GST Caselaw

#GSTCase-62- Tax under Reverse Charge on Royalty- Payable @ 18% from 1st January 2019 and Payable at the rate of tax as applicable on supply of like goods involving transfer of title in goods for the period 1st July 2017 to 31st December 2018.

#GSTCase-62- Tax under Reverse Charge on Royalty- Payable @ 18% from 1st January 2019 and Payable at the rate of tax as applicable on supply of like goods involving transfer of title in goods for the period 1st July 2017 to 31st December 2018.

 

Cases Covered

Case:1-M/S Aravali Polyart Private Limited (AAR Rajasthan)

Case:2- Poineer Partners [2018] 97 taxmann.com 511 (AAR- HARYANA)

 

  1. Query:

Query 1: What is the classification of service provided by the State of Rajasthan to M/S Aravali Polyart Private Limited for which royalty is being paid?

Query 2: What is the GST Rate applicable on given services provided by the State of Rajasthan to M/S Aravali Polyart Private Limited for which royalty is being paid?

 

  1. Facts

Applicant is engaged in the business of mining and soapstone and dolomite in the State of Rajasthan. The said products are classifiable under Tariff Heading 2518 and are leviable to GST on their supply at the rate of 5%. That the royalty on behalf of the State Government is being collected by ERCC Contractor and valid Royalty receipts are being issued by the ERCC Contractor.

 

  1. Contention of the Applicant:

Heading of 9973 covers in its ambit “Leasing or rental services, with or without operator”. The heading covers licensing services for right to use intellectual property, natural resources, minerals, etc in its fold. Serial No. 17(i) and 17(ii) of Notification No. 11/2017-Central Tax (Rate) applies to IPR Services only and Serial No. 17(viii) of the said notification is a residual heading which applies to all services covered under the classification of leasing or rental services with or without operator except as those covered under Serial No. 17(i) to 17(vii).

Service of right to use natural resources is classified under Tariff 9973 and entry at Serial No. 17(i) to 17(vii) does not cover such services of right to use minerals therefore, it would fall under the residual entry 17(viii). That on the basis of above, it is evident that the service charge paid by way of annual dead rent or royalty paid for services for granting of right to use minerals would attract GST Rate as applicable on the supply of minerals which are being extracted through such mining. That minerals which are being extracted are classifiable under Tariff Heading 2518 and are leviable to GST on their supply at the rate of 5%.

However, Application for Advance ruling was filed before the GST Council meeting held on 22nd December 2018. Subsequent to that meeting there was a change in the rate structure in 9973. Therefore, appellant submitted additional submissions in line with the changed rate structure. Serial No. 17(viia) was added to the rate notification and 17(viii) was amended accordingly. Since the minerals in questions are also goods and since lease rights have been given in respect of given minerals, therefore given service can fall under the entry at serial no. 17(iii), 17(iv) or 17(viia) but not 17(viii).

It would be worthwhile to highlight that Entry at Serial No. 17(viii) which previously provided tax at the rate “Same rate of central tax as applicable on supply of like goods involving transfer of title in goods” was amended to levy tax at the rate 18%.

 

  1. Observation of AAR:

For having assigned rights to use natural resources, licensee companies are required to pay consideration in form of annual license fees, lease charges, royalty etc. to the Government.  The activity of assignment of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism.

As per the Rajasthan Minor Minerals Concession Rules, 2017, applicant is required to pay dead rent or royalty whichever is higher but not both. This activity of payment of dead rent or royalty is supply of service classifiable under entry 257, heading 9973, group 99733, sub-heading 997337 as “Licensing services for the right to use minerals including its exploration and evaluation”.

The relevant entry under which the service would be classifiable would be as follows:

Sl. No. Chapter, Section or Heading Description of Service Rate (percent)Condition
(1)(2)(3)(4)(5)
(viii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v), (vi), (vii) and (viia) above9

 

  1. Held:

The activity under taken by the applicant is classifiable under entry 257, heading 9973, group 99733, sub-heading 997337 as “Licensing services for the right to use minerals including its exploration and evaluation”. The applicant is liable to pay tax at the rate of 18% falling under entry 17(viii) of Notification No. 11/2017-Central Tax (Rate) Dated 28th June 2017(as amended from time to time).

 

  1. Comment:

 a) Comparative Rate Structure prior to 31st December 2018 and post 31st December 2018

Prior to 31st December 2018

 

Post 31st December 2018

 

Description of ServicesTax Rate Description of ServicesTax Rate 
 (viia) Leasing or renting of goodsSame rate of central tax as applicable on supply of like goods involving transfer of title in goods. 
 

(viii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v), (vi) and (vii) above.

 

Same rate of central tax as applicable on supply of like goods involving transfer of title in goods

  

(viii) Leasing or rental services, with or without operator, other than (i), (ii), (iii), (iv), (v), (vi), (vii) and (viia) above.

 

9%

 

 

Therefore, as it can be observed that the residual rate under which AAR Rajasthan has classified the services of right to use minerals including its exploration and evaluation was taxable at the same rate of central tax as applicable on supply of like goods involving transfer of title in goods up to 31st December 2018. However, post 31st December 2018, it is now taxable at the rate of 18%.

 

b) Decision of AAR Haryana in the matter of Poineer Partners [2018] 97 taxmann.com 511 (AAR- HARYANA)

AAR Haryana in its decision in Poineer Partners also held the same view as AAR Rajasthan and classified services of right to use minerals including its exploration and evaluation under Entry 17(viii) as prevalent at that time. The decision by AAR Haryana was given on June 29, 2018 and the rate prevalent at that for 17(viii) was Same rate of central tax as applicable on supply of like goods involving transfer of title in goods which has now been changed to 18%. The relevant extract of the decision is as follows:

 

  1. Since, a perusal of classification of services shows that services of right to use natural resources classify under tariff 9973 and since description of services under serial no. 17 (i) to (v) does not cover such services of right to use minerals therefore, it would fall under the residual entry at serial no. 17(viii). Being so, the rate of tax applicable on such services, as provided therein, shall be the same rate of tax as applicable on supply of like goods involving transfer of title in goods.
  2. That on the basis of above, it is evident that service charge by way of annual dead rent or royalty paid for services of granting right to use mineral would attract GST rate as applicable on supply of mineral which is being extracted through such mining.
  3. That the minerals which are extracted from the mine are classifiable under Tariff Heading 2516 and leviable to GST @ 5%.

                                                                                                                                                                                                                                         (Emphasis Supplied)

 

Conclusion: Prior to 31st December 2018, Tax under Reverse Charge on Royalty is payable at the same rate of central tax as applicable on supply of like goods involving transfer of title in goods and post 31st December 2018, it is payable at the rate of 18%.

Impact: This would be a huge relief for the persons who were paying royalty for the goods on which compensation cess was payable as they were forced to pay tax on the royalty for such goods at the rate of goods including compensation cess. It would also impact the cost structure of industries wherein tax on the goods was less than 18% as it would be resulting in higher cash outflow.

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