In a pivotal ruling, the Supreme Court of India has determined that royalties charged by the Union Government under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) are not classified as taxes. This decision was made by an eight-to-one majority in a nine-judge bench led by Chief Justice of India Dr. D.Y. Chandrachud, with Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma, and AG Masih.
The majority opinion clarified key distinctions between royalties and taxes, noting:
- Royalties are charges made by the proprietor for the right to extract minerals, whereas taxes are imposed by the government.
- Royalties are compensation for specific actions, such as mineral extraction, while taxes are levied based on legally defined taxable events.
- Royalties arise from lease agreements, unlike taxes, which are imposed by law.
Justice BV Nagarathna provided the lone dissenting opinion, arguing that royalties under Section 9 of the MMDR Act should be considered taxes.
This ruling came in response to a series of petitions questioning the conflicting interpretations by the Supreme Court in the cases of India Cement Ltd. vs. State of Tamil Nadu (1990) and State of West Bengal vs. Kesoram Industries Ltd. (2004). The core issue was the legislative authority of states concerning mineral rights under the MMDR Act.
The MMDR Act grants the Union the power to regulate and develop mines and minerals under Entry 54 of the Union List in Schedule VII. Section 9 of the Act empowers the Union Government to set royalties for mining leases.
In the India Cement case, a seven-judge bench ruled that royalties were a form of tax, thereby restricting state legislatures from imposing taxes on mineral rights, a power reserved for the Union. This ruling was based on the case where the Tamil Nadu government levied a local cess on royalties paid for limestone and Kankar extraction under the MMDR Act. The Supreme Court’s decision overruled the Madras High Court, declaring the cess beyond the state’s authority since it was a tax on royalties.
Subsequent cases, including State of MP vs. Mahalaxmi Fabric Mills Ltd (1995), affirmed the India Cement ruling, despite suggestions of a potential typographical error in the original judgment.
In the Kesoram Industries case, a majority upheld the essence of the India Cement ruling, stating it correctly identified the tax nature of cess on royalties, not royalties themselves. However, a minority opinion maintained that states lacked the authority to levy such taxes under Entry 50 of the State List, which pertains to mineral rights.
Following these judgments, several states imposed taxes on mining land under Entry 49 of the State List. The Patna High Court struck down Bihar’s related laws, citing the India Cement judgment. This led to the current Supreme Court review, which ultimately reinforced the distinction between royalties and taxes.
