Supreme Court Upholds Inclusion Of Royalty, DMF, NMET In Average Sale Price For Determining Iron Ore Royalty

The Supreme Court on Monday upheld the constitutional validity of rules requiring royalty, District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) payments to be included in the sale value while computing the Average Sale Price (ASP) for iron ore.

Dismissing a batch of petitions led by Kirloskar Ferrous Industries Ltd, the court held that the methodology is a valid measure to check evasion and does not violate the Constitution.

A bench of Justices J.B. Pardiwala and K.V. Viswanathan held,

"For the reasons stated above, 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. We hold that the impugned Rules are not violative of Article 14 and Article 19(1)(g) of the Constitution. We further hold that the impugned provisions are not ultra vires Section 9 of the MMDR Act."

The litigation stemmed from the Union government's decision of May 17, 2025 not to amend the royalty computation framework after an earlier Supreme Court judgment had directed it to complete a public consultation process and take a final policy decision on the issue. The mining companies then filed fresh petitions challenging that decision and the validity of the rules.

The petitioners argued that including royalty, DMF and NMET payments in the sale value resulted in "royalty on royalty" and created a cascading financial burden.

According to them, the methodology was contrary to the parent law, which prescribes royalty on an ad valorem basis, and infringed their constitutional rights. They also contended that iron ore producers were being discriminated against because coal pricing excludes royalty, DMF and NMET from its computation.

Opposing the challenge, the Union government submitted that the methodology was introduced to address under-invoicing and manipulation of the Average Sale Price. It argued that ASP is computed from data furnished by miners themselves and that the existing framework was necessary to safeguard State revenues, particularly under the auction-based mining regime.

The court accepted that explanation. It noted that the Union had placed material before it referring to instances between August 2022 and January 2023 where dispatch patterns allegedly changed in a manner that depressed ASP. According to the Union, this lowered royalty collections and auction premiums. The court held that prescribing the impugned methodology as the measure for computing the levy had a rational nexus with checking evasion.

Rejecting the plea that the rules were manifestly arbitrary, the court observed, "We find nothing manifestly arbitrary in the process adopted. There is nothing capricious or irrational about the measure and it cannot be said that it has been adopted without any determining principle nor do we find the measure excessive or disproportionate for it to be characterized as manifestly arbitrary."

The court also rejected the argument that iron ore miners had been subjected to discriminatory treatment when compared with coal producers. It observed that the pricing mechanisms governing the two minerals are fundamentally different and therefore cannot be equated.

The court observed, "We also do not find any violation of Article 14 of the Constitution from the angle of discrimination. The comparison with coal is completely unjustified as there is no concept of ASP in coal and that too based on data given by the miners. Hence, comparing coal and iron ore, in this context, is akin to comparing apples and oranges which we are not prepared to do. According to the petitioners, ad valorem cannot include in the value the levy of royalty, payments made towards DMF and NMET. We are not able to countenance that submission. As a means to check evasion, a measure has been prescribed under which ad valorem will be arrived at to check manipulation and to strike at evasion, certain factors have been loaded on to the sale value and we find nothing illegal in the same."

Dealing with another contention, the court held that the recommendations made by the Praveen Kumar Committee and the Dr. Aruna Sharma Committee did not advance the petitioners' case because committee reports are only recommendatory.

It also rejected the argument that the impugned framework breached the statutory restriction on revising royalty rates within three years. According to the court, the case involved no revision in the rate of royalty but only the methodology used for computing the levy.

The court further rejected the challenge under the right to carry on business. It held that when fiscal measures are designed to check evasion, individual hardship cannot by itself be decisive and constitutional courts should exercise restraint while reviewing such measures.

The court observed, "Afterall, the grundnorm is 'Salus populi suprema lex' – regard for the public welfare is the highest law. Private rights will have to cede to public interest. A Constitutional Court called upon to pronounce on the validity of such fiscal measures should be loath to interfere, for any interference in the absence of legitimate grounds would put public interest in jeopardy."

Holding that the Union had offered a proper justification for the measure and that the petitioners had failed to establish any constitutional infirmity, the court upheld the impugned rules and dismissed the batch of pleas.