GST PAID ON ROYALTY- ENTITLEMENT OF ITC ON THE PORTION OF ROYALTY, Goods and Services Tax - GST

[Sadanand Bulbule]

GST PAID ON ROYALTY- ENTITLEMENT OF ITC ON THE PORTION OF ROYALTY

National Mineral Development Corporation Limited is India’s largest producer and exporter of iron ore. It is a Government of India enterprise. It conducts e-auction of iron ore for bulk use in the business by the potential bidders. On successful e-bidding, it issues tax invoice charging ‘Royalty & FDF” on the value of iron ore so auctioned. And thereafter, on the total value [value of iron ore plus royalty plus FDF], it charges 5% GST covered under HSN 2601. Based on such tax invoices issued by the NMDC, the buyers claim the full ITC as manifest therein.

However some adjudicating authorities are disallowing the claim of ITC paid to the extent of Royalty amount, saying that the buyers have not produced iron ore.

In my opinion, there is no such embargo under Section 16 & 17 to restrict ITC relating to the royalty amount paid to the NMDC Ltd which actually produces iron ore from mines. So the amount of royalty paid is the embedded cost of total value iron ore for the purpose Section 15 of the Act.

Query:

Is the action of the adjudicating authorities to disallow ITC on the portion of Royalty amount is justifiable in the absence of any specific provisions under Section 16 & 17 of the Act?

Experts to throw spotlight on this.

Posts / Replies

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

"Some adjudicating authorities are disallowing the claim of ITC paid to the extent of Royalty amount, saying that the buyers have not produced iron ore."

Sir, It appears to me that there may be some other reasons also and not only one reason for denial of ITC. Will you please elaborate your query on the following points ?

(i) Here royalty has been paid only for mining services and NOT for iron ore.

(ii) Supply of iron ore is not under RCM.

(iii) Here royalty is restricted to mining service only.

(iv) There may be some mistake in issuance of invoice .

Looking forward to you for your views on the above aspects. Full facts are not clear to me.

[Sadanand Bulbule]

Respected Sir ji

The tax invoice is issued by the Department of Mines and Geology under the supervision of the Monitoring Committee appointed by the Hon'ble Supreme Court of India. The Department of Mines & Geology is a registered dealer under the GST Act. In my opinion, such tax invoice is free from mistakes. Secondly there are no other controversial issues or valid reasons to restrict ITC under Section 16/17 on the portion of Royalty amount charged and collected on the value of iron ore as reflected in tax invoice.

Further as rightly pointed out, tax on royalty amount is liable to be paid under RCM in terms of HSN 997337, namely, Licensing services for the right to use minerals including its exploration and evaluation covered by serial number 5 of N/N. 13/2017-Central Tax dated 28/06/2017 by the recipient of such services. Admittedly the supply of iron ore is under FCM.

Denial of ITC on royalty portion might be due to misjudged interpretation also.

[PAWAN KUMAR]

GST on royalty is under RCM. The person who is doing mining is actually liable for royalty payment and under RCM GST is payable. If they pay (Dept of Geology) GST under RCM, they will be eligible to claim ITC. If they meet the GST liability further there cannot be any chargeability.

The amount for which they are issuing tax invoice to buyers inclusive of charges FDF, Royalty and charging GST@5%, no doubt ITC is claimable under section 16 as per my view.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

"Denial of ITC on royalty portion might be due to misjudged interpretation also."

Sir, You are absolutely right. I agree with your above observation. . Further I want to know who is the Adjudication Authority ? SGST Officer or CGST Officer ?

I also agree with Sh.Pawan Kumar Ji.

[Padmanathan Kollengode]

I am not going into the debate of whether rotalty is in the nature of tax or not and whether GST can be charged on it? I think that is a topic of discussion in itself.

Confining to the issue presented by the querist Ld Sri Sadanand sir, I am of the following view:

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 16 emphases that supply of goods or services or both must be used or intended to be used in the course or furtherance of his business.

Now business is defined as under:

Section 2(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

As per the definition of business any activity or transaction which is ancilary or incidental to trade, commerce, manufacture etc is also "business"

Therefore, without a doubt the services supplied by the government for which royalty is charged is in the course or furtherance of "business" of the buyer and hence it is allow.

There is no such provision in the Act or rule, which restricts the ITC to only the producer/ manufacturer alone. Hence the contention of Department is not valid.

[Sadanand Bulbule]

Dear all

Regarding the meaning and concept of " royalty", refer the judgement of the Hon'ble Supreme Court rendered in the case of India Cements Ltd Vs. State of Tamil Nadu [1989 (10) TMI 53 - SUPREME COURT].

Hence payment of royalty amounts to the consideration payable by tax payer for the activity of mining of minerals or use or consumption thereof by him. The activity of assignment of rights to use natural resources is treated as supply of services. So royalty is one of the components for the purpose of Section 15 of the GST Act,

[PAWAN KUMAR]

Dear sir,

moreover the same has been finalized by Rajasthan High Court in dismissing writ petitions Sudershan Lal Gupta Contractor Vs Union of India - 2022 (10) TMI 43 - RAJASTHAN HIGH COURT (Rajasthan High Court).

[Amit Agrawal]

From the query raised, it is clear that Dept. is not raising any dispute in availing ITC against 'Iron Ore' per se. What is disputed is the ITC relating to portion of GST charged on taxable-value in name of 'Royalty'.

What is bought is 'Iron Ore' falling under HSN 2601 and having tax-rate @ 5%. And method of calculation of 'taxable value' & method of its disclosure by the supplier on the tax-invoice has got no legal bearing to deny such ITC partially.

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Padmanathan Kollengode]

"On successful e-bidding, it issues tax invoice charging ‘Royalty & FDF” on the value of iron ore so auctioned. And thereafter, on the total value [value of iron ore plus royalty plus FDF], it charges 5% GST covered under HSN 2601."

If GST is charged on royalty &FDF in separate tax invoice or as a separate line-item in the tax invoice for iron ore, then my views (assuming classification as service) in above para are relevant.

But, if royalty is just added to value of iron ores (classification remains goods HSN 2601), I fully agree with views of Ld. Amit Ji.

[PAWAN KUMAR]

no need to charge separate, as per sec.15, taxes, charges other than CGST. IGST, SGST and UTGST are includible in transaction value. thus charge of Royalty & FDF and GST @5% not in dispute, accordingly ITC of the same should not disallow as per my view.

[Sadanand Bulbule]

Dear all,

On the issue of entitlement of ITC on "Royalty" under discussion, I reproduce here the findings of the appeal order dated 11/08/2023 passed under Section 107 of the CGST Act, 2017 by the Additional Commissioner of Central GST and Central Excise [Appeals],Belagavi,Karnataka for the benefit of visitors to TMI.

1. As also evident from Section 9 of MMDR Act, 1957, levy and recovery of royalty from mine owners is the prerogative of the Government. Even if the mine owners intend to recover the same from their customers, it shall be included in the cost of iron ore and not separately under the nomenclature of ‘Royalty’ as levy and collection of the same do not fall under their domain. Had the mine owners included the expenses incurred by them on Royalty in the value of Iron ore, the entire supply would have been taxed @ 5% which was the prescribed GST rate for iron ore during the material period. Instead, the mine owners have separately charged ‘Royalty’ in their invoices and collected GST @ 18% thereon, which is the rate prescribed for ‘licencing services for the right to use minerals including its exploration and evaluation’.
2. In view of the above, I find that the primary issue involved in the instant case is not that of irregular availment of ITC without underlying supply of service, but that of GST charged and collected in excess. As discussed above, the mine owners ought to have included the cost of royalty incurred by them in the sale value of iron ore and cleared the supplies by charging GST @ 5%. By showing ‘Royalty’ separately in the invoice and collecting GST @18% thereon, the mine owners have collected GST to the tune of 13% in excess from their buyers and deposited the same to the Government while filing GSTR 3B returns. Hence, in the instant case, the appellant were in fact eligible for refund of the GST paid on services not availed by them subject to the doctrine of unjust enrichment. As the appellant have not claimed refund of excess tax paid by them to the mine owners, input tax credit cannot be denied to them. Further, as the Appellant have already availed and utilized the ITC in respect of the said excess GST collected from them, the same should be treated as reversal of credit itself. The following case laws relied upon by the appellant are squarely applicable to the instant appeal.

• NITCO TILES LTD. vs Commissioner of C. Ex. & Cus. (I), Mumbai - 2007 (8) TMI 542 - CESTAT, MUMBAI
• M/s Indorama Synthesis Pvt. Ltd. vs Commissioner of Central Excise & Service Tax, Nagpur - 2018 (7) TMI 22 - CESTAT MUMBAI
• M/s Sterllite Industries Pvt. Ltd. vs CCE, Tirunelveli - 2011 (6) TMI 98 - CESTAT, CHENNAI
• Bajaj Allianz General Insurance Co. Ltd. vs Commissioner of Central Excise - 2014 (8) TMI 787 - CESTAT MUMBAI

3. As rightly observed by the adjudicating authority, the root cause for such excess charging and collection of GST lies in the invoicing adopted by the Monitoring Committee / e-Auction which should not charge GST on royalty as a forward charge on the buyer but as a reverse charge on the seller. The necessary change has to be brought to the attention of the Committee and auctioneers immediately to correct this aberration.
4. In the instant case, excess GST has been paid by the Appellant as the same was charged in the invoices wherein they assumed that the same was payable and they have also availed the input tax credit of the same under the bona fide belief that such credit was available. Hence, considering the fact that the Appellant have taken only ITC of taxes paid by them which were not payable in the first instance, there can be no demand against them as no revenue has been lost to the exchequer by merely availing credit of the amount paid which, in the first place, was not recoverable from them. Further, this has arisen from a special circumstance where the supplies are routed through a channel specifically laid out as a measure of regulating such supplies. Hence, the tax on royalty charged on the buyers and the ITC availed thereof cannot be construed as a regular contravention of law or rules made thereunder with or without intent to evade payment of taxes. Therefore, I find that the demand confirmed by the adjudicating authority alleging irregular availment of input tax credit, does not sustain and the allegation of suppression of facts with intent to evade taxes also does not have any ground.
5. As the main demand has not sustained, the demand of interest under Section 50(3) and penalty imposed under Section 74(1) also fail.

[Sadanand Bulbule]

2024 (2) TMI 488 - MADRAS HIGH COURT TVL. A. VENKATACHALAM VERSUS THE ASSISTANT COMMISSIONER (ST)

Levy of Goods and Service Tax (GST) on Mining Lease / Royalty - Constitutional validity of Entry 17 (viii) of G.O.Ms.No.72 dated 29.06.2017 as amended by para 1 (e) of G.O.Ms.No.170 dated 31.12.2018 - validity of Circular No.164/20/2021-GST, CBIC – 190354/207/2021 – TO (TRU-II) – CEBEC dated 06.10.2021.

The primary ground for the levy of Goods and Service Tax on royalty/seigniorage fee is that Royalty is a 'tax' and does not represent 'services'.

HELD THAT:- Levy of tax on royalty has been the subject of controversy even under the Finance Act, 1994. The authorities levied Service Tax on royalty which was upheld by the Rajasthan High Court. The matters were carried in appeal(s) to the Apex Court and an order of interim stay was granted by the Hon'ble Supreme Court in Udaipur Chamber of Commerce and Industry Vs. Union of India [2018 (8) TMI 287 - SC ORDER] vide order dated 11th January, 2018 on a challenge to the judgment of the High Court of Rajasthan. Subsequent thereto, with the introduction of GST, tax was levied on royalty. The same was challenged before the Apex Court. The Hon'ble Supreme Court has granted an interim order with regard to levy of Goods and Service Tax on royalty in Lakhwinder Singh Vs. Union of India & Ors. [2021 (11) TMI 336 - SC ORDER].

Following directions have been issued:

(i) In the cases, where the challenge is made to the show cause notices, the writ petitioners shall submit their objections / representations within a period of four weeks from the date of receipt of a copy of this order.

(ii) Upon receipt of the objections / representations from the writ petitioners, the authority concerned shall proceed with the adjudication, on merits and in accordance with law, after affording reasonable opportunity of being heard to the petitioners. However, the orders of adjudication shall be kept in abeyance until the Nine Judge Constitution Bench decides the issue as to the nature of royalty.

(iii) It is made clear that there shall be no recovery of GST on royalty until the Nine Judge Constitution Bench takes a decision.

(iv) Needless to state that on the matters being decided, the writ petitioners if still aggrieved, shall redress their grievance(s), if any, before the appropriate forum, including by filing appeal(s).

(v) Insofar as the challenge to the notification as well as the circular, it is open to the writ petitioners to act upon, after the outcome of the case pending before the Nine Judge Constitution Bench.

(vi) It is also made clear that all the contentions are left open for the writ petitioners to raise in appropriate proceedings, after the outcome of the decision of the Nine Judge Constitution Bench.

This batch of writ petitions are disposed of.

[Sadanand Bulbule]

2024 (2) TMI 427 - ALLAHABAD HIGH COURT - AGRAWAL INT UDYOG, SHAHJAHANPUR ROAD, HARDOI VERSUS STATE OF U.P. THRU. PRIN. SECY. (TAX AND REGISTRATION) GOVT. OF U.P. LKO. AND OTHER

Levy of GST - royalty - consideration either for sale of goods or service provided or not - whether the royalty payment is tax and not consideration in the context of the privilege parted by the State allowing the petitioner and others to mine sand? - HELD THAT:- Reliance has been placed on a Constitution Bench decision of the Supreme Court in INDIA CEMENT LIMITED VERSUS STATE OF TAMIL NADU [1989 (10) TMI 53 - SUPREME COURT], wherein, nature of royalty payment was considered and it was opined to be in the nature of tax.

List after two months - Until further orders, payment of GST for grant of mining lease/royalty by the petitioner shall remain stayed.