M/s. NMDC Limited (“the applicant”) is India’s largest iron ore producer and exporter. It extracts iron ore from fully mechanized mines provided by the Government of Chhattisgarh on lease. The applicant is liable to pay royalty in respect of mining lease under “Licensing services” for the right to use minerals including its exploration and evaluation.
- Whether the royalty paid in respect of mining lease classified under ‘Licensing for the right to use minerals including its exploration and evaluation falling under Heading No. 9973 attracting GST at the same rate of tax as applicable on supply of like goods involving the transfer of title in goods?
- Determination of the liability to pay tax on contributions made to District Mineral Foundation (“DMF”) and National Mineral Exploration Trust (“NMET”) as per Mines and Minerals (Development & Regulation) Act, 1957 (“MMDR Act”).
Observations and findings:
As per SI. No. 5 to the Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017 (“Notification No. 13/2017”), services supplied by the Central Government, State Government, Union territory or local authority to a business entity attracts GST under reverse charge basis by the recipient of such services. The applicable rate of GST on these services is to be based on the classification of service.
Further, the mining rights so granted is covered under the sub-heading 997337. It specifies ‘Licensing services for the right to use minerals including its exploration and evaluation’. This is covered under entry no. 17 of Notification No. 11/2017 – Central Tax (Rate) dated June 28, 2017 (“Notification No. 11/2017”). These services are not covered in any of the specifically mentioned descriptions of entry no 17, and thereby it qualifies being categorized in the residual clause/serial number of entry no 17, wherein it has been specified that the rate applicable for such service should be of the same rate as applicable for the supply of like goods involving transfer of title in goods.
Further, activities of the applicant come under the definition of a “business” under Section 2(17) of the GST Act. Thus, the applicant liable to duty under Sections 9B and 9C of the MMDR Act which mandates that the miner shall contribute 30 % of royalty to DMF and 2 % of royalty to NMET. This contribution to both the trust is on account of their mining operations being carried out. There is no ambiguity that the applicant pays royalty for its business of iron ore extraction and also pays to both the trusts i.e. DMF and NMET in the course of furtherance of this business only. It cannot be treated as a donation. In case of failure to contribute to the above trusts, the business/rights of iron ore extraction would legally get hampered. Whereas, donations are always voluntary here in the instant case there is a compulsory payment to both the trusts in proportion to the amount of royalty. Hence, the contributions paid by the applicant to both the trusts are amounts being paid in the course of furtherance of its business activities only.
Further observed that the compulsory activities performed by DMF and NMET enumerated under articles 243G and 243W of the Constitution of India to be performed by Panchayats and Municipalities respectively. Thus, both DMF and NMET qualify being treated as a local authority under Section 2(69) of the CGST Act. On the basis of Notification No. 13/2017 there arises the liability of payment of GST upon the applicant on the contributions made to DMF and NMET under reverse charge basis.
The Hon’ble AAR, Chhattisgarh vide Advance Ruling No. STC/AAR/09/2018 dated February 22, 2019 held that the royalty paid by the applicant in respect of mining lease is classifiable under sub-heading 997337, ‘Licensing services for the right to use minerals including its exploration and evaluation’ which covered under entry no. 17 of Notification No. 11/2017, attracting GST at the same rate as applicable for the supply of like goods involving transfer of title in goods, under reverse charge basis.
Further, the contributions made by the applicant to DMF and NMET, as per the MMDR Act, are liable to pay GST under reverse charge basis.
Citation:  105 taxmann.com 266 (AAR – CHHATTISGARH)