Why did SC's 9-judge bench hold that states have the power to levy tax on mineral extraction?

The dispute on whether royalty was a form of tax dates back to the 1960s when a cement manufacturer challenged the Tamil Nadu government’s cess on the land from which mineral was extracted.

Moneycontrol explains what the case is about and  what made a nine-judge bench hear it and what was held by the apex court ultimately.

What is the case about?

In 1957, the central government brought in the Mines and Minerals (Development and Regulation) Act (MMDR Act).  The Act gave the Centre full control of mines and minerals. The government then leased out land in which minerals were present to private players, for a royalty for extraction of minerals.

Consequently, the central government undertook a periodical exercise for the determination of royalty rates, after taking into consideration the fiscal requirement of the states, based on the assumption that states have no right to levy tax on minerals over and above the royalty.

This would mean that while minerals were extracted from lands located within a state, states would not be able to levy taxes for the use of land. The royalty amount was fixed by the central government and the states would get a share of it.

Since the Constitution empowered states to levy taxes within their borders, they claimed that they could levy tax for the usage of the land that is situated within their geographical boundaries. However, the Centre contended that since it had the control of the minerals under the MMDR Act, states could not levy any tax in addition to the royalty that the Centre was already levying.

In 1963, the Tamil Nadu government granted a mining lease to India Cements for extracting limestone and kankar, and the company was to pay royalty under the MMDR Act. However, the Tamil Nadu government imposed a local cess for the use of the land in which minerals were present. India Cements took the state government to the Madras High Court, challenging this cess.

The high court held that the Tamil Nadu government was competent to levy such a cess under Entry 49 of the State List. Furthermore, the HC noted that the cess was imposed on the usage of land and not on extracting minerals.

India Cements appealed against the decision in the SC , and a seven-judge bench was formed to look into the issue in the 1980s. The court held that the royalty was indirectly related to the minerals extracted and hence “royalty is a tax” under the Mines Act. A cess on royalty being a tax on royalty was beyond the state’s legislative competence.

In 1992, the Calcutta High Court held a cess on coal by West Bengal as unconstitutional, saying the state did not have the power to do so under the Constitution. The Bench noted that the cess imposed by West Bengal was similar to the one struck down in 1989 in the India cements case.

In 2000, the Allahabad High Court upheld Section 35 of the UP Special Area Development Authorities Act, 1986, which levied a cess on minor minerals, creating a difference of opinion within the country.

The issue ultimately reached the Supreme Court, and, in 2004, a five-judge bench of the apex court said that there was a typographical error in the 1989 verdict and that royalty was not a tax. However, since a seven judge bench had already ruled on the dispute, the case was referred to a nine judge bench.

What did the court hold?

The nine-judge bench heard the case in March 2024 for eight days. Attorney General R Venkataramani, appearing for the Centre, had contended that the Union had overriding powers with regard to taxing mines and minerals.

Solicitor General Tushar Mehta, also representing the Centre, said the entire architecture of the MMDR Act is a limitation on the states' legislative power to impose tax on minerals, and under the law, the central government has the power to fix royalty.

The court, in its judgment, held that royalty is not a tax. “Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoying mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease,” it said.

Holding that the states had the power to levy taxes on mineral extraction, the SC said: “The legislative power to tax mineral rights vests with the state legislatures.” The judgement held that states can use mineral yield or value as a measure to tax mineral rights and mineral-bearing lands, and that the MMDR Act does not impose limitations on the states' taxing powers.