Featured image for Supreme Court Judgment dated 25-11-2016 in case of petitioner name Manbhar Devi Agarwal vs State of Rajasthan & Ors.
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Supreme Court Verdict on Royalty Deduction for Construction Contractors

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The Supreme Court of India, in a significant ruling, addressed the legality of royalty deductions from the bills of contractors engaged in construction work. The case, Manbhar Devi Agarwal vs. State of Rajasthan & Ors., revolved around whether contractors purchasing minerals from the open market could be subjected to royalty payments under state government circulars.

The petitioner, Manbhar Devi Agarwal, challenged the deduction of 2% royalty from contractors’ bills as per government orders. The Rajasthan High Court had previously dismissed the appeal, prompting the petitioner to approach the Supreme Court.

Background of the Case

The petitioner, a licensed contractor in Jaipur, carried out construction projects including roads, buildings, and footpaths. The dispute arose when the Rajasthan government issued a series of circulars mandating royalty deductions from contractors’ bills for minerals such as stone, grit, and moram used in construction.

The primary question was whether contractors who procured minerals from the open market should be liable for royalty deductions, typically applicable to mining leaseholders and permit holders.

Legal Framework

The case was governed by the Mines and Minerals (Development and Regulation) Act, 1957, which specifies that royalty payments are due from mining leaseholders. The Rajasthan government, however, introduced state-specific regulations mandating royalty verification for minerals used in construction.

The petitioner argued that:

  • She had no direct involvement in mining activities and should not be liable for royalty payments.
  • Royalty is a charge applicable to mining leaseholders, not contractors purchasing minerals from the open market.
  • The deductions imposed an undue financial burden and were legally unjustified.

Arguments from Both Sides

Petitioner’s Arguments

The petitioner contended:

  • The Rajasthan High Court’s dismissal of her appeal was erroneous as it did not examine the core issues.
  • Royalty obligations should only apply to mining leaseholders or those directly engaged in mineral excavation.
  • Contractors purchasing minerals from open markets should not be required to prove that the minerals were royalty-paid.
  • Withholding payments based on royalty verification was unfair and violated due process.

Respondent’s Arguments

The State of Rajasthan defended the deductions, arguing:

  • The policy was introduced to curb illegal mining and prevent revenue loss.
  • Contractors were required to obtain a “No Dues” certificate from the mining department before their final bills were cleared.
  • If contractors procured royalty-paid minerals, they needed to present proof to avoid deductions.
  • The government orders only facilitated revenue collection and were not discriminatory.

Supreme Court’s Observations

The Supreme Court analyzed the government orders and statutory provisions to determine whether contractors could be compelled to pay royalty.

Key observations included:

  • Definition of Royalty: As per the Mines and Minerals Act, 1957, royalty is payable by leaseholders extracting minerals. Contractors are not automatically liable.
  • Government’s Power: The state government had the authority to regulate mineral use but could not arbitrarily impose royalty obligations on non-mining entities.
  • Burden of Proof: The Court held that requiring contractors to prove that minerals were royalty-paid was procedurally unfair.
  • Illegal Mining Concerns: While curbing illegal mining was a legitimate state interest, enforcing royalty deductions indiscriminately was unjust.

Final Judgment

The Supreme Court ruled in favor of the petitioner, directing:

  • Contractors purchasing minerals from open markets are not automatically liable for royalty payments.
  • The Rajasthan government must establish proper verification mechanisms without arbitrarily withholding contractors’ payments.
  • Contractors may approach the mining department with proof of royalty payments, and any excess deductions must be refunded.

With this ruling, the Court reinforced that royalty payments must be justly imposed and procedural fairness must be maintained in enforcing state tax regulations.

Judgment Outcome: Appeal allowed with directions for verification and refund if necessary.

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Download Judgment: Manbhar Devi Agarwal vs State of Rajasthan & Supreme Court of India Judgment Dated 25-11-2016.pdf

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