Supreme Court Clarifies Royalty vs. Tax in Patna Municipal Corporation Case: Patna Municipal Corporation & Ors. vs. M/S Tribro Ad Bureau & Ors. (2024)

LEGAL ISSUE: Whether the charges levied by the Patna Municipal Corporation on advertising agencies for displaying hoardings were a tax or royalty.

CASE TYPE: Civil Law, Municipal Law, Taxation Law.

Case Name: Patna Municipal Corporation & Ors. vs. M/S Tribro Ad Bureau & Ors.

Judgment Date: 16 October 2024

Introduction

Date of the Judgment: 16 October 2024

Citation: 2024 INSC 784

Judges: Vikram Nath, J., Ahsanuddin Amanullah, J. (authored the judgment)

Is a charge imposed by a municipal corporation for displaying advertisements a tax or a royalty? The Supreme Court of India recently addressed this question in a case involving the Patna Municipal Corporation and several advertising agencies. The core issue was whether the Corporation’s demand for payment from advertising agencies was a tax, which would require legislative sanction, or a royalty, which could be based on an agreement between the parties. This judgment clarifies the distinction between these two types of charges, impacting how municipal bodies can collect revenue for advertising within their jurisdictions.

Case Background

The dispute began in 2005 when the Patna Municipal Corporation (hereafter referred to as “the Corporation”) held a meeting with advertising agencies. It was agreed that agencies would pay a royalty of Re.1 per square foot per year for hoardings displayed within the Corporation’s jurisdiction. In 2007, the Corporation increased this rate to Rs.10 per square foot per year, effective from November 2, 2007. This decision was made under the premise that the Patna Municipal Corporation Act, 1951, was repealed and replaced by the Bihar Municipal Act, 2007 (hereafter referred to as “the Act”), which came into force on April 5, 2007.

The Corporation, through an order dated November 2, 2007, prescribed various rates of royalty and penalties under the Act, effective from August 24, 2007. The Municipal Commissioner recommended that advertisers who had not paid dues would be charged double the rate, and hoardings displayed without permission would be removed with a penalty of five times the amount due. On December 15, 2010, the Corporation resolved to cancel the registration of advertising agencies that had defaulted on payments.

On February 11, 2012, the Corporation demanded Rs. 64,50,040 from M/s Tribro Ad Bureau (Respondent No. 1) as royalty/fee/tax. This demand, along with the order dated November 2, 2007, was challenged by the Respondent No. 1 in a writ petition before the Patna High Court. The Single Judge of the High Court quashed the penalty demand but directed the Corporation to accept payments at the 2007 rates. The Corporation then sent a demand notice for Rs. 21,98,000 to the Respondent No. 1, which the Respondent No. 1 disputed, continuing to pay at the rate of Re. 1 per square foot.

The Respondent No. 1 and other similarly situated parties then appealed to the Division Bench of the High Court, which quashed the enhanced rate, holding that the Corporation had no power to charge royalty/fee/tax without framing regulations. The Division Bench also held that the Corporation’s decision to auction the right to collect advertisement tax to private individuals was impermissible.

Timeline

Course of Proceedings

The matter initially came before a Single Judge of the High Court of Judicature at Patna, who partly allowed the writ petition, quashing the penalty imposed by the Corporation but upholding the demand for royalty at the 2007 rates. The Single Judge directed the Corporation to accept the tax/royalty/rent payable by the petitioners in accordance with the 2007 rates. Aggrieved by this order, the Respondent No. 1 filed a Letters Patent Appeal before the Division Bench of the same High Court. The Division Bench overturned the Single Judge’s decision, holding that the Corporation could not levy any tax/fee/royalty without proper legislative sanction and framed regulations. The Division Bench also directed that all amounts recovered as tax on advertisements be refunded to the concerned parties.

Legal Framework

The core legal issue revolves around Article 265 of the Constitution of India, which states, “No tax shall be levied or collected except by authority of law.” This provision mandates that any tax imposed by the government or any of its instrumentalities must have a legal basis.

The Patna Municipal Corporation Act, 1951, was repealed and replaced by the Bihar Municipal Act, 2007. Section 146 of the Act deals with the licensing of sites for advertisements, stating that “Except under, and in conformity with, such terms and conditions of a licence as the Municipality may, by the regulations, provide, no person being the owner, lessee, sub-lessee, occupier or advertising agent shall use, or allow to be used, any site in any land, building or wall, or erect, or allow to be erected, on any site any hoarding, frame, post, kiosk, structure, vehicle, neon-sign or sky-sign for the purpose of display of any advertisement.”

Section 147 of the Act provides for tax on advertisement, which also is to be determined as per the Regulations.

Section 431 of the Act states, “If any person erects, exhibits, fixes or retains any advertisement referred to in chapter XVII, without paying any tax under that chapter, he shall be punished with fine which – shall not be less than an amount equal to two times of such tax depending upon the gravity of the breach may extend up to an amount equal to five times the amount payable as such tax.”

Arguments

Submissions on behalf of the Appellants (Patna Municipal Corporation):

• The Corporation argued that the charge was a royalty, not a tax. The initial rate of Re.1 per square foot was agreed upon in a meeting with advertising agencies in 2005.
• The increase to Rs.10 per square foot in 2007 was a revision of the royalty rate, not an imposition of tax.
• The Corporation contended that the advertising agencies had agreed to pay the royalty and had made payments accordingly.
• The appellants relied on the decisions of this Court in Indsil Hydro Power and Manganese Limited v State of Kerala, (2021) 10 SCC 165; Century Spinning and Manufacturing Company Ltd. v Ulhasnagar Municipal Council, (1970) 1 SCC 582; and Union of India v Indo-Afghan Agencies Ltd., (1968) 2 SCR 366, to argue that royalty and tax are different concepts.

Submissions on behalf of the Respondents No. 1 (M/s Tribro Ad Bureau):

• The Respondent No. 1 argued that the Corporation could not levy tax without legislative authority.
• The Respondent No. 1 contended that the Corporation had not framed the necessary regulations under the Act to levy taxes.
• The Respondent No. 1 submitted that the Office Order dated November 2, 2007, was invalid as it lacked statutory backing.
• The Respondent No. 1 argued that charging Rs.10 per square foot irrespective of whether the hoardings were on private or public land was arbitrary.
• The Respondent No. 1 relied upon the decisions of this Court in Commissioner of Income Tax, Mumbai v Anjum M H Ghaswala, (2002) 1 SCC 633; Punit Rai v Dinesh Chaudhary, (2003) 8 SCC 204; Union of India v Naveen Jindal, (2004) 2 SCC 510; and State of Kerala v Chandramohanan, (2004) 3 SCC 429, to argue that the Corporation could not levy tax without proper legal backing.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the demand by the Patna Municipal Corporation was a tax/levy or simply in the nature of royalty for permission for advertising through hoardings within the limits of the Corporation.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

The Court’s view on the authorities:

• Indsil Hydro Power and Manganese Limited v State of Kerala, (2021) 10 SCC 165*: The Court relied on this case to distinguish between royalty and tax, stating that royalty is compensation for rights and privileges, while tax is a statutory imposition.
• Century Spinning and Manufacturing Company Ltd. v Ulhasnagar Municipal Council, (1970) 1 SCC 582*: The Court used this case to support the argument that royalty and tax have different connotations in law.
• Union of India v Indo-Afghan Agencies Ltd., (1968) 2 SCR 366*: The Court cited this case to emphasize that public bodies are bound by their representations.
• Commissioner of Income Tax, Mumbai v Anjum M H Ghaswala, (2002) 1 SCC 633*: The Court found this case inapplicable as it dealt with the powers of the Settlement Commission, not the distinction between tax and royalty.
• Punit Rai v Dinesh Chaudhary, (2003) 8 SCC 204*: The Court found this case inapplicable as it dealt with the determination of caste, not the distinction between tax and royalty.
• Union of India v Naveen Jindal, (2004) 2 SCC 510*: The Court found this case inapplicable as it dealt with the status of the Flag Code as a law, not the distinction between tax and royalty.
• State of Kerala v Chandramohanan, (2004) 3 SCC 429*: The Court found this case inapplicable as it dealt with the status of government circulars as law, not the distinction between tax and royalty.
• N Mani v Sangeetha Theatre, (2004) 12 SCC 278*: The Court cited this case to support the view that quoting a wrong provision of law does not invalidate an action if the power exists.
• Ram Sunder Ram v Union of India, 2007 (9) SCALE 197*: The Court reiterated that quoting the wrong provision of law does not invalidate an action if the power exists.
• P K Palanisamy v N Arumugham, (2009) 9 SCC 173*: The Court reiterated that mentioning a wrong provision does not invalidate an order if the authority had the jurisdiction.
• Mohd. Shahabuddin v State of Bihar, (2010) 4 SCC 653*: The Court cited this case to support the view that quoting a wrong provision of law does not invalidate an action if the power exists.
• State of Haryana v Raj Kumar, (2021) 9 SCC 292*: The Court cited this case to support the view that quoting a wrong provision of law does not invalidate an action if the power exists.
• Alok Shanker Pandey v Union of India, (2007) 3 SCC 545*: The Court cited this case to clarify that interest is not a penalty but a normal accretion on capital.
• Mineral Area Development Authority v Steel Authority of India, 2024 SCC OnLine SC 1796*: The Court relied on this 9-Judge Bench decision, which was delivered after the judgment was reserved in the present case, to reiterate that royalty is not a tax.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the distinction between royalty and tax. The Court emphasized that royalty is a payment for the privilege of using property, based on an agreement between parties, while tax is a compulsory exaction by the state, requiring legislative sanction. The Court noted that the advertising agencies had agreed to pay royalty and had made payments, indicating their acceptance of the arrangement. The Court also considered the fact that the initial royalty rate was fixed after a meeting with all stakeholders, and the subsequent increase was a revision of this rate, not an imposition of tax.

The Court considered the arguments that the Corporation had not framed the necessary regulations under the Act to levy taxes, but found that this was not relevant since the charge was a royalty, not a tax. The Court also noted that the Corporation had wrongly quoted Section 431 of the Act, but held that this did not invalidate the demand as the Corporation had the power to charge royalty.

The Court also addressed the issue of proportionality in the enhancement of the royalty rate, stating that while the increase from Re.1 to Rs.10 per square foot may seem high, there was no evidence to suggest it was exorbitant or disproportionate.

The court held that the imposition of penalty for non-payment was invalid, but clarified that the Corporation could charge interest on delayed payments. The court also held that future enhancements of royalty rates cannot be retrospective.

The Court quoted Alok Shanker Pandey v Union of India, (2007) 3 SCC 545, stating, “Interest is not a penalty or punishment at all, but it is the normal accretion on capital.”

The Court also quoted N Mani v Sangeetha Theatre, (2004) 12 SCC 278, stating, “It is well settled that if an authority has a power under the law merely because while exercising that power the source of power is not specifically referred to or a reference is made to a wrong provision of law, that by itself does not vitiate the exercise of power so long as the power does exist and can be traced to a source available in law.”

The Court also quoted Mineral Area Development Authority v Steel Authority of India, 2024 SCC OnLine SC 1796, stating, “Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.”

The Court held, “Whatever be the nomenclature, the charges … in the present cases were for the privilege enjoyed …. … 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. … For such benefit or privilege conferred upon 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.”

Key Takeaways

• Distinction between Royalty and Tax: Royalty is a payment for the privilege of using property, based on an agreement, while tax is a compulsory exaction by the state, requiring legislative sanction.
• Municipal Powers: Municipal corporations can charge royalty for advertising based on agreements, but taxes require statutory backing.
• Retrospective Application: Future enhancements in royalty rates cannot be applied retrospectively.
• Interest on Delayed Payments: Municipal corporations can charge interest on delayed payments of royalty, which is not a penalty but compensation for late payment.
• Quoting Wrong Provision: Quoting a wrong provision of law does not invalidate an action if the power to do the act exists.

Directions

The Supreme Court directed the Patna Municipal Corporation to furnish a computation of amounts due to the parties concerned within 4 weeks. Payments were to be made within 16 weeks thereafter by the parties concerned, failing which they would carry interest @ 10% per annum and be recoverable as arrears under the Bihar and Orissa Public Demands Recovery Act, 1914.

Development of Law

The ratio decidendi of this case is that royalty is not a tax and can be charged by a municipal corporation based on an agreement with the parties. This clarifies the distinction between royalty and tax, which has been a subject of debate in previous cases. The Supreme Court, by relying on a 9-judge bench judgment, has settled the position of law that royalty is not a tax.

Conclusion

The Supreme Court’s judgment clarifies that the Patna Municipal Corporation’s charges on advertising agencies were a royalty, not a tax, and were valid based on the agreement between the parties. The Court upheld the enhanced rate of Rs.10 per square foot, but disallowed the imposition of penalties while allowing interest on delayed payments. This decision provides clarity on the powers of municipal bodies to collect revenue for advertising and the distinction between royalty and tax.