Read Justice BV Nagarathna’s sole dissent in SC’s verdict on ‘royalty’ as tax and States power to levy cess on mineral rights

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5 months ago

Justice Nagarathna dissent on ‘royalty’ as tax

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, she held that:

The concept of royalty is being considered from the perspective of Section 9 of the MMDR Act, 1957 and not from any other context. Thus, viewed from the statutory framework of the MMDR Act, 1957 passed by the Parliament on the strength of Entry 54 — List I of the Seventh Schedule of the Constitution of India and having regard to Section 2 of the said Act, royalty is in the nature of a ‘tax’ or an ‘exaction’.
Section 9 of the MMDR Act, 1957 is a limitation within the meaning of Entry 50 — List II of the Seventh Schedule of the Constitution and the States have no legislative competence to levy any other tax, impost or fee on the exercise of mineral rights. Entry 49 — List II is also not applicable to mineral bearing lands.
India Cement Ltd. v. State of T.N., (1990) 1 SCC 12 has been correctly decided by a seven-judge Bench of this Court and that the majority judgment in State of W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201, is incorrect and therefore, ought to be overruled.

Issues, Analysis and Decision:

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?

Justice BV Nagarathna said that the true nature of royalty determined under Section 9 read with Section 15(1) of the MMDR Act, 1957 is that it is in the nature of a tax coming within the scope and ambit of Article 366(28) of the Constitution which defines taxation to include the imposition of any tax or impost, whether general or local or special and the word “tax” is to be construed accordingly.

Thus, Justice Nagarathna held that royalty is a tax or an exaction. It is not merely a contractual payment but a statutory levy under Section 9 of the Act (Section 9A relating to dead rent). She also added that liability to pay royalty does not arise purely out of the contractual conditions of a binding lease. The payment of royalty to the Government is a tax in view of Entry 50 – List II being subject to any limitations imposed by Parliament by law in the context of Entry 54 – List I read with Section 2 of the MMDR Act, 1957.

Justice Nagarathna said that the majority decision in State of West Bengal v. Kesoram Industries Ltd, (2004) 10 SCC 201 is a serious departure from the law laid down by the seven judge Bench in India Cement Ltd. v. State of T.N., (1990) 1 SCC 12; which was wholly unwarranted and therefore, it is liable to be overruled and is overruled to the extent of that royalty is not a tax.

What is the scope of Entry 50 – 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 – List I? Does Section 9, or any other provision of the MMDR Act, contain any limitation with respect to the field in Entry 50 – List II?

Justice Nagarathna said that Entry 50 – List II of the Seventh Schedule is a taxation Entry which deals with taxes on mineral rights. But this Entry is subject to any limitations imposed by Parliament by law relating to mineral development. The use of the word “any” means the limitation could be in any form which can be imposed only by the Parliament by law relating to mineral development.

She said that in view of the use of the expression “any limitations”, it must be given the widest possible meaning to include a limitation in the form of Sections 9 and 9A, 25 or any other provision of the MMDR Act, 1957 and Rules made thereunder which act as a limitation to Entry 50 – List II.

Thus, Justice BV Nagarathna held that Sections 9, 9-A and 25 of the MMDR Act, 1957 denude or limit the scope of Entry 50 – List II.

Whether the expression “subject to any limitations imposed by Parliament by law relating to mineral development” in Entry 50 – List II pro tanto subjects the Entry to Entry 54 – List I, which is a non-taxing general Entry? Consequently, is there any departure from the general scheme of distribution of legislative powers as enunciated in M.P. V. Sundararamier & Co. v. State of Andhra Pradesh, (1958) 9 STC 298 ?

Justice Nagarathna stated that the expression “subject to any limitations imposed by Parliament by law relating to mineral development” in Entry 50 – List II pro tanto subjects the Entry to Entry 54 – List I. The use of the expression “any limitations” would mean that the taxing Entry would be subject to a non-taxing or general Entry such as in Entry 54 – List I which could also be termed as a regulatory Entry. She added that there is a departure from the general scheme of distribution of legislative powers as enumerated in MPV Sundararamier (supra) insofar as Entry 50 – List II read with Entry 54 – List I is concerned which is unique to Entry 50 — List II. This is considering the significance of Entry 54 — List I which also overrides Entry 23 — List II.

Justice Nagarathna remarked that Entry 50 – List II is a unique Entry because it is the only taxation Entry in Lists I and II where the taxing power of a State legislature has been subjected to “any limitations imposed by Parliament by law relating to mineral development”. She added that the dictum in M. P. V. Sundararamier (supra) has not been discussed on Entry 50 — List II and hence the said decision has no bearing as such on the present controversy.

She said that the conclusion that ‘royalty’ is a ‘tax’ is the only exception to the position of law laid down in MPV Sundararamier (supra). Further, she concurred with the majority that the scope of expression “any limitations” in Entry 50 – List II is wide enough to include the imposition of restrictions, conditions, principles as well as a prohibition by Parliament by law.

Thus, Justice Nagarathna viewed that the judgments in India Cement Ltd. v. State of T.N., (1990) 1 SCC 12; Orissa Cement Ltd. v. State of Orissa, 1991 Supp (1) SCC 430; State of M.P. v. Mahalaxmi Fabric Mills Ltd., 1995 Supp (1) SCC 642; Saurashtra Cement & Chemical Industries Ltd. v. Union of India, (2001) 1 SCC 91; State of Orissa v. Mahanadi Coalfields Ltd., 1995 Supp (2) SCC 686 and P. Kannadasan v. State of T.N., (1996) 5 SCC 670 excluding to the extent overruled in Tata Iron and Steel, and Tata Iron and Steel are correct and therefore are binding precedent and cannot be overruled. Per Contra, Justice Nagarathna overruled the majority judgment in State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201 to the extent it holds that royalty is not a tax.

What is the scope of Entry 49 – List II and whether it covers a tax which involves a measure based on the value of the produce of land? Would the constitutional position be any different qua mining land on account of Entry 50 – List II read with Entry 54 – List I?

Justice Nagarathna said that Entry 49 – List II deals with taxation of lands and buildings. It does not cover taxes on mineral bearing lands. The constitutional position is different qua mineral bearing lands on account of Entry 50 – List II read with Entry 54 – List I and Section 2 of the MMDR Act, 1957. Thus, any imposition based on royalty by a State Legislature or involving royalty as a measure of the value of the minerals extracted from the land is impermissible.

She said that the State legislatures have legislative competence under Article 246 read with Entry 49 – List II to tax lands and buildings but not lands which comprise of mines and quarries or have mineral deposits as mineral bearing lands do not fall within the description of lands (under Entry 49 – List II). Similarly, States can tax such mineral bearing lands which are not covered within the scope of MMDR Act, 1957 i.e., minor minerals, under Entry 50 — List II and not under Entry 49 — List II as tax on exercise of mineral rights. Thus, mineral bearing lands cannot be taxed under Entry 49 — List II.

Thus, she held that taxes on lands and buildings under Entry 49 – List II contemplates a tax levied directly on the land as a unit having a defined relationship with the land and does not include mineral bearing lands within its scope.

Further, she added that the yield of mineral bearing lands, in terms of quantity of mineral produced or royalty paid cannot also be used as a measure to tax such lands under Entry 49 – List II.

In view of the declaration under Section 2 of the MMDR Act, 1957 made in terms of Entry 54 – List I and to the extent of the provisions of the said Act, Justice Nagarathna held that the State legislature is denuded of its powers under Enry 50 – List II.

Whether Entry 50 – List II is a specific Entry in relation to Entry 49 – List II, and would consequently subtract mining land from the scope of Entry 49 – List II?

Affirming, Justice Nagarathna held that having regard to Entry 50 – List II to be read with Entry 54 – List I and Section 2 of the MMDR Act, 1957, Entry 50 – List II is a specific Entry in relation to Entry 49 – List II and would consequently subtract mining lands from the scope of Entry 49 – II.

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