State’s power to tax to apply retrospectively | Order Summary
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
On 14 August 2024, a nine-judge Constitution Bench of the Supreme Court issued an Order clarifying the effect of its judgement in Mineral Area Development Authority v Steel Authority of India. Mineral Area Development Authority, which was decided earlier this year on 25 July 2024, overruled India Cement Ltd v State of Tamil Nadu (1989). In India Cements, a seven-judge bench of the Supreme Court held that “royalty” collected under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 was in the nature of a tax. Thus, states could not impose any further financial obligations on mine leaseholders.
The Court in Mineral Area Development Authority ruled that state governments could separately tax mineral deposit lands and mineral rights under Entries 49 and 50 of the State List. In addition, the Court reaffirmed that states can demand a royalty under Section 9 as well. They held that the royalty was born out of a contractual agreement in a lease deed. It was not in the nature of a tax.
The dissenting opinion, authored by Justice B.V. Nagarathna, stated that in the context of Section 9, royalty was a tax. The decision of the majority could lead to “double taxation”, she observed.
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.
Submissions by the stakeholders
On 25 July 2024, as the nine-judge Bench completed the pronouncement of the judgement, counsel for both parties asked whether the judgement would apply prospectively—for future transactions, or retrospectively—for all the transactions that have taken place since 1989, the year of the India Cements decision. The nine-judge Bench assembled again and heard brief arguments from both parties on 31 July 2024. The clarification was issued two weeks after that hearing.
The Union government and mining companies argued in favour of a prospective overruling reasoning that the judgement laid down new constitutional principles. This would affect existing agreements, deals, and bargains that relied on the India Cements decision. Solicitor General Tushar Mehta had stated that companies would terminate their deals due to the July 2024 judgement. This would result in excessive litigation. He relied on Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc (2012), where the Supreme Court limited the rights of Indian courts to interfere in contracts with foreign arbitration clauses, but importantly favoured a prospective overruling of Bhatia International v Bulk Trading S. A. (2002). In addition, Mehta warned that consumers would be affected by the judgement as companies had passed on the increased costs to the end-consumers. Any future taxes, as well as past due taxes, would effectively be paid by the consumers instead. Moreover, he pointed out that a retrospective effect will impose a heavy financial burden on mining companies, pointing out that several states would demand interest on the taxes as well.
State governments, mainly Jharkhand appearing through Senior Advocate Rakesh Dwivedi, responded that Mineral Area Development Authority did not lay down any new constitutional principles. It was only validating previous legislation passed by the states to tax mines and minerals. Much of these legislations came in the wake of State Of West Bengal v Kesoram Industries Ltd. (2004), which said that royalties were not taxes, in contradiction to India Cements. Dwivedi argued that the doctrine of prospective overruling does not apply in instances where legislations are validated. Further, if it is applied prospectively, legislations that were passed before Mineral Area Development Authority would still be assessed on the basis of India Cements. These legislations would be struck down on the basis of an overruled decision.
Supreme Court: Mineral Area Development Authority to be retrospective
The Court decided against a prospective overruling. It noted that prospective overruling does not apply in decisions that uphold the competence of legislatures to pass certain laws. It referred to Municipal Council, Kota v Delhi Cloth & General Mills Co. Ltd. (2001), where a two-judge bench upheld the competence of a municipal council to levy a ‘dharmada’ tax and applied it retroactively. It overturned a High Court judgement which ordered the municipal council to refund the taxes it had collected.
The Court also did not see much conflict between Mineral Area Development Authority and Bharat Aluminum. The Court acknowledged that Bharat Aluminum discouraged retrospective invalidating of laws but found its “legal context” different than Mineral Area Development Authority. The power to collect tax was an exercise of state sovereignty. A prospective overruling would invalidate laws on the basis of a decision—India Cements—which was expressly overruled. “This would not be a constitutionally just outcome”, the Order noted.
In the chapter titled a “pragmatic solution”, the Court set a cut-off date on the retrospectivity of the judgement. Under Article 142, the Supreme Court is permitted to determine the scope of the retrospective application depending on the facts of the case. It only allowed taxes on transactions occurring after 1 April 2005. The cutoff date for states to levy past taxes somewhat aligns in timing with the Kesoram case, when states were first put on notice of their ability to gain revenue from mining activities. At the suggestion of Mehta, the Court also stated that the decision to waive taxes altogether rested with the discretion of the state governments.
In addition, no interest or penalties could be issued on taxes coming before 25 July 2024, the date of the Mineral Area Development Authority decision. The Court took into account the 35 years that India Cement was controlling precedent, and decided that reliance on what was previously good law did not warrant the assessment of interest and penalties for failure to pay.
To ensure that the financial burden is not immediate, the Court directed that the tax should be “staggered in instalments over a period of twelve years commencing from 1 April 2026”.