The Supreme Court of India on Monday has initiated a crucial hearing to resolve the longstanding debate on whether the royalty paid on mineral extraction, as outlined in the Mines and Minerals (Development and Regulation) Act, 1957, constitutes a tax. This significant legal question, which has seen conflicting interpretations over the years, could have wide-reaching implications for the mining sector and governmental revenues.
The issue traces back to conflicting judgments: a 1989 verdict by a seven-judge bench in the case of India Cements Limited versus State of Tamil Nadu, which classified royalty as a tax, and a 2004 decision by a five-judge bench in State of West Bengal versus Kesoram Industries Limited, which identified a “typographical error” in the earlier judgment, asserting that royalty is not a tax. To resolve these discrepancies, the matter has been escalated to a larger nine-judge bench led by Chief Justice D Y Chandrachud.
During the session, Senior Advocate Rakesh Dwivedi, representing the Mineral Areas Development Authority of Jharkhand, emphasized the historical complexity and financial stakes involved, stating,
“We are grateful for the constitution of this bench. This matter is coming up after 20 years. Whereas states are suffering from loss of taxes, the other side will be burdened with heavy taxation. This is another issue that needs to be dealt with later because the balance will be running into thousands of crores.”
The bench, comprising Justices Hrishikesh Roy, Abhay S Oka, B V Nagarathna, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih, delved into the legislative intent and historical context behind royalty payments. Dwivedi argued,
“The normal understanding is that royalty is being paid to the owner of the mineral, whether government or private. The owner, who is parting with the mineral to the lessee, is required to pay the royalty.”
He further contested the notion that uniformity in royalty rates implies taxation, clarifying,
“Therefore came the need for uniformity but uniformity, partial uniformity or broad uniformity or differentiation in royalty does not mean it is a tax. It was a classification done by Parliament and the central government.”
Highlighting the lack of comprehensive discussion in the 1989 verdict, Dwivedi criticized its abrupt conclusions and praised the 2004 judgment for correcting the oversight. Justice Roy echoed the sentiment, pointing out the disconnect between the conclusion and the analysis in the 1989 decision.
The hearing, which extended throughout the day, remains inconclusive and is set to continue. The outcome of this case could redefine the financial and operational landscape for mining companies and state governments across India, marking a pivotal moment in the interpretation of mineral rights and taxation.
BACKGROUND
The controversy dates back to a 1989 Supreme Court decision in India Cement Ltd v State of Tamil Nadu, where a seven-judge bench deemed royalty under the Mines Act as a form of tax. This interpretation was challenged in 2004 in the case of State of West Bengal v Kesoram Industries Ltd, where a five-judge bench identified a significant “inadvertent” error in the previous judgment, asserting that the royalty was mistakenly classified as a tax.
The matter has since seen various legal battles, including the 1992 Kesoram Industries Ltd case in the Calcutta High Court and the 1995 State of Madhya Pradesh v Mahalaxmi Fabric Mills Ltd case in the Supreme Court, further complicating the legal landscape. The issue has led to numerous Special Leave Petitions and writ petitions, culminating in a referral to a nine-judge bench by a three-judge bench in 2011 due to the “prima facie” conflict between the India Cements and Kesoram Industries decisions.
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