M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. STATE OF KERALA AND OTHERS

A rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied. There is, however, an element of compulsion in the imposition of both tax and fee. When the Legislature decides to render a specific service to any area or to any class of persons, it is not open to the said area or to the said class of persons to plead that they do not want the service and therefore they should be exempted from the payment of the cess. Though there is an element of quid pro quo between the tax payer and the public authority there is no option to the tax-payer in the matter of receiving the service determined by public authority. In regard to fees there is, and must always be, co- relation between the fee collected and the service intended to be rendered. Cases may arise where under the guise of levying a fee Legislature may attempt to impose a tax; and in the case of such a colourable exercise of legislative power courts would have to scrutinise the scheme of the levy very carefully and determine whether in fact there is a co-relation between the service and the levy, or whether the levy is either not corelated with service or is levied to such an excessive extent as to be a pretence of a fee and not a fee in reality. In other words, whether or not a particular cess levied by a statute amounts to a fee or tax would always be a question of fact to be determined in the circumstances of each case. The distinction between a tax and a fee is, however, important, and it is recognised by the Constitution. Several Entries in the Three Lists empower the appropriate Legislatures to levy taxes; but apart from the power to levy taxes thus conferred each List specifically refers to the power to levy fees in respect of any of the matters covered in the said List excluding of course the fees taken in any Court. H

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 179 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

The question about the distinction between a tax and a fee has A been considered by this Court in three decisions in 1954. In Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 the vires of the Madras Hindu Religious and Charitable Endowments Act, 1951 (Madras Act 19 of 1951), came to be examined. Amongst B the sections challenged was Section 76(1). Under this section every religious institution had to pay to the Government annual contribution not exceeding 5% of its income for the services rendered to it by the said Government; and the argument was that the contribution thus exacted was not a fee but a tax and as such outside the competence of the State Legislature. In dealing with this argument Mukherjee, J., as he then was, cited the definition of tax given by Latham, C.J., in the case of Matthews14 and has elaborately considered the distinction between a tax and a fee. The learned Judge examined the scheme of the Act and observed that “the material fact which negatives the theory of fees in the present case is that the money raised by the levy of the contribution is not earmarked or specified for defraying the expense that the Government has to incur in performing the services. All the collections go to the consolidated fund of the State and all the expenses have to be met not out of those collections but out of the general revenues by a proper method of appropriation as is done in the case of other Government expenses”. The learned Judge no doubt added that the said circumstance was not conclusive and pointed out that in fact there was a total absence of any co-relation between the expenses incurred by the Government and the amount raised by contribution. That is why Section 76(1) was struck down as ultra vires. The same point arose before this Court in respect of the Orissa Hindu Religious Endowments Act, 1939, as amended by amending Act 2 of 1952 in Mahant Sri Jagannath Ramanuj Das v. State of Orissa15. Mukherjea, J., who again spoke for the Court, upheld the validity of Section 49 which imposed the liability to pay the specified contribution on every Mutt or temple having an annual income exceeding Rs 250 for services rendered by the State 13 (1954) S.C.R. 1005 14 (1938) 60 C.L.R. 263 15 (1954) S.C.R. 1046 H

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A Government. The scheme of the impugned Act was examined and it was noticed that the collections made under it are not merged in the general public revenue and are not appropriated in the manner laid down for appropriation of expenses for other public purposes. They go to constitute a fund which is contemplated by Section 50 of the Act, and this fund to which the Provincial Government B contributes both by way of loan and grant is specifically set apart for the rendering of services involved in carrying out the provisions of the Act. 12. The same view was taken by this Court in regard to Section 58 of the Bombay Public Trust Act, 1950 (Act 29 of 1950) which imposed a similar contribution for a similar purpose C in Ratilal Panachand Gandhi v. State of Bombay16. It would thus be seen that the tests which have to be applied in determining the character of any impugned levy have been laid down by this Court in these three decisions; and it is in the light of these tests that we have to consider the merits of the rival contentions raised before us in the present petition.” D

48Copy pinpoint48. In State of West Bengal vs. Kesoram Industries Limited and Ors.17, another Constitution Bench of this Court explained certain observations in India Cement Limited vs. State of Tamil Nadu18, and stated as under:- E “59. First we will refer to certain dictionaries oft-cited in courts of law: Words and Phrases, Permanent Edn. (Vol. 37-A, p. 597): “ ‘Royalty’ is the share of the produce reserved to owner for permitting another to exploit and use property. The word F ‘royalty’ means compensation paid to landlord by occupier of land for species of occupation allowed by contract between them. ‘Royalty’ is a share of the product or profit (as of a mine, forest etc.) reserved by the owner for permitting another to use his property.” G Stroud’s Judicial Dictionary of Words and Phrases (6th Edn., 2000, Vol. 3, p. 2341):

16 (1954) S.C.R. 1055 17 (2004) 10 SCC 201 18 (1990) 1 SCC 12 H

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 181 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

“The word ‘royalties’ signifies, in mining leases, that part of A the reddendum which is variable, and depends upon the quantity of minerals gotten or the agreed payment to a patentee on every article made according to the patent. Rights or privileges for which remuneration is payable in the form of a royalty.” Words and Phrases, Legally Defined (3rd Edn., 1990, Vol. 4, p. B 112): “A royalty, in the sense in which the word is used in connection with mining leases, is a payment to the lessor proportionate to the amount of the demised mineral worked within a specified period.” C Wharton’s Law Lexicon (14th Edn., p. 893): “Royalty.—Payment to a patentee by agreement on every article made according to his patent; or to an author by a publisher on every copy of his book sold; or to the owner of minerals for the right of working the same on every ton or other weight raised.” Mozley & Whiteley’s Law Dictionary (11th Edn., 1993, p. 243): “A pro rata payment to a grantor or lessor, on the working of the property leased, or otherwise on the profits of the grant or lease. The word is especially used in reference to mines, patents and copyrights.” Prem’s Judicial Dictionary (1992, Vol. 2, p. 1458): “Royalties are payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government. Two important features of royalty have to be noticed, they are, that the payment made for the privilege of removing the articles is in proportion to the quantity removed, and the basis of the payment is an agreement.” Black’s Law Dictionary (7th Edn., p. 1330): G “Royalty.—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. Mineral royalty.—A right to a share of income from mineral production.” H

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A 60. In D.K. Trivedi & Sons v. State of Gujarat19 a Bench of two learned Judges of this Court dealt with “rent”, “royalty” and “dead rent” and held as follows: (SCC pp. 53-54, paras 38-39) “38. Rent is an integral part of the concept of a lease. It is the consideration moving from the lessee to the lessor for demise of the property to him. … … …

39. In a mining lease the consideration usually moving from the lessee to the lessor is the rent for the area leased (often called surface rent), dead rent and royalty. Since the mining lease confers upon the lessee the right not merely to enjoy the property as under an ordinary lease but also to extract minerals from the land and to appropriate them for his own use or benefit, in addition to the usual rent for the area demised, the lessee is required to pay a certain amount in respect of the minerals extracted proportionate to the quantity so extracted. Such payment is called ‘royalty’. It may, however, be that the mine is not worked properly so as not to yield enough return to the lessor in the shape of royalty. In order to ensure for the lessor a regular income, regardless of whether the mine is worked or not, a fixed amount is provided to be paid to him by the lessee. This is called ‘dead rent’. ‘Dead rent’ is calculated on the basis of the area leased while royalty is calculated on the quantity of minerals extracted or removed. Thus, while dead rent is a fixed return to the lessor, royalty is a return which varies with the quantity of minerals extracted or removed. Since dead rent and royalty are both a return to the lessor in respect of the area leased, looked at from one point of view dead rent can be described as the minimum guaranteed amount of royalty payable to the lessor but calculated on the basis of the area leased and not on the quantity of minerals extracted or removed.” In H.R.S. Murthy v. Collector of Chittoor20 too the Constitution G Bench of this Court had defined royalty to mean “the payment made for the materials or minerals won from the land”.

61. The judicial opinion as prevailing amongst the High Courts may be noticed. A Full Bench of the High Court of Orissa held in 19 (1986) Supp SCC 20 20 H AIR 1965 SC 177 : (1964) 6 SCR 666

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 183 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

Laxmi Narayan Agarwalla v. State of Orissa21: (AIR p. 224, A para 12) “[R]oyalty is the payment made for the minerals extracted. It is not tax.” In Surajdin Laxmanlal v. State of M.P., Nagpur22 a Division Bench of the High Court of Madhya Pradesh referred to Wharton’s Law Lexicon and Mozley & Whiteley’s Law Dictionary and said (at AIR p. 130, para 7) “royalties are B payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government”. The High Court opined that there are two important features of royalty: (i) the payment is in proportion to the quantity removed; and (ii) the basis of the payment is an agreement. … … … C

71. We have clearly pointed out the said error, as we are fully convinced in that regard and feel ourselves obliged constitutionally, legally and morally to do so, lest the said error should cause any further harm to the trend of jurisprudential thought centring around the meaning of “royalty”. We hold that royalty is not tax. Royalty D is paid to the owner of land who may be a private person and may not necessarily be a State. A private person owning the land is entitled to charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax. We declare that even in India E Cement23 it was not the finding of the Court that royalty is a tax. A statement caused by an apparent typographical or inadvertent error in a judgment of the Court should not be misunderstood as declaration of such law by the Court. We also record our express dissent with that part of the judgment in Mahalaxmi Fabric Mills Ltd.24 which says (vide para 12 of SCC report) that there was no F “typographical error” in India Cement 23 and that the said conclusion that royalty is a tax logically flew from the earlier paragraphs of the judgment.”

49Copy pinpoint49. In State of Himachal Pradesh and Others vs. Gujarat Ambuja Cement Ltd. and Another25, a Bench of three Judges of this G Court observed:- 21 AIR 1983 Ori 210 : (1983) 55 Cut LT 364 (FB) 22 AIR 1960 MP 129 : 1960 MPLJ 39 23 (1990) 1 SCC 12 24 1995 Supp (1) SCC 642 25 (2005) 6 SCC 499 H

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A “44. “Royalty” is not a term used in legal parlance for the price of the goods sold. It is a payment reserved by the grantor of a patent, lease of a mine or similar right, and payable proportionately to the use made of the right by the grantee as held in Titaghur Paper Mills Co. Ltd. case26.

B 45. In its primary and natural sense “royalty” in the legal world, is known as the equivalent or translation of “jura regalia” or “jura regia”. Royal rights and prerogatives of a sovereign are covered thereunder. In its secondary sense, the word “royalty” would signify, as in mining leases, that part of the reddendum, variable though, payable in cash or kind, for rights and privileges obtained. (See C Inderjeet Singh Sial v. Karam Chand Thapar27.)

46. “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 D 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 with 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, E though fine, yet exists and is perceptible. (See State of W.B. v. Kesoram Industries Ltd.16).

50Copy pinpoint50. On the essential charcteristics of a tax, following observations of Banumathi, J. in the concurring opinion in Jindal Stainless Limited and another vs. State of Haryana and others28 cull out the essence:- F “334. The essential characteristics of a tax are that: (i) it is imposed under a statutory power without the taxpayer’s consent and the payment is enforced by law; (ii) it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax; and (iii) it is part of the common burden. G In Commr., Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13, the Constitution Bench has laid down the characteristics of a tax which has since been consistently followed and it is as under: (AIR p. 284, para 43) 26 1985 Spp SCC 280 : 1985 SCC (Tax) 538 27 (1995) 6 SCC 166 H 28 (2017) 12 SCC 1

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 185 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

“43. … “A tax” … ‘is a compulsory exaction of money by a A public authority for public purposes enforceable by law and is not payment “for services rendered”.’ This definition brings out, in all opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is, not to confer any special benefit upon any particular individual there is as it is said, no element of “quid pro quo” between the taxpayer and the public authority.… D Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”

51Copy pinpoint51. It is true that as a result of order passed by this Court in Mineral Area Development Authority and Others vs. Steel Authority of E India and Others29, certain questions concerning “royalty” as determined under the provisions of Mines and Minerals (Development and Regulation) Act, 1957 now stand referred to a Bench of nine Judges, which reference is still pending consideration. However, none of those issues arise in the present matter. F

52Copy pinpoint52. On the use of the expression “royalty” in a contract, we may note following observations in Inderjeet Singh Sial and another vs. Karam Chand Thapar and others27:- “12. … … The word ‘royalty’ thus, in the deed was used in a loose sense so as to convey liability to make periodic payments to G the assignor for the period during which the lease would subsist; payments dependent on the coal gotten and extracted in quantities or on despatch. We have therefore to construe document Ex. D-5 on its own terms and not barely on the label or description given to 29 (2011) 4 SCC 450 H

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A the stipulated payments. Conceivably this arrangement could well have been given a shape by using another word. The word ‘royalty’ was perhaps more handy for the authors to be employed for an arrangement like this, so as to ensure periodic payments. In no event could the parties be put to blame for using the word ‘royalty’ as if arrogating to themselves the royal or sovereign right of the B State and then make redundant the rights and obligations created by the deed.

13. The commodity goes by its value; not by the wrapper in which it is packed. A man is known for his worth; not for the clothes he wears. Royal robes worn by a beggar would not make him a king. C The document is weighed by its content, not the title. One needs to go to the value, not the glitter. All the same, we do not wish to minimise the importance of the right words to be used in documents. What we mean to express is that if the thought is clear, its translation in words, spoken or written, may, more often than not, tend to be faulty. More so in a language which is not the mother tongue. Those faulted words cannot bounce back to alter the thought. Thus in sum and substance when the contracting parties and the draftsman are assumed to have known that the word ‘royalty’ is meant to be employed to secure for the State something out of what the State conveys, their employment of that word for private ensuring was not intended to confer on the assignor the status of the sovereign or the State, and on that basis have the document voided. … … “.

53Copy pinpoint53. We may also note the following observations from the decision of a Bench of three Judges of this Court in Union of India and others vs. Motion Picture Association and others30, where the payment of fee was under the terms of a contract between the parties. “31. The exhibitors also contend that the charge of one per cent on the net recoveries is a compulsory exaction in the form of a tax. Neither the Act nor the provisions of the licence stipulate payment of any such tax. Hence imposition of this amount is in violation of Article 265 of the Constitution. It is true that neither the relevant Act nor the notification nor the rules nor the terms and conditions of the licence stipulate the payment of any rental.

30 H (1999) 6 SCC 150

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 187 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

This amount is required to be paid under an agreement which the A exhibitors individually enter into with the Films Division for the supply of these films. It is a payment under the terms of a contract between the two parties. It cannot, therefore, be viewed as a tax at all. The exhibitors contend that because they are required to enter into these agreements, any payment under the agreement is B a compulsory exaction and is, therefore, tax. We do not agree. Under the terms of the agreement, the Films Division has to supply certain prints to the theatre owners at stated intervals. The Films Division is required to maintain a distribution network for this purpose. It is required to pack these films and is required to allow the exhibitors to retain these films in their possession for a certain period. The films are to be returned to the Films Division thereafter. The charge is termed in the agreement as rental for the films. It covers charges for preparing the prints of the films for distribution, and for packing them for delivery. These are clearly services rendered by the Films Division for which it is paid one per cent of the net collection as a rental. As stated earlier, the total cost of preparing prints, packing them and distributing them is much higher than the total recovery made by the Films Division by way of rental from all the exhibitors. There is a clear nexus between the services rendered and the payment to be made. The payment, therefore, is in the nature of a fee rather than a tax though there may not be an exact quid pro quo. Nevertheless the element of quid pro quo is very much present.

32. The exhibitors relied upon a number of cases which distinguish a tax from a fee. We will only refer to some of them. In the case of District Council of the Jowai Autonomous Distt. v. Dwet F Singh Rymbai31 this Court held that a compulsory exaction for public purposes would amount to a tax while a payment for services rendered would amount to a fee. On the facts in that case, the Court said that there was no element of quid pro quo which will justify the imposition of royalty as a fee. In Commr., H.R.E. v. Sri G Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 this Court as far back as in 1954, laid down the distinction between a tax and a fee. This Court has described a tax as a compulsory exaction for public purposes which does not require the taxpayer’s consent; 31 (1984) 4 SCC 38 H

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A while fee is a charge for specific service to some, and it must have some relation to the expenses incurred for the service. In Ahmedabad Urban Development Authority v. Sharadkumar Jayantikumar Pasawalla 32 this Court has said that an express authorisation for the levy of a fee is necessary. In the present case, however, the rental is charged by the Films Division by virtue B of an agreement between the Films Division and the individual exhibitor. This is in consideration of the Films Division supplying films to the exhibitor, packing the film and arranging for its delivery. This is clearly an agreed fee charged for rendering services. It cannot be viewed as a compulsory exaction or as a tax. There is C a statutory obligation which is cast on the exhibitors to exhibit certain films. To carry out this statutory obligation, if the exhibitors enter into an agreement with the Films Division and agree to pay a certain amount of rental for procuring the films from the Films Division to comply with the statutory obligation, the levy must, since it is correlated with the Films Division discharging certain obligations under the contract, be viewed, at the highest, as a fee and not as a tax. It is an agreed payment, and is not unreasonable. The High Court has rightly negatived the contention of the respondent exhibitors.”

54Copy pinpoint54. Thus, the expression ‘Royalty’ has consistently been construed to be compensation paid for rights and privileges enjoyed by the grantee and normally has its genesis in the agreement entered into between the grantor and the grantee. As against tax which is imposed under a statutory power without reference to any special benefit to be conferred on the payer of the tax, the royalty would be in terms of the agreement between the parties and normally has direct relationship with the benefit or privilege conferred upon the grantee. Whatever be the nomenclature, the charges for use of controlled release of water in the present cases were for the privilege enjoyed by INDSIL and CUMI. Like the case in Motion Picture Association31, G the basis for such charges was directly in terms of, and under the arrangement entered into between the parties, though, not referable to any statutory instrument. The controlled release of water made available to INDSIL and CUMI, has always gone a long way in helping them in generation of electricity. For such benefit or privilege conferred upon 32 H (1992) 3 SCC 285 : AIR 1992 SC 2038

M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 189 STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

them, the Agreements arrived at between the parties contemplated payment of charges for such conferral of advantage. Such charges, in our view, were perfectly justified.

55Copy pinpoint55. The submission that it was compulsory exaction and thus assumed the characteristics of a tax was completely incorrect and untenable. It was a pure and simple contractual relationship between the parties and the Division Bench was right in rejecting the submissions advanced by CUMI and INDSIL.

56Copy pinpoint56. Thus, all the submissions advanced on behalf of CUMI and INDSIL are rejected. The instant appeals are, therefore, dismissed without any order as to costs. C

Nidhi Jain Appeals dismissed.