Whether Royalty Should be Considered a Tax under Mining Law
Read the article by Adv. Utkarsh Srivastav on Whether Royalties can be considered a tax under mining law and the tax implications of royalty payments only on Legal Bites. I. Basic Definitions of Royalty Section 9 of the Mines and Mineral (Development and Regulation) Act, 1957 provides that a person is supposed to pay a royalty if he… Read More »
Read the article by Adv. Utkarsh Srivastav on Whether Royalties can be considered a tax under mining law and the tax implications of royalty payments only on Legal Bites.
I. Basic Definitions of Royalty
Section 9 of the Mines and Mineral (Development and Regulation) Act, 1957 provides that a person is supposed to pay a royalty if he has taken a mining lease. Royalty is defined as the payment that is made to a patentee through an agreement on each article made as per the patent or to the owner of minerals for a right to work on his mine or minerals for every tonne that is produced.
This definition was also used by the Rajasthan High court in the case of Bherulal v. State of Rajasthan. Royalty is the payment made to the owner of the mine or minerals for the right to exploit his property.
Royalty may even be defined as the compensation that is given for the use of property such as natural resources or copyrighted material. It is the share of product derived or profit reserved by the owner for permitting another person or enterprise to use the property.
Examining the cases in Question
Two cases will be looked at to determine whether royalty should be considered a tax or not i.e India Cements v. State of Tamil Nadu and State of West Bengal v. Kesoram Industries.
The view laid down in the India Cements case was that royalty is a tax and this royalty is a charge on the piece of land, labour as well as capital. This decision later came up for consideration in the 5 member bench of the supreme court in the Kesoram case wherein it was stated that the 7 member bench in the India Cements case had actually committed a typographical error and that in fact royalty was not a tax. The central theme in both these cases was in fact whether a cess or a charge can be levied by the govt. in addition to a tax.
And in both these cases, it was held that the govt. did have the power to impose royalty over and above the tax imposed. In the first case, the issue was a cess on the royalty itself and not on the land which is why it was held that royalty is a tax as the cess on royalty was held to be a tax on royalty and in that sense, a cess on another cess was to be prevented by holding that the royalty is a tax. In the Kesoram case as well, the cess was imposed on the land and not on a royalty or tax, thus, in that case, it was held that royalty is not a tax.
II. Harmonious Interpretation of otherwise conflicting judgments
On a plain reading of the two judgments mentioned above, it may seem that they are having opposite views, but on careful consideration, one would find that the underlying idea central to both cases is that royalties are to be paid as per the quantity of minerals mined over and above the rent that is due for the land.
This is in line with the prevalent practices in Canada, Brazil and Australia as well wherein royalties are charged in addition to taxes. Only when royalties are issued on taxes itself, does the question of tax on tax arise as then the appellants argue that royalty is itself a tax and therefore cannot be imposed on another tax.
The govt, being the sovereign owner of the land, has the right to lease it out to other entities for mining of minerals and other metals but at the same time, this right to mine the minerals is subject to royalty as it would be dependant upon the quantity of minerals mined, the ad valorem quantity, unit-based royalty or royalty based on profit sharing. Either way, the leaseholder is deriving profits out of the land and out of those profits, he is paying a share to the govt. which would be called royalty.
Only those who are extracting the minerals would be liable to pay royalties as they are deriving the benefit out of the extraction and so the govt is also entitled to compensation as the original owner of the land is the sovereign govt. the royalty is being paid in addition to the direct and indirect taxes incurred by the leaseholder.
If the royalty was a tax in itself, then it would be covered under the indirect or direct taxes of the govt. there is, however, one point of similarity between a royalty and a tax i.e that a royalty is in the nature of compulsory impost or payment that is payable to the govt. however, it would be important to remember that royalties would also be a compulsory payment even if the other party was not the govt. but a private person as the royalty rate is specified through agreement but since in this case, as one of the parties is the govt, the royalty rates are made applicable through statutes and not agreements.
Having said so, the agreement between the miners and the govt would still hold the ground on how much royalty is to be paid to the govt. and on what basis this royalty should be charged. As the different states are empowered to legislate upon the issue of taxes as per entry 23 of the state list of the constitution of India, different states could have different rates of seignorage rent payable by the leaseholders eg. Marble in UP is charged at Rs. 3000 per acre per annum.
While in Rajasthan it is Rs. 40/70 per 10 sq. metre of land depending on the type of usage such as for making chips or powder or to be used as blocks or sawn. while the royalty rates would be fixed by the central govt. the taxes if any would also be payable to the central govt as it occupies the field of legislation and precludes the state govt from levying a tax as was held in the case of K.C.P ltd. v. Govt. of Andhra Pradesh.
III. Recent Case law on the issue
The question most recently was decided in Sept. 2021 in the case of M/s Indsil Hydro Power v. State of Kerala wherein the view laid down in Kesoram Industries was upheld by the supreme court. Royalty is defined as the rate given for minerals which have been won from the land Because the royalty is based on the volume of minerals generated, while the contested cess is based on the same amount of minerals produced, the latter does not qualify as royalty.
Royalty has always been seen as remuneration given for the grantee’s rights and advantages, and it usually has its origins in the grantor-grantee agreement. In contrast to a tax imposed with legislative authority without regard to any specific advantage to be bestowed on the taxpayer, a royalty is based on an agreement between the parties and has a direct link with the benefit or privilege given to the grantee.
In this case, also the govt was held to be empowered to justify charging royalties on the basis of conferring the right on the leaseholders to disburse the water and enjoy the profits thereof. Thus there was a quid pro quo relation which us not seen in the case of a tax.
IV. Difference between Tax and Royalty
A tax is a common burden shared by all while the royalty would be only payable by the person who is availing of the right to extract minerals from the land of the govt. Having said that, in my personal opinion, the correct law that should be applicable is the law laid down in the Kesoram case but as it currently stands, the law in India Cements has not been overturned by a larger bench .
V. Current Position of the law
The current position of law is thus up for consideration before a 9 judge bench of the Supreme Court as this matter came up again in the case of Mineral Area Development Authority v. M/S Steel Authority Of India & Ors wherein it was referred to a 9 judge bench.
The Supreme Court is free to override the “faulty” 7 member decision of India Cements in its 9 member decision when it adjudicates the matter. Moreover, there was no review or revision filed before the Supreme Court for the India Cements case which indicates that the Supreme Court at that time; itself and the authors of that judgment did not feel that there was any typographical error in the judgment.
The approach taken by the judges in Kesoram was correct in their context and circumstances but the way in which the India Cements case was effectively overruled by a lesser bench is incorrect in my opinion as the only way to do so would be by a decision by a larger bench.
If ‘typographical errors’ were to be resorted to by all the courts as an excuse for deviation from the concept of precedent then it would open a floodgate of litigation and no court would be bound by the orders or ruling of its superior court. Thus a court needs to be very careful when it terms something as a typographical error as this reason may also be taken by a court that is not keen on the following precedent and thus the ends of justice would be defeated.
 Wharton’s Law Lexicon 14th edn. P. 833
 1999 CriLJ 4257
 Surajuddin v. State AIR 1960 MP 129
 Alamo National Bank of San Antonio v. Hurd, 485 S.W.2d 335 (Tex. Civ. App. 1972)
 1990 AIR 85
 AIR 2005 SC 1646,
 Alison Lacy and Michael J Bourassa, Mining duties, royalties and taxes in Canada, Available Here
 Vieira Rezende Advogados, Mining duties, royalties and taxes in Brazil, Available Here
 Aylin Cunsolo and Baker McKenzie, Mining in Australia: Overview, Available Here
 Karthy Nair and Neeraj Menon, At a glance: mining duties, royalties and taxes in India, Available Here
 Uttar Pradesh Minor Minerals (Concession) Rules, 1963, Available Here
 Royalty Legal Provisions, Ministry of Mines, Available Here
 AIR 1990 AP 314
 M/s. Indsil Hydro Power and Manganese Limited v. State of Kerala and Ors., Civil Appeal Nos. 9845-9846 of 2016
 H.R.S Moorty v. Collector of Chittoor and anr. 1965 AIR 177
 Supra Note 14
 Mineral Area Development Authority etc. v. M/s Steel Authority of India & Ors., CIVIL APPEAL NOS. 4056-4064 OF 1999