2005 (7) TMI 353 - SC - VAT / Sales Tax

Mining companies' royalty payments are rent for land use, not taxable mineral sales

State of HP. and others Versus Gujarat Ambuja Cement Ltd. and another (and other appeals)

The SC addressed sales tax exemption entitlement and purchase tax liability on royalty payments by mining companies. The Court granted the respondent ... Entitlement to Sales Tax Exemption and Date of Commencement - Liability to pay purchase tax on the royalty paid by the respondents - validity and effect of registration with the Empowered Committee under the incentive scheme - legality of the revisional orders passed by the sales tax authorities revoking the exemption and imposing tax liability - Meaning of word 'dead rent' and 'royalty' - HELD THAT:- It is stated that the High Court had not clearly quashed the said revision notices and the appellant-State and its functionaries have not pursued the revision notices. Be that as it may, the respondent No. 1-company is granted two months' time to respond to the said notices and indicate its stand. The revisional authority shall consider desirability of continuing the revision notices after considering the response of the respondents, if any, filed. The basic issue involved in these notices is to the effect of absence of provisional registration certificate after August 11, 1995 up to September 25, 1995. As noted above, respondent No. 1-company's stand is that it had applied for extension of the validity period up to December 31, 1995 and absence of any order on the same has not been disputed. Let the concerned authority deal with the application within a period of 6 weeks after giving notice to the respondent No. 1-company. The revisional authority shall take note of the order to be passed thereon. The question relating to liability to pay purchase tax on royalty paid is common to both Gujarat Ambuja and ACC. According to learned counsel for the appellant-State, the High Court erroneously held that royalty paid did not attract levy of purchase tax. The foundation for the argument is a decision of this Court in State of M.P. v. Orient Paper Mills Ltd. [1976 (11) TMI 178 - SUPREME COURT]. In that case it was held that royalty paid under the lease was the sale price. There is a contrast between sale and purchase. The definition of purchase is wider. It involves the acquisition and, therefore, nothing but a transfer. Reference is also made to several provisions of the Mines and Minerals (Regulation and Development) Act, 1957 ('Minerals Act, 1957') and it was submitted that position is different after amendment in 1972. In fact, according to the appellant what is being taxed is the consideration as minerals are being removed. Royalty' is not a tax. Simply because the royalty is levied by reference to the quantity of the minerals produced and the impugned cess too is quantified by taking into consideration the same quantity of the mineral produced, the latter does not become royalty. The former is the rent of the land on which the mine is situated or the price of the privilege of winning the minerals from the land parted by the Government in favour of the mining lessee. The cess is a levy on mineral rights with impact on the land and quantified by reference to the quantum of mineral produced. The distinction, though fine, yet exists and is perceptible. [See State of West Bengal v. Kesoram Industries Ltd. Though section 9 refers to 'mineral removed' it does not mean that the royalty is paid on removal. It is point of payability. Royalty in the context of the agreement is an alternate to dead rent. Section 9 speaks of rates of royalty. It is nothing but measure of levy. The charging of dead rent and royalty is under different situations. It is shifting of the measure. Both 'dead rent' and 'royalty' are returns to the lessor. The stand of appellant that under section 9 of the Minerals Act royalty is a payment in respect of any mineral removed or consumed or that royalty is a money consideration for transfer of property is clearly untenable in view of the analysis made above. A mining lease is an interest in immovable property. The extraction and removal of minerals is essentially an extension of the enjoyment of immovable property. The core legal questions considered in these appeals revolve around the entitlement of the respondents to exemption from payment of sales tax under the Himachal Pradesh General Sales Tax Act, 1968 and the Central Sales Tax Act, 1956, specifically concerning:Whether the respondents, Gujarat Ambuja Cement Ltd. and Associated Cement Ltd., were entitled to exemption from sales tax from the date of commencement of commercial production or only from the date of issuance/publication of the exemption notification;The validity and effect of registration with the Empowered Committee under the incentive scheme and whether the respondents fulfilled the eligibility criteria as 'Prestigious Cement Units' under the relevant notifications and rules;The legality of the revisional orders passed by the sales tax authorities revoking the exemption and imposing tax liability, including the alleged failure to comply with statutory requirements such as filing of declaration forms;The question of whether the High Court was justified in entertaining writ petitions under Article 226 of the Constitution despite the availability of alternative statutory remedies;The liability of the respondents to pay purchase tax on royalty paid for minerals extracted, and the interpretation of 'royalty' in the context of sales tax and purchase tax levies.Issue-wise Detailed Analysis:1. Entitlement to Sales Tax Exemption and Date of CommencementThe relevant legal framework includes the Himachal Pradesh General Sales Tax Act, 1968, the Central Sales Tax Act, 1956, and the notifications issued by the Himachal Pradesh Government under Section 42 of the State Act. The incentive scheme notified on March 27, 1991, and its subsequent amendments (notably notifications dated July 31, 1992; December 1, 1994; July 6, 1995; and January 30, 1996) laid down the eligibility criteria and benefits for new industrial units, including cement units classified as 'Prestigious Cement Units.'The Court noted that the respondent Gujarat Ambuja Cement Ltd. was registered as a 'Prestigious Unit' on January 13, 1993 and later declared a 'Prestigious Cement Industrial Unit' on February 2, 1996, fulfilling all eligibility criteria including capital investment and employment thresholds. The company commenced commercial production on September 26, 1995.The High Court held that the exemption should be available from the date of commercial production, not merely from the date of issuance or publication of the exemption notification. This was based on the principle that statutory notifications merely ratify and give statutory recognition to a policy decision and that the entitlement arises from fulfilling the eligibility criteria under the incentive scheme.The Court rejected the State's argument that exemption could be granted only from the date of the notification, emphasizing that the respondent had complied with all conditions and that the Empowered Committee's registration and subsequent certificates confirmed eligibility. The Court also noted that the fixation of entitlement dates in assessment and appellate orders had become final and could not be disturbed by revisional authorities.2. Registration with the Empowered Committee and Eligibility CriteriaThe notifications and rules, particularly the Revised Rules regarding grant of Incentives to Industrial Units in Himachal Pradesh (1991, 1992, 1994, and 1995 amendments), prescribed that a 'Prestigious Cement Industrial Unit' must be a new industrial unit registered with the Empowered Committee between May 1, 1992, and March 31, 1995, commence commercial production on or after May 1, 1992, have a fixed capital investment of at least Rs. 50 crores, and employ at least 200 persons on a regular basis.The respondent's registration on January 13, 1993, pre-dated the December 1, 1994 notification introducing the 'Prestigious Cement Unit' concept. The Court held that the earlier registration remained valid and was not rendered ineffective by the later notification. The extensions granted for commencement of production until September 30, 1995, were within the powers of the Empowered Committee under rule 24.4 of the July 31, 1992 notification.The Court found no merit in the State's contention that the respondent failed to comply with the registration or eligibility requirements. The respondent had obtained all necessary certificates, including the exemption certificate in form STE-II, and was expressly named in the January 30, 1996 notification granting exemption for nine years. The Court emphasized that the pre-conditions for 'Prestigious Unit' and 'Prestigious Cement Unit' status were materially identical and that the respondent satisfied them.3. Legality of Revisional Orders and Compliance with Statutory RequirementsThe revisional authorities issued show cause notices and orders revoking exemption certificates and imposing tax liability on grounds including non-compliance with statutory provisions such as filing of declaration forms ('C forms'), absence of valid provisional registration certificates during certain periods, and failure to fulfill eligibility criteria.The Court found the revisional orders to be arbitrary, illegal, and mala fide, influenced by extraneous political considerations. It noted that the respondent had applied for renewal of provisional registration and that the absence of a formal order denying extension was significant. The Court held that filing of declaration forms is a directory, not mandatory, requirement under Rule 12(7) of the Central Sales Tax (Registration and Turnover) Rules, 1957, and that the assessing officer has discretion to grant extensions for filing such forms.The respondent had requested an opportunity to rectify any defects in the declaration forms, which was denied by the revisional authority. The Court held that denial of such an opportunity was unjustified and that the respondent's claim for exemption could not be defeated on technical grounds of defective forms.The Court also noted that the revisional authority failed to consider the finality of appellate orders fixing the date of entitlement to exemption and improperly sought to revise assessment orders that had merged with appellate orders. Thus, the revisional actions were held to be without jurisdiction.4. Jurisdiction of the High Court to Entertain Writ Petitions Despite Alternative RemediesThe State argued that the High Court should not have entertained writ petitions under Article 226 of the Constitution when alternative statutory remedies of appeal and revision were available. The Court examined extensive precedents establishing that the availability of alternative remedies is a rule of discretion and policy, not a bar to writ jurisdiction.The Court reiterated that writ jurisdiction may be invoked where there is a breach of natural justice, lack of jurisdiction, or where alternative remedies are ineffective or an exercise in futility. The respondents had demonstrated that the revisional authorities acted with bias and political vendetta, making statutory remedies inadequate.The High Court's reasoning for entertaining the writ petitions was not found to be palpably unsound or irrational. The Court emphasized that the writ jurisdiction is discretionary and that the High Court had properly exercised its discretion in the circumstances.5. Liability to Pay Purchase Tax on Royalty PaidThe State contended that royalty paid by the respondents for extraction of minerals (limestone) attracted purchase tax under the Himachal Pradesh General Sales Tax Act. The State relied on a prior decision holding that royalty paid under a lease was the sale price of goods.The Court analyzed the legal meaning of 'royalty' through detailed reference to authoritative sources including Jowitt's Dictionary of English Law, Halsbury's Laws of England, and various Supreme Court precedents. It distinguished royalty as a payment reserved by the grantor of a patent or lease for the use of rights, usually proportionate to the use made, and not as the price of goods sold.The Court relied heavily on the decision in State of Orissa v. Titaghur Paper Mills Co. Ltd., which overruled the earlier Orient Paper Mills Ltd. decision, holding that royalty is not the sale price of goods and that taxing royalty as purchase tax is impermissible.The Court observed that a mining lease is an interest in immovable property and that royalty and dead rent are returns to the lessor for the privilege of extracting minerals, not consideration for sale of goods. The distinction between royalty and purchase price is recognized in law and the levy of purchase tax on royalty paid was held to be unsustainable.Significant Holdings:'So long as the petitioners satisfied the eligibility criteria prescribed in the Revised Incentive Rules, as amended from time to time, he would be entitled to the benefits and incentives extended under the Rules and the statutory notification is not a must or an essential pre-requisite for the petitioners to assert/enforce such rights. The statutory notifications issued under the relevant taxing enactments only go to ratify and accord statutory recognition also to what was originally planned and proclaimed as a policy decision and guidelines.'The Court established the principle that entitlement to incentives and exemptions under industrial policy rules arises from fulfillment of eligibility criteria and not merely from issuance of statutory notifications, which serve to ratify policy decisions.The Court held that the High Court's exercise of writ jurisdiction was proper despite availability of alternative remedies, particularly where there was evidence of mala fide and bias by tax authorities.It confirmed that registration with the Empowered Committee prior to the amendment introducing the 'Prestigious Cement Unit' definition remained valid and that extensions granted for commencement of production were lawful.On the issue of purchase tax on royalty, the Court held that royalty is not the sale price of goods and that levy of purchase tax on royalty paid is not legally sustainable, overruling earlier contrary decisions.Finally, the Court dismissed the appeals, upholding the High Court's quashing of the revisional orders and confirming the respondents' entitlement to exemption from sales tax from the date of commercial production, and rejecting the imposition of purchase tax on royalty.