Can Royalty Collected On Mining Leases Be Considered As Tax? Supreme Court 9-Judge Bench Starts Hearing [DAY1]

The bench headed by CJI DY Chandrachud comprises Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih. Among the batch are petitions challenging the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and the rules framed thereunder, which imposed additional cess and taxes on land revenue due from mineral-bearing lands.

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. These include important tax law questions such as whether 'royalty' can be considered as being like tax and can the State Legislature while levying a tax on land adopt a measure of tax based on the value of the produce of land. 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 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.

Senior Advocate Mr Rakesh Dwivedi, appearing for the state of Jharkhand, formulated five fundamental questions before the bench. These included inquiries into the true nature of royalty determined under sections 9 and 15(1) of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), and whether royalty can be classified as a form of tax. The scope of constitutional entries, such as Entry 50 List II and Entry 54 List I, was also scrutinized, with specific emphasis on potential limitations imposed by Parliament. Dwivedi delved into whether the interplay of these entries results in a departure from the established legislative powers distribution.

Moreover, the senior advocate raised questions regarding Entry 49 List II, exploring its implications on land value-based measures and the distinct treatment of mining lands under Entry 50 List II in conjunction with Entry 54 List I. Dwivedi's comprehensive argument also touched upon the intricate relationship between Entry 50 List II and Entry 49 List II. The questions raised before the bench were :

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 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 pro-tanto subjects the entry to Entry 54 List I which is a non-taxing general entry and consequently there is any departure from the general scheme of distribution of legislative power as enunciated in NPV Sundaram's Case 1958 SCR 1422 ?

4. What is the scope of Entry 49 List II and whether it envisage facts which involve the measure based on the value of the produce on the land, would the constitutional position be any different qua a mining land on account of Entry 50 List II r/w Entry 54 List I?

5. Whether Entry 50 List II is a specific Entry in relation to Entry 49 List II and would consequently abstract mining land from the Scope of Entry 49 List II?

On The Confusing Paragraph 34 of Kesoram Industries - Question of Royalty As Tax Never Raised Highlighted Mr Dwivedi

During the hearing, Mr Dwivedi pointed out a seemingly contradictory statement in paragraph 34 of the judgment in the case of Kesoram Industries. The first sentence of the paragraph states that the court is of the opinion that royalty is a tax, while the last sentence asserts that royalty is not a tax on land but a payment for the user of land.

34. In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State legislature because Section 9 of the Central Act covers the field and the State legislature is denuded of its competence under Entry 23 of List II. In any event, we are of the opinion that a cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.

Mr Dwivedi opined that the earlier paragraphs consistently describe royalty as a return on the user of land. He raised the possibility that a subsequent bench could harmonize this apparent contradiction by suggesting that adding a cess on royalty would make it consistent. He further emphasised that up to paragraph 33, there was no debate on whether a royalty is a tax. He argued that the seven-judge bench had deliberately avoided choosing between conflicting judgments.

“ Upto para 33 there is no discussion or debate as to whether royalty is a tax or not. Mysore High Court is referred and the 4 High Court decisions are referred (within Kesoram). Neither of them is discussed. Because if two reasonings are there, it should have been discussed why Mysore is to be adopted instead of the other one. In fact, the 7 judges bench has avoided the question of which of them is right.”

Justice Nagarathna weighed in to add, “ Actually in what context royalty will be held to be tax in the Mysore High Court judgement (as mentioned in Kesoram)will be clear if you see that there what was imposed was the license fee, had there been a discussion of the tax in Mysore High Court judgement, para 34 would have been different.”

Mr Dwivedi contested that the court stated royalty is a tax "in the aforesaid view of the matter," but he questioned the absence of any reference or framing of the issue in preceding paragraphs. Dwivedi expressed reservations about fully endorsing the court's assertion that royalty is not a tax on land but a payment for the use of land.

“I will not say that this is fully correct...the royalty is for the owner's right to extract the mineral and sell it, the mineral value is shared by the owner and the lessee. the lesser is the dominant owner and the lessee is the subservient owner so therefore it is logical that the mineral value of that state of owning must be shared... I am not standing to defend cess on Royalty simpliciter though in this case, a cess on land revenue by virtue of explanation royalty was an additional factor.”

Justice Roy echoed Dwivedi's sentiments, acknowledging that paragraph 34 reads abruptly and lacks a clear connection to the preceding paragraphs.

“Para 34 reads abruptly, we are not able to connect to the previous paragraphs, the logic or the reasonings.”

Analysing the 'limitations' imposed on Entry 50 of List II of The Constitution

The court also deliberated upon the ambit of Entry 50 of the State List which enlists powers of the state to make laws on taxes on mineral rights, 'subject to any limitations imposed by Parliament by law relating to mineral development'.

Mr Dwived contended that the term "limitation" in Entry 50 List II implies putting a cap on the power to tax rather than an outright transfer of this power to Parliament. Dwivedi referred to a Constituent Assembly Debate (CAD) where the suggestion to shift Entry 50 to List I was rejected by Dr. B.R. Ambedkar.

The senior advocate emphasized that the context, grammar, and historical debates all support the interpretation that the power to tax minerals remains with the state governments, with Parliament having regulatory power to impose limitations to prevent excessive competition and taxation.

“So if the framers wanted that taxing power be with the parliament, the easiest thing was to accept that move it here to there...but not to move that means no, the state will continue to have the power but facilitating the national importance minerals, the parliament has the reserve power to cap it so that the states do not go berserk and competing and setting tax limits extraordinarily. So 'Limitation' if grammatically understood will not indicate arrogation by Parliament. Contextually also it will not indicate that and we keep in mind CAD, it will not mean that.”

It was further contended that while the Entry has to be interpreted liberally, the limitation imposed requires an organic consideration of what it would imply in the common sense of the term. Mr Dwivedi then focused on the need to appreciate that the distribution of the legislative power demands balancing as could also be seen under Article 246 which provides for the division of law-making powers between the Union and the States.

“So the entry has to be liberally construed but the limitation or construction has to be construed naturally, by natural words whatever they mean. I am not saying that you squeeze the scope of limitation...this involves balance, the distribution of legislative power involves balancing, somethings are put here, some are put there, and the title is in the favour of the parliament both here in the distribution as well as in 246”

The CJI further added, “It's a taxing power of the state which is restricted by the general regulatory power of the UOI”

Mr Dwivedi refuted arguments that the MMDR Act's provision of royalty and the existence of a comprehensive code under Entry 54 List I implied the exclusion of Entry 50. He asserted that entry 50, being the exclusive power of the state, cannot be ousted, and the term "limitation" does not result in the abstraction of taxing powers from states to Parliament.

“Limitation by its very word - naturally or grammatically cannot result in the abstraction of taxes in mineral rights into the fold of parliament.”

Case details : Mineral Area Development v. M/S Steel Authority Of India & Ors (CA N0. 4056/1999)