Nature of Royalty | Day 3: Union’s power to collect tax evident in the constitutional scheme for mines and minerals, argues Union
Nature of royalty paid by mine leaseholdersJudges: D.Y. Chandrachud CJI, Hrishikesh Roy J, A.S. Oka J, B.V. Nagarathna J, J.B. Pardiwala J, Manoj Misra J, Ujjal Bhuyan J, S.C. Sharma J, A.G. Masih J
Today, the Union government began arguments on Parliament’s power to collect tax from mine leaseholders. As opening batsman for the Union, Attorney General R. Venkataramani started arguments and was followed by Senior Advocate Harish Salve who stated that he will maintain the crease for two days. Salve appeared for Easterzone Mining Association and argued that the Union can collect tax as it is equivalent to royalty.
Background
On 28 December 1957, the Union Government enacted the Mines and Minerals (Development and Regulation) Act, 1957 (‘the Mines Act’). Under this, the control of mines and minerals was brought under the ambit of the Union. Section 9 of the Act stated that mining lease holders have to pay royalty to the Union government for any “mineral removed or consumed” from the leased area.
On 19 July 1963, the Tamil Nadu government granted a mining lease to India Cement Ltd., a public limited company for extracting limestone and kankar. The royalty was fixed under the Mines Act. Meanwhile, under Section 115(1) of the Madras Panchayat Act, 1958 (‘Madras Act’), imposed a cess on the land revenue paid to the Union Government.
India Cement challenged this provision in the Madras High Court, claiming that the Tamil Nadu government lacked the legislative competence to levy cess on royalty. The Madras High Court upheld the law.
India Cements appealed against the decision in the Supreme Court. On 25 October 1989, in India Cement Ltd v State of Tamil Nadu, a seven-judge bench of the Supreme Court held that the royalty was indirectly related to the minerals extracted. The decision found that “royalty is a tax” under the Mines Act. A cess on royalty being a tax on royalty was beyond the State’s legislative competence since the Union’s Mines Act “covers the field.”
On 15 January 2004, a five-judge bench of the Supreme Court, in State of West Bengal v Kesoram Industries Ltd (‘Kesoram Industries’), by 3:2 majority, held that there had been a grave, “inadvertent” clerical error in the text of India Cements. The majority judgement held the Bench had mistakenly written that “royalty is a tax” while meaning that “cess on royalty is a tax.” They noted that India Cement had relied on case laws which had clearly stated that royalty was not a tax.
The Court recorded that this “typographical error” had thrown jurisprudence in disarray. They clarified that royalty was not a tax since even a private owner of the property, who is not entitled to charge tax, could charge royalty.
Meanwhile, in May 1999, a writ petition was filed challenging the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992. It imposed additional cess and taxes on land revenue from mineral bearing lands. This would be the genesis of a case called Mineral Area Development Authority v Steel Authority of India, which would eventually lead to the creation of the current nine-judge Constitution Bench. On 7 April 2004, the Court referred Mineral Development Area Authority, to a three-judge bench given the “far reaching implications” of the constitutionality assessment.
On 30 March 2011, a three-judge Bench consisting of Justices S.H. Kapadia, K.S. Panicker Radhakrishnan and Swatanter Kumar stated that there was a “prima facie” conflict between the decisions in India Cements and Kesoram Industries. They referred the matter to a nine-judge bench.
This is the second-oldest pending Constitution Bench decision in the Supreme Court and would have been pending for 9044 days by the first day of hearing on 27 February 2024.
Venkataramani: Narrow reading restricts Parliament to make laws for mineral development
The Attorney General began by referring to a study by the World Bank which lists 110 nations who have used “tax” and “royalty” interchangeably. This globalised context was necessary before looking at the constitutional scheme on mining, he stated. He argued that the constitutional provisions on mines and mineral developments cannot be considered in a narrow sense where its meaning can never be altered.
Chief Justice D.Y. Chandrachud interrupted to suggest that there were two critical differences between Entries 23 and 50 of the State List. On one hand, Entry 23 of the state list deals with the “regulation of mines and mineral development” subject to the provisions of the Union List on “regulation and development”. Entry 50 on the other hand is regarding “taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.”
The Chief stated that Parliament has higher control under Entry 23 because it makes the state’s scope subordinate to provisions in the Union list. Whereas Entry 50, is only subject to parliamentary law imposing a limitation on that taxing power. This way, when the Parliament made the law to regulate mines and minerals under Entry 54 of the Union list, it denuded the states power to do so under Entry 23. Entry 54 of the Union List discusses the Union’s power to regulate mines and minerals for the purpose of mineral development.
Venkataramani replied that the Chief is considering entries exclusively, whereas they should be seen as “one family.” He argued that if these entries were to be dissected then the scope of parliamentary legislation would be reduced. Moreover, the entries should not be interpreted “narrowly” as regulation of mineral development is vested with Parliament in the “larger public interest.”
The Chief countered that the Constitution has stipulated a very specific list of items on which the state can levy tax under the state list. Anything beyond a narrow, literal interpretation would dilute the framework.
Until this point in the hearing, the Attorney General had not expressly stated that the Union should be allowed to tax mines and minerals. CJI Chandrachud explicitly asked—was the Union arguing thatParliament can tax minerals? “Yes or no?” the Chief pressed. If yes, what empowers the Parliament to do so? Venkataramani responded that the Parliament cannot tax minerals under a “literal reading” of Entry 50. However, according to him, a literal reading was not advisable in this context.
Venktaramani meant that all Constitutional provisions in the Union and State list related to mines and minerals must be harmoniously interpreted. This would require moving past a narrow interpretation which would ultimately restrict the Union’s ability to collect tax.
Justice B.V. Nagarathna stated that states’ power to collect tax cannot be whittled down, it can only be limited. For instance, the Union can direct a state to not collect tax for a specific period of time. Justice Hrishikesh Roy stated, “Mr. Attorney General. There are many actors here…But you are the protagonist. You are speaking for the Union… We are trying to test the proposition you are canvassing before us. By virtue of what you are saying, are we diluting or taking away the power of the state to collect tax?” Venkataramani replied, “I am not suggesting that the doors for the [states’] taxing power need to be completely closed.”
As his brother and sister judges asked questions, CJI Chandrachud had his head down and appeared to be making notes. He looked up and announced that he was studying various entries in the Union, State, and Concurrent list “for the last five minutes.” He pointed out that Entry 50 was not expressly made subordinate to Entry 54 of the Union list. Other entries in the State list are expressly marked as subordinate. Thus, the framers chose not to put Entry 50 as a subordinate of Entry 54 of the Union list. Justice Nagarathna agreed and pointed out that the power to collect tax on the same subject cannot be in both Union and State list.
Justice Roy then added, “We [the Bench] have disturbed you too much.” The Bench directed him to proceed with his remaining arguments. Venkataramani concluded his arguments by reading aloud his 12-page written submission.
As he concluded his hour-long arguments Venkataramani quipped, “In the timelines for argument it is said that the Attorney General will take two days, I think that is a typographical error.”
Salve: Royalty is “akin to tax”
Salve argued that Entry 50 of the State List is a “sui-generis” entry. He added that there is no dilution of power under Entry 50 by the Union. He observed that the framers of the Constitution were aware of the “thick black line” between the taxing powers of the Union and the state. They are “neatly divided”—the state government could levy a tax, the union government could cap that tax. The Union’s ability to impose this cap (or limitation) was embedded in Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 where it could set the exact royalty which the state government may recover.
Salve insisted that this royalty, is “akin to tax.” The issue with seeing them as separate is that if the State exercised its power under Entry 50 to levy tax, they would effectively be earning a royalty under Section 9 and a tax under Entry 50. This would indirectly increase the royalty by charging the separate tax. The Union’s ability to limit this tax is crucial as not all states are “evenly endowed” with minerals.
CJI Chandrachud responded that Parliament can tackle this issue by instructing states to not charge additional tax above a limit set under Entry 50. Salve cheekily replied that Section 9 facilitated precisely that. He argued that Section 9 is an “exaction” fixed by Parliament. It does not usurp the power to collect tax, it prescribes a tax that is to be paid to the state government which owns the land, and simply calls it a royalty.