Nature of Royalty | Day 6: No Union-state turf war, collection of tax on minerals a consultative process, Solicitor General argues

Nature of royalty paid by mine leaseholders

Judges: 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, Solicitor General Tushar Mehta concluded his arguments on the nature of royalty paid by mine leaseholders. So far, the arguments on the respondents side has largely been on how “royalty is akin to tax.” In a significant departure from that line of argument, Mehta contended that royalty is not a tax at all. Instead, royalty, rent, and other fiscal obligations which the state governments collect under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) are exhaustive. State governments, therefore, cannot impose any other fiscal obligations beyond it, including tax.

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.

Mehta: Taxing power can be prohibited to stay on par with the global market 

Mehta argued that collection of tax is not a “federalism issue,” and that there is no turf war between states and the Union government. He contended that it is a classic example of “cooperative federalism” instead. He relied on Section 9(3) of the MMDR Act, which permits the Union government to revise the price of royalty every three years. This process is carried out after considering inputs from all stakeholders such as mining associations, industrialists, and the state governments. This means that state governments also have a say in how the royalty amount is decided. 

Justice A.S. Oka pointed out that the MMDR Act makes no mention of this consultative process. Mehta responded that the process is an inherent part of it. This consultative process was recorded in a 2019 report published by the Ministry of Mines, on the revision rates of royalty and dead minerals. This report is annexed in his written submissions on page 113. 

Chief Justice D.Y. Chandrachud pointed out that even the report proceeded with the assumption that state governments could impose a tax. Mehta quickly pointed out that the only reason for this was State of West Bengal v Kesoram Industries (2004) which held that the phrase “royalty is a tax” was a typographical error. The team behind the report, therefore, was compelled to move forward with this assumption.

According to Mehta, the MMDR Act has completely restricted the state governments from collecting tax on mines and minerals under Entry 50 of the State List. They cannot collect taxes—only royalty and “dead rent” which Parliament has permitted them to receive under the Act. He justified this by pointing out how haphazard taxation will lead to state governments recovering payments in addition to royalty. Earlier, Senior Advocate Harish Salve for Easterzone Mining Association had argued that state governments would indirectly increase royalty amount by adding tax. Salve stated that the royalty was “akin to tax” under the MMDR Act, 1957. Mehta steered away from Salve’s contention and argued that royalty is not in the nature of tax but a “consideration payable by mining lessees, at the uniform rate prescribed by the Central Government” under Section 9. Mehta contended that all fiscal obligations paid by a mine leaseholder goes to a state government, which is not provided to the Union government who is generously “parting” with its “natural resources.” 

The Solicitor General also stated that the higher tax would lead to a lesser demand in the domestic market and increase imports of the mineral from other countries at a cheaper price. This will impact the revenue of the nation. CJI Chandrachud pointed out that no state would be “foolish” to impose a higher tax as the state’s revenue would also be impacted. Mehta highlighted how a prohibition on the taxing power was in “public interest” to compete with mineral prices in the global market. 

CJI Chandrachud suggested that Parliament could cap the taxing power of the state government. The Chief has been proposing this theory to each arguing counsel since Day 3 of arguments. Mehta insisted that the MMDR Act has completely taken away states’ power to tax—the question of a limit does not arise. Justice B.V. Nagarathna asked—where did the MMDR Act stipulate such a thing?. Mehta stated statutes do not include negative provisions which abridge state legislatures powers. He contended that the “architecture” of the Act implies that the taxing power under Entry 50 is completely restricted. 

Light-heartedly Mehta gave an example involving his fellow counsel Senior Advocate Abhishek Manu Singhvi. Singhvi cannot “occupy my chair” he said, as the chair was already assigned to him. The Solicitor was explaining that a state government cannot enter the field of taxation as Parliament had already assigned that “chair” to the Union government. CJI Chandrachud stated that by this logic, Singhvi cannot occupy his own chair either, as Parliament had restricted all powers of state legislatures. 

Mehta: Tax on mineral land is impermissible 

Entry 49 of the State List allows state governments to collect tax on lands and buildings. On Day 2, Senior Advocate Rakesh Dwivedi stated that Entry 49 also extends to mineral land, which states can tax on the basis of the value of the minerals extracted. 

Mehta retorted that relying on Entry 49 is a “desperate argument.” He referred to Entries 23 and 50 of the State List and Entry 54 of the Union list which deal with the constitutional scheme of mines and minerals. According to Mehta, the Entry 49 approach is the last resort to justify the collection of tax, used only if the other Entries are unavailable. Mehta argued that the specific entries which deal with the tax of mines and minerals can justify collecting tax. He relied on Waverly Jute Mills Co. Ltd. v Raymon & Co. (India) (P) Ltd. (1963), which held that if “there are two entries, one general in its character and the other specific, the former must be construed as excluding the latter.”

Singhvi gave a brief overview of points which he will be arguing tomorrow i.e. 13 March 2024.