Nature of Royalty: Argument Matrix
Nature of royalty paid by mine leaseholdersJudges: D.Y. Chandrachud CJI, Hrishikesh Roy J, A.S. Oka J, B.V. Nagarathna J, J.B. Pardiwala J, Manoj Misra J, Ujjal Bhuyan J, S.C. Sharma J, A.G. Masih J
Last week, a nine-judge bench of the Supreme Court reserved judgement in the case of Mineral Area Development Authority v Steel Authority of India, a case concerning the nature of royalty paid by mine leaseholders to mineral land owners. At the heart of the matter is the question: Is royalty a form of tax? If so, who has the power to collect it?
Filed in 1999, the case had been pending for over 20 years. Over the years, multiple petitions were clubbed together. State governments of Jharkhand, Andhra Pradesh, and Odisha argued that the state retains the taxing power. The Union government, Public limited companies such as the Easterzone Mining Association, Central Public Sector Enterprises such as the Steel Authority of India Limited challenged these submissions. Several coal-mining companies were also involved in the litigation. The decision will determine who can tax minerals—a key source of revenue.
Royalty rates are determined under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), enacted by Parliament. This means that the quantum of royalty is set by the Union government. According to Entry 50 of the State List, state governments are authorised to levy taxes on mineral rights, subject to the laws enacted by Parliament for “mineral development.” Respondents argued that since most mineral lands are owned by state governments, they receive a royalty, which essentially functions as a tax. Allowing them to impose a tax would be an additional burden on miners.
Conversely, appellants contend that royalty lacks the inherent characteristics of a tax. Royalty was a consideration paid by a miner to the landowner who need not necessarily be state governments in all instances. They contended that state governments enjoy the power to impose taxes on extracted minerals.
The debate began in 1989 when a seven-judge bench of the Supreme Court in India Cements Ltd v Union of India held that “royalty is a tax.” In State of West Bengal v Kesoram Industries (2004), a five-judge bench ruled that the Court made a typographical error—the correct phrase should have been “cess on royalty is a tax” which the state government was not entitled to collect.
A nine-judge bench was hence constituted to decide the case. The Supreme Court Observer’s argument matrix encapsulates the main arguments that took place over eight days.
Background
On 28 December 1957, the Union Government enacted the Mines and Minerals (Development and Regulation) Act, 1957 (‘the Mines Act’). Under this, the control of mines and minerals was brought under the ambit of the Union. Section 9 of the Act stated that mining lease holders have to pay royalty to the Union government for any “mineral removed or consumed” from the leased area.
On 19 July 1963, the Tamil Nadu government granted a mining lease to India Cement Ltd., a public limited company for extracting limestone and kankar. The royalty was fixed under the Mines Act. Meanwhile, under Section 115(1) of the Madras Panchayat Act, 1958 (‘Madras Act’), imposed a cess on the land revenue paid to the Union Government.
India Cement challenged this provision in the Madras High Court, claiming that the Tamil Nadu government lacked the legislative competence to levy cess on royalty. The Madras High Court upheld the law.
India Cements appealed against the decision in the Supreme Court. On 25 October 1989, in India Cement Ltd v State of Tamil Nadu, a seven-judge bench of the Supreme Court held that the royalty was indirectly related to the minerals extracted. The decision found that “royalty is a tax” under the Mines Act. A cess on royalty being a tax on royalty was beyond the State’s legislative competence since the Union’s Mines Act “covers the field.”
On 15 January 2004, a five-judge bench of the Supreme Court, in State of West Bengal v Kesoram Industries Ltd (‘Kesoram Industries’), by 3:2 majority, held that there had been a grave, “inadvertent” clerical error in the text of India Cements. The majority judgement held the Bench had mistakenly written that “royalty is a tax” while meaning that “cess on royalty is a tax.” They noted that India Cement had relied on case laws which had clearly stated that royalty was not a tax.
The Court recorded that this “typographical error” had thrown jurisprudence in disarray. They clarified that royalty was not a tax since even a private owner of the property, who is not entitled to charge tax, could charge royalty.
Meanwhile, in May 1999, a writ petition was filed challenging the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992. It imposed additional cess and taxes on 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 would eventually lead to the creation of the current nine-judge Constitution Bench. On 7 April 2004, the Court referred Mineral Development Area Authority, to a three-judge bench given the “far reaching implications” of the constitutionality assessment.
On 30 March 2011, a three-judge Bench consisting of Justices S.H. Kapadia, K.S. Panicker Radhakrishnan and Swatanter Kumar stated that there was a “prima facie” conflict between the decisions in India Cements and Kesoram Industries. They referred the matter to a nine-judge bench.
This is the second-oldest pending Constitution Bench decision in the Supreme Court and would have been pending for 9044 days by the first day of hearing on 27 February 2024.