GST payable on Royalty to State Govt for Black Trap’ mined

By editor3 Goods and Services Tax Judiciary February 11, 2021

TaxGuru Citation: 2021 taxguru.in 2311
Case Name: In re Raj Quarry Works (GST AAAR Gujarat)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: AAAR, AAR/AAAR Gujarat, Advance Rulings

Upgrade to Basic or Premium to download.

Already Upgraded? Log in.

In re Raj Quarry Works (GST AAAR Gujarat)

(i) The service received by the appellant M/s. Raj Quarry Works from the Government of Gujarat, whereby the appellant is required to pay Royalty to the Government of Gujarat by calculating an amount per Metric Ton of ‘Black Trap’ mined or a fixed amount per year, whichever is higher, is classifiable under Service Code 999113 as “Public administrative services related to the more efficient operation of business”.

(ii) The service received by the appellant M/s. Raj Quarry Works from the Government of Gujarat, whereby the appellant is required to pay Royalty to the Government of Gujarat by calculating an amount per Metric Ton of ‘Black Trap’ mined or a fixed amount per year, whichever is higher, is chargeable to 18% (CGST 9% + SGST 9%) Goods and Services Tax as per Sl. No. 29 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended.

(iii) The appellant M/s. Raj Quarry Works is required to pay Goods and Services Tax as per Sl. No. 5 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 on the aforesaid service received by the appellant from the Government of Gujarat, whereby the appellant is required to pay Royalty to the Government of Gujarat.

FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING, GUJARAT

The appellant M/s. Raj Quarry Works is carrying out mining activity on a plot of land leased from the Government of Gujarat and quarrying “Black Trap” used for concrete mixing and sells it to customers. The appellant has entered into Quarrying lease / license agreement for 10 years for “Black Trap” material with the Government of Gujarat. The lease was granted by the Collector of Panchamahal in pursuance to lease agreement signed between the appellant and the Government of Gujarat. As per the lease agreement, the appellant is required to pay rent of Rs. 2,62,147/- per year or Royalty @ Rs. 250/- per Metric Ton, whichever is higher to the Government of Gujarat.

2. The appellant raised the following questions for advance ruling before the Gujarat Authority for Advance Ruling (herein after referred to as the ‘GAAR’) :-

(i) What is the classification of service provided in accordance with Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 read with annexure attached to it, issued by the State Government to M/s Raj Quarry Works, for which royalty is being paid. Whether said service can be classified under Tariff Heading 9973, specifically under 997337 as Licensing services for the right to use minerals including its exploration and evaluation or as any other service?

(ii) What is rate of GST on given services provided by State of Gujarat to M/s Raj Quarry Works for which Royalty is being paid?

(iii) Whether services provided by the State Government is governed by applicability of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 under entry number 5 and whether M/s Raj Quarry Works is taxable person in this case to discharge GST under reverse charge mechanism or whether given service is covered by exclusion clause number (1) of entry no 5 and State Government is liable to discharge GST on same?

3.1 The GAAR has inter-alia observed that the leasing of the Government land to the appellant is considered as supply of service as per sub-section (1) of section 7 of the Central Goods and Services Tax Act, 2017 and the Gujarat Goods and Services Tax Act, 2017 (herein after referred to as the “CGST Act, 2017” and the “GGST Act, 2017” respectively and as the “GST Acts” collectively). It has further been observed by the GAAR that leasing of the Government land to the appellant to carry out the activity of the quarrying is a supply of service in view of clause (a) of Schedule II of the GST Acts. The GAAR has also referred to the Annexure to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, prescribing Service Accounting Codes for services and observed that the nature of service received by the appellant is covered under the Service Accounting Code 9973 37 – ‘Licensing services for the right to use minerals including its exploration and evaluation’.

3.2 The GAAR has thereafter referred to entries at Sl. No. 17 and 35 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended from time to time and has held that the service ‘Licensing services for the right to use minerals including its exploration and evaluation’ would be covered under residual entry No. (viii) of Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and would attract GST rate of 18% (9% CGST + 9% SGST) from the period July, 2017 onwards.

3.3 The GAAR has referred to Sl. No. 5 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 and held that the exclusion entry (1) thereof is regarding “renting of immovable property”, whereas the appellant has taken a mine on lease for quarrying minerals from the Government of Gujarat, which is not a service of “renting of immovable property”, therefore the transaction does not fall under exclusion entry (1) of Sl. No. 5 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. It has further been held by the GAAR that the services in this case are supplied by the State Government to the appellant, which is a business entity, therefore, the appellant is required to pay tax on the said supply under reverse charge mechanism as per Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.

4. In view of the foregoing, the GAAR vide Advance Ruling No. GUJ/GAAR/R/2020/09 dated 19.05.2020, has ruled as follows –

Ans. The activity undertaken by the applicant is classifiable under Heading 9973 (Leasing or rental services, with or without operator), as mentioned in the annexure at Serial No. 257 (Licensing services for the right to use minerals including its exploration and evaluation) sub-heading 997337 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017

(ii) What is rate of GST on given services provided by State of Gujarat to M/s Raj Quarry Works for which Royalty is being paid?

Ans. The activity undertaken by the applicant attracts 18% GST (9% CGST+ 9% SGST).

Ans. The applicant is not covered under exclusion clause 1 of Sr. No. 5 of the Notification. Therefore, applicant is liable to discharge tax liability under reverse charge mechanism vide Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 (as amended from time to time) of the CGST Act, 2017.

5. Aggrieved by the aforesaid ruling, the appellant has filed the present appeal.

6.1 The appellant has submitted that the GAAR has accepted its views regarding classification of taxable event – ‘Licensing service (by the Government of Gujarat) for the right to use minerals including its exploration & evaluation from the lease of land and accepted that the said activity is covered within Service Accounting Code (SAC) 997337. Therefore, if all the other sub-entries [sub-entries (i) to (v)] of Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 are not applicable in the instant case, then the residuary sub-entry (vi) of the said Sl. No. 17, which is a specific entry for the taxable event, should have been applied in the appellant’s case. In spite of that, the GAAR has tried to change the track for applying higher tax rate by raising the issue of taxable rate as per Sl. No. 35 of the said Notification, which is general entry for services that cannot be applied as there is a specific entry for the taxable event and it provides for residual services too. The appellant has placed reliance on the judgement of Hon’ble Supreme Court in the case of Commercial Taxes Officer Vs. Jalani Enterprises, in this regard.

6.2 The appellant has submitted that at Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, there was a residual entry no. (vi) covering ‘leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv) and (v) above’ having tax rate as ‘same rate of central tax as applicable of like goods involving transfer of title in goods’. With the insertion of entry (vi) relating to ‘leasing of motor vehicles purchased and leased prior to 1^st July, 2017’, in the said Sl. No. 17, vide Notification No. 31/2017-Central Tax (Rate), the said residual entry No. (vi) was renumbered as entry no. (vii). Similarly, with the insertion of entry no. (vii) relating to ‘time charter of vessels for transport of goods’ in the said Sl. No. 17, vide Notification No. 1/2017-Central Tax (Rate), the said residual entry No. (vii) was renumbered as entry No. (viii). The appellant has further submitted that an entry (viia) relating to ‘leasing or renting of goods’ was inserted in the said Sl. No. 17 vide Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 (effective from 01.01.2019) and the rate of tax for the residuary entry (viii) has been prescribed as 9% (9% CGST + 9% SGST). It is the submission of the appellant that prior to issuance of Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018, the rate of tax prescribed for the residuary entry [at Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017] was ‘the rate of central tax as applicable on supply of like goods involving transfer of title in goods’.

6.3 The appellant has further submitted that it cannot be said that service in question in instant case viz. ‘licensing service (by the Government of Gujarat) for the right to use minerals including its exploration & evaluation from the lease of land is covered within the services covered in entry at Sl. No. 35 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. The appellant has submitted that Entry at Sl. No. 17 – Heading 9973 (leasing or rental services, with or without operator) is the specific entry heading for the instant case and its residuary entry (viii) [which was entry (vi) in Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017] is to be applied for the tax rate.

6.4 As regards the observations of the GAAR that “the GST rate so prescribed at Sl. No. 17(vi) or at clause (vii) or (viii) after amendment is not implementable due to absence of any underlying goods”, the appellant has submitted that Chapter Heading itself of Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 is ‘Leasing or Rental Services, with or without operator’, therefore, from the inception, this entry prescribes rate of tax for services. Further, the said observations of the GAAR are complete misinterpretation of the intention behind the entry. The appellant has submitted that the interpretation of said tax rate in the instant case ought to be rate of tax for goods for which licensing services for the right to use minerals, including its exploration and evaluation is provided by the Government. It is the further submission that in the appellant’s case, the mineral is ‘Black Trap’ which is to be taxed @ 2.5% CGST + 2.5% SGST. Therefore, till the Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 changed the rate of tax (9% CGST + 9% SGST), the applicable rate of tax which needed to be held was as per residual entry of Sl. No. 17 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended vide Notification No. 31/2017-Central Tax (Rate) and Notification No. 1/2017-Central Tax (Rate), which was ‘same rate of tax applicable on supply of like goods involving transfer of title in goods’. As such, the rate of tax for ‘licensing services for the right to use minerals, including its exploration and evaluation, provided by the Government’, on reverse charge mechanism basis should have been @ 2.5% CGST + 2.5% SGST.

6.5 The appellant has further submitted that it appears that the GAAR is carrying misconception of matching rate of tax to the activity, whereas it has to match activity / service to the entry / sub entry and the rate of tax prescribed for the same is attracted automatically to the said activity / service.

6.6. The appellant has also submitted that though the GAAR has tried to consider the intention behind the amendment in Sl. No. 17 by Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018, but the said intention of prescribing the rate of tax for transfer of intellectual property and similar products other than IPR is not put to word in the actual Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018.

6.7 As regards the reliance placed by the GAAR on the judgment of the Hon’ble Supreme Court in the case of WPIL Ltd. Vs. Commissioner of Central Excise, Meerut [2005 (181) ELT 359 (SC)], the appellant has submitted that all the three Notifications viz. Notification No. 31/2017-Central Tax (Rate), 1/2018-Central Tax (Rate) and Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018, are amending Notifications and not of clarificatory nature. It has been submitted that by virtue of these amending Notifications, new entries have been added to the existing notification. The appellant has relied upon the judgement of the Hon’ble Supreme Court in the case of MRF Ltd. Vs. Assistant Commissioner, Sales Tax [(2007) Taxman.com 1755 SC] and submitted that as held by the Hon’ble Supreme Court in the said judgement, unless it is expressly stated, amendment cannot be retrospective, but can only be prospective.

6.8 The appellant has requested (i) to quash and set aside advance ruling issued by the GAAR; (ii) to hold that the appellant’s taxable receipt of service is covered within sub-entry (viii) of Sl. No. 17 of Notification No. 1/2017-Central Tax (Rate) as amended vide Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 and the same is taxable @ 18% (9% CGST + 9% SGST) with effect from 01.01.2019; and (iii) to hold that prior to 01.01.2019, the appellant’s taxable receipt of service is covered within residual sub-entry (vi) or (vii) or (viii) (as renumbered from time to time) of Sl. No. 17 of Notification No. 1/2017-Central Tax (Rate) and the applicable rate of tax would be as mentioned against the said residual sub-entry i.e. the rate of Central Tax as applicable on supply of like goods involving transfer of title in goods, which is 5% (2.5% CGST + 2.5% SGST) for ‘Black Trap’ mining in this case till 31.12.2018.

7. The appellant, vide letter dated 27.07.2020 relied upon the Advance Ruling dated 29.05.2020 issued by the Uttarakhand Authority for Advance Ruling in case of Uttarakhand Forest Development Corporation.

FINDINGS :-

8. There has been change in one of the two Members of this authority consequent upon the transfer and posting of the Chief Commissioner, Central Goods and Services Tax, Ahmedabad Zone after Personal Hearing has been held in this case. However, the appellant has specifically requested vide letter dated 02.12.2020 to decide the matter on the basis of available record and their representation in hearing through video conferencing on 13.10.2020.

9. We have considered the submissions made by the appellant in the appeal filed by them, further written submission as well as submissions at the time of personal hearing and Ruling given by the GAAR.

10. The appellant has requested to decide the rate of Goods and Services Tax applicable on the taxable service. However, as the rate of Goods and Services Tax is intrinsically linked to the classification of service, we may be required to examine the aspect of classification of service in the present case as well. Therefore, the main issues involved in this case are the proper classification / Service Code of the service involved and the applicable rate of Goods and Services Tax on the said service.

Classification of Service

11. As per the facts narrated by the appellant, the Government of Gujarat, acting through the Collector of Panchamahal, has entered into lease / license agreement for 10 years whereby the appellant is entitled to carry out mining activity on a plot of land for quarrying “Black Trap”. As per the agreement, the appellant is required to pay Rs. 2,62,147/- per year or Royalty @ Rs. 250 per Metric Ton, whichever is higher to the Government of Gujarat.

12. In Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, it has been explained at clause (ii) of Para 4 that ‘reference to “Chapter”, “Section” or “Heading”, wherever they occur, unless the context otherwise requires, shall mean respectively as “Chapter”, “Section” and “Heading” in the annexed scheme of classification of services. The Annexure attached to the said Notification describes the “Scheme of Classification of Services”. It is also pertinent to note that the “Scheme of Classification of Services” adopted for the purpose of Goods and Services Tax is in accordance with the United Nation’s Central Product Classification (UNCPC) and Explanatory Notes.

13.1 In the “Scheme of Classification of Services”, Heading 9973 covers “Leasing or rental services with or without operator”. This Heading 9973 covers the following Groups –