The Supreme Court has held that inclusion of royalty, District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) in “sale value” under the Explanations to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the Mineral Conservation and Development Rules, 2017, is a valid measure for computation of average sale price and does not alter the legal nature of royalty under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 MMDR Act. The Court held that the rule-making authority is entitled to adopt such a computational mechanism as a regulatory measure to check evasion and price manipulation, provided the measure has a reasonable nexus with the levy. On that basis, the impugned Explanations were held not violative of Articles 14 or 19(1)(g), and not ultra vires Section 9 of the MMDR Act.
Accordingly, 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 in sale value for computing ASP for determination of royalty, are constitutional and valid.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K. V. Viswanathan first rejected the preliminary objections on maintainability and estoppel. It held that the challenge was maintainable because the earlier order dated May 19, 2025 had expressly granted liberty to question the government’s decision, and that participation in the auction did not bar the petitioners from challenging the validity of the Rules, especially since the Rules would continue to operate prospectively as well. The Bench then restated the presumption of constitutionality applicable not only to primary legislation but also to subordinate legislation. It noted that the burden lay on the petitioners to show invalidity, whether on the ground of inconsistency with the parent statute, violation of constitutional provisions, or manifest arbitrariness. The Bench also stressed that legislative entries and delegated powers in fiscal and regulatory matters must be read broadly, especially in the field of regulation of mines and mineral development under the MMDR framework.
On the nature of royalty, the Bench reiterated that royalty is not a tax but a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. Even so, since the levy is structured through statute and rules, principles relevant to fiscal legislation and computation of levies become applicable when examining the validity of the impugned Explanations. A key part of the judgment was the Court’s distinction between the nature of a levy and the measure of a levy. The Bench held that the real controversy was not about the existence of royalty, but about the base figure used for calculating it. Relying on settled precedent, the Bench observed that the legislature or delegated rule-making authority has broad freedom to prescribe the method and measure for quantification of a levy, so long as the method has a reasonable nexus with the levy and is not capricious, fanciful or clearly unjust.
The Bench accepted the Union’s justification that the impugned measure was designed as an antidote to evasion. It referred to prior tax cases where deeming fictions and presumptive methods had been upheld to prevent manipulation, concealment or avoidance. The Bench said that the Union had placed sufficient material showing how ASP could be artificially depressed by miners through strategic reporting of ex-mine prices and despatch quantities, and that the non-deduction of royalty, DMF and NMET from sale value was a measure adopted to suppress that mischief and arrive at a fairer value of the mineral.
The Bench found that this measure had a rational connection with the levy and could not be treated as manifestly arbitrary. It held that there was nothing capricious or irrational in retaining royalty, DMF and NMET within sale value for computation of ASP, and that the petitioners had failed to establish that the Explanations were unconstitutional or beyond the MMDR Act. On the Article 14 challenge, the Bench rejected the comparison with coal. It held that coal and iron ore operate under different pricing mechanisms, and that there is no concept of ASP for coal based on miners’ own data in the same way as for iron ore. Therefore, differential treatment between coal and iron ore in royalty computation could not be termed unconstitutional discrimination.
The Bench also rejected the Article 19(1)(g) challenge, holding that the impugned measure was aimed at preventing loss of revenue caused by price manipulation and was therefore a legitimate and proportionate restriction in public interest. It added that even if such a regime causes hardship in individual cases, that by itself does not invalidate a regulatory or fiscal measure enacted to check evasion and protect public revenue. The Bench was equally clear that the earlier Nov 07, 2024 judgment did not decide the constitutional issue in favour of the petitioners. That earlier order had only recorded the anomaly and directed the government to take a final policy call. Once the Union decided not to amend the Rules, the matter had to be examined afresh on constitutional grounds, and on such examination the Court found no infirmity in the impugned provisions.
Finally, the Bench rejected the argument based on the proviso to Section 9(3) of the MMDR Act. It held that there was no revision of the rate of royalty through the impugned Explanations; the statutory rate remained the same, and what was being challenged was only the measure or computation mechanism. Therefore, the three-year cap on revision of royalty rates was not attracted.
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Briefly, a fresh challenge was made to the constitutional validity of the Explanation 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. The petitioners argued that these provisions unlawfully include royalty, District Mineral Foundation (DMF) payments and National Mineral Exploration Trust (NMET) payments in “sale value” for computing average sale price (ASP), thereby causing a cascading effect or “royalty on royalty”.
The background to the case was that when the petitioners had challenged the same provisions in earlier round, the Supreme Court noted that the Union of India itself had acknowledged the anomaly in the royalty computation framework and had also initiated a consultation process on possible amendment of the MMDR Act. The Court had then granted the Union two months to conclude that process and take a final decision, while keeping open the petitioners’ right to challenge the eventual policy decision. Thereafter, the petitioners pursued compliance proceedings and the Union ultimately informed the Court on May 17, 2025 that it had taken a final policy decision not to amend the Rules, stating that any such change would seriously affect State revenues. Later, by order dated May 19, 2025, the Supreme Court expressly granted liberty to the petitioners to file a fresh challenge to that decision on all grounds available in law, leading to the present petition.
The statutory setting was central to the dispute. Section 9 of the MMDR Act requires payment of royalty on minerals removed or consumed, and Entry 24 of the Second Schedule prescribes royalty for iron ore at 15% of the average sale price on ad valorem basis. Rule 42 of the 2016 Rules provides the method for computation of ASP using ex-mine price, while Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules define “sale value” as the gross amount payable by the purchaser, excluding taxes, but with no deduction for royalty, DMF and NMET by virtue of the impugned Explanations. The petitioners contended that this framework loads the ASP with amounts already paid towards royalty, DMF and NMET, which according to them deviates from the concept of ad valorem and results in double incidence, particularly in auctioned mining leases where auction premium is also linked to ASP. They also relied on the fact that, in the case of coal, the royalty computation mechanism had been altered from 14.07.2020 to exclude statutory dues including royalty, NMET and DMF from the invoice value, and argued that a similar anomaly existed for other minerals like iron ore.
The Union of India defended the provisions by saying that the impugned methodology was a regulatory response to price manipulation and under-invoicing in the iron ore sector. It argued that coal stood on a different footing because coal pricing is benchmarked through the National Coal Index, while iron ore ASP is derived from data furnished by miners themselves. The Union placed material before the Court to show that some leaseholders had allegedly distorted ASP by reporting high ex-mine prices with low or nil despatches, and lower ex-mine prices with higher despatches, thereby depressing ASP and reducing both royalty and auction premium liabilities. The Union further warned that striking down the Explanations would have major financial consequences because more than 585 mineral blocks have been auctioned since 2015 using ASP as a core pricing basis. According to its affidavit, applying the suggested change would substantially reduce royalty and auction premium payable to States and could result in losses running into lakhs of crores over the lease period, apart from disturbing the basis on which auctioned blocks were awarded.
