That this article does not analyse the taxation of Royalty from the point of Constitutional Validity but is written solely for the interpretation made in Circular No. 164/19/2021-GST dated 6th October 2021 to the extent it provides that although the service by way of grant of mineral exploration and mining rights would be classifiable under HSN 9973 but since the appropriate rate as per the intention of GST Council is 18% which has not been provided in 9973 till 31st December 2018, therefore the rate as provided for Residual services i.e 18% would be applicable and from 1st January 2019 since the rate notification has been amended, therefore rate applicable would be that under 9973 at the rate of 18%.
Relevant Extract of the Circular
That for the rate structure as prevailed uptil 31st December 2018, Circular provides that there have been conflicting ruling of AAR/AAAR wherein some of the judgements, it has been provided that tax is payable at the same rate of central tax as applicable on supply of like goods involving transfer of title in goods and in some other judgements it has been provided that tax is leviable at the rate of 18%. The relevant extract of Para 9.2 of the Circular is as follows-
9.2 For the disputed period [ 1.7.2017 to 31.12.2018], divergent rulings have been issued by Authorities for Advance Ruling (AAR) and Appellate Authorities for Advance Ruling (AAAR) of various States on the GST rate applicable on the same. AAR, Haryana in case of M/s Pioneer Partners and AAR, Chhattisgarh in case of M/s NMDC have ruled that the service of grant of mining leases is classifiable under Service Code 997337 (licensing services for the right to use minerals including its exploration and evaluation) and attracted, prior to 01.01.2019, the same rate of GST as applicable to minerals, that is, 5% as prescribed against Sl. No. 17, item (viii) of Notification No. 11/2017-Central Tax (Rate). The rate prescribed against this entry prior to 01.01.2019 was “the same rate as applicable on supply of like goods involving transfer of title in goods”. In certain other advance rulings, a view has been taken that grant of rights for mineral exploration and mining would be covered under heading 9991 and would attract GST at the rate of 18%.
9.2.1 AAAR, Odisha, on the other hand has ruled vide Order dated 5.11.2019 in the case of M/s Penguin Trading and Agencies Limited that grant of mining lease was taxable @ 18% prior to 01.01.2019. The Appellate Authority in this case observed that GST rate applicable against Sl. No. 17 item (viii) of Notification No. 11/2017-Central Tax (Rate) prior to 01.01.2019 was not implementable. Unlike leasing or renting of goods, there are no underlying goods in case of leasing of mining area. The rate prescribed for goods cannot be made applicable to leasing of mining area, which confers the right to extract and appropriate minerals. The mining lease by Government, not being a lease of any goods, cannot attract the rate applicable to sale of like goods. Appellate Authority for Advance Ruling, Odisha has further held that the amendment carried out vide Notification No. 27/2018-Central Tax (Rate), dated 31.12.2018, which restricted the “same rate as applicable to supply of goods involving transfer of title in goods” only to leasing or renting of goods was to clarify the legislative intent as well as to resolve the unintended interpretation. It is a settled law that interpretation which defeats the intention of legislature cannot be adopted. It accordingly upheld that “licensing services for the right to use minerals including its exploration and evaluation” falling under service code 997337 were taxable @ 18% during 01.07.2017 to 31.12.2018.
The circular provides that that payment for mining rights is taxable at the rate of 18% are based upon following contention and Para 9.3.2. and 9.3.3 is being reproduced herein below-
9.3.2 As regards the applicable rate for the period from 1-7-2017 to 31-12-2018, the council took note of the following facts, namely-
- GST Council in its 4th meeting held on 3rd & 4th November, 2016 had decided that supply of services shall be generally taxed at the rate of 18%.
- More importantly, the GST Council in its 14th meeting held on 18th & 19th May, 2019, while recommending the rate schedules of services (5%, 12%, 18% and 28%), specifically recommended that all the residuary services would attract GST at the rate of 18%.
- The rate applicable on the service of grant of mineral exploration license and mining lease under Service Tax was also the standard rate of 15.5%. Services under this category have been standard rated in GST at 18%
- Therefore, the intention has always been to tax this activity / supply at standard rate of 18%
9.3.3 Accordingly, as recommended by the Council, it is clarified that even if the rate schedule did not specifically mention the service by way of grant of mining rights, during the period 1-7-2017 to 31-12-2018, it was taxable at 18% in view of principle laid down in the 14th meeting of the Council for residuary GST rate. Post, 1st January, 2019 no dispute remains as stated above.
Why Circular has been issued-
That the circular provides that although Notification to levy tax at the rate of 18% on service by way of grant of mineral exploration and mining rights has been issued on 31st December 2018 but since inception of GST, intention was always to tax the rights at the rate of 18%. However, since HSN 9973 did not correctly reflect the intention as it did not specifically mention service by way of grant of mining rights during the period 1-7-2017 to 31-12-2018, therefore during the period 1-7-2017 to 31-12-2018, it was taxable at 18% in view of principle laid down in the 14th meeting of the Council for residuary GST rate.
That Circular has been issued on the basis of intention by which the Rates in GST was brought and admitting that the relevant entry has been inserted with effect from 1st January 2019 but still the intention was there, therefore taxpayers must have assumed and thus paid the tax as per the intention irrespective of the fact that what the rate notification provided.
It is trite law that a circular issued are not binding on the assessee. It has been held so authoritatively in CIT Vs. Hero Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) as reiterated in CCE Vs. M/s. Ratan Melting and Wire Industries (2008) 220 CTR 98 (SC).
Understanding the Dynamics of Notification No. 11/2017-CT Rate 2017
That on the perusal of Rate Notification 11/2017-CT Rate Dated 28th June 2017 as amended from time to time
In exercise of the powers conferred by sub-section (1) of section 9, sub-section (1) of section 11, sub-section (5) of section 15 and sub-section (1) of section 16 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, and on being satisfied that it is necessary in the public interest so to do, hereby notifies that the central tax, on the intra-State supply of services of description as specified in column (3) of the Table below, falling under Chapter, Section or Heading of scheme of classification of services as specified in column (2), shall be levied at the rate as specified in the corresponding entry in column (4), subject to the conditions as specified in the corresponding entry in column (5) of the said Table:-
| Sl No. | Chapter, Section or Heading | Description of Service | Rate (per cent.) | Condition |
| (1) | (2) | (3) | (4) | (5) |
That it would be appropriate to highlight that the above rate notification provides the classification method as follows-
- Central Government, on the recommendations of the Council, and on being satisfied that it is necessary in the public interest so to do, has notified the Central Tax.
- The Tax has been notified on intra-State supply of services of description as specified in column (3) of the Table falling under Chapter, Section or Heading of scheme of classification of services as specified in column (2).
- Thereafter, tax shall be levied at the entry provided in column (4) corresponding to the description in column (3).
- The rate as prescribed in column (4) corresponding to the description in column (3) shall be subject to conditions as specified in corresponding entry in column (5).
It would be appropriate to highlight that the term “corresponding” used in notification 11/2017 for column (4) and column (5) attaches itself to supply of services of description as specified in column (3) of the Table. Therefore, the rate will have to be corresponding to the description of services as provided in Column (3) of the Table. The notification does not give any option that once a service falls in the description provided in Column (3), then to decide whether or not the tax rate provided in column (4) is correct or not and if not then taxpayer/revenue is free to choose any rate provided in column (4). Had the intention been so then the term “corresponding” would not have been used in Notification.
There cannot be a case wherein description of service as provided in Column (3) is chosen from one entry but since it is felt that the rate provided therein is not correct, therefore rate can be chosen from another entry citing the intention of the GST Council.
What does the Explanatory Notes to Classification of Service provides
That Explanatory Notes to the Scheme of Classification of Services provides that the explanatory notes indicate the scope and coverage of the heading, groups and service codes of the Scheme of Classification of Services. These may be used by the assessee and the tax administration as a guiding tool for classification of services. However, it may be noted that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.
That Explanatory Notes to Service Classification provide that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.
Therefore, in the opinion of the author, once a classification for service is chose based upon the most appropriate one than applying the manner provided in Notification No. 11/2017-C T Rate, the rate would have to be defined as discussed above.
What AAAR Odisha said about the applicable rate of 18%
That it would be appropriate to highlight the Judgement of AAAR Odisha which has been highlighted in the Circular to cite that there is confusion in the rate structure for the services by way of grant of mineral exploration and mining rights.
We find that the Applicant in its application has relied upon the notified rate against SI.No. 17 of item (vi), as it stood prior to its amendment, for the entire period 01.07.2017 to 31.12.2018. Since, the service received by the Applicant is not at all leasing of goods but rather “leasing services for the right to use minerals including its exploration and evaluation”, the transaction is appropriately covered under the residual entry of SI.No. ’17’ of the aforesaid notification. The aforesaid description of service received by the Applicant has subsequently been classified against item no. ‘vii’ [From 13.10.2017 to 24.01.2018] and item no ‘viii’ from 25.01.2018 onwards. The rate prescribed in the relevant notification against aforesaid item is ‘same rate of central tax as applicable on supply of like goods involving transfer of title in goods’ till 31.12.2018 and 9 % thereafter. We also find that the GST rate so prescribed at Si.No. 17(vi) or at clause (vii) or (viii) after amendment is not implementable due to the absence of any underlying goods.
That AAAR Odisha has also provided in its ruling that the transaction of services by way of grant of mineral exploration and mining rights is appropriately covered under entry to S. No. 17 but the rate so prescribed rate so prescribed at S. No. 17(vi) is not implementable due to the absence of any underlying goods.
How does the Circular classify the Rate at 18%
That Circular No. 164 /20 /2021-GST dated 6th October 2021 provides in Para 9.3.1 while admitting that the correct classification of services in 9973.
As regards classification of service, it was recommended by the Council that service by way of grant of mineral exploration and mining rights most appropriately fall under service code 997337, i.e. “licensing services for the right to use minerals including its exploration and evaluation”.
The Circular also relies upon the same concept that although the services by way of grant of mineral exploration and mining rights is appropriately covered under 9973 but in Para 9.2.2 it provides as follows
9.2.2 It may be noted that the expression “same rate of tax as applicable on supply of like goods involving transfer of title in goods” applies in case of leasing or renting of goods. In case of grant of mining rights, there is no leasing or renting of goods. Hence, the said entry does not extend to grant of mining rights which is an entirely different activity.
Interestingly, the Circular provides that in case of grant of mining rights, there is no leasing or renting of goods. Hence, the said entry does not extend to grant of mining rights which is an entirely different activity but at the same time circular further went on to hold that that there is no further dispute about the tax rate after 1st January 2019.
That it would be appropriate that the entry post amendment 1st January 2019 wherein tax rate has been classified at 18% is as follows-
| (3) | (4) | (5) |
| viii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v), (vi), (vii) and (viia) above | 9 | – |
That it would be apt to reproduce the residual entry earlier wherein the AAR had held that the tax rate would be the Same rate of central tax as applicable on supply of like goods involving transfer of title in goods.
| (3) | (4) | (5) |
| (vi) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv) and (v) above. | Same rate of central tax as applicable on supply of like goods involving transfer of title in Goods | – |
That it is evident from the above that the description of services as provided in Column (3) of Notification No. 11/2017-CT Rate dated 28th June 2017 prior to the amendment dated 31st December 2018 and post amendment of 31st December 2018 remains the same but the only thing which changes is the determination of tax rate wherein the earlier notification provided that it would be the same rate of central tax as applicable on supply of like goods involving transfer of title in Goods and post amendment it is 18%.
Therefore, when Circular provides that “even if the rate schedule did not specifically mention the service by way of grant of mining rights, during the period 1.7.2017 to 31.12.2018”, it means that the Board is aggrieved with the tax rate and not the entry because had it been the case that both pre and post amendment, services by way of grant of mineral exploration and mining rights should have been taxable in residuary services at the rate 18% and HSN would also been of the residual entry.
Therefore, what has been provided in the circular is that HSN applicable would be 9973 however the rate would not be the corresponding rate provided in Para (4) of HSN 9973 but it would be corresponding rate provided in another residual entry at the rate 18%.
That such an approach is beyond the language of the notification which provides that rate and condition in column (4) would be the one which has been provided corresponding to column (3).
Conclusion
That it is pretty evident from the above that the interpretation made by the Circular that although the description of the service would be from 9973 but since the applicable rate has been incorrectly provided therefore, the rate would be taken from residuary services is against the Explanatory Notes to the Scheme of Classification of Service and also goes beyond the notification and it is as if law is sought to be rewritten through the Circular.
That a circular cannot have the effect of going beyond the language of the notification as circular can only explain the things on the basis of the language of the notification as it stands but cannot rewrite the law or notification based upon the intention or any other cause.
Therefore, in view of the above, in the humble opinion of the author Circular goes beyond the language of the notification and explanatory notes.
