Statutory Royalty Rate Prevails Over Mining Contract; Buyer Cannot Freeze Rate at Auction Date
A Supreme Court bench of Justices Sanjay Karol and Nongmeikapam Kotiswar Singh holds that a statutory hike in iron ore royalty overrides a prior contractual rate, as royalty crystallises on dispatch, not on bid acceptance.
The Supreme Court has held that when the Central Government raises the rate of royalty on iron ore by statutory amendment, a mining buyer who had already paid royalty at the earlier rate under an e-auction contract cannot resist the enhanced rate for minerals actually dispatched after the amendment came into force. The Court allowed the appeal of the Director of Mines and Geology, Government of Karnataka, setting aside a Karnataka High Court order that had protected the buyer, M/s BMM Ispat Ltd, from the additional 5% royalty demand. The judgment, delivered on 4 June 2026, turns on the point that royalty under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 is payable at the rate prevailing on the date of removal or dispatch of the mineral, and no contractual arrangement can freeze that rate against a subsequent statutory change.
How the Dispute Reached the Court
The background lies in a Supreme Court-supervised e-auction of stockpiled iron ore in Karnataka. In Writ Petition (Civil) No. 562 of 2009, this Court had on 29 July 2011 banned mining in the Bellary, Chitradurga and Tumkur districts. A Monitoring Committee was constituted on 23 September 2011 to oversee the sale of approximately 25 million metric tonnes of already-extracted iron ore through e-auctions, following recommendations of the Central Empowered Committee dated 1 September 2011.
BMM Ispat Ltd participated in e-auction No. 41 (2014–15) and was declared the successful bidder for several lots. An acceptance letter dated 28 June 2014 confirmed the sale. The agreed royalty rate was 10% of the material value, which was the rate then specified in the Second Schedule to the MMDR Act. The total invoice for one lot alone came to over Rs. 3.73 crore, with royalty computed at 10%. The contract also required the buyer to deposit Rs. 50 per tonne to meet any variance in royalty or other taxes that might arise in future.
On 1 September 2014, the Central Government amended the Second Schedule to the MMDR Act, raising the royalty rate on iron ore from 10% to 15% with effect from that date. BMM Ispat lifted the iron ore in batches, some of which were transported after 1 September 2014. When the company sought refund of its security deposit of Rs. 2,91,92,750 in February 2016, the appellant deducted Rs. 2,09,26,077 (inclusive of VAT of Rs. 10,19,933) representing the 5% shortfall in royalty on quantities dispatched after the amendment, and refunded only Rs. 82,66,673.
BMM Ispat challenged the deduction before the Karnataka High Court by way of Writ Petition No. 57901 of 2016. The High Court directed reconsideration. The Director of Mines and Geology then passed an order on 25/31 January 2017 rejecting the company's claim, relying on Section 9 of the MMDR Act. That rejection was challenged in Writ Petition No. 6979 of 2017, which the High Court of Karnataka allowed on 18 March 2019, holding that imposing royalty above the rate applicable on the date of bid acceptance would be unjust. The Director of Mines and Geology then approached the Supreme Court by special leave.
The Core Question: Does Section 9 Apply, and When Does Royalty Crystallise?
The Court framed the central question as whether the State could, on account of a subsequent change in law, charge royalty at a rate different from — and higher than — what was stipulated in the tender agreement.
The appellant's case was that enhancement of royalty is a statutory function vested in the Central Government and cannot be displaced by contract. There is, the appellant argued, no legal concept of “crystallisation” of royalty at the time of auction. The respondent countered that the royalty payable should remain at 10%, that Section 9 did not apply because the parties were not holders of mining leases in the conventional sense, and that the word “applicable” in the Court's own order fixing the rate at 10% was not intended to permit any variance.
The Court first addressed the threshold question of whether Section 9 applied at all. Section 9(1) and 9(2) of the MMDR Act make royalty payable by the holder of a mining lease at the rate for the time being specified in the Second Schedule, on any mineral removed or consumed from the leased area. Section 9(3) empowers the Central Government to amend the Second Schedule to enhance or reduce royalty rates, subject to the restriction that enhancement cannot occur more than once in three years.
The Court noted that the respondent had not challenged the High Court's own finding that Section 9 applied to the transaction. Relying on the nine-judge bench decision in Mineral Area Development Authority v. SAIL, (2024) 10 SCC 1, the Court observed that the term “mining operations” has been interpreted expansively to cover every activity by which a mineral is extracted or obtained from the earth. On that basis, the respondent's activity of lifting and transporting the already-extracted ore fell within the statutory framework. The respondent's non-applicability argument was rejected.
Royalty Is Payable on Dispatch, Not on Bid Acceptance
The Court then turned to the question of when royalty crystallises. It drew on the majority opinion of D.Y. Chandrachud, CJI in Mineral Area Development Authority, which held that royalty is payable under Section 9 on the removal or consumption of minerals by the lessee from the leased area, and that “dispatch” under the MMDR Act means the removal of minerals from the leased area.
The Court held that the word “applicable” in its own earlier order fixing royalty at 10% denoted applicability at the relevant time of removing the tendered goods, and was not intended to freeze the rate of royalty. The contract between the parties had been signed before the amendment, and all payments including royalty at 10% had been made. What remained was the physical lifting and transportation of the iron ore. Between the date of payment and the actual movement of the ore, the statutory rate rose from 10% to 15%.
The Court held that a contractual provision limiting the buyer's royalty liability must give way to a statutory amendment. Had the increase come by any method other than a statutory amendment, the contractual provision would have prevailed. But because Parliament's delegate — the Central Government — had exercised its power under Section 9(3), the contract could not insulate the buyer.
The Court also noted that BMM Ispat had the option to remove the iron ore from the site at one go, or at any date before the amendment took effect on 1 September 2014. The company either adopted a piecemeal approach or moved the entire quantity after the amendment date. Having made that choice, it could not escape payment of the enhanced royalty.
The Rs. 50 Per Tonne Variance Clause
The acceptance letter and the contract both contained a provision requiring the buyer to deposit Rs. 50 per tonne (reduced from Rs. 100 per tonne mentioned in the tender document) to meet any variance in royalty or other taxes that might arise in future. The High Court had held that this clause was insufficient to show that the buyer had agreed to pay royalty at an increased tariff, because the amendment had not come into force on the date the bids were accepted and payment was made.
The Supreme Court did not accept that reasoning. It observed that one might think the specified variance amount would limit the respondent's additional liability, but the appellant's position was that the full difference between 10% and 15% royalty was recoverable. The Court agreed with the appellant's approach: the difference in royalty was correctly deducted from the security deposit, because a contractual provision must yield to a statutory amendment.
Outcome
The appeal was allowed. The impugned judgment and order dated 18 March 2019 of the High Court of Karnataka in Writ Petition No. 6979 of 2017 was quashed and set aside. The deduction of Rs. 2,09,26,077 from BMM Ispat's security deposit, representing the additional 5% royalty on iron ore dispatched after 1 September 2014, was upheld as correct. Pending applications, if any, were disposed of.