Mining companies cannot reduce royalty liability by crushing high-value iron ore lumps into fines before dispatch, rules Karnataka High Court.

MSPL Limited, a pellet manufacturer, was granted a captive mining lease (ML No. 2487) for iron ore via auction to feed its pellet plant.

The mining process involves extracting Run-of-Mine (ROM) and screening it into Lumps (+10MM) and naturally occurring Fines (-10MM).

MSPL subsequently crushed the Lumps into Fines within the leased area to meet pellet plant requirements.

On 01/03.06.2022, the Deputy Director of Mines and Geology issued an order restraining MSPL from crushing Lumps into Fines and directing status quo on the existing stockpile.

The State's premise was that since Lumps attract higher royalty (based on ad valorem Average Sale Price) than Fines, crushing Lumps into Fines before dispatch caused a loss to the exchequer.

MSPL challenged this as being without authority of law.

1. Whether the respondent authorities have the legal power to prohibit a mining lessee from processing/crushing iron ore Lumps into Fines within the leased area.

2. Whether royalty is payable on the form of the mineral as extracted (Lumps) or in the form as processed and dispatched (Fines) when such processing reduces the economic value of the mineral.

Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957, which mandates royalty on minerals "removed or consumed" from the leased area.

Rule 39 of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016, specifically the 2024 Amendment providing that if ROM processing results in a decrease in economic value, royalty is chargeable on Lumps and Fines after initial screening.

Principle from M/s. Mideast Integrated Steel Limited v. State of Odisha, which held that processing under mining rules does not accommodate "further processing" that allows a mineral to escape the prescribed rate by conversion into a lower-value form.

The court reasoned that while there is no absolute statutory bar on crushing Lumps into Fines, the lessee cannot use such processing to unilaterally reduce its royalty liability.

Although Rule 39(1) originally stated royalty is chargeable on the "processed mineral removed," the court applied a purposive interpretation, holding that "processing" implies value addition, not the destruction of economic value.

The court observed that crushing Lumps (higher value) into Fines (lower value) for pellet manufacturing constitutes "consumption" of the raw material (Lumps) under Section 9 of the MMDR Act.

Consequently, the liability to pay royalty is triggered at the stage of initial screening before the value-reducing process of crushing occurs.

The court found the 2024 amendment to Rule 39—explicitly charging royalty on initial Lumps/Fines ratio if processing decreases value—to be clarificatory in nature.

The court held that MSPL is liable to pay royalty based on the Lumps and Fines as obtained after initial screening (and not as crushed Fines), as the processing reduced the mineral's economic value.

Since the mineral remains in a stockpile and has not been dispatched, the amended Rule 39(1) (effective 10.04.2024) applies, and royalty must be calculated accordingly upon dispatch.