Nature of Royalty | Day 4: States power to collect tax is “eclipsed” by the Parliament, argues respondent
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
Senior Advocate Harish Salve, appearing for Easterzone Mining Association, argued for the whole day today. He took a considerable amount of time reading out the entirety of four statutes and three judgements, arguing in favour of state governments’ power to tax mines and minerals. Salve described his thorough reading as a part of a “building block” leading to a larger argument which he aims to continue tomorrow.
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.
Royalty not a tax in its “classic sense”
Salve began by reading the Mines and Minerals (Regulation and Development) Act, 1948. He stated under the 1948 Act, Parliament had first conferred the power of collecting royalty and tax on the Union government. Section 6(i) of the 1948 Act deals with the power of the Union government to make rules on the “levy and collection of royalties, fees or taxes in respect of minerals mined, quarried, excavated or collected.” According to Salve, the Union retained the power of “exaction”, or the power to set the fixed sum of payment of royalties, fees, taxes and more. The Mineral Concession Rules, 1949, contained details of the fixed amounts of royalty for particular minerals. The Rules gave wide powers to the Union government, including the power to grant sanctions and impose conditions on mining leases.
The next “building block” was the Mines and Minerals (Development and Regulation) Act, 1957 (Mines Act 1957). Salve pointed out a curious difference between the 1948 and the 1957 Acts. The phrase “regulation and development” from the 1948 Act was flipped around to read “development and regulation” in 1957. Salve explained that this was indicative of “mineral development” becoming a big priority for Parliament. Interestingly, “mineral development” is mentioned under all the provisions concerning mines and minerals under the Union and the State List of the Constitution.
Entry 54 of the Union List allows Parliament to make laws for the regulation and development of mines and minerals. Similarly, Entry 23 of the State List also gives the same power to the state legislature, but with a catch. The state legislature is subject to provisions of mines and minerals in the Union List, specifically under Entry 54. Salve contended that the Parliament passed the 1957 Act under Entry 54 and diluted the state legislature’s power to regulate mines and minerals. Now, the Union government has the sole authority of making laws on mineral development and regulation. Salve pointed out that the declaration under Section 2 of the Mines Act 1957 clearly stated it.
He then relied on Section 9 of the Mines Act 1957 which states that the Parliament can determine the royalty that needs to be paid to the owner of the land. Royalty, he argued, is no longer a contractual understanding between the mine leaseholder and the owner of the land, it is a statutory provision. Even the Union government cannot increase the royalty for a period of at least three years. He elaborated that unregulated, erratic increase in the royalty would be detrimental to “mineral development.” Additionally, permitting state governments to tax mines and minerals would put an added financial pressure on leaseholders. This would be antithetical to “mineral development.”
Salve admitted that claiming that “royalty is a tax” is a “shorthanded” statement which has led to “conceptual problems.” The royalty is an “exaction” by the Union government which is a permitted limitation under Entry 50 of the State List. A state government can tax mines and minerals under Entry 50. This is subject to laws by Parliament in relation to “mineral development.” Salve construed this royalty as the limitation by Parliament. So even though it is not a tax in its “classic sense” it is “akin to tax.”
No “rigorous reading” on the state’s power to collect tax by Supreme Court yet
Salve argued that the Mines 1957 Act even limited the taxing power of the state government under Entry 50. This was also for the purpose of “mineral development.” He argued that the “architecture” of the Act makes it “incompatible” with the states power to collect tax on minerals. The state power gets “eclipsed.” He clarified that in the hypothetical instance where the Mines Act is revoked, the state will be permitted to tax as it pleases. But until then, it cannot collect tax in addition to the royalty.
Entry 50 has never been fully discussed by the Supreme Court, he said, apprising the Bench that the decision in this case would be the first. However, he wanted to discuss a “trilogy of cases” before entering into a discussion of Entry 50.
The cases were Hingir-Rampur Coal Co. Ltd. v State Of Orissa (1960), State of Orissa v M.A. Tulloch (1963), and Baijnath Kedia v State of Bihar (1969). They dealt with the interplay between Entry 54 and Entry 23. In the second half of the hearings, Salve read aloud several paragraphs from these judgements.
Towards the end, Justice Hrishikesh Roy pointed out that none of these cases have a connection with Entry 50. He pushed Salve to provide a case that is directly related. Salve stated that only India Cements v State of Tamil Nadu (1989) and Kesoram Industries v West Bengal (2004) have discussed Entry 50, which he only wished to elaborate after explaining these other cases. He pointed out that the explanation given in these judgements on Entries 54 and 23 will also apply toEntry 50. He explained that Mines Act 1957 made under Entry 54 also limits Entry 50.
Salve is expected to continue his arguments on 6 March 2024.