'Royalty' is not a 'Tax' : Why Supreme Court said so?

 

Do you agree that “‘royalty’ is not a tax”? This was held by the Hon’ble Supreme Court in one of its recent judgments. Let us explore the same.

 

Basically, the Hon’ble Supreme Court in its 9-Judges Bench Judgment of Mineral Area Development Authority and Another v. Steel Authority of India and Another, 2024 SCC OnLine SC 1796, held that ‘royalty’ is not a tax (majority judgment, 8-1). The issue involved imposition of ‘royalty’ on minerals under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (in short, “Act of 1957”). Though the term ‘royalty’ has not been defined in the statute, yet in the present post, we will make an endeavour to understanding the meaning of the same through various judicial pronouncements and legal authorities.

 

Bloomsbury’s Dictionary of Law defines ‘royalty’ as “money paid to an inventor, writer, or the owner of land for the right to use his or her property.”

 

Oxford Dictionary of Law defines ‘royalty’ as “a sum payable for the right to use someone else’s property for the purpose of gain. Royalties are paid on *wasting assets, which have a limited lifespan.”

 

Thus, upon cumulative reading of the abovementioned definitions and Section 9 of the Act of 1957, it can be safely surmised that ‘royalty’ is the money paid for removal or consumption of mineral from the leased area. Payment of such ‘royalty’ creates a legal fiction whereby rights to remove or consume the mineral accrue to the mining lease holder.

 

On first blush, ‘royalty’ may look like a ‘tax.’ But what is a ‘tax’? Black’s Law Dictionary defines ‘tax’ as “a charge usually monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue.” So, ‘tax’ is a kind of ‘charge’, but now what is a ‘charge’. Black’s Law Dictionary defines ‘charge’ as “an encumbrance, lien or claim <a charge on property>; to impose a lien or claim; to encumber.”

 

All this is likely to sound very confusing and that is why, let us now move on to the observations made by the majority judgment in the Mineral Area Development Authority (supra) case, that would clear the air. I quote: -

 

“The essential characteristics of royalty are that

(i) it is a consideration or payment made to the proprietor of minerals, either the government or a private person;

(ii) it flows from a statutory agreement (a mining lease) between the lessor and the lessee;

(iii) it represents a return for the grant of a privilege (to the lessee) of removing or consuming the minerals; and

(iv) it is generally determined on the basis of the quantity of the minerals removed.”

 

 According to the majority, the rates of ‘royalty’ are fixed by the government and is paid by virtue of a mining lease. “Through the mining lease, the government parts with its exclusive privilege over mineral rights.” It was further stated that: -

 

“On first principles, royalty is a consideration paid by a mining lessee to the lessor for enjoyment of mineral rights and to compensate the lessor for the extraction of minerals from the land. The liability to pay royalty arises out of the contractual conditions of the mining lease.”

 

To explain further, the Court noted that “the payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.”

 

Thus, as per the majority judgment, ‘royalty’ is nothing but a consideration under a contract to the Government for acquiring exclusive and special privileges, and it would not be prudent to term the same as a ‘tax’.

 

However, the minority judgment did not agree with the above-stated reasoning and went on to hold that ‘royalty’ is indeed a ‘tax’. To substantiate, the minority judgment discussed Entry 54, List – I of Schedule VII appended to the Constitution of India that provides as under: -

 

“Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.”

 

According to the minority, since the Act of 1957 has been enacted under Entry 54 and once such a legislation has been made by the centre, the powers of the states in this regard could be said to be curtailed as provided in Entry 49 and 50 of List – II, that are reproduced hereinbelow: -

 

“49. Taxes on lands and buildings.

50. Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.”

 

The crux of the reasoning of the minority judgment seems to be that as long as a central legislation enacted under Entry 54, List – I, continues to occupy the field, there cannot be any law framed by the states with respect to mining imposing any tax. Put in other words, some of the provisions of the Act of 1957, which is a central act, acted as limitations on the powers of the State Governments as envisaged in Entry 50, List – II.

 

Honestly, I cannot countenance such reasoning as I fail to see its relationship with the issue of meaning of ‘royalty’.  No doubt Entry 54 of List – I, confers unbridled powers relating to regulation of mines and mineral development on the Union, yet Entry 50 of List – II nowhere provides that once a law has been enacted by the centre, the states shall be precluded to deal with the same. The field of mining is a vast one and there are myriad processes involved in it. The Act of 1957 is simply an overarching legislation to cover the broad contours of mining. For dealing with the ancillary issues, the Constitution of India has enacted Entry 50 of List – II for the states. It simply provides that the states can impose taxes on mineral rights subject to limitations imposed by the Parliament in this regard. Thus, the limitations cannot be imaginary one and a law on mining ipso facto cannot be construed as a limitation on the law-making power of the states. Of course, if the states impose tax on any mineral rights that the Parliament is explicitly limiting, then there would be a conflict and then the embargo provided in the Entry 50 of List – II shall become active.

 

Another reasoning of the minority judgment is that if all the states would start levying taxes under Entry 49 List – II on mining lands and bypass Entry 50, then there would be grave differences in prices of minerals and interest of mineral development would suffer. I think this is an unfounded fear, and constitutionality of a law can never be based on its fear of violation. If the Constitution has provided taxing powers to the states, then let them exercise it and if they exercise it wrongly, the courts can always interfere.

 

Further, the nature of ‘royalty’ under Section 9 of the Act of 1957 also needs to be seen. It is being imposed on the activity of removal or consumption of mineral. Thus, a specific activity has been aimed that involves erosion of mineral resources of the lessor i.e., the government. So, in order to compensate the government to the extent of losses suffered due to such removal or consumption of minerals, an arrangement has been entered into between the lesser and the lessee. Absolute ownership of mining lands is never given by the governments. Such lands are always given on lease. There cannot be any doubt that lease is a contract. Once we accept that lease is a contract, then the other activities flowing from such contract would also be termed as a contractual obligation only, and hence, it would not be prudent to term such ‘royalty’ as a ‘tax’. It is not as if every mining lease holder is required to pay ‘royalty’. Only those lease holders who mine and remove/consume the minerals are required to pay so.

 

Therefore, I wholeheartedly subscribe to the majority reasoning in the above-stated judgment. It is a landmark judgment, and it has touched on so many important issues that it is not possible for me to deal with them in this post.