MARCH 21, 2018

By R Sahana

ARTICLE 297 of the Constitution of India vests in the Union all things of value within the territorial waters, or the continental shelf, or the exclusive economic zone of India. In other words, the right of ownership in land and the minerals arising from such land within the territory of India, lies with the Union.

Article 245 read with Article 246 of the Indian Constitution grants the Parliament with the powers to make laws on subjects enumerated in List I (Union List) and List III (Concurrent List) of the Seventh Schedule of Constitution of India. Regulation of mines and mineral development is a subject matter enumerated in List I of the Seventh Schedule.

In accordance with this power vested in the Parliament, the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and the rules made thereunder came into existence.

Since the ownership in the land on which mining activity is undertaken and the minerals arising out of such activity vests in the Union as constitutionally recognised by Article 297, the Government grants a lease to persons undertaking mining activities for which an amount is required to be paid in the form of 'Royalty'. The machinery to levy the said amount flows from the provisions of the MMDR Act.

The question that shall be delved upon in this Article is whether the service of granting the mining lease and the consideration in the form of royalty received by the Government is a tax levied by the Government or is a consideration for doing an activity. In case of the former, there can be no liability to levy service tax/GST on the payment made.

Service tax is a tax on the act of providing a service and GST, a tax on the act of rendering a 'supply'. No doubt that there is a positive activity undertaken by the Government by way of granting a mining lease. However, both the erstwhile service tax as well as GST requires the taxable event to be rendered 'for' a consideration which is generally understood as a 'quid pro quo', i.e., something in return of value. Therefore, the nature of the payment made for the service/supply rendered is decisive of the taxability of the activity in question.

Royalty – Whether a tax or not?

"A tax", as Latham, C.J. put it in in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 " is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for services rendered". Therefore, there is no element of quid pro quo between the person who pays tax and the public authority who imposes it. This also means that such a tax cannot be said to be a consideration for a service/supply and consequently, cannot be liable to service tax or GST.

If, 'royalty' levied and collected in accordance with the MMDR Act has the qualities of being a 'tax', the same cannot be said to be a consideration for the mining lease granted by the Government and thereby, not liable to either service tax or GST.

The very same question came up before a three-Judge Bench of the Apex Court in the case of Mineral Area Development Authority and others v. Steel Authority of India and others (2011) 4 SCC 450 wherein the Court had framed eleven questions of law and referred the matter to a Bench of nine Judges. Judges. The very first question referred was on the issue of whether 'royalty' determined under the MMDR Act is tax.

The reference to the bench of nine judges was made due to an ostensible conflict arising out of the decision of a Bench of five Judges of the Apex Court in the case of State of W.B. vs. Kesoram Industries Limited and Ors, (2004) 10 SCC 201 and the decision delivered by a seven-Judge Bench of the same Court in India Cement Ltd. v. State of Tamil Nadu (1990) 1 SCC 12. The question as to whether royalty is in the nature of a tax was answered in negative by the Supreme Court of India in the case Kesoram Industries while the same was answered in the positive in the case of India Cement Ltd.

While the issue is currently pending before nine judge bench of the Supreme Court, this Article intends on briefly discussing the holdings of the Apex Court in the aforesaid landmark judgements of Kesoram Industries and India Cement Ltd. to better understand the reasonings adopted.

India Cements Ltd.

To begin with, whether 'royalty' is a tax or not was not a question that arose for determination in the case of India Cements Ltd. The actual question before the Court was the constitutional vires of the cess levied on such royalty. The Hon'ble bench recognized the fact that the question as to whether royalty is a tax or not was not very material for the purpose of determination of the question in the case. Thus, the holding of the Court can be said to be an obiter dictum .

Further, a reading the judgement indicates that although the bench holds that royalty is a tax, the same paragraph of the judgement concludes with the phrase 'royalty on mineral rights is not a tax on land but a payment for the use of the land', thereby, directly contradicting the former holding.

Kesoram Industries

The judgement of the Hon'ble Apex Court in the case of Kesoram Industries subsequently examined the aforesaid case of India Cement Ltd. and observed that the holding of the Court in India Cement Ltd. was a typographical error and what the court wanted to say was that cess on royalty is in the nature of a tax.

The Hon'ble bench held that royalty is not a tax and rather is income for the lessor granting the lease. The Court drew an analogy to an individual granting such rights and held that to such person the payment of royalty would be consideration for the rights granted and merely because the rights are granted by the State does not mean that the nature of the sum collected stands altered.

Conclusion

Independent of the various judicial precedents discussed above, the general understanding of 'royalty' is that it is a payment made for the grant of the right/privilege to mine an area of land. It is pertinent to consider the following dictionary definitions of the term 'Royalty'.

Black's Law Dictionary (Seventh Edition, p.1330) defines Royalty "as a share of the product or profit from real property, reserved by the grantor of a mineral lease, in exchange for the lessee's right to mine or drill on the land". Further Black's Law Dictionary also defined the term 'mineral royalty' 'as a right to a share of income from mineral production'. Mozley & Whiteley's Law Dictionary (Eleventh Edition, 1993) has defined 'Royalty' as "a pro rata payment to a grantor or lessor, on the working of the property leased, or otherwise on the profits of the grant of lease. The word is especially used in reference to mines/ patents and copyrights."

Such dictionary meanings play a pivotal role in moulding the understanding of why royalty is collected and the nature of the levy.

Accordingly, it can be said that there is a clear benefit that accrues to the person who is granting the right to mine for which the payment of royalty is made. In other words, there is a direct quid pro quo between the person granting the right and the person making the payment of royalty.

Various decisions rendered both Pre-and Post the decision of India Cements Ltd. have consistently held that 'royalty is not a tax'. Considering the above dictionary meanings and legal disposition so far, it can be said that royalty is not a tax and that the decision of Kesoram Industries is correct in law. However, only time can tell its tale once the decision is rendered by the Constitutional bench of the Apex Court.

(The author is Associate, LakshmiKumaran and Sridharan, Chennai and the views expressed are strictly personal.)