Nature of Royalty | Day 7: Respondents argue that Union can collect tax on mineral using residuary powers

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, after four days of arguments, the respondents concluded their submissions on the nature of royalty paid by mine leaseholders. 

Senior Advocate Abhishek Manu Singhvi, appearing for the Karnataka Iron & Steel Manufacturers Association, opened the day’s arguments. His arguments were centred around the nature of royalty, Parliament’s power to tax, and the difference between “mineral rights” and “minerals.”

Senior Advocate Arvind Datar was the last counsel to argue on the respondent’s side. He argued that the decision in Kesoram Industries v West Bengal (2004) was incorrect. He also urged that Entry 50 of the State List— which allows state governments to tax “mineral rights” yields to Parliament law on mines and minerals. 


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.

Singhvi: “Royalty” is in the nature of “tax” as it is fixed by Parliament

Singhvi argued that the characteristics of “royalty” charged under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) was similar to that of a “tax.” To buttress his argument, he relied on Article 366(28) which defines “taxation”as including “tax and impost.” An “impost”, he said, is a “compulsory levy.” Similarly, the “royalty” under Section 9 of the MMDR Act is also a compulsory levy. Therefore, it would be a “tax”. 

Further, he pointed out that the “dead rent,” under Section 9B, charged for the mineral land when minerals are not extracted, also comes under the same category of an impost or tax. He explained that the royalty and dead rent in a mining lease is not a contractual process where two parties negotiate, it is a fixed amount that Parliament has dictated. Further, also asserted that Parliament alone retains the power to amend royalty rates every three years. During the next half of today’s hearing, Senior Advocate S.K. Bagaria echoed Singhvi’s view. He also added that all “financial obligations” pertaining to mines and minerals were “occupied” by the Union under the MMDR Act. This means that state governments cannot impose more financial burdens. 

Chief Justice D.Y. Chandrachud appeared doubtful. He pointed out that if Singhvi’s argument is accepted, all enactments which consist of statutory contracts where a compulsory levy is stipulated would fall under the category of a “tax.”. In response, Singhvi quickly referred to Section 25 of the MMDR Act which deals with recovery of royalty amount. The provision, Singhvi said, unlike other statutory contracts, enforces the payment of royalty through “coercive methods.” Earlier, Senior Advocate Harish Salve also for the respondents, had argued that the royalty was a tax as the MMDR Act imposes a penalty for non-payment of royalty. If the royalty was not a tax, then the question of penalty or recovery of tax amount would not arise. 

Singhvi: Private party concerns cannot guide the decision of a nine-judge bench

“Don’t let the tail wag the dog,” Singhvi remarked. He was contesting arguments made by Senior Advocate Rakesh Dwivedi on Day 1 relating to private mineral land owners. Dwivedi, appearing for Mineral Area Development Authority had argued that royalty should not be synonymous to tax. Doing so, he said, would lead to an absurd situation where a private person who owns a mineral land will receive “tax” while receiving a royalty. 

In response, Singhvi contended that “99 percent” of mineral land today was owned by state governments. Therefore, the concern of “tax” being paid to private owners will rarely arise. Further, he stated, private owners have to go through an arduous process of different authorisations from the Union government before leasing their land. Moreover, private owners cannot enforce the royalty under Section 25 of the MMDR Act. He contended that the concerns of private landowners cannot “wag” the decision of the nine-judge bench. 

Singhvi: Kesoram Industries commented on a decision by a larger bench 

Singhvi briefly addressed the alleged “typographical error” in India Cements v State of Tamil Nadu (1989). He stated that by commenting on this error in Kesoram Industries, the Court had “set the cat among the pigeons.” This is because a five-judge bench had decided on the correctness of a seven-judge bench decision. . The bench in Kesoram Industries, Singhvi asserted, should have referred India Cements to a nine-judge bench right away. Interestingly, Singhvi also pointed out the Bench that the same judge who held that “royalty is a tax” in India Cements reiterated that decision in another judgement a few months later. This proved that the Supreme Court intended to say that royalty was in the nature of a tax. 

Union empowered to collect tax directly

According to Singhvi, the MMDR Act seizes the power of the state government to tax mineral rights. This enabled the Union to collect tax under Entry 97 of the Union List. Entry 97 gives the Union residuary powers to collect tax on subjects that are not enumerated in the State and Concurrent List. Similarly, Senior Advocate Darius Khambata also argued that once the state’s power to tax is prohibited, the question of ‘who will collect the tax?’ creates a “vacuum.” This question is answered under Entry 97. 

Singhvi added that Entry 54 of the Union List which grants the Union power to regulate mine and minerals should be harmoniously read with Entry 97. CJI Chandrachud however was unconvinced. He pointed out that Singhvi’s arguments posed a “grave danger” to India’s federal structure as Parliament would be empowered to take away any taxing power of state governments and start taxing them under Entry 97. Justice Hrishikesh Roy also added that the Union and state governments taxing powers are “clearly divided.” Further, a residuary power of the Union government cannot be used to tax mines and minerals which is an express taxing provision under Entry 50 of the State List. 

Over the course of the hearings, the Bench has been consistently pointing out that there is no declaration under the MMDR Act which claims to dilute the state’s taxing power. ” 

States right only to tax “mineral rights” and not “minerals” 

On Day 2, Senior Advocate Rakesh Dwivedi had argued that mineral land can be taxed on the basis of the value of minerals extracted from the mineral land. He had contended that “mineral rights” involved the entire process of extracting minerals. Thus, there is a “nexus” between the mineral rights and the value of the minerals. This argument did not sit well with the respondents. Singhvi relied on the dissenting opinion of Justice K.N. Wanchoo in Hingir Rampur Coal Company v State of Orissa (1961) which differentiated between “mineral rights” and “minerals.” He stated that Entry 50 of the State List specifically claimed that the tax was on “mineral rights” and not “minerals.” Thus, the value of the minerals extracted could not be considered while determining the tax on “mineral rights” as the minerals are separate from the land. 

Senior Advocate A.K. Ganguli added that the concept of “dead rent” under Section 9B is for unused mineral land. The mineral land is the “mineral right” that is granted to the leaseholder, and only that can be taxed by collecting the “dead rent” or “royalty.” 

CJI Chandrachud interjected. He pointed out that often, stamp duties in a sales agreement are also decided on the basis of the property value. This would mean that the value of the minerals have a bearing on the quantum of the tax. Singhvi suggested that the nine-judge bench should determine guidelines for deciding the quantum of tax. He reiterated that Entry 50 very carefully mentions “mineral rights” and not “minerals.”

Datar: States taxing power “yields to” the Unions limiting power 

Datar submitted that under the Constitution, state governments have 16 taxing powers. Out of them, three taxing entries in the state list use the phrase “subject to.” This phrase, Datar asserted, was recently interpreted by the Supreme Court to mean “yields to.” Therefore, he concluded that Entry 50 of the State List, which is “subject to” Parliamentary law,actually yields to it. In this context, the restrictions the MMDR places on tax were “financial limitations” made for “national interest.”

Datar then argued that Kesoram Industries was incorrect as it considered “cess on royalty as a tax” but not royalty as a tax. He stated that there is a “logical fallacy” as “99.99 per cent cases of tax law” suggest that cesses and surcharges are “piggyback” levies which are related to “mother levies.” He added that it would be “paradoxical” to say that the piggyback levy (cess) is a tax but the mother levy (royalty) is not. 

Datar’s arguments were interrupted by a battery of lawyers who were eagerly waiting behind him to rush to the spotlight. After hearing them briefly, the Chief directed Datar to return to the podium and close arguments for the respondents. 

This time, he referred to debates from the House of Commons on the “unlimited power” of states to tax mines and minerals. At that time, Entry 36 of the Federal List of the Government of India Act, 1935, which is very similar to Entry 54 of the Union List, was being discussed. He submitted that the provincial legislature (state legislature) could not be granted unlimited power to tax mines and minerals as they would impede the federal legislatures (Parliament) power to regulate mines and minerals. He concluded by stating that that the trend continued in the Constitution of India when it was drafted. Ultimately, some limitations were necessary to permit Parliament to regulate mines and minerals without interference from the state governments due to wide taxing powers. 

Dwivedi will conclude his rejoinder arguments tomorrow that is 14 March 2024.