In a significant ruling, the Supreme Court of India has highlighted constitutional concerns surrounding the “compounding” or “cascading” effect of royalties under current mining regulations, stating that this practice could potentially violate Article 14 of the Indian Constitution, which guarantees the right to equality. The court has directed the government to reconsider the current rules and bring greater clarity and fairness to the computation of mining royalties. The judgment was delivered by a bench consisting of Chief Justice Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra
The ruling stems from a writ petition filed by Kirloskar Ferrous Industries Limited (Case No. 715 of 2024), challenging certain provisions within the Mineral (Other than Atomic and Hydrocarbons Energy Minerals) Concession Rules, 2016 (MCR, 2016) and the Mineral Conservation and Development Rules, 2017 (MCDR, 2017). These provisions mandate a royalty computation method that results in the payment of royalty on royalty, leading to what the petitioners argue is an excessive financial burden on mining leaseholders.
Background of the Case
Kirloskar Ferrous Industries Limited, represented by senior counsel Dr. Abhishek Manu Singhvi, challenged the explanation clauses in Rule 38 of the MCR, 2016 and Rule 45(8)(a) of the MCDR, 2017. According to the petitioners, these clauses mandate the inclusion of previously paid royalty and contributions to the District Mineral Foundation (DMF) and the National Mineral Exploration Trust (NMET) in the sale value calculation used to determine monthly royalty payments. This approach effectively leads to “royalty on royalty,” resulting in an ongoing cumulative burden on mining companies.
Legal Issues and Court’s Observations
The core legal issue presented to the court was whether the current method of royalty computation creates a “cascading” effect, which is unfair and violates Article 14’s guarantee of equality before the law. The petitioners argued that the royalty computation mechanism under MCR, 2016, applied to minerals like iron ore, is arbitrary and discriminatory, particularly since coal is excluded from similar compounding under the same framework. They contended that this discrepancy lacks an “intelligible differentia,” a legal standard required to justify differential treatment under Article 14.
The court noted that the government had acknowledged this anomaly by constituting a committee to address the “compounding of royalty” issue. However, the lack of concrete action or amendment thus far, despite stakeholder consultations and government reports, left the existing framework unchanged. The court underscored the importance of avoiding unfair financial impositions and emphasized the urgency for policy clarity.
“The mechanism of royalty computation must not lead to an unending compounding effect that burdens mining leaseholders unduly,” observed Justice Pardiwala, adding, “Such a cascading effect raises serious constitutional concerns under Article 14.”
The Government’s Position
Arguing on behalf of the Union of India, Additional Solicitor General Mr. Shailesh Madiyal defended the current rules, asserting that royalty payments form a significant part of state revenue and that the method of computation was designed as a matter of policy. The government argued that the existing royalty calculation aligns with the economic framework governing natural resources and does not automatically lead to an indefinite cumulative royalty effect.
The government further noted that royalty rates, set at 15% on an ad valorem basis for minerals like iron ore, are determined by policies that also account for public revenue needs and financial planning. However, the court pointed out that despite public consultations and committee recommendations, there has been no legislative action to address these compounding issues in a systematic and transparent manner.
Emphasizing the need for fairness and clarity, the court directed the government to expedite its public consultation process on mining royalty rules. The government was urged to address and resolve the issue of compounding, ensuring that the royalty mechanism aligns with constitutional principles of equality and prevents any unjust financial burdens on mining leaseholders.
