SC upholds Centre's mining royalty formula, rejects Kirloskar's challenge

The Supreme Court on Monday upheld the Centre's method of calculating mining royalty, rejecting a plea by Kirloskar Ferrous Industries Ltd that challenged the existing formula as resulting in "royalty on royalty" for mining companies.

A bench of Justices J.B. Pardiwala and K.V. Viswanathan refused to interfere with the existing royalty calculation framework, holding that the methodology is a matter of fiscal and economic policy.

The ruling is expected to provide certainty to the mining sector by preserving the existing royalty framework. It also comes as a major relief to the Centre and mineral-rich states, as any change in the royalty computation methodology could have significantly affected royalty collections and auction premiums linked to mineral production.

The top court observed that such policy decisions fall within the executive's domain and should not ordinarily be interfered with unless they are found to be arbitrary, unconstitutional or contrary to law. Finding no such infirmity, the bench upheld the existing royalty calculation mechanism

“The petitioners have not been able to establish unconstitutionality. On the contrary, the Union has offered proper justification for the measure of the levy adopted, and it passes constitutional muster,” the bench observed.

The formula to calculate the average sale price (ASP) of minerals forms the basis for determining the royalty payable by mining companies.

Kirloskar Ferrous argued that under the existing rules, the sale price used to calculate the ASP already includes royalty and statutory contributions towards the District Mineral Foundation (DMF) and the National Mineral Exploration Trust (NMET).

Since royalty is calculated on this amount, the company contended that miners effectively end up paying royalty on a value that already includes royalty and other statutory levies, resulting in "royalty on royalty" and increasing their financial burden.

The company also relied on a committee constituted by the ministry of mines, which had acknowledged the cascading impact and recommended changes to the royalty computation mechanism.

It argued that while the government had excluded royalty and statutory levies from royalty computation for coal, similar relief had not been extended to iron ore and other minerals, making the existing framework discriminatory.

However, the court accepted the Centre's contention that the existing methodology serves a legitimate regulatory purpose.

The Union relied on charts, graphs and data to argue that some miners could depress the Average Sale Price by reporting higher prices for small quantities and lower prices for larger quantities, thereby reducing royalty and auction premium payments. The Bench held that the existing formula has a reasonable nexus with preventing such revenue leakage and therefore cannot be termed arbitrary or unconstitutional.

The court also held that although the mines ministry's committee had recommended removing the cascading effect, committee reports are merely recommendatory and cannot determine the constitutional validity of the rules.

Rejecting the comparison with coal, the bench observed that the royalty mechanism governing coal is materially different and does not operate on the same ASP framework. Comparing coal with iron ore for royalty computation, it said, would be akin to “comparing apples and oranges.”

The litigation traces its origin to a writ petition filed by Kirloskar Ferrous in 2024, challenging the mining royalty rules under the Mineral (Other than Atomic and Hydrocarbons Energy Minerals) Concession Rules, 2016 and the Mineral Conservation and Development Rules, 2017.

In November 2024, the Supreme Court refrained from deciding the constitutional validity of the provisions and instead directed the Centre to complete a policy review after holding public consultation

Following the review, the Centre decided to retain the existing royalty calculation methodology. Kirloskar Ferrous subsequently filed a fresh writ petition challenging the government's decision to retain the framework, leading to Monday's verdict dismissing the company's challenge.

Responding to Mint's queries, a Kirloskar Ferrous Industries spokesperson said in an emailed statement: "We respect the Hon'ble Supreme Court's ruling. Once the written order is available, we will review it carefully with our legal counsel and consider all available remedies. The company remains committed to full compliance with applicable laws."