Nature of Royalty | Day 1: Parliament cannot usurp state governments powers to collect tax
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
Today, a nine-judge bench started hearing petitions on the nature of royalty paid by mine leaseholders to the Union government: Is it a form of tax?
Today, Senior Advocate Rakesh Dwivedi began arguments on the correctness of State of West Bengal v Kesoram Industries (2004). In Kesoram Industries, the Supreme Court held that India Cements Ltd. v State of Tamil Nadu (1989) had made a typographical error when it declared that “royalty is a tax.” Dwivedi argued that this observation was “erroneous.” He also made submissions on the limited power of the Parliament to “usurp” law making powers of the state when it comes to imposing taxes on minerals.
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.
Dwivedi: Parliament cannot arrogate state governments power to collect taxes
Dwivedi argued that the Union government can only impose a limitation on tax that a state government levies under Entry 50 of the State List. Under Entry 50, a state government can impose tax on minerals “subject to any limitations imposed by Parliament by law relating to mineral development.” Dwivedi focused on the word “limitations,” claiming that it cannot be read to mean that the Union can absorb the powers of the state government from collecting tax.
Entry 54 of the Union List permits the Union government to regulate “mines and mineral development” only to that extent which is declared by a Parliamentary legislation. Dwivedi argued that this does not expressly mention that the Union government can collect tax. “The Parliament has reserved power” to cap the tax as mines and minerals are a matter of “national importance.” This is necessary or else state governments would go “berserk” and start imposing “extraordinary limits” on tax to compete with other states. Chief Justice D.Y. Chandrachud agreed, stating that law making powers relating to tax are expressly mentioned in the Union, State, and Concurrent Lists—that was not the case under Entry 54. Justice Hrishikesh Roy added that Entry 54 does not indicate that the Union can denude the state governments power to collect tax.
Justice A.S. Oka inquired whether the limitations would only extend to the “quantum of tax” collected. Dwivedi responded that the limitations are not exhaustive. They can be “anything,” he stated. This means that the Union government may direct a state to not collect any tax at all for a specific period of time. Justice B.V. Nagarathna added that the Union can encourage a state to extract only a certain type of mineral. With nine judges on the Bench, the scope for discussion with a variety of perspectives and approaches was evident.
The core of Dwivedi’s argument was that Entry 54 of the Union list was a “general entry” not specific to tax. It allowed the Union to make any kind of limitations on the tax collected by the states for “mineral development.” He highlighted that seizing the state government’s powers to collect tax goes against the “grain” of Article 246(3) of the Constitution which says that a state legislature has exclusive law making powers over entries in the state list.
Dwivedi: The Mines Act does not equate “royalty” to “tax”
Dwivedi stated that Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (Mines Act) permits the Union government to determine the royalty on minerals extracted. This is a kind of “limitation” that the Union government is allowed to impose under Entry 54. Justice Nagarathna asked what the implications of treating royalty as tax under the Mines Act were. Dwivedi argued that the Parliament will arrogate the power of collecting tax. Parliament will say “You will not do it, I will do it. This is the consequence.” he answered.
Dwivedi then pointed out a strange circumstance that would evolve, if royalty is considered to be a tax. Land used for mining can also be owned by private individuals. If the Union government used this land for extracting minerals, it would pay royalty to a private person. If royalty is considered to be the same as tax, there would be an absurd instance where the Union government is paying tax to a private person! He argued that “this fact alone is enough to conclude that royalty” under the Mines Act is not a tax.
Further, he explained that the duty of fixing a quantum of royalty is vested with the Union so that there is a sense of uniformity across the country. This kind of uniformity, he explained is not required when levying taxes.
The Mines Act, he said, has no provisions that impose a tax. The closest would be Section 25 which talks about the “recovery” of taxes which concerns taxes that were to be collected under the older legislation—the Mines and Minerals (Development and Regulation) Act, 1948. The 1948 legislation was a pre-constitution statute where the power of collecting tax was not divided between the Union and the State. At that time, the Union government was permitted to collect the tax. This changed in 1957.
Dwivedi: India Cements had an “abrupt conclusion”
Taking the Court back to the late 1980s, Dwivedi argued that the key issue in India Cements was whether a cess on royalty is “good or bad”. There was “no debate on either side” on the question of royalty being the same as tax. He reminded the Court that the seven-judge bench referred to five judgements in which four claimed that royalty was not a tax. He stated, “If there are two sets of reasoning it will be expected for seven judges to debate which one is the right one.” In India Cements, the Bench avoided this entirely.
Dwivedi read aloud the disputed paragraph which consisted of the alleged “typographical error” The paragraph is extracted below:
“In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because s. 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 of list II. In any event, we are of the opinion that cess on royalty cannot be sustained under entry 49 of list II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.”
Dwivedi argued that there was no “aforesaid view” in the judgement which made the Bench conclude that “royalty is a tax.” CJI Chandrachud pointed out that the error was “obvious.” The Chief stated that if the paragraph is re-read by ignoring the phrase “royalty is a tax,” it would give more clarity. The seven-judge bench at that time held that the “cess on royalty” is a “tax on royalty,” which is impermissible under Entry 49 of the State List. Entry 49 deals with tax on land revenue, not on mineral rights. Interestingly, the paragraph also notes that the “State Legislature is denuded of its competence under entry 23 of list II.” Entry 23 of the State List deals with regulation of mines and minerals by a state government which is subject to the provisions made by the Union government. It does not mention anything regarding tax either.
According to Dwivedi, the last line of the paragraph also summed up his submissions that the royalty was on minerals and not a “tax on land.” The royalty was just a payment for the “user of the land.” He pointed out that the “typographical error” was considered as a precedent in many cases which “went astray.”