Supreme Court upholds inclusion of royalty, DMF and NMET in iron ore sale value

A Bench of Justices J.B. Pardiwala and K.V. Viswanathan held that including royalty, DMF and NMET in sale value for computing average sale price of iron ore is constitutional.

The Supreme Court has dismissed a challenge to the way royalty on iron ore is computed, holding that the Explanations 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 are constitutional and valid. In its judgment of 13 July 2026, a Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan held that including payments towards royalty, District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) in the sale value, without any deduction, does not violate Article 14 or Article 19(1)(g), nor is it ultra vires Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957. Kirloskar Ferrous Industries had argued this produced a cascading royalty-on-royalty effect. The Court treated the measure as a permissible antidote to price manipulation.

How the dispute returned to the Court

Kirloskar Ferrous Industries holds an iron ore mining lease in Karnataka for captive production of pig iron. It had earlier filed Writ Petition (C) No. 715 of 2024 questioning the same rules. A detailed judgment was passed on 7 November 2024, and that petition was disposed of on 19 May 2025.

In the 2024 judgment, the Court had noted that the Government itself had acknowledged an anomaly in the compounding of royalty for computing the Average Sale Price (ASP). A committee headed by Praveen Kumar had examined the incidence of double calculation and concluded that since sale value already includes royalty, DMF and NMET, the lessee ends up paying royalty on royalty. A notice for public consultation on amending the MMDR Act had been issued on 25 May 2022.

The Court then granted the Union two months to conclude the consultation and take a decisive call. After a series of orders through early 2025, the Union of India filed an affidavit on 17 May 2025 stating its final decision not to amend the rules, citing serious impact on State revenue. By order of 19 May 2025 the Court granted the petitioners liberty to raise a fresh challenge “on all grounds available to them in law.” The present writ petition followed.

What the petitioners argued

The central contention was that Section 9(2) read with Entry 24 of the Second Schedule fixes royalty on iron ore at 15 per cent of ASP on an ad valorem basis. Ad valorem, the petitioners said, means according to value, and value cannot be artificially loaded with royalty, DMF and NMET already paid.

They contended the mechanism produced double payment for auctioned mines — once as part of the auction premium and again on removal of the mineral — and a compounding effect that effectively raised the rate of royalty each month. They pointed to coal, where the cascading effect was rectified with effect from 14 July 2020 by defining actual price net of royalty, DMF and NMET. They also invoked the proviso to Section 9(3), which caps revision of royalty rates to once every three years, arguing the monthly ASP changes breached it.

The Union's justification

The Attorney General for India, R. Venkataramani, argued there was no violation of any fundamental right and no inconsistency with the MMDR Act. ASP was a mechanism introduced to address under-invoicing of mineral sales and to arrive at the true sale value.

The Union relied on data from Odisha and Karnataka for the period August 2022 to January 2023, appended to an additional affidavit dated 2 February 2026. It showed that where mines reported the highest ex-mine price, despatches fell to nil or negligible levels, while mines reporting the lowest ex-mine price sharply increased despatches. Because ASP is a weighted average of ex-mine prices with despatched quantity as the weight, this pattern depressed the published ASP by up to about 50 per cent in some grades.

On coal, the Union argued the comparison was unjustified: coal production was dominated by Coal India Limited and Singareni Collieries, with royalty based on the National Coal Index, while iron ore involved many private miners and needed the ASP mechanism to counter under-invoicing. It estimated that striking down the explanations could cost States revenue running into lakhs of crores over the lease periods of more than 585 auctioned blocks.

Measure of levy distinguished from nature of levy

The Court first cleared preliminary objections. It found the estoppel argument — that the petitioners had participated in the auction with notice of the rules — without merit, since a challenge to the validity of rules operating for the future was permissible. Maintainability was covered by the express liberty in the 19 May 2025 order.

On merits, the Court applied the presumption of constitutionality to subordinate legislation, citing State of Tamil Nadu v. P. Krishnamurthy. Drawing on Mineral Area Development Authority v. Steel Authority of India, it held that fixation of royalty rates falls within the regulation of mines and mineral development, and that royalty is a contractual consideration, not a tax.

The Court then relied on the settled distinction between the subject matter of a levy and the standard by which it is measured. Citing Union of India v. Bombay Tyre International Ltd., Ralla Ram v. Province of East Punjab and R.R. Engineering Co. v. Zila Parishad, Bareilly, it held that the measure of a levy is not a true test of its nature, and that a broad-based standard maintaining a reasonable nexus with the essential character of the levy is valid.

Anti-evasion measure passes constitutional muster

The Court held that a Rule-making authority with legislative competence may enact measures to prevent evasion. It drew on Sardar Baldev Singh v. CIT, Balaji v. ITO, Navnit Lal C. Javeri v. K.K. Sen and Union of India v. A. Sanyasi Rao, where legal fictions and presumptive standards were upheld as legitimate anti-evasion devices, even where they caused individual hardship.

Applying this, the Court found the decision not to exclude royalty, DMF and NMET from sale value was a regulatory measure to check manipulation, prevent evasion and arrive at a fair value of the mineral. It held the measure was not arbitrary and bore a rational connection to the nature of the levy.

The Court rejected the Article 14 discrimination claim, holding that comparing coal and iron ore was “akin to comparing apples and oranges” since there is no ASP concept in coal. It found no violation of Article 19(1)(g), citing State of Madras v. V.G. Row on reasonable restrictions. On the three-year cap, it held there was no revision of the rate of royalty, so the proviso to Section 9(3) was not attracted.

The committee reports of Praveen Kumar and Aruna Sharma, the Court noted, were only recommendatory. It held the 7 November 2024 judgment made no pronouncement on constitutionality and could not aid the petitioners.

Outcome

The Court held 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 towards DMF and NMET in the sale value for computing ASP, are constitutional and valid, not violative of Article 14 or Article 19(1)(g), and not ultra vires Section 9 of the MMDR Act. The writ petition was dismissed with no order as to costs.