Source: Supreme Court 

Why in News? 

The Supreme Court ruled that the 'royalty' charged by the Patna Municipal Corporation from advertising companies for hoardings is not a tax. This decision overturned the Patna High Court's directive to refund the royalty stating that such charges are not compulsory exactions and therefore fall outside the scope of taxation as defined by Article 265 of the Constitution of India,1950 (COI). 

• The ruling referenced a decision clarifying the distinction between royalty and tax. 

What was the Background of the Patna Municipal Corporation & Ors. v. M/S Tribro Ad Bureau & Ors. Case? 

• On 29th August 2005, the Patna Municipal Corporation held a meeting with advertising agencies where it was agreed that:  
  • Agencies would submit details of their advertisements including location, size, etc. 
  • The Corporation would charge royalty at Re.1 per square foot per year for hoardings on Corporation land. 
• On 15^th January 2007, the Corporation revised the royalty rates:  
  • New rates were prescribed for different types of hoardings. 
  • For the respondent company, the rate was increased to Rs.10 per square foot per year. 
  • This new rate became effective from 2nd November 2007. 
• A significant legislative change occurred when:  
  • The Patna Municipal Corporation Act, 1951 was repealed. 
  • It was replaced by the Bihar Municipal Act, 2007. 
  • The new Act came into effect from 5th April 2007. 
• The Corporation took several administrative actions:  
  • Issued an office order on 2^nd November 2007 prescribing various royalty/penalty rates. 
  • Made these rates effective retrospectively from 24^th August 2007. 
  • Introduced penalties of double rates for non-payment. 
  • Implemented five times penalty for unauthorized hoardings. 
• On 15^th December 2010, the Corporation Council:  
  • Passed Resolution No.18. 
  • Decided to cancel registration of defaulting advertising agencies. 
  • This was prompted by illegal hoarding displays and non-payment of dues. 
• On 11^th February 2012:  
  • The Corporation raised a demand of Rs.64,50,040 from Respondent No.1 
  • This demand was based on various resolutions under the new Act 
• The respondent company's actions:  
  • Challenged the demand notice and rate revision in High Court. 
  • After initial court orders, received a revised demand of Rs.21,98,000. 
  • Disputed the calculation in January 2013. 
  • Continued paying at the old rate of Re.1 per square foot as self-assessed. 

What were the Court’s Observations? 

• The Supreme Court held that 'royalty' imposed by Municipal Corporation for advertising hoardings cannot be characterized as 'tax' or 'compulsory exaction', relying on the nine-judge bench decision in Mineral Area Development Authority v. Steel Authority of India. 
• The Court determined that royalty and tax are fundamentally distinct legal concepts with different imports and connotations, and these nomenclatures cannot be used interchangeably in law. 
• The Court established that once parties acquiesce to pay royalty, they are precluded from challenging such decision unless there exists an inherent lack of jurisdiction or the exercise of authority is perverse or malafide in law or fact. 
• The Court found that while the Corporation's Resolution to charge enhanced royalty under Section 431 of the Act was misplaced, this did not invalidate its inherent power to charge royalty based on agreement/understanding with parties. 
• The Court set aside the Patna High Court's Division Bench decision directing refund of royalty, holding that the Corporation's power to charge royalty exists independent of legislative competence under Article 265 of the Constitution. 
• On equitable grounds, the Court ordered the enhanced rate of Rs.10 per square foot to be payable with 6% simple interest, with provision for 10% interest on delayed payments, recoverable under the Bihar and Orissa Public Demands Recovery Act, 1914. 

What is Article 265 of the Indian Constitution? 

• Constitutional Mandate: 
  • Article 265 establishes that no tax shall be levied or collected except by authority of law 
  • It is a fundamental constitutional safeguard against arbitrary taxation 
  • The provision serves as the cornerstone for legitimate tax collection in India 
• Legislative Authority: 
  • Tax imposition must be supported by valid legislation passed by competent legislative bodies 
  • Only Parliament (for central taxes) or State Legislature (for state taxes) has the authority to impose taxes 
  • The law must specifically define the tax nature, taxable event, rate, liability, and collection procedures 
• Constitutional Limitations: 
  • Taxes cannot be imposed arbitrarily or discriminatorily 
  • Tax laws must adhere to principles of equality and non-discrimination 
  • Retrospective taxation is prohibited under Article 265 
  • Tax burden must be distributed equitably based on ability to pay 
• Legal Requirements: 
  • A specific legislation must authorize any tax imposition 
  • The tax law must clearly define all essential elements of taxation 
  • The law must prescribe proper procedures for assessment and collection 
  • Tax laws must conform to principles of social justice 
• Judicial Oversight: 
  • Article 265 provides basis for judicial review of taxation 
  • Courts have power to examine validity of tax laws 
  • Taxpayers can challenge unconstitutional taxes through judicial process 
  • Courts can strike down tax laws violating constitutional provisions 
• Protection of Rights: 
  • The provision acts as a safeguard for taxpayer rights 
  • It ensures transparency in tax administration 
  • It prevents misuse of taxing powers by government 
  • It provides constitutional remedy against illegal taxation