Based on the nine-judge bench majority opinion (8:1) delivered by CJI Dr. Dhananjaya Y Chandrachud, and the subsequent order on prospective relief dated August 14, 2024.

A nine-judge bench overruled 34-year-old precedent to hold that royalty under the Mines and Minerals (Development and Regulation) Act, 1957 (hereinafter used as, MMDR Act) is not a tax but contractual consideration, thereby affirming that States have independent plenary power to tax mineral-bearing lands under Entry 49, List II using mineral value or royalty as a valid measure, and that Parliament cannot implicitly limit this power, any limitation on State taxing power under Entry 50 must be express.

I. Key Questions

• What is the true nature of royalty determined under Section 9 of the MMDR Act, is it a tax or a contractual consideration?
• What is the scope of Entry 50, List II? Can Parliament impose limitations on State taxing power by implication, or must such limitations be express?
• Does Entry 50, List II constitute an exception to the Sundararamer principle that taxing powers are distinct from regulatory powers?
• Can a State legislature tax mineral-bearing land under Entry 49, List II using the value of minerals produced or royalty as a measure?
• Is Entry 50 a specific entry that subtracts mining land from the general scope of Entry 49?

II. The Conflict – The Heart of the Dispute

Prior Law (The India Cement Era)

For over three decades following India Cement Ltd. v. State of Tamil Nadu (1990) (seven-judge bench), the legal position was settled on three key propositions:

1. Royalty is a tax. The court held that royalty paid under Section 9 of the MMDR Act was in the nature of a tax.
2. States are denuded of competence. Because Parliament had enacted the MMDR Act under Entry 54, List I with a declaration under Section 2, the State legislatures were “denuded” of their power to levy taxes on mineral rights under Entry 50, List II.
3. Royalty cannot be a measure for land tax. The court held that royalty cannot be used as a measure to tax mineral-bearing land under Entry 49, List II, as royalty is exclusively relatable to Entry 50.

This created a heavily centralized fiscal regime for minerals, where States could not impose any additional levy on mining activities beyond the royalty fixed by the Central Government.

The Tension (The Kesoram Doubt)

In State of West Bengal v. Kesoram Industries Ltd. (2004) (five-judge bench), a Constitution Bench held that the statement “royalty is a tax” in India Cement was a typographical error and clarified that royalty is not a tax but a contractual payment. The majority in Kesoram observed that the power to tax mineral rights vests with the States under Entry 50, subject to limitations imposed by Parliament.

This created a direct conflict between benches of equal or higher strength. A three-judge bench in Mineral Area Development Authority v. Steel Authority of India (2011) referred the following eleven questions to a nine-judge bench for an authoritative ruling.

The Core Dispute – Competing Constitutional Principles

The doctrinal question was: does the Union’s regulatory power under Entry 54 implicitly swallow the States’ explicit taxing power under Entries 49 and 50?

III. Legal Principles Derived and Incorporated from Precedents

The majority opinion extensively relied on and distinguished a large body of precedents to formulate its legal principles. These are organized below as they appear in the judgment under four sub-headings.

A. Principles on the Interpretation of Legislative Entries

B. Principles on the Nature of Royalty and Tax

C. Principles on the Interplay of Entries 54 (List I) and 23 & 50 (List II)

D. Principles on Taxing Land under Entry 49, List II

IV. Application of These Principles in the Mineral Area Case

The majority applied the above principles to the constitutional and statutory framework of the MMDR Act, the Seventh Schedule entries, and the conflicting precedents. The application is structured around the three core issues.

1. Application to the Nature of Royalty (Issue 1)

The court began by examining the true character of royalty under Section 9 of the MMDR Act. Applying the distinction between tax and contractual consideration from McDowell & Co. and Devans Modern Breweries, the court held that royalty is a contractual consideration for the grant of mineral rights, not a compulsory exaction for a public purpose.

• Key points of application:
  • The compulsion to pay royalty arises from the contractual conditions of the mining lease, not from the sovereign power of taxation.
  • Applying the definition of tax from Shirur Mutt and Matthews, royalty lacks the essential characteristics of a tax: it is not an exaction by a public authority for public purposes without quid pro quo. Rather, it is a payment to the lessor (which may be a private party) as consideration for parting with mineral rights.
  • Adopting the reasoning from High Court decisions like Bherulal and Dr. Shanti Saroop, the court held that royalty is a share of produce or profit paid to the owner of land for granting the privilege of producing minerals. The liability arises only when a lessee extracts minerals in pursuance of a mining lease.
  • The fact that Section 25 of the MMDR Act allows recovery of unpaid royalty “as arrears of land revenue” is merely a procedural mechanism and does not transform its essential character into a tax.

Conclusion on Application: The observation in India Cement that “royalty is a tax” was held to be incorrect. Royalty is a contractual consideration.

2. Application to Entry 50, List II (Issues 2 & 3)

The court then addressed the scope of Entry 50 and whether the MMDR Act imposes any “limitation” on the states’ power to tax mineral rights.

• Key points of application:
  • Reaffirming the principle of distinct entries for taxation from M.P.V. Sundararamer, the court held that the power to tax mineral rights is exclusively with the states under Entry 50. Parliament cannot tax mineral rights under Entry 54 (a regulatory entry) or under its residuary powers (Entry 97, List I) because the subject is specifically enumerated in Entry 50, List II.
  • Entry 50 is not an exception to Sundararamer. The principle that taxing powers are distinct from regulatory powers remains good law.
  • Applying the principle of express limitation from Maharaj Umeg Singh and Firm Bansidhar, the court examined the MMDR Act and found that it lacks any express provision imposing a “limitation” on the states’ power to tax mineral rights. Sections 9 and 9A deal with contractual consideration (royalty and dead rent), not taxes. No provision in the MMDR Act states “the State shall not levy any tax on mineral rights” or “royalty shall be the sole levy.”
  • The court clarified that the principle of denudation from Hingir-Rampur and M.A. Tulloch applies to the regulatory field of Entry 23, but not automatically to the taxing field of Entry 50. The MMDR Act’s declaration under Section 2 relates to regulation of mines and mineral development, not to taxation of mineral rights.
  • Federal supremacy under Article 246(1) applies only where there is a direct conflict between a Union and State law on the same subject. There is no direct conflict between the regulatory power of the Union (Entry 54) and the taxing power of the States (Entry 50) – they operate in different fields.

Conclusion on Application: The MMDR Act does not limit Entry 50. The states’ plenary power under Entry 50 remains unaffected. Parliament can impose limitations only by an express statutory provision.

3. Application to Entry 49, List II (Issues 4 & 5)

Finally, the court addressed whether mineral-bearing land can be taxed under Entry 49 and whether mineral value or royalty can be used as a measure.

• Key points of application:
  • Applying the principle of broad meaning of “lands” from Raja Jagannath Baksh Singh and Anant Mills, the court held that mineral-bearing land falls within the scope of “lands” under Entry 49. The word “lands” includes everything under or over the surface, including minerals. There is no implied exception for mines and quarries.
  • Applying the principle that “measure ≠ nature” from Ralla Ram, Bombay Tyre International, and Grasim Industries, the court held that the yield of the land (mineral produce) is a valid measure for a tax on that land. The legislature has wide discretion in selecting a measure as long as there is a reasonable nexus with the nature of the tax.
  • Applying the principle of yield as a measure from Goodricke Group Ltd., the court held that just as a tax on a tea estate measured by the quantum of tea leaves produced is a tax on land, a tax on a mine measured by the quantity of minerals produced is also a tax on land. The income, yield, or productivity of land is a well-accepted mode of levying a tax on land.
  • The court further held that since royalty is directly calculated based on the quantity (yield) of minerals produced, royalty itself can be used as a measure to determine the tax on mineral-bearing land under Entry 49. This does not transform the tax into one on mineral rights.
  • Applying the principle of non-applicability of generalia specialibus non derogant, the court held that Entries 49 and 50 operate in different fields. The fact that the same measure (mineral value/royalty) is used does not create an overlap. A tax under Entry 49 remains a tax on land even if measured by mineral value.
  • The court distinguished India Cement on its facts: in that case, the cess was levied directly on “royalty” as a line item (royalty was included in the definition of “land revenue” on which cess was charged). The tax was on the payment of royalty, not on the land measured by its yield. In contrast, a tax under Entry 49 measured by the quantity of minerals produced or the value of minerals is a tax on the land itself – the yield is merely the measure.

Conclusion on Application: Mineral-bearing land can be taxed under Entry 49. The yield of the land (quantity of minerals produced) and, consequently, the royalty paid, can be used as a valid measure to tax the land itself. This does not turn the tax into one on mineral rights under Entry 50

4. The Dissenting Opinion (Justice B.V. Nagarathna):

In a lone but forceful dissent, Justice Nagarathna rejected the majority’s characterization of royalty as a mere contractual consideration. She held that royalty under Section 9 of the MMDR Act is in the nature of a tax or exaction – a statutory levy imposed by Parliament under Entry 54, List I, and therefore a valid “limitation” on the States’ taxing power under Entry 50, List II. According to the dissent, the MMDR Act (particularly Sections 9, 9A, and 25) expressly occupies the field of mineral levies, leaving no room for States to impose additional taxes on mineral rights or mineral-bearing lands. Justice Nagarathna further disagreed with the majority on the scope of Entry 49, List II: she held that mineral-bearing lands do not fall within “lands” under Entry 49; instead, they are exclusively governed by Entry 50 (taxes on mineral rights). Consequently, the yield of minerals or royalty cannot be used as a measure to tax such lands under Entry 49 – doing so would render Entry 50 redundant. The dissent concluded that India Cementwas correctly decided and that the majority in Kesoram(which had doubted India Cement) was erroneous. In her view, overruling India Cement would invite fiscal chaos, a “race to the bottom” among mineral-rich States, and undermine the Union’s power to ensure uniform mineral development.

V. New Principles Derived from Mineral Area Development Authority

The nine-judge bench, by a majority of 8:1, laid down the following new principles as the conclusive declaration of law. These principles overrule the contrary holdings in India Cement and its progeny.

Principle 1: The True Nature of Royalty

• Royalty paid under Section 9 of the MMDR Act is definitively not a tax. It is a contractual consideration paid by a mining lessee to the lessor for the enjoyment of mineral rights.
• The liability arises from the contractual conditions of the mining lease, not from the sovereign power of taxation.
• A payment to the government does not become a tax merely because a statute (like Section 25 of the MMDR Act) provides for its recovery as arrears of land revenue.

Principle 2: The Scope and Effect of “Limitations” under Entry 50, List II

• Limitations must be express: The phrase “subject to any limitations imposed by Parliament by law” in Entry 50 requires that any restriction on the states’ power to tax mineral rights must be expressly imposed by a statutory provision. It cannot be implied from the overall scheme or object of a parliamentary law like the MMDR Act.
• Regulatory law cannot automatically limit taxing power: The mere fact that Parliament has enacted a law under Entry 54, List I (a regulatory entry) does not automatically denude or limit the states’ separate and exclusive power to tax mineral rights under Entry 50, List II. Taxation and regulation are distinct fields.
• Interpretation of “any limitations”: While the expression “any limitations” is broad enough to include restrictions, conditions, and even a prohibition, such a limitation must be specifically legislated. It is not a self-operating clause.

Principle 3: Taxing Mineral-Bearing Land under Entry 49, List II

• Mineral-bearing land is “land”: Lands that contain mines and quarries are fully included within the scope of “lands” under Entry 49. There is no implied exception for them.
• Yield is a valid measure: The yield or productivity of land is a legitimate basis for measuring a tax on that land. Therefore, the quantity of minerals produced from a piece of land is a constitutionally valid measure for a tax on that land under Entry 49.
• Royalty as a valid measure: Since royalty is directly calculated based on the quantity (yield) of minerals produced, royalty itself can be used as a measure to determine the tax on mineral-bearing land under Entry 49. This clarifies that using royalty in the calculation does not transform the tax into one on mineral rights.

Principle 4: The Relationship between Entry 49 and Entry 50 (Distinct Fields)

• Entries 49 and 50 of List II deal with distinct subject matters and operate in completely different fields.
• A tax under Entry 49 remains a tax on land, even if its measure is based on mineral value or royalty. It does not become a tax on mineral rights under Entry 50 merely because of the measure adopted.
• Therefore, the limitations that Parliament can impose on the field of Entry 50 (taxes on mineral rights) do not automatically operate on the field of Entry 49 (taxes on lands).

Principle 5: Non-Applicability of Entry 54’s Denudation to Entry 50

• The principle from cases like Hingir-Rampur and M.A. Tulloch, which states that the field of regulation under Entry 23, List II is denuded by a parliamentary law under Entry 54, List I, does not apply to the taxing field of Entry 50, List II.
• The denudation of state power under Entry 23 is a consequence of the regulatory conflict. The limitation on state power under Entry 50 requires a separate, express legislative act by Parliament.

Principle 6: Maintaining Fiscal Federalism in Mineral Resources

• States endowed with mineral resources have the constitutional authority and fiscal autonomy to tax mineral-bearing lands under Entry 49 to raise revenue for welfare and development. This power is constitutionally secured and cannot be implicitly whittled down by Union legislation.
• While Parliament can ensure uniform mineral development by imposing express limitations on the taxation of mineral rights (Entry 50), this power does not extend to limiting the states’ independent power to tax the land itself (Entry 49).

Principle 7: Overruling of Precedents

The decisions in the following cases were overruled to the extent they held that royalty is a tax or that states are denuded of their power to tax mineral-bearing land under Entry 49:

The decisions in the following cases were overruled to the extent they held that royalty is a tax or that states are denuded of their power to tax mineral-bearing land under Entry 49:

• India Cement Ltd. v. State of Tamil Nadu (1990)- Overruled on the holding that royalty is a tax and that states cannot tax mineral-bearing land under Entry 49 using royalty as a measure.
• Orissa Cement Ltd. v. State of Orissa (1991)- Overruled to the extent it followed India Cement on these points.
• Federation of Mining Associations of Rajasthan v. State of Rajasthan (1992)
• State of M.P. v. Mahalaxmi Fabric Mills Ltd. (1995)
• Saurashtra Cement & Chemical Industries Ltd. v. Union of India (2001)
• State of Orissa v. Mahanadi Coalfields Ltd. (1995)
• P. Kannadasan v. State of Tamil Nadu (1996)- Overruled to the extent it held that states are denuded of power to tax mineral-bearing land.

VI. Key Paragraph Reference Index

*Advocate, Supreme Court of India, Research Associate, Chamber of Adv. Tarun Jain