The Supreme Court has held that the “royalty” charged by municipal corporations to advertising companies for installing hoardings and advertisements cannot be classified as a “tax.”
On August 29, 2005, the Municipal Commissioner convened a meeting with advertising agencies. It was resolved that agencies must submit details of their advertisements to the authorised officer, and the corporation would charge a royalty of ₹1 per square foot per year for hoardings displayed on land under its jurisdiction.
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On January 15, 2007, the corporation introduced new royalty rates for advertisements, setting different rates for various types of hoardings. For the respondent, the rate was increased to ₹10 per square foot per year, effective from November 2, 2007.
The corporation passed a resolution to cancel the registrations of advertising agencies that defaulted on enhanced royalty payments, after discovering illegal hoardings and unpaid dues. Demands for royalty, fee, or tax were issued to the advertising companies based on these resolutions.
The demand and the office order of November 2, 2007, were challenged in a writ petition before the Patna High Court. The Single Judge quashed the penalty demands and directed the corporation to accept payments according to the 2007 rates it had set.
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On July 18, 2012, the corporation issued a demand notice to the respondent for ₹21,98,000 as royalty, fee, or tax, in line with the Single Bench judgement. The respondent contested the calculation and requested a corrected notice. Without a response, the respondent continued to pay self-assessed royalty at ₹1 per square foot.
In the interim, the Patna Municipal Corporation Act, 1951, was repealed and replaced by the Bihar Municipal Act, 2007, effective April 5, 2007. Under the new Act, an office order dated August 24, 2007, prescribed various rates of royalty and penalties. The Municipal Commissioner recommended that advertisers who had not paid dues be charged twice the fixed rate, unauthorised hoardings be removed, and penalties of five times the amount due be imposed.
The advertising companies appealed to the Division Bench of the High Court, which nullified the rate enhancement. It held that, without specific regulations, the corporation lacked the authority to levy, impose, or collect taxes as attempted. The regulations framed on July 4, 2012, and published on August 13, 2012, pertained only to licensing, not taxation. The Bench also ruled that delegating tax collection to private individuals through auctions was impermissible, as taxation is a sovereign function.
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The Patna Municipal Corporation ( the appellant ) contested the final judgement issued by a Division Bench of the Patna High Court. The High Court had nullified the corporation’s demand for tax, fee, or royalty on advertisements, ruling that such a demand lacked legislative sanction and violated Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law. The High Court ordered the corporation to refund all amounts collected as “tax” on advertisements and prohibited the imposition of penalties.
The corporation contended that the increase in royalty to ₹10 per square foot, introduced in November 2007, was accepted by the respondent at the time and only challenged in 2012, years after its implementation.
The appellant maintained that it had lawfully introduced the new royalty rates as part of its contractual agreements with advertisers. On the other hand, the respondent countered that the corporation lacked legislative authority to impose any taxes without proper legal backing.
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They emphasised that there were no regulations under Sections 147 and 423 of the Bihar Municipal Act authorising such taxation, and argued that the corporation had acted beyond its legal powers by imposing what was effectively a royalty or tax without the necessary regulations in place.
The Court clarified that royalty and tax are not synonymous terms. Consequently, the corporation’s authority to impose royalty cannot be challenged on the basis that it lacks explicit provision in the Act or relevant regulations, as the issue of royalty being a tax does not arise. Section 431 of the Act, therefore, is not applicable when royalty is levied through agreements or understandings.
The Supreme Court Bench comprising Justice Vikram Nath and Justice Ahsanuddin Amanullah observed that invoking Section 431 of the Act to justify enhanced royalty was inappropriate since royalty is distinct from tax.
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Therefore, the corporation’s authority to impose royalty cannot be invalidated on the grounds of lacking provisions in the Act or regulations, as royalty does not constitute a tax. Section 431 is irrelevant when royalty is charged through mutual agreements.
Furthermore, the Court noted that the corporation did not apply the enhanced rate of ₹10 per square foot retrospectively. The new rate was effective from November 2007, ten months after the resolution in January 2007. Since there was no retroactive application, the Court saw no reason to interfere with the corporation’s demand from the effective date.
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