States’ permitted to collect retrospective tax from mine leaseholders for transactions made after April 2005
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 held that its decision upholding the states’ power to tax mines and minerals will operate retrospectively. The order came two weeks after the Court heard arguments on the retrospective and prospective application of the judgement.
On 26 July, the nine-judge Bench in an 8:1 majority affirmed the states’ authority to levy tax on mineral land and mineral rights as per Entries 49 and 50 of the State List. It struck down India Cements v State of Tamil Nadu (1989), a 35 year old judgement, which held that states’ cannot collect tax as they collected “royalty” under the Mines and Minerals (Development and Regulation) Act, 1957. The royalty itself was in the nature of tax, as per India Cements.
The majority opinion, authored by Chief Justice D.Y. Chandrachud, held that royalty had distinct characteristics and cannot be akin to a tax. Justice B.V. Nagarathna dissented stating that royalty was in the nature of tax in context of the MMDR Act, 1957.
On the day the judgement was delivered, the mining companies and the Union pointed out that the judgement did not clarify whether it was applicable prospectively or retrospectively. Solicitor General Tushar Mehta recommended prospective application, concerned that the other route would require payments worth 35 years to be made. Senior Advocate Rakesh Dwivedi for the state of Jharkhand proposed a retrospective application to compensate states for the loss of revenue they would otherwise have had. Mining companies were concerned that a retrospective ruling would result in them paying huge amounts of money as tax to make good of the loss that the states suffered for 35 years due to the decision in India Cements.
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.
Retrospective application with a cut-off date
The Court held that tax could be levied on all transactions made by mining companies and leaseholders after 1 April 2005. The cut-off date was provided based Kesoram Industries v West Bengal being decided in 2004, which held that India Cements erred in declaring “royalty” as a tax. Although the judgement of Kesoram was declared in 2004, the Court held that the tax could only be collected for the new financial year following the judgement, which started on 1 April 2005.
Several state governments had relied on Kesoram Industries to make laws collecting tax on mines and minerals. This resulted in a non-uniform taxing regime in the country where a few states collected tax while some did not.
The cut-off date will reduce the tax burden on mining companies significantly. On 31 July, the Union had argued that the expected quantum of tax for mining companies and Public Sector Undertakings was three times their net worth. Further, mining companies contended that their finances would go “belly up” if the judgement was held retrospective.
Tax to be collected in instalments
States’ can begin collecting tax starting from 1 April 2026, on all transactions that took place after 1 April 2005. The Court directed that the tax will be collected in staggered payments over a period of 12 years. This was a suggestion by Senior Advocate Rakesh Dwivedi, who appeared for the state of Jharkhand. He stated that mining companies need not pay the whole amount at once and pay it from time to time instead.
The Chief, reading the Order, highlighted that the tax will not include any interest or penalties. This was a suggestion forwarded by Solicitor General Tushar Mehta who recommended a “no refunds, no demands” approach.
Justice B.V. Nagarathna won’t sign the Order
Justice Nagarathna was the sole dissenter in last month’s verdict. She warned that states’ could now collect both tax and royalty which would result in “double taxation.” This was a concern that mining companies had repeatedly made in Court during arguments in February and March.
Her dissent noted that there will be grave economic consequences and will facilitate “unhealthy competition” among states resulting in an “uneven and uncoordinated increase” in the cost of minerals.
As she did not agree with the majority opinion on the states’ power to tax, the clarification order of retrospective application will only be signed by the eight judges in the majority. In a lighter vein, Dwivedi stated that “silence means agreement” receiving laughs from the parties and the judges. Justice Nagarathna responded that her silence was a reiteration of her dissent.