Madras High Court Stays GST Proceedings on Mining Royalty Until Supreme Court Constitutional Bench Decision
Case Overview
The Madras High Court recently adjudicated a writ petition in the matter of Dharmaraj Vs Union of India, wherein the assessee contested the validity of a Show Cause Notice proposing to impose Goods and Services Tax (GST) on royalty payments made to the State Government of Tamil Nadu. The impugned notice, bearing reference No. 12/2025-GST-AC and dated 29.09.2025, sought to bring seigniorage and royalty fees within the ambit of GST liability.
The judicial proceedings centered around the contentious issue of whether royalty payments constitute taxable consideration under the GST framework, a matter that has generated significant litigation across various High Courts and is now pending adjudication before a Nine Judge Constitution Bench of the Supreme Court of India.
Background and Context of the Dispute
The controversy in this matter arose when the GST authorities issued a Show Cause Notice to the assessee, proposing to levy GST on the seigniorage or royalty fees that the petitioner was obligated to pay to the Government of Tamil Nadu. Such royalty payments typically arise in the context of extraction of natural resources, including mining operations, where the extractors are required to pay consideration to the state government for exploitation of mineral wealth.
The fundamental legal question that forms the crux of this dispute relates to the characterization of royalty payments - whether they represent a tax imposed by the state government or whether they constitute consideration for supply of goods or services, thereby attracting GST liability. This distinction carries profound implications for assessees engaged in mining and extraction activities across the country.
Petitioner's Legal Arguments and Precedent Reliance
The petitioner's legal representative brought to the Court's attention several judgments rendered by the Madras High Court in factually similar circumstances. The cornerstone of the petitioner's submissions rested on a Division Bench judgment delivered in the case of A. Venkatachalam v. Assistant Commissioner (ST), Palladam in W.P. No. 30974 of 2022, which had laid down specific procedural directions for handling cases involving GST levy on royalty payments.
The petitioner emphasized that the nature and character of royalty payments is currently sub judice before the highest constitutional authority - a Nine Judge Constitution Bench of the Supreme Court of India. Given this pending constitutional question, the petitioner argued that any precipitate action by the tax authorities would be premature and potentially prejudicial to the assessee's rights.
The reliance on the Division Bench precedent was strategic, as that judgment had crafted a balanced approach that allowed the adjudication process to continue while simultaneously protecting assessees from coercive recovery measures until constitutional clarity emerges from the Supreme Court.
Division Bench Directions in the Precedent Case
The Division Bench of the Madras High Court in A. Venkatachalam v. Assistant Commissioner (ST), Palladam in W.P. No. 30974 of 2022 had formulated comprehensive directions to address the interim situation where numerous assessees faced Show Cause Notices for GST on royalty while the constitutional question remained unresolved. These directions reflected judicial wisdom in balancing revenue interests with assessee protection.
The Division Bench had directed that in matters where Show Cause Notices were under challenge, the affected parties should submit their objections or representations within a four-week timeframe from receiving the court's order. This direction ensured that the adjudication process would not remain indefinitely stalled.
Furthermore, the authorities were instructed to proceed with adjudication on merits after providing reasonable opportunity of hearing to the assessees. However, the critical safeguard was that any orders passed pursuant to such adjudication should be kept in abeyance until the Nine Judge Constitution Bench renders its decision on the nature and character of royalty payments.
Most significantly, the Division Bench explicitly prohibited any recovery of GST on royalty until the constitutional adjudication by the Supreme Court is completed. This direction provided immediate relief to assessees who would otherwise face financial hardship from depositing disputed taxes on an unsettled legal question.
The Division Bench also preserved the rights of both parties by clarifying that all contentions remained open for consideration in appropriate proceedings following the Supreme Court's decision. Additionally, challenges to relevant notifications and circulars were left open for future consideration based on the constitutional bench's outcome.