Supreme Court clarifies difference between Tax & Royalty/Cess/Fee

In M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED vs STATE OF KERALA AND OTHERS, the imposition of royalty or charges on controlled supply of water on the ground of absence or lack of jurisdiction and some ancilliary issues was challenged the appellant before the Supreme Court.To address this issue, the Court referred to the following precedents which discussed the difference between royalty/cess and tax. 

1) Hingir-Rampur Coal Co. Ltd. and Others vs. State of Orissa and Others (1961) 2 SCR 537

2) State of West Bengal vs. Kesoram Industries Limited and Ors (2004) 10 SCC 201

3) State of Himachal Pradesh and Others vs. Gujarat Ambuja Cement Ltd. and Another

4) Jindal Stainless Limited and another vs. State of Haryana and others

5)  Union of India and others vs. Motion Picture Association and others

The court held that 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.

It is true that between a tax and a fee there is no generic difference. A fee is levied essentially for services 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. 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 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.