On Day 4, The bench remarked: “You need to conduct a cost-benefit evaluation. This involves considering the extraction of minerals, the added value they bring, such as using coal to produce electricity, which in turn is utilized in manufacturing steel, forming a value chain. On the other side, there are costs such as land and forest degradation, human displacement, and more. The key is to ensure that the benefits outweigh the costs. This represents a modern approach. Unlike the past, where development under the Crown meant exploiting resources without regard for consequences, today’s perspective on mineral development is significantly different.”
NEW DELHI: On 4 Day, Supreme Court 9-judge bench hearing, the Chief Justice of India (CJI) highlighted a crucial aspect of mineral rights taxation, emphasizing that once a royalty is fixed, states cannot extend their demands beyond the established framework, as cited by Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act). This section directs that all mining leaseholders must pay a royalty, which is determined by the Second Schedule, and this applies irrespective of when the lease was granted. The Central Government retains the right to modify these rates, though such changes are capped once every three years.
Senior Advocate Harish Salve, representing the Eastern Zone Mining Corporation, argued that the state’s power to tax under Entry 50 List II is unique but becomes restricted by overarching mineral development laws.
He stated, “The limitation flows from the law of mineral development, not from legislation made per se by the Parliament.”
This implies that state powers are not entirely removed but are overshadowed when Union laws on mineral development come into play.
Mr. Salve clarified that the state’s authority over taxation regarding mineral rights is overshadowed by laws concerning mineral development. He suggested that while the state retains its power under Entry 50 List II to enact tax laws on mineral rights, this authority becomes secondary when the Union enacts laws on mineral development, which hold greater efficacy.
“It is overshadowed by the law on mineral development.”
Justice Nagarathna then commented, “The laws on mineral development are not exhaustive; they are dynamic.”
Mr. Salve concurred, saying, “Yes, of course. If tomorrow the 1957 MMDR Act is repealed, the state’s powers would regain their magnitude.”
The discussion further deepened when the Chief Justice of India posed a hypothetical scenario to Mr. Salve: If there were no MMRD and MMDR Act and the state had to create legislation on royalty, which entry would that legislation on royalty be attributed to?
Justice Nagarathna and Mr. Salve engaged in a nuanced discussion, exploring the hypothetical absence of the MMDR Act and its implications on state legislation concerning royalty. Salve pointed out that in such a scenario, state laws would fall under Entry 23 List II, which would then be overshadowed by Entry 54 List I, highlighting the intricate balance between State and Union legislative powers over mineral resources.
“It’s challenging to articulate a single solution for all these issues. Attention to detail is crucial because we’re navigating between competing national interests and the significant power of taxation vested in the state. Precision is essential, as the complexities lie in the specifics. We must scrutinize the exact nature of the matter under discussion.”
Justice Nagarathna emphasized that while royalty constitutes one form of exaction, alternative forms remain viable. Nevertheless, she highlighted that royalty cannot serve as a universal substitute for all types of exactions, emphasizing the court’s role in defining these distinctions.
The discussion further delved into the nature of royalty, with Justice Nagarathna categorizing it as just one form of exaction among many, understanding the complexity of taxation on mineral rights. Salve emphasized the importance of the balance between national interests and state taxation powers.
“You need to conduct a cost-benefit evaluation. This involves considering the extraction of minerals, the added value they bring, such as using coal to produce electricity, which in turn is utilized in manufacturing steel, forming a value chain. On the other side, there are costs such as land and forest degradation, human displacement, and more. The key is to ensure that the benefits outweigh the costs. This represents a modern approach. Unlike the past, where development under the Crown meant exploiting resources without regard for consequences, today’s perspective on mineral development is significantly different.”
The primary inquiry in the current case revolves around scrutinizing the definition and extent of royalty as outlined in Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and determining whether it qualifies as a tax.
Background
In 2011, the matter was referred to a nine-judge bench. A three-judge bench led by Justice SH Kapadia formulated eleven inquiries to be directed to the nine-judge bench. These inquiries encompass significant aspects of tax law, such as whether ‘royalty’ can be construed as tax and whether State Legislatures, in imposing a tax on land, can adopt a taxation measure based on the value of land produced.
The three-judge bench clarified that the reason for bypassing a referral to a five-judge bench and instead directly referring to a nine-judge bench was due to apparent conflicts between the rulings in State of West Bengal v. Kesoram Industries Ltd. and Ors, delivered by a five-judge bench, and India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors, delivered by seven-judge benches.
In a significant moment, the CJI questioned the jurisdiction of Parliament over mineral rights taxation, to which Mr. Salve responded by stressing the need to analyze the legislative intent and subject matter of Entry 50 List II. This analysis is crucial for assessing the validity of state-imposed taxes on royalties.
The matter, rooted in the interpretation of royalty under Section 9 of the MMDR Act and its classification as a tax, has been referred to a nine-judge bench, reflecting the complexity and significance of the issues at hand. This referral stems from conflicting decisions in previous judgments, highlighting the ongoing debate over the nature of royalty and the extent of state and Union powers in mineral rights taxation.
Case Title: Mineral Area Development v. M/S Steel Authority Of India & Ors (CA NO. 4056/1999)
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