Supreme Court rules States have right to levy tax on mineral rights; Justice BV Nagarathna dissents

A nine-judge Constitution Bench of the Supreme Court on Thursday 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 [Mineral Area Development Authority etc vs Steel Authority of India and ors]..The judgment was delivered by the Bench of Chief Justice of India (CJI) DY Chandrachud with Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih with Justice Nagarathna dissenting from the majority.The Court ruled that the Mines and Minerals (Development & Regulation) Act (Mines Act) will not denude the States of the power to levy tax on mineral rights.In view of the above conclusions, the Court overruled its 1989 judgment in the case of India Cement Ltd vs. State of Tamil Nadu.However, Justice BV Nagarathna dissented on all the conclusions drawn by the majority judges.Reading out the majority judgment, CJI Chandrachud said:"Royalty is not in the nature of tax ... We conclude that the observation in India Cements judgment stating that royalty is tax is incorrect ... Payments made to the government cannot be deemed to be a tax merely because a statute provides for its recovery in arrears.".Consequently, the majority on the Bench held that States are not denuded of powers to levy cess on mining or related activities. "The legislative power to tax mineral rights lies with the State legislature and the Parliament does not have the legislative competence to tax mineral rights under Entry 50 of List 1 since it is a general entry and Parliament cannot use its residuary power regarding this subject matter ... State legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral bearing lands," the majority ruled. .Justice BV Nagarathna, however, disagreed on both aspects."I hold royalty is in nature of the tax. States have no legislative competence to impose any tax or fee on mineral rights. Entry 49 is not related to mineral-bearing lands. I hold India cement decision was correctly decided.".After the judgment dictation today, the Court was urged by various petitioners to clarify that the effect of today's verdict will be prospective and not affect past transactions. The verdict today will have a significant impact, the Court was told. The Bench, in turn, agreed to clarify this aspect of the matter on July 31."We will keep this case on Wednesday only to decide this aspect.. whether it should be prospective or not," the CJI assured. .The case involved the issue of whether State governments are denuded of powers to tax and regulate activities concerning mines and minerals in view of the enactment of the Mines and Minerals (Development & Regulation) Act (Mines Act).This matter was the oldest pending nine-judge Bench case before the apex court. The Bench had reserved its judgment in the matter on March 14.In 1989, the Supreme Court had held in the case of India Cement Ltd v State of Tamil Nadu that the royalty is a form of 'tax' under the Mines Act and that the imposition of cesses on such royalty was beyond the States' legislative competence.In February 1995, a three-judge Bench of the Supreme Court in State of Madhya Pradesh v Mahalaxmi Fabric Mills Ltd upheld Section 9 of the Mines Act and reiterated the 1989 decision. In January 2004, a five-judge Bench in State of West Bengal v Kesoram Industries Ltd by a 3:2 majority held that the 1989 Bench had made a typo and only meant to say that cess on royalty is a form of tax and not the royalty itself. In March 2011, a three-judge bench held that there was a “prima facie” conflict between the decisions in the India Cements (1989 judgment) and Kesoram Industries (2004) cases, leading to the reference of the matter to a nine-judge Bench..Before the nine-judge Bench, the Central government argued that States cannot levy taxes on mineral-bearing lands and that the royalties levied by the Central government eventually go to the States only."The development of mineral industry needs uniformity at a national level failing which fragmented State-wise levy will adversely impact the development of mineral and systemic utilization of minerals in larger public interest," Solicitor General Tushar Mehta had argued..More on the verdict today.The majority of the nine-judge Bench today disagreed with the Centre's stance. In this regard, the findings of the majority on the Bench included the following.Unless the Parliament imposes a limitation, the State's plenary right to impose taxes on mineral rights is unaffected. Parliament can impose limitations under Entry 50 of List 2 of the Constitution by means of statutory instruments. The scheme of the MMRDA Act cannot be stretched to impinge upon the taxing rights of the States. Since the royalty paid under Section 9 is not a tax on mineral rights, any limitation on the enhancement of royalty is not an imposition of a tax under Entry 50 of List 2. Section 9 limits power of the centre and it does not govern tax. The expression "land" includes land of every description.. It can be used to grow tea leaves or extract minerals.. Thus we hold that the State legislature is competent to design a levy under Entry 49 of List 2 to tax lands which comprise of mines and quarries. In other words, mineral-bearing lands also fall under the expression of "land" under Entry 49 of List 2..While holding that a royalty payment is not a tax, the majority also explained its views on the difference between a royalty and a tax as follows:"Royalty flows from mining lease, it is generally determined from the basis of the quantity of minerals removed. The compulsion of royalty depends on the contractual conditions of the mining lease agreed between the lessor and lessee ... The payment is not for public purposes but it is a consideration paid to the lessor for parting with exclusive privileges in the minerals ... Pertinently, contractual payments due to the government cannot be deemed to be a tax merely because the statute provides the recovery as arrears. There are major conceptual differences between royalty and a tax. One, a proprietor charges royalty as a consideration for parting with rights to minerals while tax is an imposition of a sovereign. Two, royalty is paid in consideration of doing a particular action, that is extracting minerals in the soil while tax is generally levied with respect to a taxable event determined by law. Three, royalty can be foreclosed from the lease deed as compared to tax which is enforced by law.".In her dissent, Justice BV Nagarathna, however, opined that the nature of royalty payment under the MMDR Act is unique. Viewed from this perspective, royalty payment under the MMDR Act is a form of tax, she held. "Under the statutory scheme of MMDR act, any exercise of mineral rights to the lessee is subject to payment of royalty.. exaction of royalty is statutory in nature.. I hold that royalty is in the nature of tax or exaction," she said. Consequently, she held that States have no right to levy any taxes or cesses on mining activities or mineral use. "Sections 9 and 9A MMDR Act are an embargo and a limitation on the power of States to impose any tax on the exercise of mineral rights. This is because royalty paid for these rights is a statutory exaction of such a right," she said. She also agreed with the Centre's stance that allowing States to levy taxes on mineral use would go against mineral development in the country."Royalty as a compulsory exaction has met all the parameters of a tax. Hence States are denuded of the powers to impose a cess or any other levy on royalty or define it as a land revenue which can be imposed by the States under Entry 49 list 2. Such State levy on royalty is against mineral development of the country."Accordingly, Justice Nagarathna proceeded to conclude that if States are allowed to tax mineral use or mining activities, it would lead to double taxation. "Mineral value or mineral produce cannot be used as a measure (for States) to tax mineral bearing land under Entry 49 List 2 and the term "land" under the same Entry does not include mineral bearing lands and thus it will lead to double taxation - once by the State and again by the Central Act under Section 9 MMDR Act. This is impermissible having regard to the constitutional intent. Thus royalty cannot be a means to tax mineral-bearing lands. Thus, States resorting to the same would overlap," she held. .Attorney General R Venkataramani, Solicitor General Tushar Mehta and Additional Solicitor General Aishwarya Bhati appeared for the Union of India, and public sector companies.Senior Advocates Rakesh Dwivedi, S Niranjan Reddy, Vijay Hansaria, Harish Salve, Dr. Abhishek Manu Singhvi, Darius Khambata, AK Ganguly, SK Bagaria, Arvind Datar, and Sujit Ghosh, and Advocate Sansriti Pathak, appeared for the State governments..[Read Judgment].[Read live coverage]