Case Study 6 - Service Tax / GST

Question

As per standard practice, the service tax/GST department called for information from the mining department of the state (Gujarat) which in turn provided list of firms (quarries) in whose name royalty is paid. Accordingly, the service tax/GST department issued SCN and passed an order levying SERVICE TAX ON RCM on royalty paid as per the list provided by the mining department.

In the given case, the department had issued SCN and passed the order in the name of "A" quarry that had taken land on lease for quarry business from the mining department of the state.

But in actual "A" quarry had sub-leased the whole land to "B" quarry who had paid royalty directly to the mining department and also claimed royalty expenditure. "A" quarry had neither paid any royalty nor claimed such royalty expense in books.

Only because "A" quarry had originally leased land from the mining department, their name was forwarded to the service tax/GST department.

What stands should be taken by "A" quarry to avoid service tax demand? As per information whether a royalty is a tax or not question is pending before the 9 judge bench of SC. What other stand can be taken in given facts?

Answer

Royalty is a fee or payment made against the license to use minerals including its exploration and evaluation.  In other words, royalty is a fee or consideration paid to the property owner for the right to use the property or patentee for the use of a patent or property against money obtained on sold of each patent or value of extracted resources during the licensed period. 

Royalties are agreed upon as a percentage of gross or net revenues obtained from the use of an asset so authorized by the party assets owns.

In terms of Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 the holder of mining lease shall pay royalty in respect of any mineral removed/consumed. 

The Hon'ble Supreme Court in the case of State of Orissa and others v. M/s Steel Authority of India Ltd. (AIR 1998 SC 3052), the Apex Court opined that Section 9(1) of the MMDR Act, 1957 also contemplates the levy of royalty on the mineral consumed by the holder of a mining lease in the leased area, hence the processing of mineral amounts to consumption and, therefore, the entire mineral is eligible to levy of royalty.

Thus, levy and applicability of tax on royalty were disputed in the erstwhile Service tax regime. But in GST regime the applicability is not a matter of dispute rather applicable rate of GST on royalty is a matter of litigation, which has been clarified by the CBIC vide Notification No. 27/2018-C.T. (Rate), dated 31-12.2018 as amended and rate of GST on royalty shall be chargeable to 18% on the amount of royalty so collected from the license holders of mines under RCM.

Further, it is clarified vide Sectoral FAQ's by CBEC, is that " The Government provides license to various companies including public sector undertakings for exploration of natural resources like oil, hydrocarbons, iron ore, manganese, etc. For having assigned the right to use the natural resources, the licensee companies are required to pay consideration in the form of the annual license fee, lease charge, royalty, etc to the Government. The activity of assignment of rights to use natural resources is treated as supply of service and the licensee is required to pay GST on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism".

In the given case since the lease is in the name of "A", it is his duty for payment of royalty on lease and not of "B". In may be considered that the royalty may be paid by "B" in the name of "A". The liability of payment of GST on royalty will fall on "A" through RCM.

Let's consider that "B" has also not paid the royalty and GST on RCM, then it is liability of "A" to pay GST on RCM. On other hand if "B" has paid the same then there is not liability of "A" for payment of GST or Service Tax ,since double taxation on the same matter cannot be paid.

If such facts exist then reliance can also be made on the judgment of Hon. Bombay High Court in case of United Spirits Ltd. vs. State of Maharashtra (Writ Petition (L) no.10092 of 2020 dt.29.4.2022) wherein High Court has held that when buyer has paid tax, vendor is not liable to pay tax. The factual position be seen accordingly.

The other fact appearing from query is that there is sub-lease. Therefore on consideration received by A from B, there may be GST liability on A. This aspect should also be examined.

Disclaimer: The case law presented here is only for sharing information with the readers. in case of necessity do consult with tax professionals.