Royalty on Minerals excavated from Mines─Whether liable to GST─Constitutional Validity of entry No. 5 of notfn 13/2017-CT(R) dated 28.6.2017 (HSN code 9973)
1. Background.─
1.1 Recently, Rajasthan HC, dismissed on 27.9.2022, a Number of writ petitions, seeking relief in payment of GST, on reverse charge basis, on ‘Royalty” in respect of Minerals excavated from Mines: Sudershan Lal Gupta Contractor & Ors. v. Union of India & Ors.(2022) 38 J.K.Jain’s GST & VR 288 (issue dated 9.10.2022). It resulted into initiation of proceedings for levy of GST on Royalty.
In our view, the Hon’ble High Court has exceeded its jurisdiction, as explained later & as such, it is invalid with no force of law and requires urgent reversal till the decision and/or vacation of stay by the Hon’ble Supreme Court.
2. Analysis of Levy of GST on Royalty:
2.1 “Lease”/“Licenses”─Not a ‘Supply’─It was held that the leases executed by the assessee were leases of immovable property and neither “licenses” nor “agreement to sell” the mineral concerned. Therefore, there was no sale/supply of the mineral extracted or mined by the assessee and that the mining and quarrying of the mineral was only a form of enjoyment of immovable property/land leased out and may also include the right to remove minerals from the land leased. It necessarily meant that the royalty amount was not the purchase price, or a sale price, as it may be called. It was more in the nature of a lease amount, or rent, or the share of the owner in the produce, as the case may be based on Supreme Court decision & High court decision.
The Supreme Court decision in State of Madhya Pradesh & Ors v. Orient Paper Mills Ltd. (1977) AIR 687, holding Royalty amount & Excavated material, liable to tax, had already been overruled by the Supreme Court.
2.2 ‘Right to enjoy immovable property’─Not leviable to GST ─According to the decisions of the Supreme Court, mining and quarrying of the mineral at all times have been treated as leases of immovable property. A right to carry on mining operations in land to extract a specified mineral and to remove and appropriate that mineral, is a ‘right to enjoy immovable property’ within the meaning of S.105 of the Transfer of Property Act. If the subject-matter of the lease is mineral land or a sand-mine, it can only be enjoyed and occupied by the lessee by working it, as indicated in S.108, Transfer of Property Act, which regulates the rights and liabilities of lessors and lessees of immovable property.[1]
2.3 S.9 of the Mines and Minerals (Regulation and Development) Act, 1957 states that the holder of a mining lease or agent, etc. is entitled to remove or consume the mineral. It has been held by the Supreme Court that payment of royalty for destruction of the estate leases out and appropriation thereof is a ‘right to enjoy immovable property’ within the meaning of S.105, Transfer of Property Act. No right, title or interest has been created in the contractor over the mining area. But he has been permitted to remove and use the minor minerals in the execution of the works as its right to enjoy immovable property spoken of in S.105 which means the right to enjoy the property in the manner in which that property can be enjoyed.
2.4 As such, the mining lease by Govt. and payment of Royalty to the Govt., is covered under lease of Immovable property & it is not a lease of any goods and/or transfer of right to use any intellectual property right, cannot attract the GST applicable to sale/supply of like Goods/ Services.
At the same time, royalty cannot be termed as a consideration received by the Govt. to grant rights over the Mine for mineral extraction & it cannot be said that State Govt. has supplied the service of granting rights for mineral extraction to come within the ambit of “Supply.
2.5 The entry under HSN Code 9973 relates to “Supply of Services”. As mentioned in paras 2.2 & 2.3 above, Mining Leases have been treated as leases of immovable property & payment of Royalty to the Govt. in respect of any immovable property, i.e., mines, cannot be termed as “Supply” within the ambit of S.7, GST Act & any GST levied beyond GST Act is ultra virus the GST Act since the Act does not Govern levy of GST on Royalty paid to the Govt. for extraction of Minerals.
3. We reiterate that per ratio decidendi of the Hon’ble Supreme court, no GST is payable on Royalty paid on minerals excavated. As such, the demand of GST on Royalty by the Govt. is ultra vires the GST Act. The crucial point as to the Constitutional Validity of entry No. 5 of notfn 13/2017-CT(R) dated 28.6.2017 (HSN code 9973) has not been discussed at all at any judicial Forum.
4. When the Goods excavated from mines are sold by the taxable person, the applicable GST on the sale price must be paid since at that stage there is a ‘Supply of Goods’ u/s 7, GST Act, 2017.
5. Judgment of Rajasthan High Court dated 27.9.2022─Not valid due to overlooking of Stay granted by Supreme Court─With due respect, I write to state that the Hon’ble Rajasthan High Court on 27.9.2022 has given their judgment based of order dated 24.10.2017 in the case of Udaipur Chambers of Commerce and Industry v. The Union of India (Raj). Against this order dated 24.10.2017, SLP was filed in the Hon’ble Supreme Court by the petitioner, wherein Stay was granted on 11.1.2018, on payment of Service Tax for grant of mining lease/royalty, by the petitioner. The case is still sub-judice in the Apex Court and not yet judicially decided [(2022) 37 J.K.Jain’s GST & VR 93]. In the case of Lakhwinder Singh & Ors. v. Union of India & Ors. (2022) 37 J.K.Jain’s GST & VR 93, the Hon’ble Supreme Court did not dismiss the SLP(C) 37326/2017 of Udaipur Chambers of Commerce and Industry v. The Union of India.
This crucial fact did not find any mention in the judgment of Hon’ble Rajasthan High Court. The matter is under judicial consideration of the Apex Court & Stay granted by the Hon’ble Supreme Court on 11.1.2018 on payment of Service Tax for grant of mining lease/royalty is still continuing.
Moreover, the legality of HSN Code 9973 (Leasing or Rental Services), in the light of levy of GST on reverse charge basis, on ‘Royalty’ payable to the Govt. in respect of the ore or mineral excavated, consumed or removed from any land, based on Ratio Decidendi of Hon’ble Supreme Court has not been discussed in the entire case.
The sub-judice pending matter in the Apex Court with grant of Stay in Udaipur Chambers of Commerce and Industry v. Union of India, can not be overlooked, in deciding the other cases by the lower Hon’ble Rajasthan High Court, based on its earlier decision. The decision of Hon’ble Rajasthan High dated 24.10.2017 in Udaipur Chambers of Commerce and Industry v. The Union of India (Raj) has also been wrongly followed in Shivalik Silica v. Union of India (2022) 38 J.K.Jain’s GST & VR 286 (Raj), by overlooking the Stay granted by the Hon’ble Supreme Court, which is also beyond the jurisdiction of the High Court.
Our Views.─As such, in our view, the decision dated 27.9.2022 of Hon’ble Rajasthan High in Sudershan Lal Gupta Contractor & Ors. v. Union of India (2022) 38 J.K.Jain’s GST & VR 288 by dismissing various Writ Petitions is against all cannons of law.
Recent Developments.─Recently a SLP (c) has been admitted by the Apex Court in the matter of payment of GST on Royalty, in the case titled Hanumangarh Int Nirmata Samiti v. Union of India & Ors. (2022) 38 J.K.Jain’s GST & VR 493 (SC), wherein on the next date of hearing on 20.1.2023, the case will be heard alongwith Udaipur Chambers of Commerce and Industry v. The Union of India, wherein the Apex Court has already granted stay on Payment of Service Tax 11.1.2018, which is still continuing.
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[1]. (1985) 58 STC 223 Associated Cement Cos. Ltd. v. Govt. of A.P. (AP)
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what is the current position of Nirmata Samiti v. Union of India & Ors. (2022) 38 J.K.Jain’s GST & VR 493 (SC), wherein on the next date of hearing on 20.1.2023
Kindly advise latest position.
Whether the SC decided , weather issue settletd