Supreme Court: In a matter concerning the distribution of legislative powers between the Union and the States on the taxation of mineral rights, the Nine Judge Constitution Bench of Dr. DY Chandrachud, CJI, Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih JJ. has held that royalty paid by mining operators to the Central government is not a tax and that States have the power to levy cesses on mining and mineral-use activities. Whereas, Justice BV Nagarathna, gave a dissenting opinion.
The Majority held the following:
- Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
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Entry 50 of List II does not constitute an exception to the position of law laid down in M. P. V. Sundararamier & Co. v. State of Andhra Pradesh, (1958) 9 STC 298. The legislative power to tax mineral rights vests with the State legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject-matter.
Background:
Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule to the Constitution. The entrustment of the subject to the State legislatures under Entry 23 of List II is made subject to the provisions of Entry 54 of List I.
Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957 (‘MMDR Act’) in exercise of its legislative powers under Article 246 of the Constitution. The MMDR Act is a comprehensive code for the regulation of mines and development of minerals. Section 9 provides that the holder of a mining lease shall pay royalty in respect of any mineral removed or consumed from the leased area at the specified rates.
In India Cement (supra) , a seven-Judge Bench of this Court held that royalty is tax, and the State legislatures lack competence to levy taxes on mineral rights because the subject-matter is covered by the MMDR Act. The Court also held that royalty cannot be used by the State legislature as a measure of tax on mineral-bearing lands under Entry 49 of List II. Later in time, in State of West Bengal v. Kesoram Industries Ltd, 2004) 10 SCC 201 a Constitution Bench of this Court held that the decision in India Cement (supra) stemmed from an inadvertent error and clarified that royalty is not a tax.
Thereafter, the State legislatures exercised their legislative powers to impose taxes on mineral- bearing land in pursuance of Entry 49 of List II by applying the mineral value or royalty as the measure of the tax. The constitutional validity of these levies was challenged before the High Courts on the ground that they were beyond the legislative competence of the State legislatures. One such matter came before the Patna High Court, wherein the Court held that tax was not within the scope of Entry 49 of List II of the Seventh Schedule. The correctness of the High Court’s decision was assailed before this Court. On 3-03-2011, a Bench of three Judges noticed the divergence between India Cement (supra) and Kesoram (supra) and referred the matter to a Bench of nine Judges.
Issues, Analysis and Decision:
1. What is the true nature of royalty determined under Section 9 read with Section 15(1) of the MMDR Act? Is royalty in the nature of tax?
Whether Royalty is tax?
The Court noted that the MMDR Act was enacted by Parliament in exercise of its legislative power derived from Article 246 read with Entry 54 of List I. The Act seeks to provide for the regulation of mines and development of minerals under the control of the Union. The Court said that the declaration indicates that Parliament intends to take the regulation of mines and development of mines under the control of the Union to the extent indicated in the statute.
The Court noted that rates of royalty were primarily governed by the terms of lease prior to the enactment of the MMDR Act. Once a mining lease was entered into between a lessor and lessee, the rates of royalty would remain static during the subsistence of the lease. Section 9 of the MMDR Act has enabled the Central Government to examine the rates of royalty in respect of all minerals and modulate them periodically after taking into consideration various factors, including the uniformity of mineral prices.
The Court clarified that the primary reason for empowering the Central Government to fix the rate of royalty could be traced to the Industrial Policy Resolution which underscored the active and predominant role of the State in organizing and utilizing mineral resources. The State Governments were not empowered to determine royalty to maintain a uniform regime of royalty across India. This was intended to promote domestic industry and maintain competitive commodity prices in the international market.
Concerning the meaning of ’Royalty’, the Court said that Royalty is generally understood as compensation paid for rights and privileges enjoyed by the grantee.
The Court noted the essential characteristics of royalty are that (i) it is a consideration or payment made to the proprietor of minerals, either the government or a private person; (ii) it flows from a statutory agreement (a mining lease) between the lessor and the lessee; (iii) it represents a return for the grant of a privilege (to the lessee) of removing or consuming the minerals; and (iv) it is generally determined on the basis of the quantity of the minerals removed.
The Court said that, like royalty, dead rent is also a statutory imposition and an integral part of the mining lease, but it generally does not serve as a consideration for the removal or consumption of minerals. The dead rent is determined by the area of land covered by the lease. Imposition of dead rent ensures that the proprietor obtains a fixed rent from the lessee even if the mine remains unworked. Therefore, dead rent is not in addition to royalty but an alternative.
If royalty is a consideration paid by the lessee to the lessor as part of the terms of a mining lease, can this payment be considered tax?
The Court said that the expression “tax” under Article 265 includes every kind of impost in the form of a compulsory exaction. An impost is a compulsory exaction. The power to levy an impost is an incident of sovereignty. A liability arising out of contract cannot be termed as an impost or tax. A consideration paid under a contract to the State Government for acquiring exclusive privileges and rights with respect to a particular activity cannot be termed as an “impost” or “tax” under Article 366(28) of the Constitution.
After noting the divergence between India Cement (supra) and Kesoram (supra), the Court opined that royalty does not meet the characteristic requirements of a tax, as a royalty is a consideration paid by a mining lessee to the lessor for enjoyment of mineral rights and to compensate for the loss of value of minerals suffered by the owner of the minerals. The failure of the lessee to pay royalty is considered to be a breach of the terms of the contract, allowing the lessor to determine the lease and initiate proceedings for recovery against the lessee.
The Court said that Section 9 of the MMDR Act statutorily regulates the right of a lessor to receive consideration in the form of royalty from the lessee for removing or carrying away minerals from the leased area. Prior to the enactment of the MMDR Act, such a condition was treated as part of a mining lease. The object of empowering the Central Government to specify rates of royalty for major minerals was to ensure a certain level of uniformity in mineral prices in view of the domestic and international markets.
The Court said that there are major conceptual differences between royalty and a tax:
- the proprietor charges royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign;
- royalty is paid in consideration of doing a particular action, that is, extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; and
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royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.
The Court said that under the MMDR Act, the Central Government fixes the rates of royalty, but it is still paid to the proprietor by virtue of a mining lease. In case the minerals vest in the Government, the mining lease is signed between the State Government (as lessor) and the lessee in pursuance of Article 299 of the Constitution. Through the mining lease, the Government parts with its exclusive privilege over mineral rights. A consideration paid under a contract to the State Government for acquiring exclusive privileges cannot be termed as an impost. Since royalty is a consideration paid by the lessee to the lessor under a mining lease, it cannot be termed as an impost.
After referring to Rules 27 and 45, Mineral Concession Rules 1960, the Court said that the principles applicable to ‘royalty’ also apply to ‘dead rent’ because:
- dead rent is imposed in the exercise of the proprietary right (and not a sovereign right) by the lessor to ensure that the lessee works the mine, and does not keep it idle, and in a situation where the lessee keeps the mine idle, it ensures a constant flow of income to the proprietor;
- the liability to pay dead rent flows from the terms of the mining lease;
- dead rent is an alternate to royalty; if the rates of royalty are higher than dead rent, the lessee is required to pay the former and not the latter; and
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the Central Government prescribes the dead rent not in the exercise of its sovereign right, but as a regulatory measure to ensure uniformity of rates.
Thus, the Court held that both royalty and dead rent do not fulfil the characteristics of tax or impost. Accordingly, the Court concluded that the decision in India Cement (supra) to the effect that royalty is a tax is incorrect.
2. What is the scope of Entry 50 of List II of the Seventh Schedule? What is the ambit of the limitations imposable by Parliament in exercise of its legislative powers under Entry 54 of List I? Does Section 9, or any other provision of the MMDR Act, contain any limitation with respect to the field in Entry 50 of List II?
The Court analysed the Inter-relationship between Entry 50 of List II and Entry 54 of List I.
Taxes on mineral rights
The Court noted that the expression “taxes on mineral rights” was originally used in the Government of India Act, 1935. The Constitution uses a similar expression.
The Court also noted that the Constitution does not define “mineral rights”. The expression has not been defined in the MMDR Act or the rules framed under it. Though the expression “mineral rights” is used in Entry 50 of List II, it does not find mention in any of the other related legislative entries — Entry 54 of List I and Entry 23 of List II. Thus, the Court gave the expression an ordinary and natural meaning by adopting an interpretative approach which eschews rigidity. Mineral rights are inextricably connected to property. Any understanding of “mineral rights” must be prefaced on an understanding of the basics of property law.
Concerning the scope and ambit of taxes on mineral rights, the Court said that the working of a mine can be undertaken either by the owner or by another to whom the right to work the mine has been granted by a mining lease. In the latter case, the lessee has to pay royalty to the lessor as a consideration for removing or consuming the minerals from the leased area. The right to receive royalty is an integral part of the mineral rights of the lessor. However, royalty is not a tax. Therefore, royalty would not be comprehended within the meaning of the expression “taxes on mineral rights.” The scope of taxes on mineral rights includes taxes on the right to extract minerals. Taxes on mineral rights also take within their fold other aspects relating to the exercise of mineral rights such as working the mines and dispatching minerals from the leased area. However, the legislature must ensure that the exercise of the taxing powers relatable to the field under Entry 50 of List II does not foray into a duty of excise or a tax on the sale of minerals.
The Court, while disagreeing that the incidence of a tax on mineral rights would necessarily have to be on the owner of the land, said that the taxable event with respect to taxes on mineral rights will be the exercise of mineral rights. The incidence of the tax on mineral rights depends upon who is exercising the right. A tax under Entry 49 of List II is not only levied on the owner of the land, but also an occupier. Similarly, a tax on mineral rights could be levied on any person who has an interest in minerals.
The Court said that the field of tax on mineral rights vests with the State legislature. Parliament cannot impose a tax on mineral rights under Entry 54 of List I. Parliament cannot resort to its residuary powers to tax mineral rights when the subject matter is specifically enumerated in Entry 50 of the State List. The fixation of the rates of royalty under Section 9 can be validly traced to Entry 54 of List I because royalty is not a tax. The fixation of the rates of royalty falls with the regulatory powers of Parliament under Entry 54 of List I. The decisions in Mahalaxmi Fabric Mills (supra) Saurashtra Cement (supra), and Mahanadi Coalfields (supra) do not reflect the correct position of law.
[Mineral Area Development Authority v. Steel Authority of India, 2024 SCC OnLine SC 1796, decided on 25-07-2024]
*Judgment Authored by: CJI Dr. DY Chandrachud
