Nature of royalty paid by mine leaseholders: What is the case about?

Transcript: 

Hello everyone! 

Welcome to SCO Explains! A nine-judge Constitution Bench of the Supreme Court recently heard one of its longest pending constitution bench cases. Filed in 1999, this case has been pending for over 9000 days. The Constitution Bench will decide whether royalty paid by mine leaseholders is synonymous to tax.

On the surface, this case is about mineral taxation and royalty. Dig deeper and this is really a case about a turf war between the Union and state governments over who has the power to impose and collect tax on minerals, also a key source of revenue.

To understand the story of this case, we’ll have to travel back to 1957. In 1957, the Union government passed the Mines and Minerals (Development and Regulation) Act. Under this, the Union was given control over the regulation and development of minerals and mines across the country.

Section 9 of the Act said that the Union government will determine the royalty that has to be paid by a mine leaseholder to the owner of the land. The royalty will vary on the value of each mineral. In 1958, in the state of Tamil Nadu, another law came to be. This was the Madras Panchayat Act, which levied a local tax on land revenue in each panchayat development block. With a central law and a state law on land revenue, the ground for conflict appeared to have been set.

Let’s get into the story of how the conflict unfolded.

In July 1963, the Tamil Nadu government granted a mining lease to India Cements Limited. The royalty was fixed under Section 9. Immediately, India Cements challenged the local tax imposed under the Madras Panchayat Act in the Madras High Court. The Madras High Court upheld the state law. When they appealed the case before the Supreme Court, they argued that imposing an added local cess essentially was like levying a tax on royalty that they were already paying to the state government.

They also argued that the Tamil Nadu government did not have any legislative competence to make this law. The Tamil Nadu government argued that the cess was imposed on the land and under Entry 49 and 50 of the State list, state governments had the power to take taxes on land, buildings and minerals. Parliament, of course, reserved the power to impose any limitations on any tax laws based on mineral development.

In October 1989, a seven judge bench in India Cements Ltd. v state of Tamil Nadu held that “royalty is a tax.” By this, the Supreme Court held that state governments were not competent to collect tax on royalty. This would become one of the key contentions of the nine judge case, especially the part where the bench held that “royalty is a tax.” Ten years later, a similar story played out in Bihar.

In May 1999, a writ petition was filed challenging the Bihar Coal Mining Area Development Authority Act of 1992 and corresponding rules which imposed additional cess and taxes land revenue from mineral bearing lands. This would be the genesis of a case called Mineral Area Development Authority v Steel Authority of India, which the Supreme Court recently heard. This case remained pending, but as state laws emerged across the country, parallel hearings on the same issue were being considered by the Supreme Court.

In 2004, a five judge bench of the Supreme Court in State of West Bengal v Kesoram Industries by a 3:2 majority held that there had been a grave inadvertent clerical error in the text of India Cement. The clerical error was an unfortunate typo. Instead of writing “cess on royalty is a tax,” the judgement said that “royalty is a tax.” They noted that India Cements had relied on case laws which had clearly stated that royalty was not a tax. The Court also recorded that for the past 41 years this typographical error had thrown jurisprudence of mineral taxation in disarray.

Meanwhile, the Mineral Area Development Authority, the lead case before the nine judge bench, had snowballed into a cluster of litigations. Over 80 cases got linked to this main case. In April 2004, a two judge bench referred it to a bench of three judges.

In 2011, the three judge bench stated that there was a prima facie conflict between the decisions in India Cement and Kesoram Industries, as both of them were Constitution Benches, with India Cements comprising of seven judges and Kesoram with five. The bench referred the case to a bench of nine judges.

In October 2023, the Supreme Court under Chief Justice D.Y. Chandrachud listed all pending nine judge cases. One of them included the Mineral Authority case, which had been pending with no substantial hearings for over a decade. At this point there were 85 pending cases attached to it.

A bench of nine judges started hearing the matter on 27th February. We at the Supreme Court Observer have covered all the hearing reports so far. To catch up with the case in detail, make sure to visit our case background and check them out.

Stay tuned for more analytical content and explainers on the work of the Supreme Court.

Thank you for watching!