Nature of Royalty | Day 5: State governments cannot tax a land based on the value of the mineral extracted, argue respondents
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 concluded his arguments after three days, today. He expanded his previous arguments on how “royalty is akin to tax” and how the Mines and Minerals (Development and Regulation) Act, 1957 limited the state’s taxing power through its “architecture.” He also made submissions on the power of a state government to collect tax on mining lands under Entry 49 of the State List. Entry 49 permits a state government to collect tax on “land and buildings.”
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.
“Nothing left for the state” after the Mines Act, 1957
Salve pointed out that the Mines Act, 1957 has “occupied the field” for taxing, leaving the state government with no power to collect it. He stated that Entry 50 of the State List has three elements which permit such a restriction.
Entry 50 reads, “Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.” There are three elements in this. First, this meant that taxes could be levied “mineral rights.” Second, Parliament was empowered to set “any limitations.” This element, he said, is crucial. Lastly, the limitation could only be made by a “law relating to mineral development.” According to Salve, the Mines Act 1957 covered the three key elements under Entry 50. He contended that the law was made for the purpose of “mineral development” and set a royalty for “mineral rights.” This limited the state’s taxing power as royalty is “akin to tax.”
Salve argued that the structure of the Mines Act, 1957 makes it evident that there is “nothing left for the state government” to make laws on. Chief Justice D.Y. Chandrachud pointed out that Entry 54 of the Union List, which allows the Union government to control the regulation of mines and minerals, does not entrust Parliament with the “entire universe” of a subject. The declaration under Section 2 of the Mines Act, 1957 states that the statute only governs development and regulation of mines up to an “extent.” CJI Chandrachud stated that the “extent” taken over by Parliament is just a part of the “universe carved out” for mines and minerals regulation. This way, anything which is not included in the Act, will still be in the hands of the state governments.
In the hearings so far, the Chief has not missed an opportunity to remind counsel that there is no express provision for diluting the taxing power of the state government.
Salve responded that Parliament is empowered to “take the whole cake or a slice of it.” The Mines Act, 1957 gives Parliament power over all aspects of “mineral development.” This includes imposition of royalty, which is not a tax in its “general sense” but a statutory “exaction” which cannot be modified by a state government . He further pointed out that the central legislation treats states as delegates of the state government. A state government is subject to several terms and conditions stipulated by the Mines Act. Moreover, the rights between the owner of a land and the leaseholder are exhaustive. This means the state government as the land owner cannot add any further conditions when it grants a mining lease to a private person.
Entry 49 of State List does not allow taxing mineral rights
On Day 2, Senior Advocate Rakesh Dwivedi had argued that the state government is empowered to collect tax from mineral land under Entry 49 of State List. The tax would be calculated on the basis of the “mineral value.” Dwivedi explained that “mineral rights” which consist of drilling the land, extracting minerals, and sale of minerals is interconnected with the process of determining the value of the minerals. As this process is carried out on mineral land, the state government is empowered to tax it under Entry 49. Today, Salve contended that Entry 49 has nothing to do with taxing “mineral rights.”
He argued that “mineral rights” are very different from mineral land. He stated that Entry 50 was “decoupled” and kept separate from taxes collected from land. Mineral rights, he said, “are a class apart” and there is no legal nexus of minerals extracted to the value of the land. He illustrated that the value of an aircraft is not added to the value of a land used for parking aircrafts. Previously, Dwivedi had highlighted that taxing mineral land is permissible because minerals are attached to the land, not simply adjacent or associated to it.
India Cements had no “typographical error”
The root of the issue in this case lies in India Cements v State of Tamil Nadu (1989). A seven-judge wrote that “royalty is a tax” which was alleged to be a typographical error. A five-judge Bench in Kesoram Industries v State of West Bengal (2004) concluded that the phrase was in fact a typographical error. The Bench in Kesoram had held that India Cements relied on many precedents which suggested that royalty was not in the nature of tax. Salve argued that although the statement was “shorthanded,” the preceding parts of the judgement clarified that the Supreme Court wrote it intentionally.
He referred to several parts of India Cements to contextualise the meaning behind the phrase that “royalty is a tax.” The judgement had noted that states’ power to tax under Entry 50 of the State List was an occupied field under Section 9 of the Mines Act. Salve also pointed out precedents cited in India Cements—specifically Anant Mills Co Ltd v State of Gujarat (1975) and Laxminarayana Mining Co Bangalire v Taluka Dev. Board (1972). Anant Mills held that Entry 50 expressly deals with mineral rights and cannot be read into Entry 49. Further, Laxminarayana Mining held that the states power to regulate and tax mines and minerals can be restricted by a Union declaration made under Entry 54 of the Union List. Salve insisted that it was clear that the Court had indeed meant to hold that “royalty is a tax.”