GST on Mining Royalty: AAR Maharashtra Clarifies 18% Tax Rate on Licensing Services for Mineral Extraction Rights

Introduction

The Maharashtra Authority for Advance Ruling has delivered a significant ruling clarifying the GST treatment of royalty payments made by mining lease holders to the State Government. In the matter of Ramandeep Upkarsingh Bindra (Black Rock Crusher), the AAR conclusively held that royalty constitutes consideration for licensing services under Service Accounting Code (SAC) 997337 and attracts GST at 18% under the Reverse Charge Mechanism (RCM). This ruling settles the controversy surrounding whether mining royalty should be taxed at the goods rate of 5% or the service rate of 18%.

Background of the Case

Profile of the Applicant

The applicant, Ramandeep Upkarsingh Bindra, operates as a registered person under GST bearing registration number 27AUPB1427H1ZL. The primary business activity involves mining and quarrying operations, specifically the extraction, crushing, and sale of minerals including black rock and stones.

Nature of Mining Operations

The applicant entered into a lease transfer agreement with the State Government of Maharashtra to obtain mining rights. Under this arrangement, the applicant acquired the right to explore and extract minerals such as black rock and stones from the leased area. Although the applicant purchased the land title through a registered sale deed (Reg No. UMD/1414/2015) executed on 29th April 2015, the mining rights themselves were obtained separately through the lease mechanism.

Regulatory Framework

The mining lease operates under the Maharashtra Minor Mineral Extraction (Development and Regulation) Rules, 2013. In accordance with Rule 46 of these rules, the lessee must pay royalty or dead rent as specified in the lease order. The applicable royalty rate was fixed at Rs. 100 per metric ton as per the lease order dated 02/05/2018.

Questions Raised Before the AAR

The applicant approached the AAR seeking clarification on two critical questions:

First Question: Whether the leasing of mines where royalty is charged by the Government falls under Heading 9973, specifically sub-heading 997337 covering "licensing services for the right to use minerals including exploration and evaluation"?

Second Question: Whether such services qualify under Entry 17(iii) of Notification No. 11/2017–Central Tax (Rate) dated 28.06.2017, thereby attracting the same GST rate as applicable on supply of like goods (i.e., 5%)?

Applicant's Contentions and Arguments

Primary Argument: Royalty as Consideration for Transfer of Right to Use Goods

The applicant argued that royalty paid to the State Government represents consideration for leasing services involving the transfer of the right to use minerals. According to the applicant, such services should be classified under Entry 17(iii) of Notification No. 11/2017–Central Tax (Rate) dated 28.06.2017.

The relevant entry reads:

Sr. No. 17 - Heading 9973 (Leasing or rental services, with or without operator)

Entry (iii): Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration - Rate: Same rate of Central tax as applicable on supply of like goods involving transfer of title in goods.

The applicant relied on several legal principles and precedents:

Definition of Royalty: According to sub-section (o) of Section 2 of the Maharashtra Minor Mineral Extraction (Development and Regulation) Rules, 2013, "Royalty" means the charge payable to the Government in respect of the ore or mineral excavated, removed, or utilized from any land. The applicant contended that royalty represents payment for two distinct rights: (1) the right to conduct mining operations, and (2) the right to use the minerals extracted.

Transfer of Right to Use Goods as Service: Under Schedule II, Point 5(f) of the CGST Act, 2017, transfer of the right to use goods constitutes a supply of service. The applicant argued that mining leases involve such transfer.

Application of BSNL Precedent: The applicant cited the Supreme Court judgment in BSNL vs Union of India (2006) 145 STC 91 (SC), which laid down five essential attributes for a transaction to constitute transfer of right to use goods:

  • There must be goods available for delivery
  • Consensus ad idem as to the identity of goods must exist
  • The transferee should have legal right to use the goods
  • For the period of transfer, the right must be exclusive to the transferee
  • The transferor cannot transfer the same rights to others during the lease period

According to the applicant, all these conditions were satisfied in the mining lease arrangement.

Nature of Royalty Payment: The applicant emphasized that royalty is variable and linked directly to the quantity of minerals extracted. This characteristic, according to the applicant, supports classification under the entry prescribing "same rate as on supply of like goods."

Rate Applicable to Extracted Minerals: The applicant pointed out that stone boulders extracted fall under HSN 2516 in Notification No. 1/2017-CT (Rate) dated 28.06.2017, attracting 5% GST (2.5% CGST + 2.5% SGST). Therefore, royalty should also attract 5% GST.

Argument Against Residual Entry Classification

The applicant argued strongly against classifying the service under the residual entry 17(viii) which prescribes 18% GST.

UN Classification Differences: The applicant noted that GST classification follows the United Nations Central Product Classification (UNCPC). However, Indian mining laws differ significantly from those in other UN member countries. For instance, in Canadian law, payments for mineral rights are termed "Mineral Tax," whereas in India, the nature and character of royalty remains under judicial consideration.

Principle of Specific vs. General Entry: Relying on Rule 3 of the General Rules of Interpretation of the Customs Tariff Act, 1975 (applicable mutatis mutandis to GST), the applicant argued that when a service is specifically classifiable under a particular entry, it cannot be relegated to a residual category.

The applicant cited several judicial precedents:

  • Jyoti Industries v. CCE (2000) 115 ELT 559 (CEGAT): Kitchen sinks are more appropriately covered under "sanitary ware" (specific description) than "household articles of iron and steel" (general description).

  • Bharat Forge & Press Industries (P) Ltd. v. CCE (1990) 45 E.L.T. 525 (S.C.): The Department must prove that goods cannot be brought under a specific tariff item by any conceivable process of reasoning before resorting to a residuary entry.

  • Dunlop India Ltd v. VOI (1983) 13 ELT 1566 (SC): Vinyl Pyridine latex is classifiable as 'raw rubber' under a specific item and not under a residuary item.

  • Shree Baidyanath Ayurved Bhavan Ltd. (Supreme Court): Specific entry must prevail over general entry as per Rule 3(a) of the General Rules of Interpretation.

Jurisdictional Officer's Submissions

Emphasis on Recent Circular and Clarifications

The jurisdictional officer drew attention to Circular No. 164/20/2021-GST dated 16th October 2021 issued by the Ministry of Finance, Department of Revenue. This circular comprehensively addressed GST on mining activities and royalty payments.

Issue Addressed in the Circular

The circular acknowledged that representations had been received seeking clarification on the GST rate applicable to granting mineral exploration and mining rights during the period from 1.07.2017 to 31.12.2018. The circular noted that with effect from 1.1.2019, the rate schedule was specifically amended, making it undisputed that such services attract 18% GST.

Divergent AAR Rulings

For the disputed period (1.7.2017 to 31.12.2018), various State AARs and AAARs had issued conflicting rulings:

Rulings Favoring 5% Rate:

  • AAR Haryana (M/s Pioneer Partners): Held that grant of mining leases is classifiable under Service Code 997337 and attracted 5% GST prior to 01.01.2019.

  • AAR Chhattisgarh (M/s NMDC): Took a similar view.

Rulings Favoring 18% Rate:

  • AAAR Odisha (M/s Penguin Trading and Agencies Limited) - Order dated 5.11.2019: The Appellate Authority held that grant of mining lease was taxable at 18% even prior to 01.01.2019. The AAAR observed that 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 Appellate Authority further held that the amendment carried out vide Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 was clarificatory in nature and resolved unintended interpretation.