In re Naren Rocks and Mines Private Limited (GST AAR Karnataka)
I. Whether royalty payments in respect of quarrying /mining lease as per the MMDR Act read with the KMMC Rules would amount to supply of goods or service under the Central Goods and Service Tax Act, 2017 (CGST Act) and the Karnataka Goods and Service Tax Act, 2017 (KGST Act)?
The royalty paid in respect of Mining Lease is a part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation falling under the Head 9973.
II. Where it is clarified that quarrying /mining royalty is taxable under CGST Act, 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?
The royalty paid in respect of Mining Lease is a part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation falling under the Head 9973, which is taxable at the rate applicable on supply of like goods involving transfer of title in goods up to 31.12.2018 and taxable at 9% CGST and 9% SGST from 01.01.2019, under the residual entries of Serial No.17 of the Notification No.11/2017-Central Tax dated 28.06.2017 as amended by Notification No. 27/2018 — Central Tax (Rate) dated 31-12-2018.
III. Applicability of GST and reverse charge implication on contributions to DMF as per the MMDR Act read with KDMF Rules.
The statutory contribution made to District Mineral Foundation (DMF) as per MMDR Act, 1957 is also part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING,KARNATAKA
1. M/s. Naren Rocks and Mines Private Limited, No.24, Old No.56B/34 Lower Palace Orchards, Bangalore- 560003 having a GSTIN: 29AADCN1012B1Z6, is a private limited company filed an application for Advance Ruling under Section 97 of CGST Act, 2017 and Section 97 of the Act, KGST Act, 2017 in FORM GST ARA-01 discharging the fee of Rs.5,000/-each under the CGST Act and the KGST Act.
2. M/s. Naren Rocks and Mines Private Limited, is engaged in the business of developing, owning, hiring, leasing or otherwise acquiring or disposing off any rights in any mines, stone quarry lands, and exploring, drilling, processing etc., of all types of products derived from such mines and stone quarry lands. The applicant is quarrying building stones and sells it to the customers. Building stones attracts GST at 5% under Heading 25169020 in Schedule I.
3. The Applicant has entered into Quarrying lease/license agreement for “building stones’ with the Government of Karnataka (Department of Mines and Geology) and is required to pay royalty @ Rs 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”). The Applicant is also contributing 30% of royalty amount to District Mineral Foundation (“DMF”) as per the MMDR Act read with Karnataka District Mineral Foundation Rules, 2016 (“KDMF Rules”). The applicant has been paying GST on reverse charge under heading 997337 at 18% on payments made towards royalty and DMF as per Notification 13/2017 Central Tax (Rate) dated June 28, 2017, i.e. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the specified services, which are chargeable to tax under reverse charge.
4. The Applicant seeks Advance Ruling on the following questions:
I. Whether royalty payments in respect of quarrying /mining lease as per the MMDR Act read with the KMMC Rules would amount to supply of goods or service under the Central Goods and Service Tax Act, 2017 (CGST Act) and the Karnataka Goods and Service Tax Act, 2017 (KGST Act)?
II. Where it is clarified that quarrying /mining royalty is taxable under CGST Act, 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?
III. Applicability of GST and reverse charge implication on contributions to DMF as per the MMDR Act read with KDMF Rules.
Grounds for Application / Interpretation of law
5. The Applicant submitted that as per Section 7(1) of the CGST Act, the expression “supply” includes —
a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
b) import of services for a consideration whether or not in the course or furtherance of business;
c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
From the above provision, the applicant submitted that transaction to be treated as supply of goods or services there must be specific activities for a consideration, whereas in this case while executing quarrying / mining lease no service/activity is rendered either by the State Government or the quarrying/mining lease holder, as such, no question arises to levy GST. The payment of royalty by a lessee is also a statutory obligation and is paid in proportion to the mineral exploited for sale, use or consumption. Hence, it cannot be treated as a ‘consideration’ for any service/activity. In either case, the royalty does not come into ambit of “supply”. The Royalty is ‘profit a pendre’, that is, share of profit received from land which is not taxable under GST. Sharing of profit will not be a supply from one person to another subjected to levy of GST. Therefore, in their view, royalty payment is not subject to GST since there is no ‘supply’.
6. The applicant further submitted that payment of royalty as per MMDR Act read with KMMC Rules is not for service of renting of immovable property, but it is licensing service for right to extract minerals. The payment of royalty, even if it is taxable, should be classified as licensing service for right to extract minerals and taxed at 5% (being the rate of tax for supply of Building stones). Royalty is in the nature of periodical payments to be made by the lessee under his covenants in consideration of the various benefits which he is granted by the lessor. Royalty on quarrying / mining is collected by the State Government for right given to the applicant to extract mineral and is payable based on quantum mineral removed or consumed.
7. The applicant submitted that the term ‘Royalty’ is not defined in MMDR Act/MMC Rules. However, applicant has referred some judicial decisions to get the meaning of royalty. Many of these judicial decisions have been jummed up in the judgment delivered by the Supreme Court in the case of the India Cement Ltd., etc. V. State of Tamil Nadu, etc. (AIR 1990 SC 85). The case was primarily on the legality of the cess on royalty. However, the meaning and concept of royalty has also been discussed in the judgement in an incidental manner. Although royalty has not been explicitly defined, the Supreme Court held that royalty is separate and distinct from land revenue and that it is not related to land as a unit. On the other hand, royalty is payable on a proportion of the minerals extracted and it has relationship to mining.
8. Further, the applicant has drawn reference to the Sectoral FAQ’s published by Central Board of Indirect Taxes and Customs (“CBIC”) relating to ‘Mining’, wherein it is categorically stated that Royalty payment is made towards Licensing services provided by the Government. The extract of the same is produced as under: –
“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 right 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”
Further, as also stated above, it is confirmed by CBIC that Royalty payment is chargeable to tax under Reverse charge. Therefore, in our view, royalty payment is classifiable as Licensing services for the right to use minerals.
