Analysis of SC Judgment in Mineral Area Development Authority vs. Steel Authority of India with reference to incidence of levy of GST―(2024) 42 J.K.Jain’s GST & VR 70
Summary: In its recent ruling, the Supreme Court on July 25 and August 14, 2024, affirmed that royalty paid by mining lessees for mineral rights is not a tax but a consideration for land use. The Court overruled previous judgments that classified royalty as a tax, such as India Cements v. State of Tamil Nadu and Orissa Cement Ltd v. State of Orissa. This decision aligns with earlier rulings, reinforcing that royalty payments relate to enjoyment of immovable property and are outside GST’s scope. The Court also waived interest and penalties on pre-July 2024 demands. The judgment confirms that GST cannot be levied on royalty as it is not considered a supply of goods or services under the GST Act. The analysis also criticizes the lack of debate on the constitutional validity of GST on royalty and calls for a review of ongoing cases to address this issue comprehensively.
1. The Hon’ble Supreme Court on 25.7.2024 & on 14.8.2024, reiterated by following its own Judgments that; “The royalty is a consideration paid by a mining lessee to the lessor for enjoyment of mineral rights”
2. The Hon’ble Supreme Court overruled the following judgments, which held that Royalty is a Tax.
India Cements v. State of Tamil Nadu (1990) 1 SCC 12, Orissa Cement Ltd v. State of Orissa (1991) Supp 1 SCC 430, Federation of Mining Associations of Rajasthan v. State of Rajasthan, 1992 Supp (2) SCC 239, State of M P v. Mahalaxmi Fabric Mills Ltd,1995 Supp (1) SCC 642, Saurashtra Cement & Chemical Industries Ltd. v. UOI (1979) SCC OnLine Guj 23, State of Orissa v. Mahanadi Coalfields Ltd. (1995) Supp 2 SCC 686, P Kannadasan v. State of Tamil Nadu (1996) 5 SCC 670.
3. The Hon’ble Supreme Court followed its earlier judgments (para 83 of the present judgment), as under;
State of Karnataka v. Subhash Rukmayya Guttedar, 1993 Supp (3) SCC 290 (SC);
Sri Tarkeshwar Sio Thakur jiu v. Dar Dass Dey (1979) 3 SCC 106 (SC).
4. The Hon’ble Supreme Court waived for all the assessees, the levy of interest and penalty on demands made for the period before 25.7.2024.
5. We also covered both these earlier cases of Supreme Court in our Article titled, “Constitutional Validity of levy of GST for grant of mining lease/royalty under HSN code 9973 on Reverse charge basis”, in the magazine (2023) 39 J. K. Jain’s GST & VR (Part 8). We held the same conclusion that;
A). “the mining and quarrying of the minerals is only a form of enjoyment of Immovable Property/ Land leased out.” (para 83 of the present judgment) And Royalty is a consideration paid for the above activity, which is a ‘benefits arising out of land’ (para 83 of the present judgment).
6. According to S.3(26) of the General Clauses Act 1897, immoveable property is defined to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. S.2(6) of the Registration Act defines immoveable property to include land, buildings, hereditary allowance, rights of way, lights, ferries, fisheries, or any other benefit to arise out of land, and things attached to earth, or permanently fastened to anything which is attached to the earth, except for standing timber, growing crops, and grass. A mineral is also a benefit arising out of land (para 83 of the present judgment).
B). Our views.─ Our views, deduced from above article read with the ratio decidendi of the present judgment, are as under;
i) the levy of GST on Lease rentals of Mines including Royalty, under HSN code 9973 on Reverse Charge basis under entry No. 5 of notfn13/2017-CT(R) dated 28.6.2017 is ultra virus the provisions of GST Act since GST can be levied only on “supply of Goods/Services” under Article 246A, Constitution of India, which starts with “Notwithstanding clause”, i.e., predominance or supremacy (para 31 of the present judgment). The Royalty paid as a consideration by a mining lessee to the lessor is a right for enjoyment of mineral rights, which is neither Goods nor Services and accordingly outside the scope of GST.
ii) When a lease is given on rent by the lessor/landlord to the lessee/tenant by way of lease, all rights and enjoyment over that immovable property is denounced from the lessor/landlord to the lessee/tenant for the lease/tenant period.
iii) It was held by the Hon’ble Supreme Court that the leases executed by the assessee were leases of immovable property and neither “licenses” nor “agreement to sell”, the mineral concerned.
iv) There was no sale/supply of the right of 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 for acquiring this right the Royalty is paid, which has now again been held by the Hon’ble Supreme Court as Right of enjoyment of immovable property/land leased out(para 82 of the present judgment). The Right which has been treated as immovable property repeatedly by Hon’ble Supreme Court is outside the purview of levy of GST.
v)The Royalty is 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, liable to GST. It was more in the nature of a lease amount, or the share of the owner in the produce, as the case may be. The legislature may take into account the use of land or buildings for determining the incidence or measure of tax levied under Entry 49 of List II(para 271 of the present judgment).
vi) As such the Royalty, which is paid by a mining lessee to the lessor for enjoyment of mineral rightsis outside the purview of levy of GST.
6. It is disturbing to note that;
i). none of the learned advocates associated with the present case in Supreme Court, have raised the crucial issue of;
“Constitutional Validity of levy of GST for grant of mining lease/royalty under HSN code 9973 on Reverse charge basis”.
ii) readers/writers are also not analysing the present judgment of the Hon’ble Supreme Court in the wake of point No. (i) above.
We request the learned senior advocates, associated with the various pending writs tagged with the case of Udaipur Chambers of Commerce & Industries v. UOI, to contest the point of Incidence of levy of GST on Royalty on the above lines, in the interest of all citizens of India.
Conclusions.―We have given the detailed analysis in the magazine (2024) 42 J.K.Jain’s GST & VR 70, over the present judgments of the Hon’ble Supreme Court and also covered entire details in the Article published in the magazine (2024) 42 J.K.Jain’s GST & VR, Pages A1-A4, titled “Royalty─Whether liable to GST”.
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