Nine-judge bench reserves verdict on prospective application of mineral taxation judgement
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, nine judges gathered in the Chief Justice’s court to determine the retrospective or prospective application of a judgement. A hearing that was meant to be short work took the better part of the morning and ended with some head-scratching. The judgement in question was last week’s decision in Mineral Area Development Authority v Steel Authority of India Ltd, where an 8:1 majority held that states had the sole power to tax mines and minerals.
Familiar faces argued before the bench today. If last week’s judgement was held to be retrospective, mining companies would have to cough up huge sums of money to state governments. If prospective, states would be unable to claim the revenue which they tried to raise before last week’s judgement.
After hearing all perspectives, the Bench reserved the order.
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.
A simple summary of a complex issue
Last week, the bench held that state legislatures can collect tax on mines and minerals. Mineral Area Development Authority overruled a seven-judge bench decision in India Cements v State of Tamil Nadu (1989), which said states cannot levy tax as they are already collecting it as a ‘royalty’ under the Mines and Minerals (Development and Regulation) Act, 1957. In that case, the Court concluded that royalty is a tax.
If India Cements was overruled, state governments could collect tax on mines and minerals from 25 July 2024, the day Mineral Area Development Authority was decided. However, a decision from 2004 complicated matters. In State of West Bengal v Kesoram Industries (2004), a five-judge bench had held that India Cements’ holding of “royalty is a tax” was incorrect.
The catch, of course, is that Kesoram Industries was a smaller bench compared to India Cements. But that didn’t prevent High Courts across the country from relying on either of the two judgements to determine the validity of mineral taxing laws. Odisha, for instance, had a taxing law declared invalid due to India Cements. West Bengal, on the other hand, relied on Kesoram Industries to collect tax.
Union: India Cements held the field for 35 years
Most High Courts had relied on India Cements to strike down laws which taxed mines and minerals. The Union and mining companies objected to retrospective application. Attorney General R. Venkataramani stated that the decision would have a “multipolar effect” as minerals are found in all sectors from “nanotechnology to health care.” Solicitor General Tushar Mehta said that the economic consequences will eventually affect the “common man.”
If states demand retrospective payment, mining companies will be bound to pay money “three times their net worth,” he argued. Mehta stated that Public Sector Undertakings will suffer the most. He stated that such additional burdens cannot be passed on to new consumers.
Mehta pointed out that, in practice, some state governments were collecting tax based on Kesoram Industries whereas others hadn’t done so on the ground that India Cements was the prevailing law. If the Mineral Development judgement would be applied prospectively, mining companies would be able to seek a refund in states where tax was collected. Since a state-wise analysis of the applicability of the judgement “would be too complicated and time consuming,” Mehta recommended a pan-India solution.
He proposed that the judgement be held prospective with the condition that there will be “no refunds, no demands.” The implication of this would be that states would not be able to make good any notional losses from the last 35 years and mining companies wouldn’t be allowed to demand a refund from states that had collected tax.
Mining companies have their say on prospective overruling
Senior Advocate Harish Salve, appearing for the Eastern Zone Mining Association, argued that the “certainty of the law is more important than the purity of the law.” He stated that consequences of a retrospective judgement will witness an “ugly spectacle of companies going belly up.”
Senior Advocate Abhishek Manu Singhvi, appearing for the Karnataka Iron and Steel Manufacturers Association, also cited several case laws, stating that India Cements also favoured a prospective application of its judgement in 1989. There was a “huge gap” between India Cements and Mineral Area Development Authority—in such a case, Singhvi noted, a prospective overruling is favoured.
Senior Advocate Arvind Datar argued that state governments lost a huge chunk of revenue after India Cements, resulting in a steep increase of royalty rates by Parliament. The rates were increased to compensate states for lost revenue. Instead of going back to existing laws which were struck down due to India Cements, Datar recommended that states make new laws that conform with last week’s judgement.
Both Union and mining companies put forth massive estimates for the amount that have to be paid to states were the judgement to be applied retrospectively: in the range of Rs. 30,000 to 50,000 crores.
Senior Advocate Rakesh Dwivedi argues against prospective overruling
Dwivedi, appearing for the Mineral Area Development Authority of Jharkhand, argued that the “doctrine of prospective overruling” applies only in instances where laws are invalidated. In the present case, no law had been invalidated. In fact, taxation laws that had been declared invalid by High Courts have been resurrected by last week’s judgement.
Dwivedi said that the bench would also have to decide if Kesoram Industries would operate in an instance where India Cements was overruled. If Kesoram Industries is the judgement in play, state laws which were declared invalid due to India Cements would also have to be declared valid. He went through High Court decisions from Madhya Pradesh and Rajasthan where state laws for taxation had been upheld. Justice Abhay Oka interjected to say that a state-wise study would be complicated.
On the aspect of the paying capacity of mining companies, Dwivedi said that they need not pay the whole amount at once. There could be an arrangement where states are paid over a period of time. CJI Chandrachud suggested that the companies could be directed to pay a fraction of the amount.
“We’ll close it now,” the Chief said. By then, the Court had heard arguments for almost 1.5 hours. Counsels were on their feet to make further submissions. The nine judges walked out of the room with a fresh burden. Among them was Justice B.V. Nagarathna, whose dissent had cautioned about the economic consequences of the majority’s judgement. The question of “who can tax” decided, the Court has to now contemplate the more practical question of “when can they tax.” Crores and crores of rupees are at stake.