The Supreme Court of India has ruled that statutory amendments altering royalty rates will override prior contractual arrangements, as royalty is legally payable on the dispatch of minerals rather than at the time of a tender auction. A bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh allowed the appeal filed by the Director of Mines and Geology, Government of Karnataka, setting aside a judgment of the Karnataka High Court that had prevented the State from charging an enhanced royalty rate of 15% instead of the 10% rate agreed upon in a tender agreement.
Case Background
The dispute originated from the e-auction of existing stocks of iron ore in Karnataka. In an earlier litigation under Writ Petition (Civil) No. 562 of 2009, the Supreme Court had banned mining in the concerned areas on July 29, 2011, and subsequently, on September 23, 2011, constituted a Monitoring Committee to oversee the sale of approximately 25 million metric tonnes (MMT) of existing extracted iron ore stock. The court-mandated modalities required the iron ore to be sold through e-auctions to eligible steel and associated industries, with the successful bidder required to pay “applicable royalty (at 10% of the market price),” Forest Development Tax (FDT), sales tax, and other charges.
In e-auction No. 41 (14-15), M/s BMM Ispat Ltd emerged as the successful bidder for several lots. An acceptance letter was issued to them on June 28, 2014, for 12,000 metric tonnes of iron ore fines at Kumarswamy Mines (M.L. No. 1111). The total invoice amount of Rs. 3,79,08,648 included Rs. 2,91,36,000 as material value, 10% royalty (Rs. 29,13,600), 5.5% VAT, and 12% FDT. It also included a contingency deposit of Rs. 50 per tonne (noted as Rs. 100 per tonne in the general agreement terms) to meet any future variance in royalty or other taxes. M/s BMM Ispat Ltd paid the full amount.
On September 1, 2014, the Central Government amended the Second Schedule of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), revising the royalty rate for iron ore from 10% to 15%. M/s BMM Ispat Ltd subsequently removed the auctioned iron ore in batches, with several consignments transported after the September 1, 2014 amendment.
Upon completion of the work, M/s BMM Ispat Ltd requested a refund of its security deposit on February 1, 2016. However, the appellant communicated objections raised by the Accountant General regarding a 5% deficiency in the royalty paid for the mineral transported after the statutory hike. Consequently, the appellant deducted Rs. 2,09,26,077 (including VAT) from the security deposit of Rs. 2,91,92,750, returning only the balance of Rs. 82,66,673.
The Monitoring Committee supported this deduction, stating that under Section 9(1) of the MMDR Act, royalty is linked to the removal and consumption of minerals from the leased area, and the sale is only complete upon physical delivery and removal. M/s BMM Ispat Ltd challenged this action in the High Court of Karnataka. Though the High Court initially directed reconsideration, the appellant rejected the representation on January 25/31, 2017. In a subsequent writ petition (Writ Petition No. 6979 of 2017), the High Court of Karnataka set aside the rejection, holding that because the bids were accepted and paid before the amendment, imposing a higher royalty rate was unjust. The State then appealed to the Supreme Court.
Arguments of the Parties
The appellant, the Director of Mines and Geology, argued that the enhancement of royalty is a statutory function within the discretion of the Central Government. The appellant contended that there is no legal concept of “crystallisation” of royalty at the time of an auction, and being a statutory import, royalty rates cannot be frozen by contractual terms or equitable considerations.
In response, M/s BMM Ispat Ltd submitted that the royalty payable by them was frozen at 10% under the tender agreement. They argued that Section 9 of the MMDR Act does not apply to the current proceedings as the appellants do not qualify as “holders of mining leases” under the Act. They further contended that the term “applicable” in the Supreme Court’s original order did not permit any variance, and the contractual contingency clause for “variance” only covered existing laws, not subsequent legislative amendments.
The Court’s Analysis
The Supreme Court centered its analysis on Section 9 of the MMDR Act, 1957. The court identified the main facets of Section 9 as requiring the existence of a mining lease, the removal or consumption of mineral from the leased area, coverage of the persons involved, payment of royalty at the rate specified in the Second Schedule, and the power of the Central Government to periodically amend those rates.
Addressing the respondent’s claim that Section 9 did not apply, the court rejected the contention, pointing out that M/s BMM Ispat Ltd did not challenge the High Court’s determination that Section 9 was applicable to them. Furthermore, citing the nine-judge bench decision in Mineral Area Development Authority v. SAIL (2024) and the precedent in Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co. (1979), the court observed that “mining operations” broadly cover any activity extracting minerals from the earth, which encompasses the respondent’s activities.
The court then addressed the core conflict between contractual terms and subsequent statutory amendments. It noted that while the contract was signed and payments made prior to the amendment, the physical movement of the iron ore took place after the rate was statutorily increased to 15%. The court observed:
“This, in our view, appears to be the correct approach for a contractual provision would have to give way to a statutory amendment. Had the increase been by way of any other method other than a statutory amendment, the contractual provision limiting the respondent’s liability would have prevailed.”
The bench explained that the term “applicable” used in the Supreme Court’s original order refers to the rate applicable at the time of removing the goods and was not intended to freeze the royalty rate. The court highlighted that royalty is legally linked to the dispatch or removal of minerals, relying on the majority opinion of Chief Justice D.Y. Chandrachud in Mineral Area Development Authority v. SAIL:
“The expression “dispatch” has been defined to mean the removal of minerals or mineral products from the leased area and to include the consumption of minerals and mineral products within such area. It is worth noting that royalty is payable under Section 9 on the removal or consumption of minerals by the lessee in the leased area. Thus, essentially royalty is payable on the dispatch of minerals from the leased area.”
Applying this principle, the court declared that the rate of royalty must be determined based on the date of the movement of the minerals:
“In that view of the matter, the payment is to be made on the date of the movement of the minerals. If the date of the movement is after the enhancement in royalty, a contract entered into prior to the statutory change cannot be limiting its impact.”
The court held that the appellant was fully justified in deducting the additional 5% royalty from the respondent’s security deposit. The court observed that M/s BMM Ispat Ltd had the opportunity to transport the ore before the amendment but chose to adopt a piecemeal approach or delay transportation until after the statutory change:
“As such, they cannot escape payment of enhanced royalty.”
The Decision
Concluding that statutory amendments override prior contractual agreements when mineral transportation occurs post-amendment, the Supreme Court allowed the appeal. The court quashed and set aside the High Court of Karnataka’s judgment dated March 18, 2019, upholding the State’s deduction of the enhanced royalty. All pending applications were also disposed of.
Case Details
Case Title: The Director of Mines and Geology v. M/s BMM Ispat Ltd & Anr.
Case No.: SLP (Civil) No. 16259 of 2019
Bench: Justice Sanjay Karol, Justice Nongmeikapam Kotiswar Singh
Date: June 4, 2026
