Nature of Royalty | Day 2: State government entitled to collect tax from mineral land, appellants argue
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, appellants concluded their arguments in support of State of West Bengal v Kesoram Industries (2004) which held that India Cements Ltd. v State of Tamil Nadu (1989) had incorrectly declared that “royalty is a tax” due to a typographical error.
Senior Advocates Rakesh Dwivedi, S. Niranjan Reddy, and Vijay Hansaria appeared for the Mineral Area Development Authority, the state of Andhra Pradesh, and Uttar Pradesh respectively.
They argued that the state government is entitled to levy tax on land under Entry 49 of the State list—even if the land is used for extracting 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.
Appellants: States can collect tax on land used for extracting minerals
Dwivedi stated that Entry 49 of the State List allows a state government to collect taxes on lands and buildings. This power can even extend to lands which are mined. Simply because Entry 49 does not mention minerals expressly, it does not preclude a state legislature from imposing tax on that mineral rich land. Interestingly, in India Cements, the Tamil Nadu government had relied on Entry 49 to justify their cess on royalty.
To buttress his point, Dwivedi adopted a detailed reading of Kesoram Industries, where the Supreme Court had relied on several precedents that dealt with this power of the state government. Relying on Ralla Ram v Province of East Punjab (1948), he argued that the quantum of the tax to be levied on the land and buildings can be determined on the basis of its annual value. Further, in Asstt. Commrr. Of Urban Land Tax v Buckingham and Carnatic Co. Ltd (1969), the Supreme Court had laid down a twin test for determining the state government’s capacity to collect tax under Entry 49. The twin test said that the tax should be directly imposed on the land, and must have a definite relation to it. He highlighted that the “incidence of tax” is directly on the land and has a “proximate nexus” with the land from which the minerals are being extracted. “Until extraction, it lies embedded as part of the land. Hence, it will fall exclusively under Entry 49 of the State List.”
Further, the quantum of the tax will be determined on the basis of the “mineral value” i.e. the value of the mineral produced. Dwivedi explained that once a lease for mining purposes is granted there are “four strands” of mineral rights which flow from this lease. First is the right to excavate and drill to take out the minerals. Second, is to extract the minerals. Third, the lesser can “beneficiate” from the mineral dust and lumps that are created from the excavation process. The last and fourth right is to carry and dispatch the minerals for sale. These are all “interconnected,” contended Dwivedi. The state government is thus entitled to collect the tax under Entry 49 on the basis of the annual mineral value, or it would be left out of the equation.
Reddy relied on Kunnathat Thathunni Moopil Nair v State of Kerala (1961). In this case, a fixed tax on forest land—which was not determined on the basis of the produce—was struck down due to “under classification.” Relying on this, Reddy argued that for taxing mineral land under Entry 49 the value of the mineral produce would become a key consideration. He pointed out that Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (Mines Act) does not limit the state’s power to collect this tax at all. He highlighted that the state’s power can only be restricted through an express provision—which is not found under the Mines Act.
Advocate Sansriti Pathak added that state governments are permitted to collect tax for land used for mobile towers as well. This would mean that Entry 49 permits tax on land irrespective of its use.
Hansaria: Limitations on State government does not enable Parliament to collect tax
Hansaria referred to Entry 50 of the State List which expressly mentions the states power to tax “mines and minerals.” This is subject to “limitations imposed by Parliament by law relating to mineral development.” Hansaria contended that the limitation under Entry 50 is not an enabling power in favour of the Parliament to collect tax. Parliament can only limit the power of the state government to collect tax for the purpose of “mineral development,” and this is not an absolute limitation.
He drew the Court’s attention to Section 2 of the Mines Act which declares that the Union can regulate mines and the development of minerals to the “extent hereinafter provided.” According to him, the control is only to the “extent” determined under the Act and not beyond it. Further, “mineral development” is only mentioned under Section 18 of the Mines Act. “What is mineral development? The Parliament has chosen to prescribe specifically under Section 18 and 18 alone.” Thus, according to him, the limitation for “mineral development” under Entry 50 can only be made as prescribed under Section 18.
Dwivedi: Royalty has an “innate character” which is not that of tax
“It was left to Keshav and Ram to correct the error” said Dwivedi when he referred to Kesoram Industries as he began his arguments on the “typographical error” found under India Cements. He read the relevant section under Kesoram, titled “a cautious evaluation of India Cements.”
Chief Justice D.Y. Chandrachud stated that the section “begins beautifully” where the Supreme Court noted that the error in India Cements was “attributable to the stenographer’s devil or to sheer inadvertence.” The rationale of Kesoram Industries had piqued the interest on the bar and the bench.
In the previous hearing, Dwivedi had dealt with this aspect briefly, contending that India Cements had reached the conclusion that “royalty is a tax” abruptly. In Kesoram Industries, the Court held that the majority in India Cements wished to state that “cess on royalty is a tax” but inadvertently omitted “cess,” resulting in the phrase “royalty is a tax.” He pointed out that Kesoram Industries also deals with the dictionary meaning of “royalty” which does not consider it the same as tax.
Justice B.V. Nagarathna pointed out that the royalty under Section 9 is for the purpose of uniformity. She added that it is a limitation for the state government under Entry 50 of the State List. “So it is tax in a way. You can call it an impost” she stated.
Relying on Article 366(28), which defines tax, Dwivedi responded that tax and impost come under the same umbrella within the definition. Pointing out that “tax” and “impost” are mentioned together in the provision, he said that a “man is known by the company he keeps.”
Dwivedi highlighted that the “innate character of royalty” remains the same, it cannot be considered similar to an impost or tax. In contrast, this innate characteristic does not change if there is uniform royalty. Uniform royalty is settled for major minerals, and only the Union can be trusted to determine that value because of the mineral’s importance.
Senior Advocate Harish Salve provided a brief overview of his submissions. He will begin arguments on 29 February 2024.