The nature of ‘royalty’ case: How an alleged typographical error led to 9-judge SC case

As part of the case, the court will also decide if a state can levy a tax on the mining of minerals or if its power is limited under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA). The Section requires a mining lease holder to pay royalties to the landowner for conducting mining activities.

How a typo resulted in conflicting Supreme Court decisions

In 1963, India Cement Ltd was granted a mining lease by the Tamil Nadu government and was paying royalties to the state under Section 9 of the MMDRA. Later, in addition to the royalties, the state government placed a cess — a tax that is levied in addition to the normally taxable amount — on India Cement under Section 115 of the Madras Panchayat Act, 1958.

For every rupee paid as land revenue to the government, which included royalties, an additional 45 paise would have to be paid as well. This meant that the state government was leaving a cess on royalties too.

After unsuccessfully challenging the cess provision at the Madras High Court, India Cement approached the Supreme Court in 1970 in India Cement Ltd v. State of Tamil Nadu. They argued that the levy of a cess on royalty would amount to a tax on royalty, which the Tamil Nadu Legislature did not have the power to impose under any of the subjects contained in the State List under the Constitution.

The Tamil Nadu government, however, argued that the cess was on the land revenue and mineral rights — subjects which are included in Entries 23, 45, and 50 of the State List (List II) and thus, taxable by states. Parliament has the authority to pass laws on subjects in the Union List whereas States can pass laws on subjects contained in the State List.

In 1989, a seven-judge bench decided the case in favour of India Cement. It held that the Centre has primary authority over “regulation of mines and mineral development” in accordance with laws enacted by Parliament, such as the MMDRA, under Entry 54 of the Union List (List I). States only have the power to collect royalties under the MMDRA and cannot impose any further taxes on mining and mineral development.

The court further said: “We are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because s. 9 of the Central Act covers the field”.

Notably, the use of the phrase “royalty is a tax” triggered a series of events leading to the current nine-judge bench case 25 years later.

In 2004, in another Constitution Bench case dealing with cesses on land and mining activities, the apex court noted that the phrase “royalty is a tax” should in fact read as “cess on royalty is a tax”. It observed: “The words ‘cess on’ appear to have been inadvertently or erroneously omitted while typing the text of judgement…(in the preceding paragraphs) their Lordships have held that ‘royalty’ is not a tax”.

The five-judge bench then held that states no longer have the power to levy taxes on matters concerning mineral rights as Parliament has overriding authority to enact laws on the subject and has done so through the MMDRA.

How the typographical error was referred to a nine-judge bench

In 1992, the Bihar government passed the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and imposed additional cess and taxes on land revenue paid to the government from mineral bearing lands.

Seven years later, the Act was challenged in the Supreme Court in the case Mineral Area Development Authority v. Steel Authority of India. In the following years, over 80 more matters dealing with additional taxes imposed by states were tagged with this case.

In 2011, a three-judge bench heard the case and took note of the apparent conflict between the decisions in Kesoram Industries and India Cement cases over the alleged typographical error.

As India Cement was decided by a seven-judge bench and had a direct bearing on the Mineral Area Development Authority case, the latter was referred to a nine-judge bench to decide whether a royalty is in fact a type of tax or if there was an error in the India Cements case judgment.

The arguments so far

Senior Advocate Rakesh Dwivedi, appearing for the Mineral Area Development Authority — the petitioners — argued that royalties under the MMDRA cannot be considered a tax as taxes can only be levied by the government.

Royalties, on the other hand, can be paid to a private person as well. According to Dwivedi, if royalties are considered a tax, then the Centre would then be required to pay taxes to a private person to conduct mining activities which cannot be permitted.

He also argued that states have the power to levy taxes on mines and mineral development on the basis of Entries 49 and 50 of the State List.

Entry 49 gives states the power to levy “taxes on lands and buildings”, which Dwivedi argued includes lands where mining activities are taking place. Entry 50 allows states to levy “taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.”

Referring to the phrase “limitations imposed by Parliament” in Entry 50, Dwivedi argued that this does not expressly allow the Centre to completely take over state governments’ powers to levy tax on mineral development, and neither does Entry 54 of the Union List.

Entry 54 allows the Centre to make laws on the “regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.”

Senior Advocate Harish Salve, appearing for the Easterzone mining association — the respondents — argued that it is necessary to consider royalties under the MMDRA as “akin to tax” and allow Parliament to place limits on the tax that can be collected by states. He stated that this limitation is crucial as all states are not “evenly endowed” with minerals.

The court is currently still hearing submissions from Salve, with more respondents waiting in the wings to present their arguments.