The Supreme Court has presided over the controversy of whether ‘Royalty’ Is A ‘Tax’ or not.
The court concluded that royalty is in the nature of a tax or an exaction. It is not merely a contractual payment but a statutory levy under Section 9 of the Act (Section 9A relating to dead rent). The liability to pay royalty does not arise purely out of the contractual conditions of a binding lease. The payment of royalty to the Government is a tax in view of Entry 50 – List II being subject to any limitations imposed by Parliament by law in the context of Entry 54 – List-I read with Section 2 of the MMDR Act, 1957.
The court observed that Entry 50 – List II is an exception to the position of law laid down in MPV Sundararamier vs. State ofAndhra Pradesh, AIR 1958 SC 468 (“MPV Sundararamier”). Moreover, in the said case, the scope and ambit as well the implication of Entry 54 – List I on Entry 50 – List II was not considered at all. Therefore, the principle stated in MPV Sundararamier is foreign to the instant case and the ratio of the said decision does not apply to the present case. No doubt, the legislative power to tax mineral rights vests with the State legislature but Parliament, though may not have an express power to tax mineral rights under Entry 54 – List I, it being a general Entry, Parliament can, nevertheless on the strength of Entry 54 – List I read with Section 2 of the MMDR Act, 1957, impose any limitation on the power of the States to tax mineral rights under Entry 50 – List II. Sections 9 and 9A of the MMDR Act, 1957 are two such instances of limitations imposed by the Parliament on the taxing power of the State under Entry 50 – List II. This is a unique Entry and must be given its true and complete meaning and while interpreting the same one cannot be swayed by the principles laid down in MPV Sundararamier as the same do not apply in the instant case. At the cost of repetition, it is stated that Entry 50 – List II never came for consideration in the case.
The court stated that Parliament is not using its residuary power with respect to imposing any limitation on the taxing power of the State under Entry 50 – List II. In fact, even the Validation Act, 1992 enacted by Parliament was upheld having regard to Entry 54 – List I read with Section 2 of the MMDR Act, 1957 and not Entry 97 – List I.
Entry 50 – List II envisages that Parliament can impose “any limitations” on the legislative field created by that Entry under a law relating to mineral development. The MMDR Act, 1957 has imposed the limitations as envisaged in Entry 50 – List II in Sections 9, 9A and 25, etc. on the strength of Entry 54 – List I.
The court concured with the Chief Justice that the scope of the expression “any limitations” under Entry 50 – List II is wide enough to include the imposition of restriction, conditions, principles as well as a prohibition by Parliament by law.
The State legislatures have legislative competence under Article 246 read with Entry 49 – List II to tax lands and buildings but not lands which comprise of mines and quarries or have mineral deposits as mineral bearing lands do not fall within the description of lands (under Entry 49 – List II). Similarly, States can tax such mineral bearing lands which are not covered within the scope of MMDR Act, 1957 i.e., minor minerals, under Entry 50 – List II and not under Entry 49 – List II as tax on exercise of mineral rights. Thus, mineral bearing lands cannot be taxed under Entry 49 – List II.
The court said that the majority decision in Kesoram is a serious departure from the law laid down by the seven- judge Bench in India Cement which was wholly unwarranted and therefore, in my view, the said majority judgment is liable to be overruled and is overruled to the extent of holding that royalty is not a tax.
At the same time the court stated, “the conclusion that ‘royalty’ is a ‘tax’ is the only exception to the position of law laid down in MPV Sundararamier. Of course, the scope of expression “any limitations” in Entry 50 – List II is wide enough to include the imposition of restrictions, conditions, principles as well as a prohibition.”
The court opined that the judgments in India Cement, Orissa Cement, Mahalaxmi Fabric Mills, Saurasthra Cement, Mahanadi Coalfields, Kannadasan excluding to the extent overruled in Tata Iron and Steel, and Tata Iron and Steel are correct and therefore are binding precedent and cannot be overruled. On the other hand, the majority judgment in Kesoram, is overruled to the extent it holds that royalty is not a tax.
The court has directed the registry to place the matters before the Chief Justice of India for directions on listing the matters before the appropriate Bench.
ISSUES RAISED
Whether royalty is tax?
Position Of Royalty under the MMDR Act.
Purpose of Section 9 of the MMDR Act.
Contours of a mining lease
FACTS OF THE CASE
The batch of appeals bears on the distribution of legislative powers between the Union and the States on the taxation of mineral rights. The legislative entry which lies at the core of the present reference is Entry 50 of List II of the Seventh Schedule to the Constitution. The entry deals with taxes on mineral rights subject to “any limitations imposed by Parliament by law relating to mineral development.” Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule. The entrustment of the subject to the State legislatures under Entry 23 of List II is made subject to the provisions of Entry 54 of List I.
Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957 in exercise of its legislative powers under Article 246 of the Constitution. The subject which the legislation predominantly covers is relatable to Entry 54 of List I. The MMDR Act is a comprehensive code for the regulation of mines and development of minerals. Section 9 provides that the holder of a mining lease shall pay royalty in respect of any mineral removed or consumed from the leased area at the specified rates. In India Cement Ltd. v. State of Tamil Nadu,2 a seven-Judge Bench of this Court held that royalty is tax and the state legislatures lack competence to levy taxes on mineral rights because the subject-matter is covered by the MMDR Act. The Court also held that royalty cannot be used by the State legislature as a measure of tax on mineral-bearing lands under Entry 49 of List II. Later in time, in State of West Bengal v. Kesoram Industries Ltd. a Constitution Bench of this Court held that the decision in India Cement stemmed from an inadvertent error and clarified that royalty is not a tax.
In the aftermath of India Cement (supra) and Kesoram (supra), State legislatures exercised their legislative powers 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.4 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. The constitutional validity of these levies was challenged before the High Courts on the ground that they were beyond the legislative competence of the State legislatures. The levies were also assailed on the ground that they were in violation of the law laid down in India Cement.
Case Information
Case Name : Mineral Area Development Authority & Anr. V/s M/S Steel Authority of India & Anr Etc.
Judicial Level & Location : Supreme Court
Appeal Number : Civil Appeal Nos. 4056-4064 of 1999
Date of Ruling : 25/07/2024
Judges : Justice B.V. Nagarathna
Counsel for Tax Payer: S Niranjan Reddy
Counsel for Department : Attorney General, Solicitor General
