Royalty Paid By Mining Leaseholders Is Not Tax, Says Supreme Court

Royalty paid by a mining leaseholder is not in the nature of a tax and a state's power to impose taxes on mineral-bearing lands is not limited by any provision of the Mines and Minerals (Development and Regulation) Act of 1957, the Supreme Court has held.

Royalty is a contractual consideration paid by a mining leaseholder to its lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease, the top court has held.

The court further held that the legislative power to tax mineral rights rests with state legislatures. "Parliament does not have the legislative competence to tax mineral rights under the relevant entry of the Union List," it said.

Parliament cannot use its residuary powers to impose taxes on mineral rights, the top court said.

On the issue of the quantum of tax that the states can impose, the court said that the yield of mineral bearing land in terms of the quantity produced can be used as a measure by the states to tax such lands.

The judgment was delivered by a nine-judge bench of the top court with an 8:1 majority. Chief Justice of India DY Chandrachud pronounced the majority verdict.

In her dissenting opinion, Justice BV Nagarathna said that allowing states to tax mineral rights could result in unhealthy competition among them for revenue, potentially exploiting the national market. This, in turn, would lead to a breakdown of the federal system in the context of mineral development, she said.

It is important to note that after the judgment was delivered, the lawyers questioned the court regarding its applicability, meaning whether the judgment would be applied retrospectively or prospectively. The court will decide this on July 31.

The hugely contentious case, filed nearly 25 years ago, pertains to the question of whether royalty paid by a mining leaseholder is in the nature of tax or not.

In other words, the court was tasked with determining the true nature of royalties paid for minerals produced or extracted from mines.

Crucially, the court also needed to decide on the aspect of whether the provision pertaining to royalty in respect of mining leases in the Mines and Minerals (Development and Regulation) Act of 1957 denudes the power of states to levy taxes on mineral rights.

Notably, the case was referred to a bench of nine judges without being referred to a five-judge bench or a seven-judge bench because of an alleged 'typographical error' in a 1989 judgment of the top court.

In 1989, the Supreme Court held that royalty is a tax. A seven-judge bench of the court rendered this decision.

However, a five-judge bench of the top court cast certain doubts on this decision in 2004. The court had held that royalty is not a tax and that the seven-judge bench's decision in this regard was a "typographical" or an inadvertent error.

Since there was an apparent conflict between the two apex court judgments, the question as to whether royalty is a tax or not was referred to a nine-judge bench.