Royalty Is Tax, States Have No Right To Tax Mineral Rights : Justice Nagarathna's Dissent

The Supreme Court nine-judge bench headed by Chief Justice of India, Dr D.Y. Chandrachud and comprising Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih, by 8:1, held that royalty charged by the Union Government under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is not tax.

The majority has held: “There are major conceptual differences between royalty and a tax: (i) the proprietor charges royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign; (ii) royalty is paid in consideration of doing a particular action, that is, extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; 178 and (iii) royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.”

Justice Nagarathna alone dissented.

Justice Nagarathna's dissent

Justice Nagarathna has held that royalty charged under Section 9 of the MMDR is in the nature of a tax.

In the present case, a batch of petitions was filed in regard to the divergent views adopted by the Supreme Court in India Cement Ltd. vs State of Tamil Nadu (1990) and State of West Bengal vs. Kesoram Industries Ltd (2004). It concerned the legislative competence of the States on mineral rights under the MMDR Act.

The MMDR Act gives the Union legislative power relatable to Entry 54 of the Union List under Schedule VII on regulating mines and developing minerals. Section 9 of the MMDR Act allows the Union Government to regulate royalty to be paid on mining leases for any mineral removed or consumed from the leased areas at specific rates.

In India Cement judgment, a seven-judge Bench of the Supreme Court held that “royalty is tax” and State legislatures lack the competence to levy taxes on mineral rights as it is vested with the Union under the MMDR Act. In this case, Tamil Nadu government granted a lease to India Cement for limestone and Kankar under the MMDR Act. While the royalty was fixed under the MMDR Act, the Madras Panchayat Act, 1958 (which was replaced by the Tamil Nadu Panchayats (Amendment and Miscellaneous Provisions) Act, 1964 allowed the State to levy a local cess at the rate of 45 paise charged on royalty on land revenue paid to the government.

The legislation was challenged by India Cement before the Madras High Court and its division bench. Both held that it was within the State's competence to levy cess on royalty as it was a tax on land, which was relatable to Entry 49 (taxes on land and buildings)of List II.

The Supreme Court in India Cement judgment however rejected this reasoning and held that cess was essentially on the royalty and not on land revenue. It therefore held that since royalty is a tax, the cess on royalty being a tax on royalty is beyond the State's competence. The reasoning of this decision was followed in numerous cases. In State of MP vs Mahalaxmi Fabric Mills Ltd (1995), the court examined whether the India Cement judgment incurred a “typographical error” by saying “royalty is a tax” while it meant “cess on royalty is a tax”. However, the court upheld the correctness of India Cement's judgment. This issue ultimately came before the Supreme Court five-judge bench in Kesoram Industries.

The majority in Kesoram Industries judgment held that India Cement judgment committed an “inadvertent error” because they considered “royalty as tax” while they meant “cess on royalty is tax”. However, the court concurred with India Cement judgment's reasoning. The minority held that States are denuded of their power to levy tax in terms of Entry 50 of State List which says: “taxes on minerals rights subject to any limitations imposed by Parliament by law relating to mineral development”.

In the aftermath of both judgments, many States started imposing tax under Entry 49, State List. One such was Bihar, where Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules, 1994 levied tax on land being used for mining. The High Court of Patna held the two laws unconstitutional, relying on the India Cement judgment.

The correctness of the high court's judgment was heard in the present case based on the following issue.

Conundrum between different entries

Nature of royalty under Section 9 of MMDR Act

Justice Nagarathna explained that the royalty is imposed by the Parliament in the interest of mineral development in the country.

The payment of royalty is triggered on the removal and/or consumption of mineral. The rates of royalty is prescribed under Second Schedule of MMDR Act. They are generally expressed as a percentage of the average sale price of the respective mineral, and the same is to be paid on ad valerum basis.

Justice Nagarathna has held that the lessor is bound to collect royalty or that the exaction of royalty is statutory in nature because it is a consideration to be paid by the lessee for exercising mineral rights under the scheme of public interest envisaged under Section 2 of MMDR Act. In the event of non-payment, it is recoverable as arrears of land revenue under Section 25 of the MMDR Act.

The majority has held that the exaction of royalty is not compulsory in nature because the compulsion stems from the contractual conditions of mining lease and the demand is made by the lessor (which could by State government or a private party) and the payment is not for public purposes. It is merely a consideration paid for parting with exclusive privileges in mineral rights.

Relation between Entry 54, List I and Entry 23 & Entry 50, List II

Justice Nagarathan interpreted the relationship between Entry 54, List I and Entry 23 and Entry 50, List II and observed: “In my opinion, it would be incongruous with the constitutional intent to hold that the conscious provision for Union supremacy through the insertion of aforesaid apparatus, specifically through insertion of Entry 50 – List II, denudes the States' power to use mineral rights or royalty levied upon them as a measure to tax land. To do so would simply render Entry 50 – List II nugatory.”

India Cement vs. Kesoram

Justice Nagarathna stated that the court in Kesoram Industries inferred that it had made an apparent error in holding that “royalty to be a tax”. She pointed out that this inference was made ignoring the observation of the court in India Cement said “royalty on mineral rights is not a land tax, but a payment for the user of the land.”

She clarified that the court in India Cement meant that the royalty is a tax on mineral rights.

This could be further clarified through the examination of Entry 49 and Entry 50, List II for levying cess on royalty.

Levy of cess on royalty: Entry 49 or Entry 50 of List II?

Justice Nagarathna upheld the reasoning in India Cement which had noted that royalty is only indirectly connected with land and cannot be said to be a tax directly on land as a unit.

Therefore, she held: “In my opinion, this finding requires no second look. The contention that royalty can be used a measure to tax land under Entry 49 – List II would, in my opinion, inevitably lead to conflation with the nature of tax that is reserved for Entry 50 – List II subject to any limitations imposed by Parliament by law relating to mineral development.”

The majority had held that while the Parliament can limit the taxing field entrusted under Entry 50, List II through a law relating to mineral development, such a limitation cannot operate on Entry 49, List II. It further stated both Entry 49 and 50 are distinct and therefore the rule of lex specialis does not apply.

Justice Nagarathna pointed out that any other proposition on this would go against the cardinal rule of interpreting Entries in the Lists, which is: “It is settled law that there must be a reasonable nexus between the nature of tax and the measure of tax.”

She pointed out this would lead to double taxation: “This would amount to “double taxation” so to say imposed by two different Legislatures: one, by the State Legislature on the mineral bearing land under Entry 49 - List II and again for conducting a mining operation which is for exercise of a mineral right under Section 9 of MMDR Act, 1957, which is a Parliamentary law also paid to the State Government.”

Lastly, Justice Nagarathna noted her dismay over the reasoning imported by the court in Kesoram Industries based on “sensible reading” and stated that this led to the constitution of a nine-judge bench “to answer eleven points for reference which” which in her opinion was “wholly unnecessary”.

She said: “Judgments of larger Benches cannot be questioned by smaller Benches on the basis of an imagined “typographical error”! The entire judgment must be read and understood including its under currents before negating it for what it stands.”

She further pointed out that the majority in Kesoram Industries had concluded royalty is not a tax based on the definition of royalty in dictionary meanings, etc without reference to the constitutional Entries.

She added that the minority judgment in Kesoram Industries had rightly identified that States under the garb of land tax are imposing cess on royalty.

The minority judgment in Kesoram Industries said: “The question which has to be answered on the basis of the aforementioned principle is, is it a tax on land or tax on mineral. If having regard to the nature of tax and keeping in view the history of the legislation to the effect that the State of West Bengal has all along been trying to impose tax on minerals as opposed to tax on land, is taken into consideration, it will be noticed that endeavours have been made to continue to impose “cess” on mineral and mineral rights in the garb of “land tax”.”

Justice Nagarathna has concluded that the majority judgment in Kesoram Industries must be set aside.

Other stories about the judgment can be read here.