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#GSTCase-180-Whether Tax under RCM is payable on Contribution to District Mineral Foundation (DMF)/National Mineral Exploration Trust (NMET); Whether Service Provider in such cases is DMF/NMET or Government; Whether DMF/NMET is a “Local Authority” in GST

A question which regularly arises is whether Tax under RCM is payable on amount paid as contribution to DMF/NMET.  The article tries to put perspective about liability to pay tax on the contribution of the amount towards DMF/NMET. Lets first look at the regulatory provisions of DMF/NMET.

1. Regulatory Provisions for District Mineral Foundation (DMF Cess):

Before, discussing various judgements by AAR lets refer to Section 9B of the Mines and Minerals (Development & Regulation) Act, 1957 as amended from time-to-time reads as under:

“9B. District Mineral Foundation —

(1) In any district affected by mining related operations, the State Government shall, by notification, establish a trust, as a non-profit body, to be called the District Mineral Foundation.

(2) The object of the District Mineral Foundation shall be to work for the interest and benefit of persons, and areas affected by mining related operations in such manner as may be prescribed by the State Government.

(3) The composition and functions of the District Mineral Foundation shall be such as may be prescribed by the State Government.

(4) …..

(5) The holder of a mining lease or a prospecting licence cum mining lease granted on or after the date of commencement of the Mines and Minerals (Development & Regulation) Amendment Act, 2015, shall, in addition to the royalty, pay to the District Mineral Foundation of the district in which the mining operations are carried on, an amount which is equivalent to such percentage of the royalty paid in terms of the Second Schedule, not exceeding one-third of such royalty, as may be prescribed by the Central Government.

(6) The holder of a mining lease granted before the commencement of the Mines and Minerals (Development and Regulation) Amendment Act, 2015, shall, in addition to the royalty, pay to the District Mineral Foundation of the district in which the mining operations are carried on, an amount not exceeding the royalty paid in terms of the Second Schedule in such manner and subject to the categorization of the mining leases and the amounts payable by the various categories of lease holders, as may be prescribed by the Central Government.”

2. Regulatory Provisions for National Mineral Exploration Trust (NMET):

Section 9C of the Mines and Minerals (Development and Regulation) Act, 1957 as amended from time to time reads as under:

“9C. National Mineral Exploration Trust. – (1) The Central Government shall, by notification, establish a Trust, as a non-profit body, to be called the National Mineral Exploration Trust.

(2) The object of the Trust shall be to use the funds accrued to the Trust for the purposes of regional and detailed exploration in such manner as may be prescribed by the Central Government.

(3) The composition and functions of the Trust shall be such as may be prescribed by the Central Government.

(4) The holder of a mining lease or a prospecting licence-cum-mining lease shall pay to the Trust, a sum equivalent to two per cent of the royalty paid in terms of the Second Schedule, in such manner as may be prescribed by the Central Government.

3. List of AAR Cases-In the above background, lets discuss various judgements of AAR in this respect-

a) Naren Rocks and Mines (P.) Ltd [2019] 110 taxmann.com 280 (AAR – KARNATAKA)

b) NMDC Ltd [2019] 110 taxmann.com 284 (AAR – KARNATAKA)

c) NMDC Ltd [2019] 110 taxmann.com 473 (AAR – MADHYA PRADESH)

d) NMDC Ltd [2019] 105 taxmann.com 266 (AAR – CHHATTISGARH)

e) JSW Steel Ltd. [2019] 110 taxmann.com 286 (AAR – KARNATAKA)

Case-1-Naren Rocks and Mines (P.) Ltd [2019] 110 taxmann.com 280 (AAR – KARNATAKA)

a) Query-Whether GST is payable under RCM on DMF?

b) Observation- AAR observed that payment towards DMF are payable by a lessee in addition to royalty and the calculations are made on the basis of royalty.

  • Amount paid is directly linked to Royalty Payable and computed as percentage of Royalty-Section 15 read with rule 27 says that any amount that supplier is liable to pay in relation to supply but which has been incurred by recipient is includible. Further, section 15(2) of the CGST Act, also provides that amount of any taxes, duties, cesses, fees and charges levied under any law for time being in force other than GST related Acts are includible in value of supply. There is no doubt that amount payable by way of DMF is on account of supply made and is directly linked to royalty payable and is also computed as a fixed percentage of royalty.
  • Service provided by way of license to extract and right to use such goods is a single service where consideration is payable under different heads and in case any one of payments is not made, service provider, Government would not issue permit to use goods so extracted-It was also observed by AAR that in case of non-payment of DMF, mineral permits would not be issued to applicant and hence he would not be able to use land for mining and thus there would be no supply at all. Though ultimate beneficiaries are trusts set-up by the State Government and Central Government respectively, it is, like royalty, payable under the same Act. The payments are made to different persons does not mean that they are different suppliers, as amounts paid are classified on the basis of purpose for which amounts are applied. The service provided is only license to extract building stone and also right to use such goods extracted is a single service where consideration is payable under different heads and in case any one of payments is not made, service provider, that is Government would not issue permit to use building stone so extracted. Hence it forms value of the supply under section 15 and the charges for DMF being compulsory payment, would only amount to application of the amounts paid and still would form the value of the taxable services.

It was also inferred that service is a single service and there are no separate service providers for royalty and DMF and in all cases Government, which has provided license to mine and permitted use of such building stone mined, would be person who has supplied the service.

c) Held: The statutory contribution made to District Mineral Foundation (DMF) as per MMDR Act, 1957 is also part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation.

Case-2-NMDC Ltd [2019] 110 taxmann.com 284 (AAR – KARNATAKA)

a) Whether GST is payable under RCM on DMF and NMET?

b) Observation- AAR observed that payment towards DMF and NMET are payable by a lessee in addition to royalty and the calculations are made on the basis of royalty.

  • Amount paid is directly linked to Royalty Payable and computed as percentage of Royalty-Section 15 read with rule 27 says that any amount that supplier is liable to pay in relation to supply but which has been incurred by recipient is includible. Further, section 15(2) of the CGST Act, also provides that amount of any taxes, duties, cesses, fees and charges levied under any law for time being in force other than GST related Acts are includible in value of supply. There is no doubt that amount payable by way of DMF and NMET is on account of supply made and is directly linked to royalty payable and is also computed as a fixed percentage of royalty.
  • Service provided by way of license to extract and right to use such goods is a single service where consideration is payable under different heads and in case any one of payments is not made, service provider, Government would not issue permit to use goods so extracted-It was also observed by AAR that in case of non-payment of DMF and NMET, mineral permits would not be issued to applicant and hence he would not be able to use land for mining and thus there would be no supply at all. Though ultimate beneficiaries are trusts set-up by the State Government and Central Government respectively, it is, like royalty, payable under the same Act. The payments are made to different persons does not mean that they are different suppliers, as amounts paid are classified on the basis of purpose for which amounts are applied. The service provided is only license to extract building stone and also right to use such goods extracted is a single service where consideration is payable under different heads and in case any one of payments is not made, service provider, that is Government would not issue permit to use building stone so extracted. Hence it forms value of the supply under section 15 and the charges for DMF being compulsory payment, would only amount to application of the amounts paid and still would form the value of the taxable services.

It was also inferred that service is a single service and there are no separate service providers for royalty, DMF and NMET in all cases Government, which has provided license to mine and permitted use of such building stone mined, would be person who has supplied the service.

c) Held: The statutory contribution made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) as per MMDR Act, 1957 is also part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation.

Case-3-NMDC Ltd [2019] 110 taxmann.com 473 (AAR – MADHYA PRADESH)

a) Whether GST is payable under RCM on DMF and NMET?

b) Observation-AAR observed that before judging whether activities undertaken by DMF and NMET are for business purposes or not, it is important to understand that underlying service is not actually being provided by the trusts, but rather payments made to these trusts is nothing but addition to royalty itself. That is to say, such payments are part of the original supply itself. The original supply, i.e. the mining rights given by Central Government to applicant was for a consideration payable in the form of royalty. It can be seen that the payments made to DMF and NMET are also part of same royalty, and consideration paid in respect of same supply.

  • Whether amount paid as DMF and NMET falls within the purview of “Consideration”-For falling the amount paid as DMF or NMET under the purview of “Consideration”, first question is whether payment made to DMF and NMET are “in respect of, in response to, or for the inducement of, the supply of service by way of granting leasing rights’? For this purpose, provisions of MMDR Act, 1957 were noted which provided for payment of royalty as well as the contributions made to DMF and the NMET. AAR observed that as per Section 9 of MMDR Act, payment of royalty is ‘in respect of the minerals removed by the holder of the mining rights. The said Section 9 is reproduced here —

9. Royalties in respect of mining leases.-(1) The holder of a mining lease granted before the commencement of this Act shall, notwithstanding anything contained in the instrument of lease or in any law in force at such commencement, pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area

It is worth noting that payment of royalty is described as being in respect of mineral removed or consumed by holder of mining rights. Therefore, it is no doubt a consideration for said mining rights.

  • Payment towards DMF/NMET are nothing but payment towards Royalty-Further, Section 9B and Section 9C of MMDR Act, which talk about contributions made to DMF and NMET, state that such contributions are to be made by holder of mining rights ‘in addition to the royalty’. Since said Sections 9B and 9C use word ‘in addition to the royalty’, these contributions are also in the nature of royalty and as such are to be treated just like they were royalty. Per this view, the amounts payable to DMF and NMET are nothing but payments of royalty, albeit by a different name. Authority was of the view that money payable to DMF and NMET may be treated as nothing but royalty itself, since these contributions are described as being ‘in addition to’ the payment of royalty, which itself is “in respect of the mining rights. As such, therefore, such amounts are paid in respect of mining rights and said supply is already deemed to be taxable under reverse charge basis.
  • The reason behind collection of DMF/NMET affirms the view of being part of Royalty-AAR also affirmed its view on the basis of intent behind contributions to be made to these trusts. The intention behind setting up these trusts is to rehabilitate the affected areas and the affected people as a result of the mining operations being carried out. Had the government not started these trusts, onus of rehabilitation would fall on government itself, and as such would result in an additional cost directly related to royalty. By way of such contributions, government has transferred such responsibility and cost thereof to the recipient, i.e. the applicant in this case. It should be seen that under regular valuation rules of GST, if any amount which the supplier is liable to pay has been incurred by the recipient, then such amount would also be added to the value of supply. While there is no legal liability on the government in this case, the intent behind such contribution is the same, i.e. to pass on the liability of the supplier to the recipient. In other words, if no such funds were set up, then the government might be forced to increase the royalty itself in order to meet the cost for rehabilitation. Therefore, the intent behind such contributions is clear, and therefore it is nothing but an addition to royalty.

c) Held: In respect of the second question raised by the Applicant regarding the taxability or otherwise of the additional contributions made to DMF and NMET, it was held that said contributions are nothing but additions to the royalty payable for the original supply itself, and is therefore liable to be added to the value of the original supply and treated accordingly for the purposes of GST.

Case-4-NMDC Ltd [2019] 105 taxmann.com 266 (AAR – CHHATTISGARH)

a) Whether GST is payable under RCM on DMF and NMET?

b) Contention of Petitioner- The applicant has emphasized the following points with regard to the amount contributed to DMF and NMET:—

  1. That, the amount transferred to both the trusts cannot be treated as money consideration under business.
  2. That, DMF & NMET both are trust which shall be a non-profit body and the objective of the foundation as per Rule 5 of the said rules is as under to work for the interest and benefit of persons and areas affected by mining or mining related operations in such a manner as specified in these Rules. The objective of DMF Trust is to mitigate advance impact of mining. In order to carry out the said objective, the contribution to such fund is made by Miners. It is pertinent to note that in lieu of such contribution made, there is no supply made by the trust to the Applicant and accordingly in no manner such contribution made DMF/NMET can be regarded as payment towards services. The said sum is towards benefit of the interest and benefit of persons and areas affected by mining related operations, exploration activities and cannot be considered as consideration towards mining right.

The main thrust of the applicant was that the amount given to both the trusts are not a commercial transaction in the course of business and that the contributions are made for public welfare activities.

c) Observation by AAR-

  • Relevant Extract of Chhattisgarh District Mineral Foundation Trust Rules, 2015 –Rule 2 of Chhattisgarh District Mineral Foundation Trust Rules, 2015 stipulates following definitions with regard to the contribution made by NMDC to DMF and NMET in addition to royalty.

Rule 2(1)(d) “Collector” shall have the same meaning assigned to him/her under the Chhattisgarh land revenue code, 1959 (No. 20 of 1959)

Rule 2(1)(e) “Contribution” means the contribution to be collected in the Trust from the holders of a mining lease or a composite license (prospection license-cum-mining lease) in case of Minerals or a mining lease or a quarry lease or a quarry permit in the case of Minor Minerals in the District at such percentage of the royalty to be paid in terms of the Second Schedule of the Act, as may be prescribed by the Central Government in the case of Minerals and such percentage of royalty to be paid in the case of Minor Minerals as may be prescribed by the State Government from to time.

  • Payment towards DMF and NET are collected by Collector in the same way as Royalty-AAR observed thatit was amply clear from above rules that way in which a Collector of District enters into an agreement/contract to gain royalty from mining lease of the Government land, in the same way he enters into an agreement with NMDC to make it contribute to both the trusts in addition to royalty. Thus, both trusts uphold parallel rights on ownership rights on Government land with regard to royalty of mining lease. Accordingly, owing to above discussions it was concluded that contribution made by M/s NMDC to DMF and NMET merits treatment as mining royalty in the course or furtherance of business of M/s NMDC.
  • Trusts under DMF and NMET are Local Authority-In this context, Section 2(69) of the GST Act was examined. The definition of ‘local authority’ is provided as under: —

“Local Authority” means —

  1. a “Panchayat” as defined in clause (d) of article 243 of the Constitution;
  2. a “Municipality” as defined in clause (e) of article 243P of the Constitution;
  3. a Municipal Committee, a Zilla Parishad, a District Board and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;
  4. a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);
  5. a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution;
  6. a Development Board constituted under article 371 of the Constitution; or ‘**
  7. a Regional Council constituted under article 371A of the Constitution;

It was observed by AAR that Para ‘c’, specified in the above definition of ‘local authority’ attains significance i.e. “and any other authority legally entitled to, or entrusted by the Central Government or any other State Government with the control or management of a municipal or local fund”. The activities undertaken by DMF and NMET are the same as enumerated in 11th schedule (Article 243G) and 12th schedule (Article 243W) of the Indian constitution. 11th and 12th schedule supra reads as under:

Eleventh Schedule (Article 243 G)

  1. Agriculture, including agricultural extension.
  2. Land improvement, implementation of land reforms, land consolidation and soil conservation.
  3. Minor irrigation, water management and watershed development.
  4. Animal husbandry, dairying and poultry.
  5. Fisheries.
  6. Social forestry and farm forestry.
  7. Minor forest produce.
  8. Small scale industries, including food processing industries.
  9. Khadi, village and cottage industries.
  10. Rural housing.
  11. Drinking water.
  12. Fuel and fodder.
  13. Roads, culverts, bridges, ferries, waterways and other means of communication.
  14. Rural electrification, including distribution of electricity.
  15. Non-conventional energy sources.
  16. Poverty alleviation programme.
  17. Education, including primary and secondary schools.
  18. Technical training and vocational education.
  19. Adult and non-formal education.
  20. Libraries.
  21. Cultural activities.
  22. Markets and fairs.
  23. Health and sanitation, including hospitals, primary health centres and dispensaries.
  24. Family welfare.
  25. Women and child development.
  26. Social welfare, including welfare of the handicapped and mentally retarded.Welfare of the weaker sections, and in particular, of the Scheduled Castes and the Scheduled Tribes.
  27. Public distribution system.
  28. Maintenance of community assets.

Twelfth Schedule [Article 243W of the Constitution (Seventy-Fourth Amendment) Act, 1992

  1. Urban planning including town planning.
  2. Planning of land- use and construction of buildings.
  3. Planning for economic and social development.
  4. Roads and bridges.
  5. Water supply for domestic, industrial and commercial purposes.
  6. Public health, sanitation conservancy and solid waste management.
  7. Fire services.
  8. Urban forestry, protection of the environment and promotion of ecological aspects.
  9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally Retarded.
  10. Slum improvement and up gradation.
  11. Urban poverty alleviation.
  12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.
  13. Promotion of cultural, educational and aesthetic aspects.
  14. Burials and burial grounds; cremations, cremation grounds and electric crematoriums.
  15. Cattle pounds; prevention of cruelty to animals.
  16. Vital statistics including registration of births and deaths.
  17. Public amenities including street lighting, parking lots, bus stops and public conveniences.
  18. Regulation of slaughter houses and tanneries.

The activities undertaken by DMF and NMET for local bodies were held to be same as mentioned above. On above lines duties of both trusts on basis of Rule 22 of Chhattisgarh District Mineral Foundation Trust Rules, 2015 mandates use of the said funds as under :—

22 Expenditure from the Trust fund- The Funds available with the Trust shall be used for:—

22(2) At least 60% of the funds available with the Trust shall be utilized for High priority areas like :—

  • Drinking Water Supply – centralized purification systems, water treatment plants, permanent/temporary water distribution network including .standalone facilities for drinking water, laying of piped water supply system.
  • Environment preservation and pollution control measures – effluent treatment plants, prevention of pollution of streams, lakes, ponds, ground water, other water sources in the region, measure for controlling air and dust pollution caused by mining operations and dumps, mine drainage system, mine pollution prevention technologies, and measures for working or abandoned mines and other air, water & surface pollution control mechanisms required for environment- friendly and sustainable mine development.
  • Health care – the focus must be on creation of primary/secondary health care facilities in the affected areas. The emphasis should not be only on the creation of the health care infrastructure, but also on provision of necessary staffing, equipment and supplies required for making such facilities effective. To that extent, the effort should be to supplement and work in convergence with the existing health care infrastructure, the expertise available with the National Institute of Miners Health may also be drawn upon to design special infrastructure needed to take care of mining related illnesses and diseases. Group Insurance Scheme for health care may be implemented for mining affected persons.
  • Education – construction of educational institutes and vocational training centers, additional class rooms, laboratories, libraries, Art and crafts room, toilet blocks, drinking water provisions Residential Hostels for students/teacher in remote areas, sports infrastructure, engagement of teachers/other supporting staff, e-learning setup, other arrangement of transport facilities for students (bus/van/cycles/rickshaws etc.) and nutrition related programs.
  • (Welfare of Women and Children – Special programmes for addressing problems of maternal and child health, malnutrition, infectious diseases, etc.
  • Welfare of aged and disabled people – Special program for welfare of aged and disabled people.
  • Sanitation – collection, transportation & disposal of waste, cleaning of public places , provision of proper drainage & Sewage Treatment Plant, provision of disposal of faecal sludge, provision of toilets and other related activities.

It was observed by AAR that above-mentioned activities were to be compulsorily performed by both the trusts which have been enumerated under Article 243G and 243W of the Indian Constitution to be performed by Panchayats and Municipalities respectively. Thus, in terms of section 2(69) of GST Act, both DMF and NMET were held to be treated as local authority and on basis of state Notification No. 13/2017 dated 28-06-2017 liability was held to be arising on upon M/S NMDC, on contributions made to DMF and NMET under reverse charge basis.

d) Held:-The contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET), by M/s NMDC as per MMDR Act, 1957 are liable to GST, under reverse charge basis.

Case-5-JSW Steel Ltd. [2019] 110 taxmann.com 286 (AAR – KARNATAKA)

a) Query: Whether GST is payable under RCM on DMF and NMET?

b) Observation- On perusal of Section 9B and 9C OF Mines and Minerals (Development and Regulation) Act, 1957 related to DMF and NMET, it was observed that both these payments were payable by a lessee in addition to the royalty and both the calculations are made on the basis of royalty.

Therefore from above provision AAR observed that, value of taxable supply of service not only includes amount of royalty paid to Government but also includes amount paid to District Mineral Foundation of district and to National Mineral Exploration Trust as these payments are made under statutory requirements of Mines and Minerals (Development and Regulation) Act, 1957 which is taxable under GST.

In view of above provision in instant case AAR held that since Government (Central/state) has provided the land to applicant on lease to carry out mining activity, Government (Central/state) becomes supplier of service and applicant (business entity) is recipient of service. Therefore, as per Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017 applicant is liable pay GST on payment made to District Mineral Foundation of district and payment made to National Mineral Exploration Trust on reverse charge basis.

c) Held- The Applicant is liable to pay GST under reverse charge, for the payment made towards NMET and DMF, in light of Sl. No. 5 of the Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017.

4. Comment:

Although in all the above cases, it has been held that tax is payable under RCM on the amount paid as contribution to DMF/NMET. However, it was interesting to note that there was no unanimity on why tax is payable under RCM. The relevant entry under which RCM is payable is Services supplied by the Central Government, State Government, Union Territory or Local Authority to a business entity.

AAR Chhattisgarh in the matter of NMDC Ltd [2019] 105 taxmann.com 266 (AAR – CHHATTISGARH) has held that since DMF and NMET are local authorities, therefore tax is payable under RCM as services are provided to registered person by a Local Authority.

In the case of Naren Rocks and Mines (P.) Ltd [2019] 110 taxmann.com 280 (AAR – KARNATAKA), NMDC Ltd [2019] 110 taxmann.com 284 (AAR – KARNATAKA), JSW Steel Ltd. [2019] 110 taxmann.com 286 (AAR – KARNATAKA) and JSW Steel Ltd. [2019] 110 taxmann.com 286 (AAR – KARNATAKA), since service provider is Government, therefore tax is payable under RCM.

Is there a chunk in armour, if it can be proved that amount paid to DMF/NMET is not an amount payable to Government but to the trusts and trust are neither Government nor Local Authority, therefore, Tax under RCM is not payable on those amounts? Although all AAR have held that RCM is payable but have not come out clearly on given subject.

Is it a question for the future to be decided?