Supreme Court To Clarify If Judgment Upholding States' Power To Tax Minerals Will Operate Only Prospectively

A 9-judge bench of the Supreme Court on Wednesday (July 31) reserved its orders on the issue whether its July 25 judgment upholding the power of States to tax mineral rights and mineral-bearing lands should be given only a prospective effect.

A bench comprising Chief Justice of India DY Chandrachud, Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih heard arguments on whether the States should be allowed to recover past dues based on the judgment delivered on July 25 in Mineral Area Development v. M/S Steel Authority Of India & Ors.

States' should not recover past dues: SG 

Solicitor General of India Tushar Mehta requested the Court to clarify that the judgment will not enable recoveries for the period before the date of pronouncement. He pointed out that the judgment in India Cements Ltd. v. State of Tamil Nadu (1990) 1 SCC 12 [34], which was overruled by the 9-judge bench, had held the field for over 35 years and the positions which the parties had been following bona fide based on that precedent would be upset if the judgment is made retrospective. Allowing retrospective demands by States would have a cascading effect on prices and ultimately the common man would bear the brunt, as almost all industries are dependent on minerals.  The SG also stated that the parties who had taken part in public auctions for mining leases, based on the 2015 amendment to the MMDR Act, formulated their bids as per the then-existing rates, without anticipating any retrospective tax levy by the States. So, the retrospective application of the judgment will affect many industries, including the PSUs, and will open the floodgates of new litigations.

"Lordships may consider stating that neither the state may demand any levy retrospectively nor the private parties or PSUs who have paid would seek any refund of the money," SG said, adding that this proposal will do justice to both sides. He handed over a compilation of 62 judgments where the Court has applied the principle of prospective overruling.

Senior Advocate Harish Salve, appearing for Mahanadi Coalfields, submitted that the past levy demands would be more than the net worth of many companies and if they are allowed, several of them would be pushed to bankruptcy. Senior Advocate Mukul Rohatgi, cited yesterday's judgment in the Bar Council-enorlment fee matter, which stated it would not apply retrospectively.  Sr Adv Arvind Datar referred to a report by the Ministry of Mines where the central govt increased S.9 and S.9A levies to compensate the states for the loss of revenues.

Advocate General of Odisha Pritambar Acharya submitted that the State legislations were primarily welfare measures aimed at the tribal population who reside in the mining regions. At the same time, he submitted that the increase in the royalties by the Union after the 2015 amendment has benefited the State as well.

The bench asked the Advocate General to make a clear stand on whether the judgment should apply retrospectively or not. The AG evaded a direct answer, but at the the same time said that giving the judgment a prospective effect will affect the State exchequer. When the bench asked if he has received instructions from the Government, the AG replied in the negative and said, "I have worked this out myself."

"Don't pass on your dilemma to the bench," Justice Oka told the Odisha AG. CJI also pointed out in a lighter vein that the AG was standing in the centre of the Court while making submissions. At this juncture, SG said that states like Rajasthan and Madhya Pradesh are in favour of having a prospective effect.

Jharkhand, UP seek retrospective effect

Senior Advocate Rakesh Dwivedi, for the State of Jharkhand, submitted that the judgment should be given the full effect by making it retrospective. He submitted that allowing the judgment only a prospective effect would mean that the laws validly enacted by the States would be deemed ineffective till July 25. Pointing out that the Jharkhand law was enacted in 1994, Dwivedi submitted that to make this law inoperative on the basis of the overruled India Cements judgment, would be a "travesty of justice." He also pointed out that in 2004, the judgment in State of West Bengal v. Kesoram Industries Ltd(which differed from India Cements) came. Therefore, the Court would be now forced to get into another issue whether India Cements or Kesoram would govern the period before the 9-judge bench verdict.

Responding to the concerns raised by the other side regarding financial implications, Dwivedi suggested that the past arrears could be paid in a staggered manner in instalments.

Dwivedi submitted that the laws passed by Rajasthan, MP, UP and Chhattisgarh were upheld by the respective High Courts and the Supreme Court has not stayed those judgments. He stated in West Bengal, the companies have been complying with a similar law and they have not been affected. 

Dwivedi also stated that an argument of financial difficulty cannot be raised without any supporting materials. He demanded that the companies produce their balance sheets and file affidavits.

Advocate General of Jharkhand Rajiv Ranjan submitted that the Court should not be moulding the relief at the instance of assessee companies, who have not discharged their burden. Regarding the concerns raised by the Solicitor General on the common man being impacted, the Jharkhand AG stated that the money which the States collected are also meant for the common man's welfare.

Senior Advocate Vijay Hansaria, for the State of UP, the state levy was upheld by the High Court and the Supreme Court also approved it. All companies except Hindalco and Kanoria Chemicals have been paying the state tax.

In rejoinder, the SG stated that he was not arguing that the overruled judgment in India Cements should be allowed to operate till the pronouncement of the 9-judge bench verdict. The 9-judge bench judgment is the law of the law, the SG said, clarifying that he is only seeking a "moulding of the relief" in exercise of the powers under Article 142 of the Constitution in the peculiar factual circumstances. A listed PSU(which the SG refrained from naming), will face a demand of past arrears which would be more than its net worth, he cited.

On July 25, 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.

The majority opinion essentially held that Royalty is not within the nature of a tax as it is a contractual consideration paid by the lessee 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. 

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.

Other relevant reports on the decision can be read here.