The Supreme Court on Monday upheld the constitutional validity of provisions governing royalty calculation under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), ruling that royalty, District Mineral Foundation (DMF) contributions and National Mineral Exploration Trust (NMET) payments can continue to form part of the sale value while calculating the Average Sale Price (ASP) of minerals. A Division Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan dismissed a writ petition filed by Kirloskar Ferrous Industries Ltd, holding that the challenged provisions neither violate Articles 14 and 19(1)(g) of the Constitution (fundamental rights to equality and the freedom to practise any profession or business) nor exceed the rule-making powers conferred under the MMDR Act. According to the latest judgment, 'We hold that the Explanations to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules, insofar as they provide for inclusion of royalty and payments made towards DMF and NMET in the sale value for computing the average sale price for determination of royalty, are constitutional and valid'. The ruling is expected to provide certainty to the mining sector by preserving the existing royalty framework.
The ruling comes as major relief to the Centre and mineral-rich states, as any change in the royalty computation methodology could have significantly affected royalty collections and auction premiums linked to mineral production. As reported by Business Standard, the top court observed that 'the petitioners have not been able to establish unconstitutionality' and that the Union has offered proper justification for the levy adopted. The court held that 'the petitioners have not been able to establish unconstitutionality. On the contrary, the Union has offered proper justification for the measure of the levy adopted, and it passes constitutional muster'. The formula to calculate the average sale price (ASP) of minerals forms the basis for determining the royalty payable by mining companies, making this ruling crucial for the mining sector's financial stability. The Centre had earlier defended the existing framework, prompting the present constitutional challenge, citing concerns over the possible impact on state revenues. According to submissions placed before the court, changing the methodology could have reduced state government revenues by about ₹6,200 crore annually based on FY24 production levels, with the annual impact potentially rising to around ₹14,000 crore by FY30 as production from auctioned mines increases.
The dispute centred on the explanations added to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules, which state that no deduction shall be made for royalty, DMF or NMET payments while calculating the sale value. According to Business Standard, the company contended that since royalty is calculated on this amount, miners effectively end up paying royalty on a value that already includes royalty and other statutory levies, resulting in 'royalty on royalty' and increasing their financial burden. Kirloskar Ferrous also argued that auction premiums are linked to the ASP, creating a cascading effect because the same base is used both for auction premium and for royalty-related payments. The company relied on a committee constituted by the ministry of mines, which had acknowledged the cascading impact and recommended changes to the royalty computation mechanism. It argued that while the government had excluded royalty and statutory levies from royalty computation for coal, similar relief had not been extended to iron ore and other minerals, making the existing framework discriminatory.
The Centre accepted the court's observation that the existing methodology serves a legitimate regulatory purpose, as reported by Business Standard. The Union relied on charts, graphs and data to argue that some miners could depress the Average Sale Price by reporting higher prices for small quantities and lower prices for larger quantities, thereby reducing royalty and auction premium payments. The bench held that the existing formula has a reasonable nexus with preventing such revenue leakage and therefore cannot be termed arbitrary or unconstitutional. The Centre maintained that the formula was adopted to curb under-reporting of mineral prices and prevent revenue leakage, with the ASP mechanism introduced after authorities found that declared sale prices in some instances did not reflect prevailing market values. Including statutory levies within the sale value, the government argued, formed part of a broader fiscal policy aimed at protecting public revenue. The Centre also said royalty regimes differ across minerals and that the separate treatment accorded to iron ore and coal could not be characterised as discriminatory. Agreeing with the government's stand, the Supreme Court observed that 'fiscal and economic measures warrant a high degree of judicial restraint and cannot be struck down merely because an alternative policy may appear preferable'. The court also rejected comparisons with coal royalty rules, observing that 'coal and iron ore operate under different pricing mechanisms, comparing the two sectors was akin to comparing apples and oranges'.
The litigation traces its origin to a writ petition filed by Kirloskar Ferrous in 2024, challenging the mining royalty rules under the Mineral (Other than Atomic and Hydrocarbons Energy Minerals) Concession Rules, 2016 and the Mineral Conservation and Development Rules, 2017. In November 2024, the Supreme Court refrained from deciding the constitutional validity of the provisions and instead directed the Centre to complete a policy review after holding public consultation. Following the review, the Centre decided to retain the existing royalty calculation methodology. According to Business Standard, the Court had then allowed the government to complete the exercise. After deciding against any change, citing concerns over the possible impact on state revenues, the Centre defended the existing framework, prompting the present constitutional challenge. The court also clarified that 'recommendations made by expert committees examining the royalty framework were advisory and did not bind the government to amend the rules'. The Centre had earlier informed the Bench that it was reviewing the royalty computation mechanism after inviting public comments, with the government deciding against any change after considering the material placed on record.
