Court Rules That Explanations to Rules 38 and 45 of 2016 and 2017 Mineral Rules Are Constitutional and Not Ultra Vires MMDR Act, Rejecting Petitioners’ Challenge on Grounds of Article 14 and 19(1)(g)
In a significant judgment dated July 13, 2026, the Supreme Court of India dismissed the constitutional challenge raised by Kirloskar Ferrous Industries Ltd. and others against the Explanation clauses appended to Rule 38 of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016, and Rule 45(8)(a) of the Mineral Conservation and Development Rules, 2017. These rules provide for the inclusion of payments made towards Royalty, District Mineral Foundation (DMF), and National Mineral Exploration Trust (NMET) in the sale value for computing the average sale price (ASP) of minerals, particularly iron ore.
The petitioners contended that including these payments in the sale value amounted to “royalty on royalty,” resulting in a cascading and compounded effect that effectively increased the royalty rate beyond the statutory 15% ad valorem prescribed under Section 9 and Entry 24 of the Second Schedule of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act). They argued that this was ultra vires the MMDR Act, violated Articles 14 (equality before law) and 19(1)(g) (right to practice any profession) of the Constitution, and was manifestly arbitrary.
The Supreme Court, however, upheld the validity of the impugned rules. It emphasized several key points:
1. Presumption of Constitutionality and Legislative Competence: The Court reiterated the strong presumption in favor of constitutionality of subordinate legislation. It found no lack of legislative competence as the MMDR Act authorizes regulation of mines and mineral development, including fixation and computation of royalty. The Court held that legislative entries are to be liberally construed and include subsidiary measures like the ones challenged.
2. Nature of Royalty and Measure of Levy: The Court clarified that royalty is a contractual consideration paid by lessees for the right to extract minerals, not a tax. The measure of the royalty (percentage of average sale price) is distinct from its nature. The manner of calculating the ASP, including sale value, is a matter of legislative policy and convenience, provided it has a reasonable nexus to the levy.
3. Justification for Inclusion of Royalty, DMF, and NMET in Sale Value: The Union of India demonstrated instances of price manipulation by miners who artificially depressed ex-mine prices in certain months and increased dispatch quantities, thereby lowering the ASP and consequently the royalty and auction premiums payable. The inclusion of these payments in the sale value was a regulatory measure to prevent such evasion and manipulation. The Court found this measure rational and proportionate, designed to safeguard public revenue and ensure fairness in computation.
4. Distinction from Coal and No Discrimination: The Court rejected the petitioners’ comparison with coal, where a different mechanism for royalty calculation exists due to the monopoly of coal production and the use of the National Coal Index. It stated that treating different minerals differently in royalty computation does not violate Article 14, as only equals should be treated equally, and iron ore and coal are not comparable in this context.
5. No Violation of Article 19(1)(g): The Court held that the impugned rules impose a reasonable restriction in the interest of public revenue and welfare, which is permissible under Article 19(6).
6. No Breach of Three-Year Royalty Revision Cap: The Court clarified that the impugned provisions do not revise the royalty rate but prescribe the method of computation. The statutory cap on revising royalty rates every three years does not apply to the computation method.
The Court also noted that the petitioners’ argument that the inclusion leads to double payment was unfounded as the sale value is a computed figure reflecting the market realities and is necessary to prevent revenue loss. The Court observed that any hardship caused to individual lessees does not outweigh the public interest in safeguarding mineral revenue.
This judgment follows an earlier 2024 judgment by the Court where it acknowledged the anomaly in royalty computation but left the decision to the government to reform the policy. The government, after consultations, decided not to amend the rules citing substantial revenue loss to states and justified the present scheme.
With this ruling, the Supreme Court has reinforced the government’s regulatory authority to ensure fair revenue collection from mining activities and curb evasion tactics, underlining the broad discretion accorded to fiscal legislation and subordinate rules.
Bottom Line:
Explanations appended to Rule 38 of the 2016 Rules and Rule 45(8)(a) of the 2017 Rules, providing for inclusion of royalty, District Mineral Foundation (DMF), and National Mineral Exploration Trust (NMET) payments in the sale value for computing average sale price for royalty determination, are constitutional and valid; they are not ultra vires Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) nor violative of Articles 14 and 19(1)(g) of the Constitution of India.
Statutory provision(s):
Section 9 of Mines and Minerals (Development and Regulation) Act, 1957; Rule 38 of Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016; Rule 45(8)(a) of Mineral Conservation and Development Rules, 2017; Articles 14 and 19(1)(g) of the Constitution of India
Kirloskar Ferrous Industries Ltd. v. Union of India, (SC) : Law Finder Doc id # 2939376
