The Supreme Court on Monday upheld the Centre’s methodology for calculating mining royalties, rejecting Kirloskar Ferrous Industries Ltd’s challenge to the existing formula on the grounds that it leads to “royalty on royalties” and imposes a cascading financial burden on mining lessees.
A bench of Justices JP Pardiwala and KV Viswanathan refused to strike down the provisions governing the calculation of the average selling price of metals, holding that the methodology adopted by the Union government is a fiscal and economic policy measure aimed at preventing tax evasion and is neither unconstitutional nor manifestly arbitrary.
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The ruling is expected to bring certainty to the mining sector
The ruling is expected to bring certainty to the mining sector by maintaining the current royalties framework. It also comes as a huge relief to the Center and mineral-rich states, as any change in the royalty calculation methodology would have significantly impacted the collection of royalties and auction premiums associated with mineral production.
After dismissing the writ petition, the Court upheld the constitutional validity of the interpretations annexed to Rule 38 of the Minerals (Other than Atomic and Hydrocarbon Energy Minerals) Concession Rules 2016 and Rule 45(8)(a) of the Mineral Conservation and Development Rules 2017, which provide that royalties and contributions to the District Mineral Foundation (DMF) and National Mineral Exploration and Trust (NMET) are not excluded when calculating the sale value used to determine the average selling price.
“We are of the view that the impugned rules do not violate Article 14 and Article 19(1)(g) of the Constitution. We are also of the view that the impugned provisions are not ultra vires the bounds of Section 9 of the MMDR Act,” the bench said while dismissing the petition.
Kirloskar Virus and another petitioner objected to the royalty system, arguing that since royalty, DMF and NMET payments are included in the sale value while calculating the average selling price, miners effectively end up paying “royalty on royalty”. They argued that the methodology artificially inflates the underlying value, leading to double payment of royalties, particularly in auctioned mines where the auction premium is also tied to the average selling price.
The petitioners also asserted that while a similar anomaly in the calculation of coal duty was corrected in 2020 by excluding statutory duty from the sale value, no such correction was made for iron ore and other minerals, making the rules arbitrary and in violation of Articles 14 and 19(1)(g) of the Constitution.
The Supreme Court rejected these requests, holding that the measure adopted by the government was aimed at curbing bill-gouging and manipulation of metal prices, and thus constituted a legitimate mechanism for setting royalty.
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The court accepted the Centre’s argument
The court accepted the Centre’s argument that the average selling price is calculated afresh every month based on market data provided by the miners and does not carry over the equity components of previous months, negating the claim of doubling or cascading. It also noted that the methodology was introduced to address attempts by some lessees to manipulate ex-mine prices and transmission patterns to artificially lower the average selling price and reduce royalty obligations and auction premiums.
The Commission emphasized judicial restraint in matters of economic policy, and stressed that legislative bodies and rule-making authorities enjoy a great deal of freedom in prescribing the tax method and calculation methodology.
“We do not find anything clearly arbitrary in the process adopted. There is nothing capricious or irrational about this procedure,” the court said, adding that legitimate measures designed to check evasion can validly be adopted as a tax measure. It also rejected the comparison with coal, noting that the property rights framework for coal operates according to a completely different mechanism and therefore cannot be equated with iron ore.
The court also held that although royalty is a statutory tax, it is in the nature of a contractual consideration paid by a mining lessee to the lessor in exchange for the right to extract minerals, and the legislature has broad discretion in prescribing the method of calculating such payments.
It is worth noting that the ruling agreed with the Centre’s submission that changing the formula for calculating royalties would have far-reaching financial consequences. The Center has warned that more than 585 mineral blocks have been auctioned under the current framework and that any change would fundamentally change the basis on which bidders determine auction premiums. According to the government, such a change could reduce state revenues by 15-17%, leading to losses amounting to several thousand crore rupees over the life of the mining lease, while giving unintended windfall to existing lessees.
The court concluded that the petitioners failed to prove any constitutional defect in the contested rules, and held that private commercial interests cannot outweigh the broader public interest underlying the fiscal measure aimed at protecting public revenues and preventing tax evasion.
