Mining Royalty is not a tax – Supreme Court Nine Judges Bench approves decision In Kesoram Industries and held that observation in India Cement to the effect that royalty is a tax was incorrect.
In a recent judgment, the Hon’ble Supreme Court has held that Mining Royalty is not a tax. A Nine Judges Constitution Bench approved decision in Kesoram Industries and held that observation in India Cement to the effect that royalty is a tax was incorrect
ABCAUS Case Law Citation:
ABCAUS 4166 (2024) (07) SC
In 1990, a seven-judge bench of the Hon’ble Supreme Court in the case of India Cement Ltd v. State of Tamil Nadu & Ors., AIR 1990 SC 85, had held that royalty payable on minerals extracted as provided for under section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is in the nature of tax itself and hence there can not be any further tax thereon.
However, in 2004 a five judge Constitution Bench of the Hon’ble Supreme Court in the case of Kesoram Industries Ltd and Ors. held that the decision in India Cement stemmed from an inadvertent error and clarified that royalty is not a tax. It was held that decision in India Cement was caused by “an apparent typographical error or inadvertent error” and should not be understood as a correct declaration of law.
Subsequent to the decision in Kesoram Industries, several States imposed 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. Many States also sought to impose environment and health cess and fees for transporting coal and coal-dust collected from mines. The constitutional validity of these levies was challenged before the High Courts.
In one of the case where Petitioners challenged the tax on land being used for mining, the Hon’ble Patna High Court allowed the petition by holding that the tax was not within the scope of Entry 49 of List II of the Seventh Schedule. The correctness of the Patna High Court’s decision was challenged before the Hon’ble Supreme Court. In 2011, a Bench of three Judges of the Hon’ble Supreme Court noticing the divergence between the judgments in India Cement and Kesoram Industries referred the matter to nine Judges Bench to provide a decisive ruling.
One of the questions before the 9 judges Bench was whether royalty payable under Section 9 of the MMDR Act is in the nature of a tax or impost in the backdrop of the divergence of opinion in the decisions in India Cement and Kesoram.
The 9 judges Constitution Bench has held that royalty is not a tax, as it does not meet the characteristic requirements of a tax.
The Hon’ble Supreme Court has observed that there are major conceptual differences between royalty and a tax: (i) the proprietor charges royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign; (ii) 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 (iii) royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.
The Hon’ble High Court further observed that the principles applicable to royalty apply to dead rent because: (i) 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; (ii) the liability to pay dead rent flows from the terms of the mining lease;181 (iii) 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 (iv) 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.
The Hon’ble Supreme Court held that both royalty and dead rent do not fulfil the characteristics of tax or impost. Accordingly, it was held that the observation in India Cement to the effect that royalty is a tax was incorrect.
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