Royalty Is Not Tax, Royalty Is Contractual Consideration, States' Power To Levy Mineral Tax Is Not Limited: Apex Court Holds By 8:1 Majority

The 9-Judge Bench of the Supreme Court, today, held by an 8:1 majority 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.

The majority judgment was delivered by Chief Justice and the dissenting judgment was authored by Justice B.V. Nagarathna.

Chief Justice DY Chandrachud, Justice Hrishikesh Roy, Justice Abhay S. Oka, Justice J.B. Pardiwala, Justice Manoj Misra, Justice Ujjal Bhuyan, Justice Satish Chandra Sharma and Justice Augustine George Masih held, "a. Royalty is not a tax, royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The Liability to pay royalties arises out of the contractual conditions of the mining leads. The payments made to the government cannot be deemed to be taxes mainly because the statute provides further recovery as arrears. b. Entry 50 of List II does not constitute an exception to the position laid down in...The legislative power to tax mineral rights vests in the State Legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I with being a general entry, since the power to tax mineral rights is enumerated in Entry 50 of List II. Parliament cannot use its residuary powers with respect to that subject matter. The state legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral bearing lands."

The Court further held, "c. Entry 50 of List II states that the Parliament can impose any limitation on the legislature created by that Entry under the law relating to mineral development by means of statutory instruments. The Act as it stands, has not imposed any limitations as envisaged in Entry 50 of List II. The scope of the expressions "any limitations under Entry 50 of List 2" is wide enough to include the imposition of restrictions, conditions, principles as well as prohibitions. d. State legislature has the legislative competence under Article 246 read with entry 49 of list 2 to tax mineral bearing lands. e. The yield of mineral bearing land in terms of minerals produced can be used to assess tax to be paid under entry 49 of list 2. The limitation imposed by parliament under entry 50 List II does not affect entry 49 List II since there is no constitutional scheme in this regard."

The Bench also overruled the judgments in India Cement Ltd vs State Of Tamil Nadu. The Court further held that the Parliament does not have the power to tax mineral rights under Entry 50 List I.

Justice Nagarathna while dissenting with the majority opinion has observed that the judgment in Indian Cement (supra) has been correctly decided and therefore, binding precedent and cannot be overruled. It was held that the royalty is a tax. It was also held that the steep increase in the prices of minerals would result in a hike in prices of all industrial and other products dependent on minerals which may hamper the foreign exchange reserves of the country. "This would lead to a breakdown of the federal system.", the Court said. "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.", she said.

The major questions that the Bench examined were 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 Parliamentary law MMDR Act.

The Court also held that the expression "land" in Entry 49 of List II covers all categories of land. 

The matter was referred to a 9-judge bench 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. The main issue was whether the royalties on mining leases be considered as tax and whether the States have the power to levy royalty/tax on mineral rights. The hearing went for 8 long days 

Cause Title: Mineral Area Development Authority Etc. v. M/S Steel Authority Of India & Ors. (Civil Appeal Nos.4056-4064/1999)

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