Nature of Royalty | Judgement Pronouncement: States have the power to collect tax on mines and minerals, SC holds in 8:1 majority
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 Constitution Bench of the Supreme Court upheld the state government’s power to tax mines and minerals in an 8:1 majority. The bench heard arguments in the case for eight days in February and March 2024.
Chief Justice D.Y. Chandrachud, authored the majority opinion for himself and seven other judges. The sole dissenting opinion was authored by Justice B.V. Nagarathna. She cautioned that allowing states to impose tax on mines and minerals would have grave economic implications.
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.
Do states have power to tax on mines and minerals under Entries 49, 50 of the State List?
The majority held that state governments were empowered to impose tax under both Entry 49 and Entry 50 of the State List. Entry 49 is a “general entry” that allows states to collect tax on “lands and buildings.” Entry 50 says that state legislatures can make laws for collecting tax on mines and minerals.
The appellants, mainly states governments of Jharkhand, Andhra Pradesh, Uttar Pradesh and Odisha had argued that “land” under Entry 49 would include “mineral land.” Further, they argued that the quantum of tax could be calculated on the basis of the value of minerals extracted from that land. The majority judgement agreed with this view. It rejected the respondents’ arguments that the tax could not be collected under Entry 49 because it does not expressly mention “tax on mineral rights.”
Doubling down, the majority also held that state governments could collect tax under Entry 50 of the State List as well. Entry 50 expressly provides the power to “tax on mineral rights.” This Entry however, also says that the state governments’ power is subject to any restriction imposed by Parliament for “mineral development.” The Chief noted that the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) does not expressly impose such a restriction yet. The Chief also said that such restrictions, if expressly imposed, could altogether prohibit the collection of tax under Entry 50, but clarified that such a restriction cannot be imposed under Entry 49. Lastly, the majority held that Parliament could not invoke “residuary powers” exercised under Entry 97 of the Union List to restrict a state’s taxing power.
Justice Nagarathna disagreed with the view that state governments could use Entry 49 of the State List to collect tax on mines and minerals. She pointed out that allowing this would lead to “double taxation” as state governments now have the opportunity to collect tax on the basis of two entries. She warned that now, Entry 49, a general entry, had the potential to make Entry 50, a specific entry, redundant. She cautioned that this would result in “unhealthy competition” and “heightened crisis” between the states, as states can now collect taxes despite limitations imposed by Parliament. It would become a “race to the bottom,” she said.
Is “royalty” a form of “tax”?
A key question in the case concerned whether the nature of “royalty” paid by mine owners is a form of “tax”. During the hearings, mining companies had argued that the “royalty” prescribed by the Union under Section 9 of the MMDR Act is in the nature of tax. Today, the majority held that royalty is “conceptually different from a tax.” A “royalty,” the majority clarified, is a financial obligation arising from a lease deed—a contractual relationship between a mining lessor and a lessee. The landowner could be either the state government or a private person. Therefore, it does not fulfil the characteristics of a tax. In doing so, the majority overruled the seven-judge bench decision in India Cements v State of Tamil Nadu (1989) and several other cases in which the Court has held that “royalty is a tax”.
Justice Nagarathna held that “royalty” under Section 9 of the MMDR Act fulfilled the parameters to be considered as “tax”. She however, clarified that “royalty” and “tax” were similar only in the context of the MMDR Act and nothing else. She reasoned that the statutory scheme of the MMDR Act, makes it evident that “royalty”, is a “compulsory exaction,” and is therefore, in the nature of a tax. Further, the rate for this was prescribed by the Union government. “Although Section 9 is not worded in that manner, nevertheless its import has to be understood.” She observed that the royalty acts as a limitation to Entry 50 of the Union List because it was carried out “in the interest of mineral development” she said.
In her dissent, she also stated that Kesoram Industries v State of West Bengal (2004), which held that India Cements had a “typographical error” when it held that “royalty is a tax” must be overruled. She highlighted several reasons to overrule Kesoram Industries. First, she stated that Kesoram Industries, being a five-judge bench, did not have the competence to comment on the ratio of a India Cements, which was a seven-judge bench decision. Second, she said that the 2004 judgement did not take into consideration other factors which were considered by India Cements when it concluded that “royalty is a tax.” Subsequent judgements, she stated, reaffirmed India Cements and brought an informed closure to the issue. Lastly, she noted that Kesoram Industries disregarded the “adverse economic consequences” of overruling India Cements.
Justice Nagarathna’s words of caution
In her judgement, Justice Nagarathna found that the majority view would lead to an uneven increase in cost of minerals, resulting in heightened prices of products dependent on minerals. She pointed out that non-mineral extracting states would resort to imports, hampering the foreign exchange reserves of the country. This, she said, would lead to a “breakdown” of the federal system of the Constitution in the context of mineral development. She also noted that there will be a slump in mining activities in states having a huge deposit of minerals, because the double levy of tax would disincentive mine owners. Lastly, she stated that there will be “unhealthy competition” among miners who would attempt to obtain mining leases in states that do not levy royalty.
Court to clarify the applicability of the judgement next week
After the pronouncement, counsels present in Court, including Senior Advocates Arvind Datar, A.M. Singhvi, and Rakesh Dwivedi had a seminal question for the bench: Would the judgement apply prospectively or retrospectively?
They pointed out that so far, most Courts had relied on India Cements to declare that royalty was a tax. As the majority differentiated the two, it would effectively overrule all of them. Solicitor General Tushar Mehta stated that retrospective applications would create complications, with return of funds between the Union and states. Dwivedi, appearing for Jharkhand, disagreed with Mehta.
The Chief decided to hear both sides next week. He directed the parties to make brief submissions for not more than 10 minutes on next Wednesday, 31 July 2024.
(This report was last updated at 2.57 pm on 25 July 2024)
