Supreme Court Upholds Rule Allowing Inclusion Of Royalty In Iron Ore's Average Sale Price To Determine Royalty

The Supreme Court on Monday (July 13) upheld the government's method of calculating royalty on iron ore, ruling that the practice of not deducting royalty payments towards District Mineral Foundation (“DMF”) and National Mineral Exploration Trust (NMET”) while computing the sale price is a valid measure to prevent mining companies from evading their liability to pay royalty to the government.

A bench of Justice JB Pardiwala and Justice KV Viswanathan upheld the constitutional validity of the Explanation appended to Rule 38 of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016 and Rule 45(8)(a) of the Mineral Conservation and Development Rules, 2017, which provided for the inclusion of royalty and payments made towards DMF and NMET in the sale value for computing the average sale price for determination of royalty.

“…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, is constitutional and valid. We hold that the impugned Rules are not violative of Article 14 and Article 19(1)(g) of the Constitution.”, the Court held.

Under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), mining companies are required to pay 15% royalty to the State Government based on the Average Sale Price (ASP) of minerals such as iron ore.

The dispute arose because the Central Government framed rules stating that, while calculating the sale value for determining the ASP, no deduction would be allowed for royalty, DMF contributions or NMET payments.

Petitioner-Kirloskar Ferrous Industries challenged these provisions, arguing that royalty itself was being included in the sale value on which fresh royalty was calculated. According to the company, this resulted in an unfair "royalty on royalty" and artificially increased its financial burden.

The company also pointed out that the Government had excluded such components while calculating the sale value of coal, and argued that iron ore producers should receive similar treatment.

Earlier, the petitioners had approached the Supreme Court in 2024 after an expert committee constituted by the Government recommended excluding royalty, DMF and NMET from the sale value. However, after considering public consultation, the Union Government decided not to accept the committee's recommendation, stating that any such change would substantially reduce the revenue earned by State Governments. The petitioners thereafter filed the present Writ Petition under Article 32 of the Constitution claiming violation of Articles 14 and 19(1)(g) of the Constitution.

Dismissing the petition, the judgment authored by Justice Viswanathan held that the impugned Rules merely prescribe the method of computing the value on which royalty is calculated and do not alter the statutory rate of royalty.

“According to the petitioners, ad valorem cannot include in the value the levy of royalty, payments made towards DMF and NMET. We are not able to countenance that submission. As a means to check evasion, a measure has been prescribed under which ad valorem will be arrived at to check manipulation and to strike at evasion, certain factors have been loaded on to the sale value and we find nothing illegal in the same.”, the Court observed.

The Court accepted the government's argument about the "measure of levy" on iron, noting that, unlike for coal, where the notified prices, auction prices of Coal India Limited and Singareni Collieries Company Limited or the import price form the basis of National Coal Index (NCI), there is no such mechanism for iron ore. As far as iron ore is concerned, the ASP depends on market forces and is not decided by the Government, the Court noted.

Upon noting that the government's additional affidavit says that there were instances of ASP manipulations by the miners, the Court found it justifiable and reasonable to approve the government's existing measurement of ASP for levying of royalty on iron ore. According to the Court, coal pricing is largely regulated and dominated by public sector entities, whereas iron ore is produced by numerous private miners, making it more vulnerable to price manipulation.

“The Union of India has demonstrated before us by producing graphs, charts and data that wherever highest examine price was reported, the quantity despatched was NIL or very less. They also demonstrated that where the ex-mine price was low, the quantity despatched was high…They contend that by this jugglery, enormous loss is caused in royalty payments and in premium payments by beating down the average sale price. The graphs, charts and data have all been set out in the earlier part of this judgment… In this scenario, it cannot be said that the measure adopted is arbitrary and has no nexus and rational connection with the nature of the levy.”, the Court observed.

“We find nothing manifestly arbitrary in the process adopted. There is nothing capricious or irrational about the measure and it cannot be said that it has been adopted without any determining principle nor do we find the measure excessive or disproportionate for it to be characterized as manifestly arbitrary.”, the court added.

In terms of the aforesaid, the petition was dismissed, and the government method of calculating ASP was upheld.

Headnote

Mines and Minerals (Development and Regulation) Act, 1957 – Section 9, Second Schedule (Entry 24) – Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016 – Rule 38, Rule 42 – Mineral Conservation and Development Rules, 2017 – Rule 45(8)(a) – Constitutional Validity of Explanations to Rule 38 (2016 Rules) and Rule 45(8)(a) (2017 Rules) – Inclusion of Royalty, DMF, and NMET in Sale Value for ASP Calculation – Held - The Explanations appended to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules which bar the deduction of royalty, District Mineral Foundation (DMF) payments, and National Mineral Exploration Trust (NMET) payments from the "gross amount" when computing the "sale value" for the determination of Average Sale Price (ASP) are constitutionally valid - They do not violate Articles 14 and 19(1)(g) of the Constitution, nor are they ultra vires Section 9 of the MMDR Act.

Key Legal Principles & Findings – i. Presumption of Constitutionality of Subordinate Legislation - There is a strong presumption in favor of the constitutionality and validity of subordinate legislation - The burden lies heavily on the challenger to displace this presumption by showing a lack of legislative competence, violation of fundamental or constitutional rights, or manifest arbitrariness; ii. Regulation of Mines and Mineral Development - The scope of "regulation of mines and mineral development" under List I Entry 54 of the Seventh Schedule, and implemented through the MMDR Act, is wide. The fixation of rates of royalty under Section 9 read with the Second Schedule falls squarely within this regulatory domain – iii. Distinction Between Measure of Levy and Nature of Levy - The standard or measure adopted to quantify a levy is a matter of legislative policy and convenience - The standard does not need to be contoured along the lines that define the character of the levy itself - The inclusion of royalty, DMF, and NMET in the "sale value" (as a measure to compute ASP) does not alter the ad valorem nature of the royalty levy under Section 9; iv. Regulatory Measures to Prevent Tax/Revenue Evasion - Legislative and subordinate rule-making bodies possess the competence to design and enact measures/fictions specifically aimed at suppressing price manipulation, under-invoicing, and revenue evasion - Regulatory data showed that some miners deployed clever stratagems (such as showing nil or very low despatches when ex mine prices were high, and vice versa) to artificially depress the ASP and keep their premium and royalty payouts down. Hence, loading royalty, DMF, and NMET onto the sale value is a valid regulatory antidote to check evasion and arrive at a fair mineral value; v. No Article 14 Violation (Comparison with Coal Disallowed) - Miners of iron ore cannot claim discrimination by comparing themselves to coal miners (where statutory dues are excluded from actual price calculations) - Coal has a distinct price mechanism (the National Coal Index based on notified PSU prices and imports) and has historically been subject to a public sector monopoly, whereas iron ore prices are determined by highly competitive, private-sector market forces prone to under-invoicing - Comparing coal with iron ore is akin to comparing apples and oranges; v. No Violation of Article 19(1)(g) / Public Interest Over Individual Hardship - The restriction imposed is reasonable and proportional - Individual hardship cannot override a regulatory measure designed in the larger public interest to prevent substantial losses to the state exchequer - The grundnorm is "Salus populi suprema lex" (regard for the public welfare is the highest law), and private rights must cede to public interest. [Relied On State of Tamil Nadu and Another v. P. Krishnamurthy and Others, (2006) 4 SCC 517; Sardar Baldev Singh v. CIT, Delhi & Ajmer, [1961] 1 SCR 482; Mineral Area Development Authority & Anr. v. M/s Steel Authority of India and Another, (2024) 10 SCC 1; Ralla Ram v. Province of East Punjab, 1948 SCC Online FC 9; Union of India & Ors. v. Bombay Tyre International Ltd. and Others, (1984) 1 SCC 467; Hingir-Rampur Coal Co., Ltd. and Others v. State of Orissa and Others, [1961] 2 SCR 537; Navnit Lal C. Javeri v. K.K. Sen, [1965] 1 SCR 909; Union of India and Another v. A. Sanyasi Rao and Others, (1996) 3 SCC 465; State of Madras v. V.G. Row, [1952] SCR 597; Paras 61-64, 72-78, 87-102].

Cause Title: Kirloskar Ferrous Industries Ltd. and Anr. Versus Union of India & Anr.

Citation : 2026 LiveLaw (SC) 664

Click here to download judgment

Appearance:

For Petitioner(s) : Dr. A. M. Singhvi, Sr. Adv. Mr. Balbir Singh, Sr. Adv. Mr. Shyam Divan, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Ninad Laud, Adv. Mr. M S Ananth, Adv. Mr. Avishkar Singhvi, Adv. Ms. Aanchal Mullick, Adv. Ms. Kamakshi Sehgal, Adv. Mr. Siddharth Seem, Adv. Mr. Ivo Dcosta, Adv. Mr. Naman Tandon, Adv. Mr. Abhinav Agrawal, AOR Mr. Piyush Bhardwaj, Adv. Mr. Shivam Sengupta, Adv. Ms. Ishani Shekhar, Adv.

For Respondent(s) : Mr. R Venkataramani, Attorney General for India; Mr. Tushar Mehta, Solicitor General; Mr. K. M. Nataraj, A.S.G Mr. Vikaramjeet Bannerjee, Addl Solicitor General; Mr. Sudarshan Lamba, AOR Ms. Ameyvikrama Thanvi, Adv. Mr. Chitvan Singhal, Adv. Mr. Abhishek Kumar Pandey, Adv. Mr. Raman Yadav, Adv. Mr. Kartikay Aggarwal, Adv. Ms. Deboshree Mukherjee, Adv. Ms. Yamika Khanna, Adv. Ms. Hina Bhardwaj, Adv. Mr. Vikash Kumar Adv.  Mr. P. V. Yogeswaran, AOR Ms. Shailja Singh, Adv.