Royalty ruling: It’s ironic how a judgement can prove so taxing for an economy

This “inadvertent error," as the Supreme Court (SC) later termed it, was called out only in 2004, in State of West Bengal vs Kesoram Industries Ltd. Unfortunately, this case was judged by a five-judge bench that could not overrule the India Cement judgement. The latter held firm, despite the court’s 2004 observation, even though a curative order could have been issued to rectify the flaw.

Also read: Mint Explainer: Significance of the sole dissenter in the mining tax ruling

In 2011, the SC finally took note of the discrepancy between India Cement and Kesoram, and referred the issue to a nine-judge bench to provide a decisive ruling.

In 2024, 20 years after Kesoram (and 13 years after the reference), India Cement was overruled by a nine-judge bench decision of the SC in Mineral Area Development Authority (MADA) vs Steel Authority of India, which held that royalty is not a tax. Interestingly, the minority opinion in the MADA judgement pointed out that actually there was no clerical error in the India Cement ruling. The judges meant to hold that royalty is a tax, and they were right.

This chain of events raises several important questions with respect to the functioning of India’s highest court. These concern the accountability standards it has set for itself, its expectations of others while discharging public functions, and the unintended consequences of its decisions.

First, how did it happen that the court in India Cement meant that royalty was not a tax, but a typographical error in the text led to a completely different reading? Should the court not have an institutionalized a mechanism to review, proof-read and correct such clerical errors?

After all, ensuring what is written in the judgement is correct, as intended by judges, is one of the most basic functions of the court and its registry. One would assume that the court would invest substantial resources in this purpose.

While the court is investing in artificial intelligence to ensure real-time translations of its decisions and has been identifying errors (such as ‘leave granted’ being translated to ‘chhutti de di’ in Hindi), should basic diligence not be undertaken to ensure what is typed is correct?

Also read: Royalty is not a tax: SC ruling deals a financial blow to mining firms

Often, when laws are enacted or rules and regulations are made and inadvertent typographical errors are identified subsequently, a corrigendum is immediately issued and a correction made.

We can’t recall another situation when a law or rule was drafted whose text was different from what was intended by policymakers or the executive. While there are instances galore of bad laws, where the language is ambiguous or violates the Constitution, these are different problems, and the faults lie with poor comprehension, drafting and imagination skills.

Such blunders are not expected of constitutional courts, the SC least of all. A bad judgement is like a bad law or an extra-constitutional executive order still in operation.

The continuation of the India Cement ruling as the law of the land even after the error was identified and referred to a larger bench has a parallel in the police still apprehending citizens under Section 66A of the Information Technology Act after it was invalidated by the SC.

Or the bulldozer actions ordered by state governments against citizens accused under criminal laws, without the necessary legislative mandate. The court has taken strong note of such actions, which are not backed by the rule of law. When will it hold itself to account by similar standards?

Irrespective of whether there was a clerical error in India Cement or not, since judges in Kesoram differed, why did it take the SC two decades to settle this confusion? Why did it wait 13 years after the reference was made? All of us, including members of the judiciary, lament how archaic laws remain in the rule books years after losing relevance.

What about judge-made laws which continue to operate and direct policies and practices, even when evident errors in them have been identified by the court itself?

It was a matter pending for more than 9,000 days when the nine-judge bench heard arguments over eight days in February-March 2024 and delivered a verdict soon after. In its 8:1 judgement, the court ruled that ‘royalty’ is not the same as ‘tax.’ There was a single dissent, but it could influence reforms in taxation and regulatory policies for the mining sector.

Since 1992, the Central government has steeply increased the rate of royalty to compensate states. Increases were passed on to consumers. States like Chhattisgarh, Rajasthan and Madhya Pradesh had enacted laws to collect tax, but similar enactments in Bihar and Odisha were struck down by their respective high courts, resulting in ambiguities.

To set the record straight, in August 2024, the SC held that the MADA judgement will apply from April 2005. States were authorized to levy or renew tax demands (as distinct from royalties) since 2005, leading to concerns of these demands debilitating the net worth of several companies, with adverse consequences for the economy. However, fortuitously, states can choose not to raise such demands.

Also read: Green light for retro tax sends a shockwave across mining and metals companies

The entire story has been one of unfortunate events. The confusion began with an SC decision and continued for 35 years because the court could not rectify a simple error. The question, perhaps, was not just whether royalty is a tax, but if judgements could become taxing. Unfortunately, we have seen this is possible.

The authors are, respectively, vice president of Pune International Centre and secretary general of CUTS International.

Amol Kulkarni of CUTS contributed to the article.