Introduction
The question of law whether
Royalty is a tax or not was crucial to be decided for the fiscal federalism of
India. A seven-judge bench of the Supreme Court in the case of India
Cement Ltd. v. State of Tamil Nadu[i]
held that Royalty is a tax. Later in time, a constitution bench of the
Supreme Court in the case of State of West Bengal v. Kesoram Industries Ltd.
[ii]
stated that decision in the case of India Cement Ltd.[iii]
stemmed from the inadvertent clerical error and clarified that royalty is
not a tax. In the background of these judgments, several suits were filed
questioning the taxing power of the State under Entry 50 of List II of the Seventh
Schedule of the Constitution.
Issues
Several issues were framed during
the hearing of the case and were framed into the following 5 issues.
1. Whether
Royalty is taxed or not?
2. The
inter-relationship between Entry 50 of List II and Entry 54 of List I of the
Seventh Schedule. Whether Mines and Minerals (Development and Regulation) Act,
1957 limit the power of the State under Entry 50 of List II of the Seventh
Schedule?
3. Whether
the expression “subject to any limitations imposed by Parliament by law
relating to mineral development” in Entry 50 of List II pro tanto subjects the
entry to Entry 54 of List I, which is a non-taxing general entry”?
4. What
is the scope of Entry 49 of List II of the Seventh Schedule and whether it
covers a tax measured on the value of the produce of the Land?
5. Whether
Entry 50 of List II is a specific entry in relation to Entry 49 of List II, and
would consequently subtract mining land from the scope of Entry 49 of List II?
The Supreme Court in the present
case delivered the judgment in 8:1 where Justice BV Nagarathna dissented.
Relevant Provisions Involved in the Case
1. Article
246: This Article enumerates the following principles regarding the
legislative powers of the Union and the State[iv].
a.
Parliament has the exclusive power to make laws
with respect to the legislative fields mentioned in Union List i.e List I of
the Seventh Schedule
b.
The State has the exclusive power to make laws
with respect to the legislative fields mentioned in the State List i.e. List II
of the Seventh Schedule.
c.
The exclusive power of the State is subject to
the exclusive power of the Parliament with respect to matters enumerated in
List I. It means that the power of the Parliament will prevail pro tanto
over the power of the State in the conflict between entries of List I and II.
d.
The State and the Parliament have the concurrent
power to make legislation in respect of the Concurrent list i.e. List III
of the Seventh Schedule.
e.
The Parliament law will prevail over the State
law over the same entry in List III.
f.
The power of the State in List II and List III
is subject to the power of the Parliament in List I
2. Entry
50, List II: Taxes on mineral rights subject to any limitations
imposed by Parliament by law relating to mineral development.
3. Entry
23, List II: Regulation of mines and mineral development subject
to the provisions of List I with respect to regulation and development under
the control of the Union.
4. Entry
49, List II: Taxes on lands and buildings.
5. Entry
54, List I: 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.
ISSUE 1
The Supreme Court delved into the
characteristics of Royalty and the characteristics of Tax to decide whether Royalty
is taxed or not.
The Supreme Court referred to the
judgment in the case of D.K. Trivedi v State of Gujarat[v]
to know the characteristics of Royalty. The Court in the said case
distinguished between surface rent, royalty and dead rent. Surface rent is the
rent for the area leased, royalty is the amount in proportionate to minerals
extracted from the leased land and dead rent is the fixed amount to be paid to the lessor whether the mine was worked or not. So, the Court formulated the
following characteristics of the royalty.
1. Consideration
made to the proprietor of minerals
2. Statutory
agreement
3. Represents
a return for the grant of privilege of removing or consuming the minerals.
4. Determined
on the basis of the quantity of minerals removed.
Dead rent is not in addition to
royalty but an alternative.
Then, the Supreme Court moved on
to the characteristics of tax. For this, the Supreme Court referred to the landmark
judgment in the case of Commissioner, Hindu Religious Endowment, Madras v.
Sri Lakshmindra Thrita Swamiar of Sri Shirur Mutt[vi].
The Court in the said laid down the following characteristics of tax.
1. Tax
is paid out of the compulsion i.e. without the consent of the taxpayer and
enforced by the law.
2. The
tax is levied for the public purpose without reference to any special benefit
to be given. It means no quid pro quo arrangement between taxpayer and public
authority.
3. It
is part of a common burden. The quantum of imposition upon the taxpayer depends on
his capacity to pay.
Lastly, the Court referred to
Article 366 (28) and the judgment in the case of CIT v. McDowell Co. Ltd.[vii]
to decide whether royalty is taxed or not.
Article 366 (28) defines the term
“taxation” as the imposition of any tax or impost, whether general local or
special. In the said judgment of McDowell[viii]
the court interpreted the word “impost” and stated as follows”
-
Impost is a compulsory levy, levied under
Article 265.
-
Tax, duty, cess, and fees are various kinds of
impost by the State.
-
Power to tax is an incident of sovereignty.
-
Taxation needs a legislative action under
Article 265; cannot be imposed exercising the executive power of the Union and the
State under Articles 73 and 162.
-
A liability founded on the principle of contract cannot be taxed, Tax is the nature of compulsory exaction.
On these grounds, the Supreme
Court ruled that royalty is not a tax. As royalty is a consideration paid under
a contract to the State Government for acquiring exclusive privileges and
rights and cannot be termed as impost or tax.
ISSUE 2 and 3
The Supreme Court before stating the inter-relationship between Entry 50 of List II and Entry 54 of List I,
it laid down the relationship between Entry 23 of List II and Entry 54 of
List I.
Both the Entries 23 of List II
and 54 of List I are general entries. These entries relate to the
regulation of mine and mineral development.
The State has the power to make laws for the regulation of mine and mineral
development and this power is subject to the limitation mentioned in Entry 54
of List I. Entry 54 of List I has three essential elements: a) Parliament
must make a law, b) the law must contain a legislative declaration that it is
in the public interest to bring the regulation of mines and mineral development
under its control and c) lay down the extent of the law.
The Court referred to judgments
in three following cases laid down that:
- Hingir-Rampur Coal Co. Ltd. v State of Orissa[ix]: The State cannot impose fees by exercising legislative power under Entry 23 read with Entry 66 of List II if Entry 54 of List I cover the field. Entry 66 of List II lays down that the State can impose fees in matters enlisted in general entries, except court fees. The reason is that when the field is covered by Entry 54 of List I then the State cannot legislate in that field owing to the lack of jurisdiction.
- State of Orissa v. MA Tulloch[x]: Legislative competence under Entry 66 read with Entry 23 of List II is affected by Entry 54 of List I.
- Baijnath Kedia v. State of Bihar[xi]: The limitation needs to be expressed; it can be implied through the provisions of the law. However, the Supreme Court declined to accept this ratio and stated that limitations should be expressed in the provisions of the law. The reasoning behind this is explained later.
Now, coming to the
inter-relationship between Entry 50 of List II and Entry 54 of List I. The
Supreme Court stated though Entry 50 of List II is sui generis in nature as it
is the only tax entry which is subjected to the general entry is not an exception
to the law laid down in the case of MPV Sundararamier & Co. v State of
Andhra Pradesh[xii].
In this case, the Supreme Court laid down that general entry does not encompass
the taxation power.
The Supreme Court explained the
term “any limitation”. The Supreme Court gave a wide meaning to this term and
stated the limitation can be a) grant or revoke of permission or license, b)
complete prohibition, c) control and d) issue directions.[xiii]
The Court referring to the judgment of Gujarat High Court in the case of Tata
Chemicals Ltd. v. State of Gujarat[xiv]
explained the meaning of the “mineral rights” and “mining rights”. Mineral
rights refer to the title over certain minerals whereas mining rights refer to
the right to enter upon or occupy land for the purpose of work. The Court also
declined to accept the dissenting view of Justice S B Sinha in the case of Kesoram
Industries Ltd.[xv]
wherein Justice Shah stated that mineral rights culminate with the
extraction of minerals and the right to dispatch minerals is not covered under
mineral rights. The Court stated that royalty is a mineral right and royalty is
paid on the dispatch of minerals thus right to dispatch is also included in the
ambit of mineral rights.
In last, referring to the
judgment in the case of Hoechst Pharmaceuticals[xvi]
for the rules of interpretation of different entries in different lists.
These rules are as follows:
i)
The entries should be read together, without
giving narrow meaning.
ii)
Whether entries can be reconciled.
iii)
The doctrine of pith and substance.
Only after these, Article 246(1)
should be invoked to subject the State legislative power to that of the
Parliament. By referring to these two judgments Hoechst Pharmaceuticals[xvii]
and MPV Sundararamier[xviii]
the Court held that the Parliament can only impose limitations and not tax
as Entry 54 of List I is the general entry and not the taxing entry.
Also, the Court stated that
there is nothing in the MMDR Act, 1957 which imposes a limitation on the State
taxation power. The Court rejected the contention of the doctrine of implied
limitations as propounded in the case of Kesavananda Bharti v. State of
Kerala[xix].
The court stated that when the law is clear in its terms there is no scope to this
doctrine. The law is clear in Entry 50 of List II as limitations can be imposed
by Parliament by law relating to mineral development. Thus, merely enacting a law
for mineral development will not limit the power of the State, it should
expressly limit the power.
ISSUE 4 & 5
Entry 49 of List II refers to
the tax on lands and buildings. The Supreme Court grappled with the question
of whether mineral differs from land? The Supreme Court held that rights in
minerals follow the ownership of land. The Supreme Court referred to the
definition of immovable property under the Transfer of Property Act, of 1882 and the General Clauses Act, of 1897. The Court held the MMDR Act, 1957 does not provide the
ownership of land to the State. The Court referred to the judgment in the case
of Raja Anand Brahma Shah v. State of UP [xx]
to state that the transfer of the right to surface conveys the right to minerals
underneath unless expressly provided. Also, the Court referred to the judgment
in the case of Thressiamma Jacob v. Geologist, Dept. of Mining and Geology[xxi]
to state the ownership of minerals follows ownership of land unless
deprived through valid law. That means the state can deprive the right to minerals of the owner of the land. In conclusion, land means the surface, beneath it and the sky
above it. Also, land under Entry 49 of List II includes the minerals lands as
the subject matter of these two entries is different.
The Court referring to the
question of severance between surface rights and mineral rights referred to the
judgment in the case of Burrakur Coal Ltd. v. Union of India[xxii]
to state that severance between these two things cannot take place during
the mining operation. Mining operation requires both surface rights and
mineral rights. The minerals rights are transferred on the specified day of the
commencement of the lease (reference to Section 110 of the Transfer of Property Act,
1882).
Lastly, the Court referred to
the judgment in the case of Goodricke Group Ltd. v. State of West Bengal[xxiii]
to state that income or yield of land can be taken as a measure of the tax. It is
the principle of law that measures of tax do not determine the nature of tax but
measures of tax should have a direct and reasonable connection with the nature of
tax. Thus, the question before the Supreme Court was that can royalty be used
as a measure of tax to impose a land tax under Entry 49 of List II? The Court in
the case of India Cements[xxiv]
had held otherwise that royalty cannot be used as a measure of tax to impose
tax on land. However, the Supreme Court overruling this stated that royalty has a direct connection with the yield of the land (minerals extracted from land x
Rate of royalty). Thus, it can be used as a measure to impose a tax on land.
CONCLUSION
In conclusion, the Supreme Court
upheld the power of the State to impose a tax under Entry of 50 List II and this power
can be limited by the Parliament by enacting the express law up to the extent
of prohibition. But the Parliament cannot impose a tax under the garb of regulation.
The State can impose a tax on land under Entry 49 of List II by measuring through
royalty. Land under Entry 49 of List II encompasses mineral land. Lastly, Royalty
is not a tax. Thus, it will not come under Entry 50 of List II.
[i]
(1990) 1 SCC 12 [34].
[ii]
(2004) 10 SCC 201 [71].
[iii] Supra, note i.
[iv] Hoechst Pharmaceuticals v. State of
Bihar (1983) 4 SCC 45.
[v] 1986
(Supp) SCC 20.
[vi] (1954)
1 SCC 412.
[vii] (2009)
10 SCC 755.
[viii]
Ibid.
[ix] (1961)
2 SCR 537.
[x] (1964)
4 SCR 461.
[xi] (1969)
3 SCC 838.
[xii] (1958)
1 SCR 1422.
[xiii]
Jindal Stainless Steel Ltd. v.
State of Haryana
[xiv] 1988
SCC OnLine Guj 13.
[xv] Supra,
note ii.
[xvi] Supra,
note iv.
[xvii]
Ibid.
[xviii]
Supra, note xii.
[xix] (1973)
4 SCC 225 [210].
[xx] 1966
SCC OnLine SC 89 [13].
[xxi](2013)
9 SCC 725.
[xxii]
AIR 1961 SC 954.
[xxiii]
1995 Supp (1) SCC 707.
[xxiv]
Supra, note i.
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