U.0.1. AND ORS. ETC. ETC v. HINDUSTAN DEVELOPMENT CORPN.

The following Order of the Court was delivered by : H

ll6 SUPREME COURT REPORTS [1993) 3 S.C.R.

A K. JA YA CHANDRA REDDY, J. All these Special Leave Peti- tions arise out of the conunon judgment of the High Court of Delhi in Civil Writ Petitions Nos. l l52and 1157/92. We heard these matters for considerable length of time. Eminent counsel appearing on both sides advanced detailed arguments. After the conclusion of the hearing it was represented that having regard to the constraint of time factor, B namely that the contracts ·with the Railways entered into by the manufacturers who are, parties, have to be completed very soon the judgment in these matters has to be delivered as early as possible or at. least the conclusions have to be given soon. We are conscious of the fact that it is likely to take considerable time to deliver a detailed c judgment. However having gone through the records carefully and -- after due considera'tion of the various arguments advanced, we have reached the conclusions given hereunder and we propose to cteli ver the detailed judgment at a later stage giving all the reasons in support of these conclusions. We, however, think it necessary to state a few relevant facts and the issues involved in a concised form before we set out our conclusions.

Every year the Railway Board enters into contracts with the manufacturers for the supply of cast steel bogies which are used in turn for building the wagons. Cast steel bogies come under a specialised item procured by the Railways from the established sources of proven ability. There are 12 suppliers in the field who have been regularly supplying these items. Two new firms Simplex and Beekay also entered the field. Among them admittedly M/s H.D.C .. Mi.1kand and Bhartiya are bigger manufacturers having capacity to manufacture larger quantities. On 25.10.91 a limited tender notice for procurement of 19000 cast steel bogies was issued to the regular suppliers as well as the above two new entrants for the year namely from 1.4.1992 to 31.3.93. The last date for submission of offers to the Ministry of Railways was 27.11.91by2.30P.M. and the tenders were to be opened on the same day at 3 P.M. It was also stated therein that the price was subject to the price variation clause and the base date for the purpose of escalation was l.9.91 and that. the Railway reserved the right to order additional quantity upto 30% of the ordered quantity during the currency of the contract on the same price and terms and conditions with suitable extensions in delivery period. The offers were to remain open for a period of 90 days. On that day the tenders were opened in the presence of all parties. The price quoteq by the three manufacturers

U.O.l. v. H.D.C.[REDDY. J.] 117

i.e Mis H.D.C., Mukand and Bharatiya was an identical price of Rs. A 77,666 per bogie while other tenderers quoted between 83.000 and 84,500 per bogie. After the tenders were opened and before the same could be finalised, the Government of India announced two major concessions namely reduction of custom duty on the import of steel scrap and dispensation of freight equalisation fund for steel. The tenders were put up and and placed before the Tender Committee of B the Railways which considered all the aspects. The comfnittee con- cluded that three of the tenderers namely Mis H.D.C., Mukand and Bharatiya who hact' quoted identical rates without any cushion for escalation between 1. 7. 91 and I. 9. 91, have apparently formed a cartel. The Tender committee also noted that the rates quoted by th~.m were c the lowest. Taking into consideration the reduction of Rs.1500 as a result of the concessions in respect of the reduction of custody duty on the import of steel scrap and dispensation of the freight equalisation fund for steel, the Tender Committee concluded that the reasonable rate would be Rs. 76,000per bogie. On the question of distribution of quantities to the various manufacturers the Tender committee decided to follow the existing procedure. The Tender Committee_ signed these reconunendations on 4.2.92 but on the same day the Member (Me- chanical) of the Committee received letters from Mis H.D.C. and Mukand. Mis H.D.C. ill its letter stated that in view of the concessions and also on the basis that per kg. rate of casting per bogie could be reduced fromRs.37.50 to Rs.29 the cost of casting can also be reduced and therefore they would be in a position to supply the bogies at a lesser rate, in case a negotiation meeting is called. Mis Mukand in its letter also offered to substantially reduce the prices and they would like to co-operate with the Railways and the Government and bring down the prices as low as possible and asked for negotiations. Though this was post-tender correspondence, the Department felt that the offers made - by Mis H.D.C. and Mukand could be considered. The whole matter was examined by the Advisor (Finance) in the first instance and by an elaborate note he observed that the need for encouraging open compe- tition to improve quality and bring down costs has been rec'om- G mended by the Government and if it Is intended to continue the existing policy of fixing a rate and dist.Iibuting the order among all \'lie manufacturers, then negotiations may not be useful as uniform prices offered to all manufacturers have to be sufficient even for the smaller and less economical units and that as any review of the 8

p. 118

A existing policy would take time. the present tender can be decided on the basis of the existing policy. With this noting the file was immedi- ately sent to the Member (Mechanical), the nest higher authority. He with some observation, however recommended the acceptance of the Tender Committee's recommendations. The file was then put up to Financial -Commissioner, He noted that the Tender Committee was B convinced that the three manufacturers who quoted identical price of Rs. 77 ,666 had formed a cartel. He also considered the offers made by M/s H.D.C. and Mukand and observed that these three manufacturers who quoted a cartel price intended to get a larger order on the basis of such negotiated price which would eventually numfy the competition c form the other manufacturers and lead to their industrial sickness and subsequently to monopolistic price situation. He, however, approved --... the Tender committee's recommendations that a counter-offer of Rs. 76,000 may be accepted but in the case ofM/s H.D.C. a price lower by Rs. 11,000 may be offered as per their letter dated 4.2.92. He also recommended that the two manufacturers M/s. Cin1IUco and Texmco D may the given orders to the extent of their capacity or quantity offered by them whichever is lower in view of the fact that they are wagon builders and the present formula regarding the· distribution of quanti- ties may be applied to all manufacturers except the three who have formed a cartel. He also recommended some recoveries from these E three manufacturers who are alleged to have formed a cartel on the basi~ of their letters wherein they have quoted prices which \Vere much less than the updated price as on 1.9.91 of Rs. 79,305. He also made certain other recommendations and finally concluded that the post- tender letters may be ignored and that for short-term gains the Department can not sacrifice long- term healthy competition. After F these recommendations of the Financial commissioner the file was put up to the approving authority i.e. the Minister for Railways, who in general agreed with the recommendations of the Financial Advisor. He also noted that these tl,1ree manufacturers have formed a cartel. He also noted that subsequent· to the Financial commissioner's note, besides <; ~/s H.D.C. and Mukand has also offered to reduce the price by lO!fr 11r.more vide their letter dated 19.2.92if called for negotiations. Taking thc~c circumstances into consideration the Minister ordered that all these three finns may be offered a price lower by Rs. 11,000 with reference to the counter-offer recommended by the Tender committee and the quantities also be suitably adjusted so that the cartel is broken. 8 The Minister also noted that as a result of this a savi~g of about Rs. 1!

1-

U.0.1. v. H.D.C. (K.J.REDDY. J.] 119

--.. crores would be effected. In his note, the Minister also ordered redistribution of the quantities. He also ordered that 309C option should straightaway be exercised. Aftl1.i; the approving authority took these decisions, the file went to he Chairman. Railway Board for implement- A

ing the decisions. He noted that action will be taken as decided by the Minister but added that action will be taken as decided by the Minister but added that it results in dual-pricing namely one to the three B manufacturers and the higher one to the others and therefore the Minister may consider whether they could counter-offer the lower price to all the manufacturers as that would result in saving much more. The file was then again sent to and was considered by the financial Commissioner who noticed this endorsement made by the Chairman, c Railway Board. He however noted that so far all the other firms are concerned it is Rs.3305 less than the present contract price but it would not be equitable to offer the lower price put forward by the three manufacturers as it would make the other units enviable and that incidentally the price of Rs. 76,000 now proposed to be counter- D offered to the other finqs is also in line with the recommendation of the Tender committee. He:.however, noted that some of the units were sick units and owe a lot of money to the nationalised ban_ks and it would therefore be in the national interest to accept dual-pricing. Therefore the file was again put up to the approving authority who agreed with

.. the recommendations of the Financial Commissioner and the Tender Committee and directed that the same may be implemented. In view. of this final decision taken by the approving authority a telegram was issued to the three manufacturers giving them a counter-offer of Rs. 65 ,000 per bogie. The counter-offer was also made to the other E

nine manufacturers at the rate of Rs. 76,000 per bogie namely the price F worked out by the Tender committee. Soon after the receipt of this telegram dated 18.3. 92 Mis H.D.C. andMukand filed writ petitions in the Delhi High Court challenging the so-called discriminatory counter- offer. M/s Bhartiya also filed a similar petition in Calcutta High Court but the same was withdrawn but another writ petition was filed later in the Delhi High Court. In the writ petitions filed by M/s H.D.C. and G Mukand, the High Court s stayed the operation of the telegram dated 18.3.92 and issued notice to the Union of India and to the Executive Director and Director of the Railways (Stores) who figured as respon- dents in those writ petitions. M/s H.D.C. and Mukand also wrote to the Minister of Railways in reply to the telegram that they were not H prepared to accept the counter-offer at the rate of Rs.65,000 ano

120 SUPREME COURT REPORTS ( 199~) 3 S.C.R.

A instead they offered to supply the bogies at the rate of Rs 67,000 ·per bogie. The Railways accepted thfs offer andintimated M/s H.D.C. and ..... ... Mukand accordingly. The High Court, in an interlocutory stage pending the writ petitions, passed an order on 2.4.92 directing the Ministry to accept the allocation of bogies recommended hy the Tender committee and to pay a price at the rate of Rs. 67,000 only per B bogie and that would be subject to the final decision of the writ petitions. Being aggrieved by this order, the Railways filed a petition for special leave to appeai'no. 5512/92 and this court while refusing to interfere at that interlocutory stage made the following observations on ,8.Zl-.j92: c "However, we may observe-and so direct - that during the pendency of the writ petition if any of the ~ suppliers in terms of the package of distribution indicated by the High Court (including the petitioners in the High Court in the writ.petition), seek an "on- D account" .payment representing the difference be- tween the sum of Rs. 67,000 indicated as price by the High Court and the sun of Rs 76,000 contemplated by the Railways; the order of the High Court shall not

.. prohibit the Government making such on-account payment to such suppliers on each wagon on the condition that the said on-11ccount payment of Rs. 9,000 per bogie should be covered by a bank guarantee ·~ for its prompt repayment together with interest at 20% -1m per anum in the event the on-account payment cannot be observed in the price structure that r'nay ultimately come to be determined pursuant to the final decision in the writ petitions.

The special leave petitions are disposed of accord- ingly." G Thereafter the High Court took up the writ petitions for final hearing and by the impugned judgment allowed the writ petitions filed by Mis H.D.C. and Mukand and directed that all the suppliers should ~ make the supplies at the rate of Rs. 67 ,000 per bogie and also set aside the quantity al.location and directed that the same should be considered

l1.0.I. 1·. H.D.C. (K. J. REDDY. J.J 121 .

afresh on a reasonable basis and pending such fresh consideration future supplies should be made on the basis of the recommendations of the Tender Committee. In the course of the judgment, the High Court also made certain observation to the effect that the decision of the approving authority is arbitrary and that this Government has no justification to offer a higher price than the market price to any supplier to rehabilitate it. It was further observed that the stand of the Railways B that those three manufacturers formed a cartel is based on extraneous considerations. The learned judges of the High Court also observed that they failed to understand as to why the Railways authorities could not initiate negotiations with those manufacturers who had offered to reduce their offer which could result in saving crores of rupees to the c Railways. Aggrieved by this judgment of the High Court the Union of India filed S.L.P. (civil) Nos. 11897-98/92. Befort: the High Court in the two writ petitions filed by M/s H.D.C. and Mukand the other manufacturers figured as respondents Nos. 4 to 12 and M/s Bharatiya otherwise Known as Besco figured as respondent No. 13. The other D S.L.Ps. are filed by those nine manufacturers. M/s Bharatiya, respon- dent No. 13. has not questioned the judgment of the High Court. As mentioned above M/s Bharatiya filed a separate writ petition No. 1753/ 92 in the Delhi High Court after withdrawing an earlier writ petition filed in the Calcutta lligh Court. The same also was disposed of in terms of the judgment in the other two writ petitions Nos.1152 and E 1157/92. But they have not questioned the same. Consequently Mis Bharti ya figures as a respondent before us in the SLP filed by the Union of India. Before we proceed further, we \vould like to briefly indicate the main submissions made on behalf of all the parties to the extent relevant and important for arriving at the necessary conclusions. F Learned counsel have advanced arguments on several other aspects which are incidental. We propose to deal with them and give our findings in our detailed judgment at a later stage.

Mr. Kapil Sibal, learned counsel appearing forthe Union of India submitted that the three big manufacturers i.e. M/s H.D.C.. Mukand G and Bharti ya fonned a cartel and the same is evident from the.f-act that each one of them quoted an identical price which is a cartel price; and that the Government in the matters of economic policy for good and sufficient reasons and in the public interest can reject the lowest offer with a view not to allow any monopoly and to encourage competition H <>mong the recognised manufacturers and that the dual pricing adopted

p. 122

A by the Railways under the circumstances is not discriminatory. In this context it is also submitted that the Railways had rightly taken into account the two concessions and found that the price at the rate of Rs. 67 ,000 per bogie was not reasonable and workable and it was only a cartel price and that Rs. 76,000 was the reasonable price and on that basis made a counter-offer to other manufacturers except to these three 8 big manufacturers. The Railways had no option except to accept the offer of Rs. 67 ,000 by the three big manufacturers as they took firm stand that the price is reasonable and that they would be able to supply on that rate and thereby a binding contract came into force so far these three manufacturers are concerned. Regarding the allocation of quan- C tities the Railways have taken into consideration all the relevant factors namely that three of the nine manufacturers were BIFR companies and the two others arc also wagon builders having their entire business with Railways only and on that rational basis the quantiles were allotted. It is also his submission that since the three big manufacture originally offered a cartel price and all of them later D apparently offered Rs. 67,000/-, an unworkable price. the Railways felt that they attempted to destroy the competition. Therefore they were not gi~en larger share. Learned counsel relied on several authori- ties particularly touching the scope and ambit of Article 14 and rhe power of the court under Article 226 of the constitution of India. Mr. E Sibal also strongly contended that the High Court grossly erred in making certain observations against the Railways namely that the stand of the Railways that those three manufacturers formed a cartel is based on extraneous considerations and somewhat similar observa- tions in respect of the decision of the Railways on the question of price fixation. The other counsel appearing for the nine smaller manufac- F turers in general supported these suhmissions and also highlighted certain aspects in their individual cases.

Shri K.K. VenugopaL learned counsel appearing for the respon- dent namely Mis H.D.C. submitted that the award of the contract for supply of bogics was vitiated by ma/a/ides and that disproportionate allotment of quota of bogies and dual pricing were based on malafides and extraneous considerations violating Artick 14 of the Constitution. He further submitted that the reasons put forward on behalf of the Railways are disingenuous and bereft of rationale. He supported the finding of the High Court that the price should be fixed at Rs. 67 ,000

U.0.1. ''· H.D.C. [K. I.REDDY, J.I 123

for every manufacturer. Shri Nariman, learned counsel appearing for A M/s Mukand, another respondent submitted that the dual set of counter offers and allocation of disproportionate quantites are highly arbitrary and that the practice and policy of the past 10 years of placing orders on all manufacturers in respect of the quantities worked out on the basis of standard quantity formula at a uniform price, gave rise to legitimate expectations among all bogie manufacturers and irrational departure B from the existing policy is arbitrary and unreasonable. He furthJr submitted that the making of law tender offers can not by itself be visited with punty consequences like dual pricing and reducing the allotment of legitimate quantities. c .. Shri Shanti Bhaushan, learnedcounsel appearing for M/s. Bhartiya submitted that the Tender Conunittce erred in treating Mis. Bhartiya also as a member of the cartel and that the allotment of quantities has been arbitrarily reduced. He however made one special submission namely that M/s Bharti ya never made an offer of Rs. 67,000 and there D is nothing in writing to that effect and that merely because of the statement of the counsel during the proceedings before the High Court, it should not be understood that they are williri~ to supply at·the rate of Rs. 67,000 and that they should not be treated by treated differently from the other nine manufacturers. E Taking all the aspects into consideration and for the purpose of giving our conclusions it may broadly be stated that M/s H.D.C. and Mukand gave post-tender offers at a low pride with the hope that they would get a larger quantity allotted. M/s Bharti ya also fell in line with them though did not specifically put it in writing. But during the course of the hearing of the writ proceedings, it was represented on behalf of M/s Bharatiya that they would be willing to supply at Rs. 67 ,000 if the court fixes that price. This is noted by the High Court in its judgment.

The Railways authorities however concluded that in the begin- ning itself these three have formed a cartel and the price quoted by them was only a cartel price. The note by the Financial Commissioner is somewhat elaborate on this aspect and the Minister for Railways, the competent authority ·agreed with him and also directed that the quantities be suitably adjusted so that the cartel is broken. He also took into consideration the fact that some of the smaller units are sick and H

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p. 124

A therefore they_ should be given a larger quantity to enable them to rehabilitate. The other recommendations of the authorities were also accepted. However in giving any directions we must bear in mind that the contract period is going to end shortly and till now all the manufacturers have been manufacturing and supplying.pursuant to the interim orders_. We may indicate atthis stage that we shall discuss all 8 the.se aspects later in detail in our judgment. After due and careful consideration of all the aspects, our conclusions are as follows:

1) 1bere is no enough material to conclude that M/s H.D.C.. Mukand and Bhartiya formed a cartel. Because of mere quoting identical tender offers by the said three manufacturers for which there is so1111.: basis, the conclusion that the said manufacturers had formed a cartel does not appear to he correct. However sinc.e the offers of the said three tenders were identicle and the price was somewhat lower. the Tender Committee entertained a suspicion that a cartel had been formed and the same got further strengthened by· the post-tender attitude of the said manufacturers which further resulted in entertain- ing the same suspicion by the other authorities in the hierarchy of the decision making body including the Minister o( Railways. Though there is no enough of material to establish formation of a cartel as is understood in the legal parlance but at the same time it cannot be contended that such an opinion entertained by the concerned authori- ties including the Minister wasperse malicious or was actuated by any extraneous considerations. After a careful examination of the entire record and facts and circumstances of the case we are of view that all° the Railway authorities including the Minister acted in a bonafide manner in taking the stand that the three manufactures formed a cartel.

2) The current contract price based on the updated price is Rs. 79,305 The three manufacturers offered at Rs. 77,6000. Taking into consideration the later concessions, the Tender Committee decided that the price of Rs. 76,000 is reasonable. In the post tender correspon- G dence M/s H.D.C. and Mukand offered to supply at a price of Rs. 67 ,000 per bogie, but no particulars as to _how it would be reasonable, were given._ However they have come forward before us with some particulars. M/s Bharti ya clid not gave any such offer in writing, but fell in line with ~hem and did not choose to question the order of the High H court fixing the price at Rs. 67,000The Railways were of the view that · 1

U.O.I. v. H.D.C. [K. J. REDDY. J.] 125

it is an unreasonable price an smaller manufacturers cannot supply at that price and consequently they will get extinguished resulting in a monopoly by the big manufacturers.'The High court has directed that supply should be at Rs. 67,000 by everyone. 'faking into consideration all these aspects we are of the view that the fixation of price at Rs. 67,000 per bogie straightaway without necessary and proper consider- ation and appraisal regarding the viability and other aspects by .some experts, is not just and fair from many points of view-_ A fresh consideration is called for, particularly. from the point of view of safeguarding the interests of the public exchequer and giving neces- sary protection to the smaller manufacturers. Consequently we set aside this direction of the High Court and direct the Tender Committee c to reconsider the question of fixation of reasonable price. The Tender committee shall consider the offer of Rs, 67.000 made by Mis H.D.C. and Mukand along with the data that would be given by them in support of that and the percentage of profits available to all the 3 manufacturers and other relevant aspects and then fix a reasonable price. at which the manufacturer would be able to supply. The Tender Committee shall within two weeks from today complete the process.

3) At a belated post tender stage the Railways authorities did not deem it fit to reconsider the question of fixation of price in the light of the post tender offers made by Mis H. D. C. and Mukand, as by then they were of the opinion that the three big manufactu.rers have formed a carte 1and quoted a cartel price. The stand by the Railways to adopt dual pricing under these circumstances is bonafide and not malafide. However, dual pricing on principle may not appear to be rational since the railways have been following certain formula in fixing the price which is made applicable to all the manufacturers. But under certain circumstances dual pricing may be reasonable. In the instant case Ml s H.D.C. and Mukand came forward with firm offer of a price at Rs. 67,000 per bogie. Mis Bharatiya also got committed to supply at the same price. All the three of them did not even challenge the order of the High Court. These three big manufacturers just be deemed to be in G a position to supply at the rate of Rs. 67,000 and thus they form a distinct category. The smaller manufacturers belong to a different category and if a different price is fixed for them it is not discrimina- tory. H

126 SUPREME COURT REPORTS {199313 S.C.R.

A 4) If the price that is to be fixed by the Tender Committee as directed by us happens to be more than Rs. 67.000 then that would be applicable to the smaller manufacturers only and not to M/s H.D.C., Mukand and Bhartiya who on their own commitment have to supply at the rate of Rs. 67 ,000.

B 5) The price thus fixed by the Tender committee which applies only to the smaller manufacturers shall be deemed to be final and the respective contracts shalJ be deemed to be concluded so for the price is concerned.

c (6) Now coming to the allotment of quota of bogics the Tender ·· Committee made recommendations on the basis of the existing prac- tice. The Minister of Railways in his ultimate decision has made some -- variations taking into consideration the recommendations of the Financial commissioner and other authorities. I k has however not '\

D accepted these recommendations fully. In making these variations, the Minister accepting. ultimately reduced the allotment of quota to the said three tenderers substantially by way of reprisal. In view of our finding that the formation of an opinion that cartel was formed had no firm factual foundation; such a reduction of quota by way of reprisal can not be justified. we are however, not inclined to accept the E contention made on behalf of M/s H.D.C., Mukand and Bharti ya that no departure from the recommendations of the Tender committee is permissible in the absence of any established policy which was also known by the tenderers. From the records it appears that in the past also there have been such variations. In our view. the Minister of Railways F as the final authority, after considering various relevant factors, may be justified in taking a particular decision in the matter of allotment of quota but such decision must be taken on objective basis. But, in this case. it appears to us that all the smaller manufacturers deserving a favourable treatment in the matter of allotment of quota, have not been equally treated in the sense that one or two of them got larger G quantities. Though this does not appear to be a serious departure, yet in these matters the Govt. is expected to be just and fair to one and all. We hope that in future the authorities would make a proper consider- ation of the relevant factors in respect of each tenderer in an objective manner in allotting the quantities. H

U.O.l. 1·. H.D.C. [K. J. REDDY. J.) 127

- (7) In view of the interim orders, during the pendency of writ A petitions before the High Court, and until now all the manufacturers have been supplying as per the allotments by the Tender Conunittee. The High Court in its judgment finally directed the Railways to reconsider the allocation on reasonahle basis. It is submitted on behalf ofthl! smaller manufacturers that they have made necessary manufac- turing arrangements on the basis of the final allotment. On behalf of the B M/s H.D. C., Mukand and Bharti ya, it is submitted that their legitimate quotas also are cut short and that they are entitled to larger quantities in view of the low price offered by them. Having considered the contentions made by aU the manufacturers we direct that the there manufacturers M/s H.. D.C.. Mukand and Bhartiya should be allocated c the quantities as per the recommendations of the Tender committee. We, however, do not want to disturb at this stage the quantities finally allotted by the competent authority to the small manufacturers as that would cause great hard<;hip lo them. We leave it to the Railway authorities to make necessary adjustments next year in the matter of allocation of quantities to them taking into consideration these allot- D ments given to them this year. To that extent we modify the order of the High Court.

(8) It will be open the Railways to exercise 30'k option. if not already exercised. E

. (9) Taking all the circumstances and the time faqor into consid- eration the time to complete the supply is extended upto 31.3. 1993.

Accordingly these Special Leave petitions are disposed of. There F will be no order as to costs.

V.P.R. SLPs disposed of.