 28.06.2017 - HELD THAT - 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? - HELD THAT - 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 is fixed at the rate of tax which was applicable on supply of like goods involving transfer of title in goods - In the pertinent case, there was a transfer of title in goods involved in the activities of the applicant and that was of the extracted building stone on which the royalty was paid and hence the tax rate applicable on the service is that rate of tax applicable on the building stone, the transfer of title of which was happening in the transaction. The leasing or renting of goods was made taxable at the rate of tax which was applicable on supply of like goods involving transfer of title in goods and all other leasing or rental services have been made taxable at 9% CGST. Since the transaction of the applicant is not leasing of goods but license to extract and use mineral ore, which involves 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 - Similarly, for the same reasons, the transactions are taxable under SGST at 9% on or after 31.12.2018 and at the rate applicable to the mineral ore extracted prior to 31.12.2018. On plain reading of section 15 of the CGST / SGST Act along with the rule 27, it says 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 by way of DMF is on account of supply made and is directly linked to the royalty payable and is also computed as a fixed percentage of royalty. The service provided is only the license to extract building stone and also the right to use such goods extracted is a single service where the consideration is payable under different 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 building stone so extracted. Hence it forms the value of the supply under section 15 and the charges for DMF being compulsory payment, would only amount to application of the amounts paid and still would form the value of the taxable services - It is also inferred that the service is a single service, there are no separate service providers for royalty and DMF and in all cases the Government, which has provided the license to mine and permitted the use of such building stone mined, would be the person who has supplied the service.
Issues Involved:
1. Nature of royalty payments under the CGST and KGST Acts. 2. Classification and tax rate applicable to royalty payments. 3. Applicability of GST and reverse charge mechanism on contributions to the District Mineral Foundation (DMF). Issue-wise Detailed Analysis: 1. Nature of Royalty Payments: The applicant sought clarification on whether royalty payments for quarrying/mining leases under the MMDR Act, read with KMMC Rules, constitute a supply of goods or services under the CGST and KGST Acts. The applicant argued that royalty payments are statutory obligations and not considerations for any service/activity, thus falling outside the ambit of "supply" under GST. They contended that royalty is a 'profit a prendre' and not taxable under GST. Findings: The Authority determined that leasing government land for mining is a supply of service under Section 7 of the CGST/KGST Act, 2017. The lease agreement between the applicant and the government involves consideration (royalty payments), making it a taxable supply of service. 2. Classification and Tax Rate on Royalty Payments: The applicant classified royalty payments as licensing services for the right to extract minerals, arguing for a 5% GST rate applicable to building stones. They referenced CBIC FAQs, judicial decisions, and relevant notifications to support their stance. Findings: The Authority classified the mining rights under sub-heading 997337, "Licensing services for the right to use minerals including its exploration and evaluation." Prior to 31.12.2018, the tax rate for this service was the same as the rate on the supply of like goods involving transfer of title (5% for building stones). Post 31.12.2018, the service falls under the residual entry (viii) of Serial No. 17 of Notification No. 11/2017, as amended, and is taxable at 9% CGST and 9% SGST. 3. GST and Reverse Charge on DMF Contributions: The applicant argued that contributions to DMF, a non-profit trust established under the MMDR Act, do not constitute consideration for any supply of goods or services, thus not attracting GST. Findings: The Authority concluded that DMF contributions are part of the consideration for the licensing service. Section 15 of the CGST Act includes any taxes, duties, cesses, fees, and charges levied under any law in the value of supply. Since DMF contributions are mandatory and linked to royalty payments, they form part of the taxable value of the service. The service provider (government) supplies a single service (license to extract and use minerals), and all related payments (royalty and DMF) are included in the taxable value. Ruling: 1. Royalty payments are part of the consideration for licensing services for the right to use minerals, classified under Head 9973. 2. Royalty payments are taxable at the rate applicable to the supply of like goods involving transfer of title up to 31.12.2018, and at 9% CGST and 9% SGST from 01.01.2019. 3. DMF contributions are part of the consideration for licensing services and subject to GST under the same conditions as royalty payments.
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