Introduction:

Lord Emerich Edward Acton, an English Catholic historian, politician and writer very aptly remarked, “Power tends to corrupt, and absolute power corrupts absolutely”.  It is in this context that decentralisation, or allocation of subjects amongst the Parliament and Legislatures of State, with certain overlapping subjects, assumes significance.  Running a vibrant and vast democracy such as ours efficiently and effectively requires division in responsibilities, so that the benefit of engaging with communities both at macro and micro levels as well as sustaining a system of checks and balances, all towards economic stability and substantive justice, does not spill over to nearby jurisdictions.  Decentralisation, as a functional problem-solving model, sustains on identification of the tier of Government better suited to fulfil the responsibility at hand.  India has consistently wrestled with managing frictions associated with decentralisation, viz., balancing the autonomy of Legislatures of State and coordinating role of the Parliament over varied subject matters.

It is against the background set out above, that the authors will examine a judgment by the Constitution Bench of the Supreme Court^[1].  They will examine the impact of the observations in the said judgment, scrutinising the synthesis between Centre-States powers of taxation vis-a-vis mineral rights and mineral bearing land, beyond the complex construct before the Supreme Court.

The judgment in Mineral Area (Supra):

The core issue before the Supreme Court in Mineral Area (Supra) involved the interpretation of Entry 50 of List II to the Seventh Schedule to the Constitution of India, 1949 (“Constitution”)^[2], specifically, whether under Entry 50 of List II to the Seventh Schedule to the Constitution, Legislatures of State have the power to impose “taxes on mineral rights”, notwithstanding:

• Mines and Minerals Development and Regulation Act, 1957 (“MMDR Act”), enacted under Entry 54 of List I to the Seventh Schedule to the Constitution^[3].

• Entry 23 of List II to the Seventh Schedule to the Constitution^[4].

• Entry 49 of List II to the Seventh Schedule to the Constitution^[5].

 At the very outset, the Supreme Court set out the scheme of distribution of legislative powers between the Parliament and Legislatures of State or federal supremacy, flowing from Article 245 of the Constitution.  The Parliament has the supreme and exclusive power to make laws in respect of subject matters set out in List I to the Seventh Schedule to the Constitution.  The Legislatures of State have the supreme and exclusive power to make laws in respect of subject matters set out in List II to the Seventh Schedule to the Constitution.  In the event of a direct and irreconcilable conflict (or repugnancy) between a subject matter set out in List I and List II to the Seventh Schedule to the Constitution, the power of the Parliament to make laws in respect of the said subject matter will prevail over the power of the Legislatures of State in respect thereof.  The Parliament and Legislatures of State have concurrent powers to make laws in respect of subject matters set out in List III to the Seventh Schedule to the Constitution.  In the event of a direct and irreconcilable conflict (or repugnancy) in a law made by the Parliament and a law made by the Legislatures of State in respect of a subject matter set out in List III to the Seventh Schedule to the Constitution, the law made by the former will prevail.  Instances of direct and irreconcilable conflict (or repugnancy) are resolved by application of doctrine of pith and substance.  In this regard, specific expressions used in the Constitution assume relevance.  For instance, where an Entry uses the expression “subject to”, it conveys the idea of a provision yielding to another provision, or in the instant context, of the legislative power of States set out in List II or List III being made subordinate to that of the Parliament.  Further, where an Entry uses the expression “by law”, it conveys the idea that overriding powers should be effectuated through a statue by the Parliament, not by a subordinate authority vested with powers under a statue.  The subject matter of taxation is dealt with under separate Entries in the Lists to the Seventh Schedule to the Constitution, which are not traceable to any non-taxing Entry.  If the power to tax a specific subject matter is set out under a specific legislative List, the same stands excluded from the other Lists and is legislated upon as per the scheme set out above.  The Parliament has the residuary power to tax a subject matter not set out under any legislative List.  Any tax levied or collected against the mandate of Article 245 of the Constitution will be illegal, being in violation of Article 265 of the Constitution^[6].

Having eloquently set out the scheme above, the Supreme Court dwelled into whether the field of “taxes on mineral rights” is held entirely by the Parliament, so as to exclude the same from the jurisdiction of Legislatures of State.^[7]  To this end, the Supreme Court noted that “regulation of mines and mineral development” has been entrusted to the Parliament and Legislatures of State under Entry 54 of List I and Entry 23 of List II to the Seventh Schedule to the Constitution respectively, laws declared by Legislatures of State having been made subservient to laws declared by the Parliament “in public interest”.  Therefore, provisions of the law declared by the Parliament, being the provisions of the MMDR Act, will prevail over any law declared by Legislatures of State in respect of “regulation of mines and mineral development” in the event and to the extent of a direct and irreconcilable conflict (or repugnancy).  As per the MMDR Act, the Central Government is empowered to regulate mining leases, exploration licences and composite licences.  Section 9 of the MMDR Act sets out the mechanism for determination by the Central Government of “royalty” or consideration compulsorily payable by a lessor to a lessee (a private person or concerned State Government), in lieu of grant of a mining lease in respect of any mineral removed or consumed from a leased area.  Such royalty or consideration is determined either on an ad valorem basis at a specified percentage of the average sale price, or at specific rates per tonnage basis.  The question remained whether royalty under the MMDR Act is in the nature of “tax”, so as to oust the jurisdiction of Legislatures of State to impose “taxes on mineral rights”.^[8]  The Supreme Court noted that as per Article 366(28) of the Constitution, taxation includes “imposition of any tax or impost, whether general or local or special”.  In the opinion of the Supreme Court, royalty^[9] is not in the nature of tax owing to the distinctions set out in the table below:

Since royalty imposed by the Central Government under MMDR Act is not in the nature of tax, the field of “taxes on mineral rights”, envisaged in Entry 50 of List II to the Seventh Schedule to the Constitution, is open for the Legislatures of State to occupy.  Further, though the limitation in the said Entry extends to “any (non-fiscal) limitations imposed by Parliament by law relating to mineral development”, owing to the conclusion that regulatory Entries in Lists I and II to the Seventh Schedule to the Constitution are distinct from taxing Entries, Entry 54 of List I to the Seventh Schedule to the Constitution will not include the power to tax.  Such power cannot also be exercised by taking recourse to Article 248(2) of the Constitution, which provides for residuary powers of the Parliament to impose tax not mentioned in Lists II and II to the Seventh Schedule to the Constitution, because “taxes on mineral rights” is specifically enumerated in Entry 50 of List II to the Seventh Schedule to the Constitution.  Be that as it may, as such, though specifically empowered, the Parliament has not imposed any limitation in the form of restriction, condition, principle and prohibition, in the MMDR Act relating mineral development, which has any bearing on “taxes on mineral rights”.  Finally, the Supreme Court noted that a tax levied on an activity or service rendered on or in connection with “lands and buildings” does not fall within the description of “taxes on lands and buildings” under Entry 49 of List II to the Seventh Schedule to the Constitution, for the reason that what is contemplated under the said Entry is tax on lands and buildings as a unit.  Accordingly, there is no conflict between Entries 49 and 50 of List II to the Seventh Schedule to the Constitution and limitations imposed by way of express language of the latter do not apply to the former.  Therefore, Legislatures of State have the sovereign authority to impose “taxes on mineral rights” and any potential adverse consequence on “mineral development” should be dealt with through “any limitations imposed by Parliament by law relating to mineral development”.^[10]

Fine Line Analysis:

Tax has been defined in section 2(43) of the Income-tax Act, 1961 (“IT Act”) to mean income-tax chargeable under the provisions of the IT Act, including fringe benefit tax payable under section 115WA of the IT Act.  Section 4 of the IT Act provides for the charge of income-tax for any assessment year at any rate or rates in accordance with and subject to the provisions of the IT Act in respect of total income of the previous year of every person.  Section 5 of the IT Act read with sections 7 and 9 of the IT Act provide for the scope of total income of a Resident and a non-Resident for tax purposes.  As per sections 5(1)(b) and 5(2)(b) of the IT Act, total income of the previous year of a person includes all income from whatever source, which inter-alia, is deemed to accrue or arise to him in India during such year.  As per section 9(1)(vi) of the IT Act, income deemed to accrue or arise in India includes income by way of royalty as defined under Explanation 2 to section 9(1)(vi) of the IT Act^[11].  Pertinently, section 5 of the IT Act is “subject to” or yields to the other provisions of the IT Act, including section 90 of the IT Act.  As per section 90(1)(a)(ii) of the IT Act, the Central Government is entitled to enter into an agreement with the Government of any country outside India or specified territory outside India for granting relief in respect of income-tax chargeable under the IT Act as well as under the corresponding law in force in that country or specified territory (“Double Taxation Avoidance Agreement” or “DTAA”).  Further, as per section 90(2) of the IT Act, where the Central Government has entered into DTAA, then, in relation to an assessee to whom such DTAA applies, the provisions of the IT Act shall apply only to the extent they are more beneficial to that assessee.  In a nutshell, therefore, where the Central Government enters into a DTAA, then, to the extent the provisions contained such DTAA are more beneficial to an assessee, the same shall apply over the corresponding provisions of the IT Act.  At this juncture, it would be relevant to point out that since DTAAs typically confine the scope of royalty income^[12] considerably, in comparison to the scope of royalty income under the IT Act, such DTAAs supersede the provisions of the IT Act as far as determination of scope of royalty income is concerned.^[13]  Income, which is in the nature of royalty, is ultimately taxed as per the prevailing rates of tax.  Essentially, the difference between the scope of royalty income under the IT Act and DTAAs is that while in case of the former, consideration received for parting away with any right results in royalty income, in case of the latter, it is consideration received for parting away with the right of commercial exploitation^[14], which results in royalty income.^[15]  Be that as it may, in both scenarios, royalty is regarded as income of the recipient, obligation to deduct and deposit tax on which is typically cast on the payer of such royalty.  Accordingly, the observations in Mineral Area (Supra) stand reconciled with the position captured above, since it is after a consideration has been characterized as royalty, in view of principles in Mineral Area (Supra) read with Engineering Analysis (Supra) in the context of domestic law (including, the IT Act) and in view of principles in Engineering Analysis (Supra) in the context of DTAAs, that tax, as expounded upon in Mineral Area (Supra), on such consideration is appropriately levied.

Conclusion:

The judgment of the Supreme Court in Mineral Area (Supra), in all its appearances, is likely to have a significant impact, beyond its actual dictum.  It is trite law that observations in a judgment should typically conform to hypothesis to avoid unintended or undesired outcomes.  Further, that well-intentioned Courts strenuously avoid passing judgments that may potentially lead to any unintended or undesired outcome.  However, as far as the judgment in Mineral Area (Supra) is concerned, observations thereunder, inasmuch as the same, inter-alia, obliterate the rough patches concerning the conceptual differences between royalty on one hand and tax on the other, may have a limited bearing in the context of the IT Act, for reasons that has been elaborated upon elsewhere above.  Ignorance of the said reasons is to the general detriment and fraught with danger.

Footnotes:

[1]               Mineral Area Development Authority and Another vs. Steel Authority of India and Another, 2024 SCC OnLine SC 1976 (Supreme Court).  It is relevant to state that the discussion on Mineral Area (Supra) is restricted to discussion on the relevant aspects thereof.  The minority view expressed by Hon’ble Justice B.V. Nagarathna has not been discussed for present purposes.

[2]               “Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development”.

[3]               “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 public interest”.

[4]               “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”.

[5]               “Taxes on lands and buildings”.

[6]               No tax shall be levied or collected except by authority of law.

[7]               Supra Note 2.

[8]               On this question, there was a divergence of opinion in India Cement Ltd. vs. State of Tamil Nadu, [1990] 1 SCC 12 (Supreme Court) and State of West Bengal vs. Kesoram Industries Ltd., [2004] 10 SCC 201 (Supreme Court).  The Supreme Court in Mineral Area (Supra) overturned the decision in India Cement (Supra).

[9]               As per Mineral Area (Supra), distinction between royalty and tax applies mutatis mutandis to distinction between dead rent and tax.  Dead rent is an imposition in exercise of proprietary rights by a lessor to ensure that a lessee does not keep a mine idle and in the event a lessee keeps a mine idle, it ensures flow of income to the lessor constantly.

[10]             By way of judgment dated 14.08.2024 in Mineral Area (Supra), the Supreme Court rejected prospective application of the judgment in Mineral Area (Supra).  However, bearing in mind the consequences that are likely to emanate from past period, it imposed certain conditionalities, viz., (i) demand of tax pertaining to Entries 49 and 50 of List II to the Seventh Schedule to the Constitution shall not operate on transactions prior to 01.04.2005; (ii) time for payment of demand of tax shall be staggered in instalments over a period of 12 years, commencing from 01.04.2026; and (iii) levy of interest and penalty on demand of tax made prior to 25.07.2024 shall stand waived.

[11]             Royalty means “consideration for (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iv-a) the use or right to use of any industrial, commercial, or scientific equipment but not including amounts referred to in Section 44-BB; (v) the transfer of all or any rights (including granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with radio broadcasting; or (vi) the rendering of any services in connection with activities referred to in (i) to (iv), (iv-a) and (v)”.

[12]             As per the DTAA between India and United States of America, royalty means “(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment…”

[13]             Engineering Analysis Centre of Excellence Private Limited vs. CIT and Another, [2022] 3 SCC 321 (Supreme Court).

[14]             Section 14(a) or (b) of the Copyright Act, 1947.

[15]             Supra Note 13.