The Supreme Court has upheld the constitutional validity of the provisions requiring royalty, District Mineral Foundation (DMF) contributions and National Mineral Exploration Trust (NMET) payments to be included in the “sale value” while calculating the Average Sale Price (ASP) for determining royalty under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act).
The Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan, settles an important dispute concerning the methodology adopted by the Central Government for computing royalty on major minerals such as iron ore.
The petition challenged 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 the identical Explanation to Rule 45(8)(a) of the Mineral Conservation and Development Rules, 2017.
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Under these provisions, while computing the “sale value” of minerals for determining the Average Sale Price (ASP), no deduction is permitted in respect of royalty, payments made to the District Mineral Foundation (DMF), or contributions to the National Mineral Exploration Trust (NMET). The petitioners argued that this effectively resulted in “royalty on royalty” and created a cascading effect, leading to excessive financial burdens on mining leaseholders.
The litigation had its genesis in an earlier round before the Supreme Court. In its 2024 judgment, the Court had noted that the Central Government itself had acknowledged the anomaly arising from the inclusion of royalty, DMF and NMET while calculating ASP and had initiated consultations for legislative reform. However, after considering the issue, the Union Government ultimately decided not to amend the rules, citing substantial revenue implications for State Governments. The present writ petition challenged that policy decision as well as the validity of the rules.
The appellant contended that Section 9 of the MMDR Act prescribes royalty on an ad valorem basis, meaning according to the value of the mineral. According to the petitioners, adding royalty, DMF and NMET into the sale value artificially inflated the base on which royalty was calculated.
They argued that the impugned provisions resulted in royalty being levied on amounts that already represented royalty and statutory contributions; auctioned mining leaseholders effectively paid these components twice—once while calculating auction premium and again while computing royalty; the methodology departed from the statutory concept of ad valorem royalty under Section 9 of the MMDR Act; and the rules were manifestly arbitrary and violated Articles 14 and 19(1)(g) of the Constitution.
The petitioners also relied upon the fact that the Government had amended the royalty framework for coal to exclude such statutory levies from the sale value and argued that a similar approach ought to have been adopted for other minerals.
The Union of India defended the rules by arguing that the methodology was adopted as an anti-evasion measure.
According to the Government, unlike coal, the iron ore market comprises numerous private miners, making it vulnerable to under-invoicing and manipulation of ex-mine prices. The Average Sale Price mechanism was therefore designed to ensure accurate valuation and protect public revenue.
The Government also placed before the Court data showing instances where miners allegedly altered dispatch patterns to artificially reduce the Average Sale Price and consequently lower royalty liability. It maintained that including royalty, DMF and NMET in sale value was a regulatory measure intended to counter such manipulation and preserve State revenues.
The Union further argued that striking down the impugned provisions would significantly reduce royalty collections and auction premium payable to States, potentially causing losses running into several lakh crore rupees over the life of mining leases.
The Court held that the challenged provisions merely prescribe the measure for computing royalty and do not alter the nature of the levy itself.
Referring to settled constitutional principles governing fiscal legislation, the Bench observed that legislatures enjoy considerable latitude in designing taxation and royalty mechanisms, particularly where the measures are intended to prevent tax avoidance or revenue leakage.
The Court accepted the Union Government’s explanation that the methodology was introduced to prevent manipulation of ex-mine prices and suppression of Average Sale Price through strategic reporting of dispatch quantities. It noted that material placed before it demonstrated instances where miners appeared to have adopted reporting patterns capable of depressing ASP calculations.
According to the Bench, where a measure of levy is adopted to suppress evasion and advance the statutory objective, courts should ordinarily refrain from interfering unless the measure is clearly arbitrary or unconstitutional.
Rejecting the petitioners’ argument that ad valorem royalty necessarily required exclusion of royalty, DMF and NMET from the sale value, the Court observed that these additions formed part of a permissible regulatory mechanism designed to arrive at a fair valuation and prevent manipulation.
The Court also rejected the comparison with coal.
It observed that the royalty regime applicable to coal is fundamentally different because coal pricing operates under a different mechanism involving the National Coal Index and a distinct market structure. Unlike iron ore, coal pricing does not depend upon an Average Sale Price computed from returns submitted by numerous private miners.
Consequently, the Court held that treating coal differently did not amount to unconstitutional discrimination under Article 14.
The Bench also dealt with the recommendations of the Praveen Kumar Committee and the Dr. Aruna Sharma Committee, which had earlier suggested removing the cascading effect by excluding royalty, DMF and NMET from sale value.
The Court clarified that committee reports are merely recommendatory and do not determine constitutional validity. Once the Government decided, after consultation, not to amend the rules, the Court’s role was confined to examining whether the existing provisions violated constitutional or statutory limits. It concluded that they did not.
The Supreme Court held that the Explanations to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules, insofar as they include royalty, DMF and NMET payments in the sale value for computing Average Sale Price, are constitutionally valid.
The Court ruled that the provisions do not violate Articles 14 or 19(1)(g) of the Constitution; they are not ultra vires Section 9 of the MMDR Act; the argument that they breach the three-year cap on royalty revision under Section 9(3) is misconceived because the rate of royalty itself has not been revised; and the writ petition deserved dismissal.
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