Introduction:

The case Mineral Area Development Authority v. M/S Steel Authority of India & Ors., revolves around the legislative competence of the State to impose a tax on land used for mining purposes. This issue stems from the Bihar Coal Mining Area Development Authority (Amendment) Act 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules 1994, which levied a tax on mining land. The petitioners challenged the validity of these levies, arguing they were beyond the legislative competence of the State legislatures under the Indian Constitution, specifically concerning Entries 49 and 50 of List II (State List) and Entry 54 of List I (Union List) of the Seventh Schedule.

Facts of the Case:

1. Enactment of the Mines Act (1957):

The Mines and Minerals (Development and Regulation) Act, 1957 was enacted by the Union Government to regulate the development and mining of minerals in India. Section 9 of the Act stipulated that mining leaseholders must pay a royalty for any mineral extracted or consumed from the leased area. This provision put control of mining activities under the Union Government’s jurisdiction.

2. Grant of Mining Lease to India Cement Ltd. (1963):

On 19 July 1963, the Tamil Nadu government granted a mining lease to India Cement Ltd., a public limited company, for the extraction of limestone and kankar in the state. The terms of the lease provided that India Cement Ltd. would pay a royalty to the government for the minerals extracted from the leased area, in accordance with the rates set under the Mines Act.

3. Imposition of Local Cess under Madras Panchayat Act (1958):

The Madras Panchayat Act, 1958 (Section 115(1)) imposed a local cess on land revenue paid to the government, at a rate of 45 paise per rupee of land revenue, for each panchayat development block. The cess was intended to provide financial resources for local panchayat bodies. This provision applied to the land and mineral rights within the state, including areas used for mining.

4. Challenge by India Cement Ltd. (1963):

India Cement Ltd. challenged the imposition of the cess, arguing that it was essentially a tax on the royalty paid for the extracted minerals. They contended that this levy was beyond the legislative competence of the Tamil Nadu government, as the royalty payment was already regulated under the Mines Act. India Cement Ltd. argued that the state did not have the authority to impose any further tax or cess on royalty under the Act.

5. Judgment of the Madras High Court (1965):

A single-judge bench of the Madras High Court held that the cess imposed by the Tamil Nadu government was a tax on land, which fell within the state’s legislative competence under Entry 49 of the State List (Constitution of India). The bench noted that the cess was connected to the land from which the minerals were extracted and did not directly pertain to the royalty on minerals themselves. A Division Bench of the Madras High Court later reaffirmed this decision, holding that the cess was a charge related to the land and was thus within the state's jurisdiction to levy.

6. Appeal to the Supreme Court (1989):

India Cement Ltd. appealed the decision to the Supreme Court of India, asserting that the cess on royalty was, in essence, a tax on royalty, which should be covered by the Mines Act and thus outside the jurisdiction of the state government. India Cement contended that since the Mines Act already governed the royalty structure, the state was not empowered to levy a separate cess.

7. The India Cement Judgment (1989):

In India Cement Ltd. v. State of Tamil Nadu (1989), a seven-judge bench of the Supreme Court ruled that is a tax under the Mines Act. The Court held that since royalty was already regulated by the Union Government under the Mines Act, a cess imposed on that royalty by the Tamil Nadu government was beyond the state’s legislative competence. The Court concluded that the Union's legislative control over mining and mineral rights “covered the field,” making it impossible for the state to impose any additional tax or cess on royalty payments.

8. Subsequent Developments and Kesoram Industries Ltd. (1992-1999):

In Kesoram Industries Ltd. v Coal India Ltd. (1992), the Calcutta High Court struck down similar cesses on coal and tea plantations, relying on the India Cement decision. The case further emphasized that the Union government had full control over taxation in the mining sector.

However, in State of Madhya Pradesh v Mahalaxmi Fabric Mills Ltd (1995), the Supreme Court reaffirmed the India Cement ruling, rejecting the argument that there had been a typographical error in the decision.

9. The Kesoram Industries Decision (2004):

A five-judge bench of the Supreme Court in State of West Bengal v Kesoram Industries Ltd. (2004) revisited the India Cement decision, concluding that there had been a clerical error in the judgment. The Court clarified that royalty is not a tax but a contractual payment to the lessor. The judgment held that a cess on royalty could be levied by states under Entry 49 of the State List as a tax on land and mineral rights.

10. Escalating Disputes and Referral to a Nine-Judge Bench (2004-2011):

Following the Kesoram Industries decision, multiple Special Leave Petitions and writ petitions arose concerning the constitutionality of royalty and cess. These cases related to similar disputes in Bihar and Uttar Pradesh, with challenges against state levies on mineral rights and royalties.

On 30 March 2011, a three-judge bench of the Supreme Court referred the issue to a nine-judge bench due to the significant constitutional implications of the matter.

11. Nine-Judge Bench Hearing and Judgment (2024):

After more than a decade of legal proceedings, the Supreme Court, on 15 January 2024, began hearing arguments before the nine-judge bench. The Court considered the India Cement, Kesoram Industries, and Mahalaxmi Fabric Mills judgments in light of current disputes regarding the levying of cess on royalties and the legislative powers of states.

On 25 July 2024, the nine-judge bench, by an 8:1 majority, ruled that state governments had the constitutional authority to impose taxes on mineral lands and mineral rights, under Entries 49 and 50 of the State List. However, Justice Nagarathna dissented.

Issues:

1. What is the true nature of royalty determined under s. 9 r/w s.15 (1) of the MMDR Act of 1957 and whether a royalty is in the nature of tax?

2. What is the scope of entry 50 List II of the 7th Schedule of the Constitution of India and what are the limitations imposable by Parliament in the exercise of its power under entry 54 List I

3. Whether the expression - 'subject to any limitations imposed by Parliament by Law relating to Mineral development' in Entry 50 List II partially subjects this entry to Entry 54 of List I

4. What is the scope of Entry 49 List II and whether it includes taxes based on land produce value;

5. Whether Entry 50 List II specifically deals with mining land, and if so, whether it takes precedence over Entry 49 in List II when it comes to matters related to mining land.

Observation

1. True Nature of Royalty under the MMDR Act:

The Court held that royalty determined under Section 9 read with Section 15(1) of the Mines and Minerals (Development and Regulation) Act (MMDR Act) is not in the nature of a tax.

2. Scope and Limitations of Legislative Powers under Entry 50 of List II and Entry 54 of List I:

The Court clarified that Entry 50 of List II of the Seventh Schedule of the Constitution empowers the State Governments to impose taxes on the extraction and subsequent use of minerals within their territories, subject to any limitations imposed by Parliament under laws relating to mineral development. The legislative competence of States to levy such taxes remains intact unless explicitly limited by Parliament.

3. Interplay between Entries 50 and 54:

The phrase "subject to any limitations imposed by Parliament by law relating to mineral development" in Entry 50 List II indicates a partial subordination to Entry 54 List I

4. Scope of Entry 49 of List II and Its Relationship with Mineral-bearing Lands:

Entry 49 of List II pertains to taxes on lands and buildings. The Court concluded that mineral-bearing lands fall under this entry, and the value of the minerals extracted can be used as a measure to tax such lands. This interpretation does not conflict with Entry 50 List II or Entry 54 List I, as the tax on land remains distinct from the regulation of mineral development.

5. Precedence of Entry 50 over Entry 49:

The Court held that Entry 50 of List II, which specifically deals with taxes on mineral rights, takes precedence over Entry 49 in matters related to mining lands. This ensures that State legislatures have the authority to impose taxes on mineral rights without undermining their competence by Entry 49.

6. Prospective Application of the Judgment (2024):

On 31 July 2024, the Court addressed concerns over the retrospective application of the judgment. It ruled that the decision would apply retrospectivelyfrom 1 April 2005, meaning states could not demand taxes or cess for transactions before that date. The Court clarified that no penalties or interest would be imposed on outstanding tax demands, and the taxes would be paid in staggered instalments over the next 12 years, starting from 1 April 2026.

Implications:

• The long-standing dispute eventually resulted in the formation of a nine-judge bench to resolve the conflict between India Cement and Kesoram Industries judgments.

• On 25 July 2024, the nine-judge bench ruled in favor of states' power to impose taxes on mineral lands and rights under Entries 49 and 50 of the State List.

• Justice Nagarathna dissented, challenging the decision.

• The case sets a precedent for future tax disputes between state and central governments concerning mining and mineral rights.

• The ruling has significant implications for mining companies as it clarifies tax liabilities and the retrospective application of royalty-related taxes.