"Royalty Is In The Nature Of A Tax": Justice BV Nagarathna 's Dissent In SC Verdict On MMDR Act

Justice BV Nagarathna has authored a dissenting opinion in a case before the Supreme Court where a 9-Judge Bench was examining whether the royalties on mining leases be considered as tax and whether the States have the power to levy royalty/tax on mineral rights after the enactment of the Mines and Minerals (Development and Regulation) Act. 

Disagreeing with the majority view, she held that royalty is in the nature of a tax, and hence, the provisions of the MMDR Act regarding the levy of royalty restrict the power of the States to levy taxes on minerals.

In that context, she observed that, "I hold that royalty is in the nature of 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). The 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."

In the same vein, it was further held that, "As Entry 49 - List II does not apply to mineral bearing land, the limitations imposed by Parliament by law relating to mineral development with respect to Entry 50 - List II would restrict the power of the State legislature to impose tax on mineral rights under the latter Entry. Thus, the power of the State legislature to impose tax under Entry 50 - List II is subject to the Parliament imposing any limitation by law relating to mineral development."

In 2011, a 3-judge bench headed by Justice SH Kapadia had framed eleven questions to be referred to the 9-judges bench. On March 14, 2024, the Bench reserved the judgment after arguments were concluded by the parties.

With an 8:1 majority, the Supreme Court Bench of CJI DY Chandrachud, Justice Hrishikesh Roy, Justice Abhay Oka, Justice JB Pardiwala, Justice Manoj Misra, Justice Ujjal Bhuyan, Justice SC Sharma and Justice AG Masih held that the States have the power to levy tax on mineral rights and that the Mines and Minerals (Development and Regulation) Act 1957 ('MMDR Act'), passed by the Union, do not limit such power of the States.

In her dissenting judgment, Justice Nagarathna came to the following conclusions: 

1) Entry 50 - List II is an exception to the position of law laid down in MPV Sundararamier vs. State of Andhra Pradesh, AIR 1958 SC 468 (“MPV Sundararamier”). Moreover, in the said case, the scope and ambit as well the implication of Entry 54 – List I on Entry 50 - List II was not considered at all. Therefore, the principle stated in MPV Sundararamier is foreign to the instant case and the ratio of the said decision does not apply to the present case. No doubt, the legislative power to tax mineral rights vests with the State legislature but Parliament, though may not have an express power to tax mineral rights under Entry 54 - List I, it being a general Entry, Parliament can, nevertheless on the strength of Entry 54 - List I read with Section 2 of the MMDR Act, 1957, impose any limitation on the power of the States to tax mineral rights under Entry 50 - List II. Sections 9 and 9A of the MMDR Act, 1957 are two such instances of limitations imposed by the Parliament on the taxing power of the State under Entry 50 - List II. This is a unique Entry and must be given its true and complete meaning and while interpreting the same one cannot be swayed by the principles laid down in MPV Sundararamier as the same do not apply in the instant case.

2) Parliament is not using its residuary power with respect to imposing any limitation on the taxing power of the State under Entry 50 – List II. In fact, even the Validation Act, 1992 enacted by Parliament was upheld having regard to Entry 54 - List I read with Section 2 of the MMDR Act, 1957 and not Entry 97 - List I.

3) Entry 50 - List II envisages that Parliament can impose “any limitations” on the legislative field created by that Entry under a law relating to mineral development. The MMDR Act, 1957 has imposed the limitations as envisaged in Entry 50 - List II in Sections 9, 9A and 25, etc. on the strength of Entry 54 – List I.

4) The scope of the expression “any limitations” under Entry 50 - List II is wide enough to include the imposition of restriction, conditions, principles as well as a prohibition by Parliament by law.

5) 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.

6) Further, 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. 

7) Entries 49 and 50 - List II, no doubt, operate in different fields. Entry 49 - List II deals with taxes on lands and buildings but Entry 50 - List II deals with taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development. There is no constitutional limitation on the competence of the State legislature to tax lands and buildings. However, the State’s competence to tax mineral rights is subject to any limitations imposed by the Parliament by law relating to mineral development. Entry 49 - List II and Entry 50 - List II are distinct and operate in distinct ways. Entry 49 - List II does not apply to mineral bearing lands as such lands are taxed in the form of royalty or dead rent in the context of exercise of mineral rights. Exercise of mineral rights is the basis for payment of royalty or dead rent. Consequently, value of mineral produced cannot be used as a measure to once again impose a tax on mineral bearing land under Entry 49 - List II. If so, Entry 50 – List II would be rendered redundant.

Cause Title: Mineral Area Development Authority & Anr. vs M/S Steel Authority of India & Anr. Etc. (Neutral Citation: 2024 INSC 554)

Click here to read/download Judgment