Rajasthan Government’s Circular on Royalty Deduction Upheld: Supreme Court’s Verdict Explained

The Supreme Court of India, in the case of State of Rajasthan & Anr. vs. M/S Deep Jyoti Company & Anr., examined the legality of the Rajasthan government’s circular dated 06.10.2008, which mandated deduction of royalty from contractors’ bills. The judgment, delivered on February 26, 2016, overturned the Rajasthan High Court’s decision that had quashed the circular.

Background of the Case

The dispute arose when the Rajasthan government issued a circular on October 6, 2008, stipulating that contractors undertaking government construction projects must obtain a short-term permit and pay royalty for minerals used. The circular also required royalty deductions from contractors’ bills unless they could prove that the minerals were procured from leaseholders who had already paid the royalty.

The respondent, Deep Jyoti Company, a registered ‘A’ class contractor, was awarded a government contract for constructing a link road. The company challenged the legality of the circular, arguing that it imposed unreasonable conditions on contractors.

Petitioner’s (State of Rajasthan) Arguments:

• The government contended that the circular was introduced in public interest to prevent loss of revenue through unauthorized mining.
• It ensured that only royalty-paid minerals were used in construction, reducing illegal mineral excavation.
• The circular did not impose any new tax but merely provided a mechanism for collecting royalty.
• Clause (7) of the circular allowed contractors to claim refunds if they procured royalty-paid minerals.

Respondent’s (Deep Jyoti Company) Arguments:

• The respondent argued that the circular placed an undue burden on contractors by compelling them to obtain a short-term permit and prepay royalty.
• The requirement to first pay and then claim a refund was arbitrary and financially straining.
• The High Court was correct in ruling that the State could not impose such conditions on contractors.

Supreme Court’s Judgment:

• The Supreme Court upheld the circular and ruled that it was a reasonable restriction.
• The judgment stated, “The circular only provides the procedure for payment of royalty for minerals used by the contractors who have been given the works contract by the government department.”
• The Court emphasized that the circular was not a new levy but a method to ensure compliance with existing mineral laws.
• It ruled that contractors were not compelled to mine but only required to use legally sourced minerals.
• The High Court’s decision was set aside, and the writ petitions filed by Deep Jyoti Company were dismissed.

Key Takeaways

• The Supreme Court recognized the State’s power to regulate mineral usage to prevent revenue loss.
• It held that the requirement to prove royalty payment before refunding deductions was a reasonable condition.
• Contractors must comply with government conditions when executing public projects.

The judgment was delivered by a bench comprising Chief Justice T.S. Thakur, Justice A.K. Sikri, and Justice R. Banumathi on February 26, 2016.

This ruling establishes a crucial precedent regarding government regulations on royalty payments in construction contracts, ensuring accountability and preventing illegal mining practices.

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Download Judgment: State of Rajasthan & vs MS Deep Jyoti Compa Supreme Court of India Judgment Dated 26-02-2016-1741852866571.pdf