SC Upholds Rules on Royalty, DMF, NMET in Iron Ore ASP

The Hon’ble Supreme Court, in Kirloskar Ferrous Industries Ltd. & Anr. v. Union of India & Anr., Writ Petition (Civil) No. 733 of 2025 (Pardiwala and Viswanathan, JJ., decided 13 July 2026; 2026 INSC 679), 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 the Explanation to Rule 45(8)(a) of the Mineral Conservation and Development Rules, 2017, holding that the inclusion of royalty, District Mineral Foundation (DMF) contributions and National Mineral Exploration Trust (NMET) contributions in the sale value for computing the average sale price (ASP) of iron ore is constitutionally valid and does not amount to an impermissible levy of “royalty on royalty.”

The petition challenged the validity of the impugned Explanations on the ground that they were ultra vires Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), as well as Articles 14 and 19(1)(g) of the Constitution. The petitioners contended that while Section 9 prescribes royalty on an ad valorem basis, the impugned provisions artificially inflated the sale value by prohibiting deduction of royalty, DMF and NMET payments, thereby resulting in a cascading effect and effectively imposing royalty on royalty. They further contended that the monthly recalculation of ASP effectively revised the rate of royalty more frequently than the three-year limit prescribed under the proviso to Section 9(3) of the MMDR Act.

In the earlier writ petition (Writ Petition (Civil) No. 715 of 2024), the Court had observed that the Union Government, through a committee headed by Shri Praveen Kumar, had acknowledged the anomaly in the computation of royalty and had undertaken a public consultation regarding possible amendments. However, by affidavit dated 17 May 2025, the Central Government decided not to amend the Rules, citing substantial revenue implications for the States, while granting liberty to the petitioners to challenge that decision. The present writ petition was filed pursuant to that liberty.

The petitioners argued that Rule 42(2)(b) of the 2016 Rules contemplates computation of the ex-mine price after deducting actual transportation and other permissible expenses. They submitted that royalty, DMF and NMET are statutory levies and cannot form part of the value of the mineral. According to them, the impugned Explanations artificially enlarged the sale value, resulting in double payment of royalty, particularly in the case of auctioned mining leases where auction premiums are also linked to the average sale price.

The Union of India opposed the challenge by submitting that the impugned provisions merely prescribe the methodology for computing sale value and do not alter the statutory rate of royalty under Section 9 of the MMDR Act. It contended that the ASP mechanism was introduced to curb under-invoicing and price manipulation in iron ore transactions, placing before the Court month-wise ex-mine price and dispatch data from Odisha and Karnataka in support. The Government also stated that striking down the impugned Explanations would cost the exchequer an estimated Rs. 6,200 crore a year in iron ore royalty alone and over Rs. 3 lakh crore over a typical 50-year lease tenure across the mining blocks already auctioned, substantially reducing royalty and auction premium collections and adversely affecting State revenues.

The Court observed that Section 9 merely prescribes the rate of royalty while leaving the method of determining the value of minerals to subordinate legislation. It held that the impugned Explanations relate only to the measure of the levy and not to the levy itself. Rejecting the contention that the Rules imposed “royalty on royalty”, the Court held that royalty, DMF and NMET payments are components considered while determining the sale value used for computing ASP and do not constitute successive levies. It also accepted the Government’s explanation that each month’s ASP is independently computed from actual ex-mine sale data and that there is no mathematical compounding of royalty across successive months. The Court further held that the statutory rate of royalty under Section 9 remains unchanged, so the monthly fluctuation of the market-driven ASP does not attract the restriction under the proviso to Section 9(3).

Declining to compare the treatment of iron ore with coal, the Court held that the comparison was “akin to comparing apples and oranges,” noting that coal prices are benchmarked to the National Coal Index, drawn from PSU notified/auction and import prices, whereas iron ore’s ASP is based entirely on ex-mine prices self-reported by private miners, making it more susceptible to manipulation. Different minerals, the Court held, may legitimately be governed by different pricing mechanisms.

Relying on State of Tamil Nadu v. P. Krishnamurthy, (2006) 4 SCC 517, the Court reiterated that subordinate legislation enjoys a presumption of constitutionality and can be invalidated only on limited grounds such as violation of the Constitution, the parent statute or manifest arbitrariness.

It also relied on the nine-judge bench decision in Mineral Area Development Authority v. Steel Authority of India, (2024) 10 SCC 1, to hold that royalty is a contractual consideration and not a tax, and that legislative entries relating to mineral regulation must be construed liberally to cover the computation of royalty. For the specific proposition that the measure adopted for computing a levy is distinct from the nature of the levy itself, the Court also drew on Ralla Ram v. Province of East Punjab (1948) and Union of India v. Bombay Tyre International Ltd. (1984) and held that the legislature and subordinate rule-making authority are competent to prescribe such measures, including machinery provisions to prevent evasion, relying on Sardar Baldev Singh v. CIT (1960), Balaji v. ITO (1961), Navnit Lal C. Javeri v. K.K. Sen (1965) and Union of India v. A. Sanyasi Rao, (1996) 3 SCC 465.

Accordingly, the Supreme Court held that the Explanations appended to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules are intra vires the MMDR Act and do not violate Articles 14 or 19(1)(g) of the Constitution.