Why Supreme Court upheld 'royalty on royalty' under the MMDR Act

The Supreme Court has backed the existing royalty calculation for iron ore. Here's why miners called it 'royalty on royalty' and why the court disagreed

The Supreme Court (SC) on Monday upheld the Centre's rules allowing royalty, District Mineral Foundation (DMF), and National Mineral Exploration Trust (NMET) payments to remain part of the sale value when calculating the Average Sale Price (ASP) of iron ore. In effect, the apex court rejected the argument that the methodology results in an illegal "royalty on royalty".

 

The judgment came in a petition filed by Kirloskar Ferrous Industries Ltd, which challenged explanations inserted in the Minerals (other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016 and the Mineral Conservation and Development Rules, 2017.

 

The company argued that the rules artificially inflate the value on which royalty is calculated and are inconsistent with the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act).

 

What is royalty in mining?

Royalty is the amount a mining lease holder pays for extracting minerals from a leased area. The Supreme Court has earlier held that royalty is not a tax but a contractual payment made by a lessee to the owner of mineral rights under a mining lease.

 

For iron ore, Section 9 of the MMDR Act, read with Entry 24 of the Second Schedule, prescribes royalty at 15 per cent of the Average Sale Price (ASP) on an ad valorem basis.

What is Average Sale Price?

Average Sale Price (ASP) is the benchmark published monthly by the Indian Bureau of Mines for different mineral grades. It is computed using the weighted average of ex-mine prices reported by eligible mines. The ASP is then used to determine royalty and also serves as the base for auction premium calculations.

 

Why are DMF and NMET payments collected?

 

Apart from royalty, mining lease holders must make contributions to two statutory funds.

 

The District Mineral Foundation (DMF) receives contributions meant for the welfare of people and areas affected by mining. Under the DMF Rules, iron ore lease holders pay an amount equal to 10 per cent of the royalty.

 

The National Mineral Exploration Trust (NMET) finances mineral exploration. Mining lease holders contribute two per cent of the royalty under the NMET Rules. 

Why did mining companies challenge the rules?

The dispute centred on the explanations added to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules.

 

These provisions state that while calculating the sale value, no deduction shall be made for royalty, DMF or NMET payments. Since the sale value forms part of the ASP calculation, the petitioners argued that miners effectively end up paying royalty on amounts that already include royalty and related levies.

 

Kirloskar Ferrous also argued that auction premiums are linked to the ASP. According to the company, the methodology resulted in a cascading effect because the same base was used both for auction premium and for royalty-related payments.

What did the Centre argue?

The Union government defended the rules, saying the methodology was introduced to address price manipulation in the iron ore sector.

 

It argued that multiple private miners operate in the iron ore market, unlike coal, making ASP-based computation necessary to deal with under-invoicing and protect government revenue. It also said different minerals can legitimately have different royalty calculation methods.

What did the Supreme Court decide?

The Supreme Court rejected the challenge.

 

It held: "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."

 

The Bench also held that the provisions do not violate Articles 14 or 19(1)(g) of the Constitution and are not ultra vires Section 9 of the MMDR Act.

 

The court further rejected the argument that the methodology amounted to revising royalty more than once in three years, saying, "there is no revision of the rate of royalty. The injunction for three years is on the revision only for the rate of royalty."

Does the judgment increase miners' costs?

No. The judgment does not introduce a new levy or increase royalty rates. It upholds the validity of the existing rules governing how the ASP is calculated for iron ore.

 

Mining companies had argued that the methodology creates a cascading effect and raises their effective burden. The Supreme Court, however, accepted the Centre's justification that the measure serves as an anti-evasion mechanism and found no constitutional infirmity in the rules.

Why was coal treated differently?

The petitioners relied on the fact that coal rules were amended in 2020 to exclude royalty, DMF and NMET while determining the actual price.

 

The Supreme Court held that the comparison was misplaced because coal and iron ore operate under different pricing systems. The Union government argued that coal pricing follows a different mechanism, while iron ore requires an ASP-based system because of the structure of the market.

 

With the writ petition dismissed, the existing framework for calculating the Average Sale Price for iron ore remains unchanged.

 

The ruling means royalty, DMF and NMET payments will continue to be included in the sale value while computing ASP unless Parliament or the Centre changes the law or rules in the future.