The Supreme Court has held that statutory amendments enhancing royalty rates under the Mines and Minerals (Development and Regulation) Act, 1957, will prevail over pre-existing contractual arrangements, ruling that royalty is payable at the rate applicable on the date of actual dispatch or removal of minerals and not on the date of auction or execution of the contract.
The Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh on Thursday allowed an appeal filed by the Director of Mines and Geology, Government of Karnataka, and set aside a Karnataka High Court judgment that had restrained the State from recovering enhanced royalty at the rate of 15 per cent from M/s BMM Ispat Limited.
The dispute arose from e-auctions of iron ore conducted under the supervision of a Monitoring Committee constituted by the Supreme Court in proceedings relating to mining operations in Karnataka. In 2011, while dealing with large-scale illegal mining issues, the Apex Court had suspended mining activities in certain areas and directed the Monitoring Committee to oversee the sale of approximately 25 million metric tonnes of already extracted iron ore through e-auctions.
Under the auction modalities approved by the Court, successful bidders were required to pay the applicable royalty, Forest Development Tax (FDT), Value Added Tax (VAT) and other statutory levies. At the time of the auction, royalty on iron ore was payable at the rate of 10 per cent of the market value.
M/s BMM Ispat Ltd emerged as the successful bidder in one such auction conducted in June 2014 for the purchase of 12,000 metric tonnes of iron ore fines from Kumarswamy Mines. The company paid the entire sale consideration, including royalty at 10 per cent, VAT, FDT and a contingency deposit intended to meet any future variation in royalty or other statutory dues.
Subsequently, on September 1, 2014, the Central government amended the Second Schedule to the MMDR Act and enhanced the royalty on iron ore from 10 per cent to 15 per cent. Although the auction had taken place before the amendment, substantial quantities of the iron ore were transported and removed from the mining lease area after the revised royalty rates came into force.
When the company later sought a refund of its security deposit, the Director of Mines and Geology deducted the differential royalty amount along with applicable VAT, relying on audit objections raised by the Accountant General. The State maintained that royalty under Section 9 of the MMDR Act becomes payable upon the removal or dispatch of minerals and that the enhanced statutory rate applied to all consignments transported after September 1, 2014.
The Monitoring Committee also supported the deduction, stating that the sale process was completed only upon physical delivery and removal of the mineral and that royalty liability was directly linked to dispatch from the leased area.
Aggrieved by the deduction, BMM Ispat Limited approached the Karnataka High Court. The High Court accepted the company’s contention that the royalty liability stood crystallised on the date of acceptance of the bid and held that the subsequent statutory enhancement could not alter the concluded contractual arrangement. The State challenged that decision before the Supreme Court.
Before the Supreme Court, the State argued that royalty is a statutory levy governed entirely by Section 9 of the MMDR Act and cannot be frozen through contractual terms. It contended that the Central Government possesses statutory authority to revise royalty rates and that any such amendment automatically becomes applicable from the date it comes into force.
The company, on the other hand, argued that the auction conditions specifically contemplated royalty at 10 per cent and that the contractual arrangement insulated it from any subsequent increase. It further contended that Section 9 was not attracted in the peculiar facts of the case and that the word “applicable” used in the auction conditions referred only to the royalty rate prevailing on the date of the auction.
Rejecting these submissions, the Supreme Court undertook an extensive analysis of Section 9 of the MMDR Act and reiterated that royalty is a statutory exaction payable for the privilege of extracting and removing minerals. The Court noted that the provision specifically links royalty liability to the removal or consumption of minerals from the leased area and authorises the Central Government to periodically revise royalty rates through amendments to the Second Schedule.
The Bench referred to the Constitution Bench decision in Mineral Area Development Authority v. Steel Authority of India Limited and observed that royalty becomes payable upon dispatch or removal of minerals from the leased area. The Court emphasised that the legally relevant date for determining royalty liability is the date of actual movement of minerals and not the date on which the commercial transaction or auction is concluded.
The Court held that a contractual arrangement cannot override a subsequent statutory amendment. It observed that while contractual provisions may govern commercial obligations between parties, they must necessarily yield to legislative changes having statutory force.
The Bench observed that if the enhancement had arisen from a purely contractual mechanism, the contractual terms might have governed the matter. However, where the increase was brought about through a statutory amendment, the revised rate became binding irrespective of any earlier contractual stipulation.
The Court further clarified that the term “applicable royalty” used in the auction conditions referred to the royalty rate applicable at the time of removal of minerals and could not be interpreted as freezing the rate existing on the date of the auction. It also noted that the agreement itself contemplated future variations in royalty and taxes by requiring bidders to maintain a contingency deposit.
The Bench observed that BMM Ispat Ltd had the opportunity to remove the iron ore before the statutory amendment came into force but either adopted a piecemeal approach or delayed transportation until after the enhancement became effective. Having chosen to remove the mineral after the revised rates were notified, the company could not avoid liability to pay the enhanced royalty.
Holding that the State authorities were fully justified in recovering the differential royalty amount from the security deposit, the Court concluded that the Karnataka High Court had erred in interfering with the decision of the Director of Mines and Geology.
Accordingly, the Supreme Court allowed the appeal, upheld the recovery of the additional five per cent royalty along with applicable taxes, and set aside the Karnataka High Court’s judgment. The Court reaffirmed that royalty under the MMDR Act is payable at the rate prevailing on the date of dispatch or removal of minerals and that statutory amendments enhancing royalty rates override prior contractual arrangements.
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