States' Power To Tax Mining Rights & Mineral-Bearing Lands Not Limited By MMDR Act; Royalty Not Tax: Supreme Court Holds By 8 :1
States have the legislative competence to tax mineral-bearing lands, the Court held.
The Supreme Court 9-judge constitution bench today held by an 8:1 majority that States have the power to levy tax on mineral rights and that the Union law - Mines and Minerals (Development and Regulation) Act 1957 - do not limit such power of the States.
Chief Justice of India DY Chandrachud wrote the judgment on behalf of himself and seven colleagues. Justice BV Nagarathna delivered a dissenting judgment.
The key questions that the court examined were (1) whether royalties on mining leases be considered as tax and (2) whether the States have the power to levy royalty/tax on mineral rights after the enactment of Parliamentary law Mines and Minerals (Development and Regulation) Act 1957.
Conclusions of the Majority judgment :
1. Royalty is not within the nature of a tax as it is a contractual consideration paid by the lesssee to the lessor under the mining lease. Both royalty and dead rent do not fulfil the characteristics of tax. The judgment in India Cement Ltd. v. State of Tamil Nadu (1990) 1 SCC 12 [34] holding royalty to be a tax is overruled. The payment made to the Government cannot be deemed to be a tax merely because the statute provides for the recovery of the arrears.
2. Entry 54 of List 1(Union list) is a regulatory entry dealing with the regulation and development of mines and minerals. Regulatory entries are distinct from taxing entries. Entry 54 of List 1, being a general entry, does not include the power of taxation of the Union.
3. The legislative power to tax mineral rights vests with the state legislatures. Parliament does not have the legislative competence o tax mineral rights under Entry 54 of List 1, it being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List 2, Parliament cannot use its residuary power with respect to that subject matter.
4. Entry 50 of List 2 envisages that the Parliament can impose any limitations on the legislative field of the States through a law relating to mineral development. The MMDR Act, as it stands, does not impose any such limitations.
5. There is no specific provision in the MMDR Act imposing limitations on the taxing powers of the State. Royalty under S.9 of the MMDR Act is not in the nature of a tax. Section 9 MMDR Act does not impose any limitation on the power of States to tax minerals. The limitations imposed by S.9 on royalties do not amount to limitations on the State's powers.
6. The expression "land" in Entry 49 of List 2 covers all sorts of land. Mineral-bearing lands also fall under the description of "land" under this Entry in the State list and hence States are competent to tax them.
7. State legislatures have legislative competence under Article 246 read with Entry 49 of List 2 to tax land which comprise of mines and quarries. containing minerals.
8. Yield of mineral-bearing land in terms of the quantity of minerals produced or royalty can be used as a measure to tax mineral-bearing lands. Mineral value or mineral produce can be used as a measure to levy tax on mineral-bearing lands.
9. Entries 49 and 50 of List 1 deal with different subject matters and operate in different fields. Mineral value or mineral produce can be used as a measure to impose tax under Entry 49 of List 2.
10. The limitations imposed by the Parliament in a law relating to mineral development with respect to Entry 50 of List 2 cannot operate on Entry 49 of List 2 because there is no specific stipulation in the Constitution to that effect.
The decisions in India Cements, Orissa Cements, Mahanadi Coal Fields, Saurashtra Cement and P Kannadasan are overruled.
Dissenting view
Justice Nagarthna, disagreeing with the majority, held that royalty is in the nature of a tax. Hence, the provisions of the MMDR Act regarding levy of royalty denude the States of their power to levy taxes on minerals.
Justice Nagarathna further held that "land" under Entry 49, List 2 will not include "mineral bearing lands" as it would amount to double taxation on mineral rights. It would be impermissible to hold that the States have power to levy tax over and above the royalties paid by the lease-holder of the mining lease.
Justice Nagarathna opined that allowing States to levy taxes on minerals would lead to a lack of uniformity on a national resource. This could also lead to unhealthy competition among the States. This may result in the breakdown of the federal system.
Whether the judgment will apply prospectively? SC to hold hearing next week
After the judgment was pronounced, Solicitor General Tushar Mehta, Senior Advocates Arvind P Datar and AM Singhvi requested the Court to clarify that the judgment would operate only prospectively. Senior Advocate Rakesh Dwivedi opposed the demand.
The bench agreed to hear the parties on this point next Wednesday.
Issues addressed by the Court
The batch of cases arose from various petitions filed against the laws made by States to impose taxes on mineral- bearing land in pursuance of Entry 49 of List II by applying the mineral value or royalty as the measure of the tax. States such as Rajasthan and Uttar Pradesh also sought to impose environment and health cess and fees for transporting coal and coal-dust collected from mines.
Laws like Bihar Coal Mining Area Development Authority (Amendment) Act 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules 1994 were also under question.
To examine the issues, the Court had to look into the nature and scope of royalty as prescribed in Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and whether it could be termed as tax. As per S. 9 the holders of of mining leases, whether granted before or after the commencement of the MMDR Act, must pay royalties on minerals removed or consumed from the leased area at rates specified in the Second Schedule. The Central Government has the power to amend the royalty rates through notification, but such changes cannot occur more than once every three years.
It may be noted that S. 15(1) of the MMDR Act specifies the powers of the State Governments in making rules relating to minor minerals.
The 9-judge bench which delivered the judgement was headed by CJI DY Chandrachud and comprises Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih.
The 5 main questions framed by the petitioners focused on the interplay between S.9 and S. 15 of the MMDR Act and Entry 50 List II, Entry 49 List II and Entry 54 List I of the 7th Schedule of the Constitution.
Entry 50 List II: States' powers on taxing mineral rights. The State Governments have the authority to impose taxes on the extraction and subsequent use of minerals within their territories. However, such a power is subject to 'any limitations imposed by Parliament by law relating to mineral development'
Entry 49 List II: States' powers to levy taxes on lands and buildings
Entry 54 List I: Power of the Parliament to regulate mines and mineral development to the extent to which such regulation and development is deemed as per a Parliamentary Law to be necessary in the public interest.
Entry 23, List II - States' power for regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union.
The 5 Main Issues Before The Bench
1. What is the true nature of royalty determined under s. 9 r/w s.15(1) of the MMDR Act of 1957 and whether a royalty is in the nature of tax?
2. What is the scope of entry 50 List II of the 7th Schedule of the Constitution of India and what are the limitations imposable by Parliament in the exercise of its power under entry 54 List I? Does S.9 or any other provision of the MMDR Act contain any limitation with respect to the field in Entry 50 List II?
3. Whether the expression - 'subject to any limitations imposed by Parliament by Law relating to Mineral development' in Entry 50 List II partially subjects this entry to Entry 54 of List I, which is a general, non-taxing entry and whether such a limiting phrase deviates from usual distribution of legislative power as established in the NPV Sundaram case of 1958?
4. What is the scope of Entry 49 List II and whether it includes taxes based on land produce value; would the constitutional position be any different for a mining land on account of Entry 50 List II r/w Entry 54 List I?
5. Whether Entry 50 List II specifically deals with mining land, and if so, whether it takes precedence over Entry 49 in List II when it comes to matters related to mining land.
Arguments By The Appellants
Senior Advocate Rakesh Dwivedi appearing for the State of Jharkhand contended that the term "limitation" in Entry 50 List II (States' powers on taxing mineral rights) implies putting a cap on the power to tax rather than an outright transfer of this power to Parliament.
It was further argued by Senior Advocate Vijay Hansaria appearing for the Mineral Development Authority of the State of UP, that Entry 50 List II doesn't grant the Union the power to tax mineral rights. He emphasized that it acts as a limitation on the state's authority rather than enabling the Parliament to tax. Hansaria argued that if royalty was deemed a tax, it should fall under specific entries between 82-92B of List I, and a limiting power on the state cannot transform into an enabling power for the Parliament.
Entries 82-92 B of List I deal with the law-making powers of the Parliament to levy tax on a variety of subjects such as non-agricultural income ( Entry 82); export duties and customs (Entry 83); tobacco (Entry 84) and so on.
Referring to Section 2 of the MMDR Act (Union should take under its control the regulation of mines and the development of minerals to the extent hereinafter provided.), it was contended that the Parliament's powers were confined to what is outlined in the Act, primarily under Section 18 of MMDR Act concerning conservation and development of minerals.
Thus any restrictions imposed by the Union under Entry 50 List II would be limited to Section 18, and the legislative intent of the MMDR Act shows a conscious effort to refrain from imposing restrictions on the state's authority to levy taxes on mineral rights.
Arguments By The Union
The Union and the Eastern Zone Mining Corporation contended that Entry 50 List II in its language goes beyond mere development or conservation and is uniquely crafted for holistic national welfare. Attorney General for India R Venkataramani and Solicitor General Tushar Mehta appeared for the Union.
Drawing attention to Entry 50 List II as the only entry where Parliament limits the power of the State, the respondents called for a proper interpretation of the limiting phrase, "imposed by the law of the Parliament relating to Mineral Development."
The respondents disagreed with a narrow interpretation that only the presence of a specific section in the MMDR Act would explicitly prohibit states from imposing taxes. Instead, they urged for a broader understanding of the phrase. They argued that the existence of the MMDR Act itself was enough to limit state powers under Entry 50 List II.
The Union stressed that the legislative intent of the MMDR Act was purely to consider the holistic view on the management of national minerals at the Countrywide and Global levels. The Union flagged concerns over the potential issue of non-uniformity in taxes on minerals listed under Schedule I of the MMDR Act if the appellant's case is allowed. It was emphasized that uniform taxation by Parliament ensures fair revenue distribution among states rather than unequal accumulation of revenue between different states.
The Union also cautioned against overreliance on Entry 49(state power to tax lands and buildings) to interpret S. 9 of the MMDR Act since it was the vision of the founding fathers of the Constitution to encourage central control over minerals compared to land.
Senior Advocate Harish Salve, for Eastern Zone Mining Corporation, argued that MMDR Act occupied the entire field relating to mineral rights and hence the States' powers over the subject were completely eclipsed.
Senior Advocates AM Singhvi, Arvind P Datar, Darius Khambhata, AK Ganguly, SK Bagaria also made submissions.
How Did The Matter Travel To A 9 Judge Constitution Bench?
The matter was referred to 9 judge bench in 2011. A three-judge bench headed by Justice SH Kapadia had framed eleven questions to be referred to the nine-judge bench. The three-judge bench clarified in this case that the reason why it was not referred to a five-judge bench and directly referred to a nine-judge bench was because prima facie, there appeared to be some conflict in the decisions of State of West Bengal v. Kesoram Industries Ltd. and Ors which was delivered by a bench of five-Judges and India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. which were delivered by seven-judge benches.
Other reports on the judgment can be read here.
Case Details : Mineral Area Development v. M/S Steel Authority Of India & Ors (CA N0. 4056/1999)
Citation : 2024 LiveLaw (SC) 512
Click here to read the judgment
Hearing reports :