TMI Blog1993 (4) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been regularly supplying these items. Two new firms Simplex and Beekay also entered the field. Among them admittedly M/s H.D.C., Mukand and Bharatiya are bigger manufacturers having capacity to manufacture larger quantities. On 25.10.91 a Iimited tender notice for procurement of 19000 cast steel bogies was issued to the regular suppliers as well is the above two new entrants for the year namely from 1.4.92 to 31.3.93. The last date for submission of offers to the Ministry of Railways was 27.11.91 by 2.30 P.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 1.9.91 and that the Railways 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 quoted by the three manufacturers i.e. M/s H.D.C., Mukand and Bharatiya was an identical price of ₹ 77,666 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en negotiations may not he 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 existing policy would take time, the present tender can be decided on the basis of the existing policy. With this noting the file was immediately sent to the Member (Mechanical), the net higher authority, The, with some observations 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 convinced that the three manufacturers who quoted identical price of ₹ 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 nullify the competition from 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 ₹ 76,000 may he accepted but in the case of M/s H.D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then again sent to and was considered by the Financial Commissioner who noticed this endorsement made by the Chairman, Railway Board. The however noted that so far all the other firms are concerned it is ₹ 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 unviable and that incidentally the price of ₹ 76,000 now proposed to be counteroffered to the other firms is also in line with the recommendations of the Tender Committee. The, however, noted that some of the units were sick units and owe a lot of money to the nationalised banks 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 ₹ 65,000 per bogie. The counter-offer was also made to the other nine manufacturers at the rate of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may ultimately come to be determined pursuant to the final decision in the writ petitions. The special leave petitions are disposed of accordingly. Thereafter the High Court took up the writ petitions for final hearings any by the impugned judgment allowed the writ petitions filed by M/s H.D.C. and Mukand and directed that all the suppliers should make the supplies at the rate of ₹ 67,000 per bogie and also set aside the quantity allocation and directed that the same should he considered 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 observations to the effect that the decision of the approving authority is arbitrary and that the 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 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 Railway authorities c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the data that would given by them in support of their offer and the percentage of profits available to all the manufacturers and other relevant aspects and then fix a reasonable price at which the manufacturers would be able to supply. 3) Dual pricing under certain circumstances may be reasonable and the stand of the railways to adopt dual pricing under the circumstances is bonafide and not malafide. M/s H.D.C., Mukand and Bharatiya must be deemed to be in a position to supply at the rate of ₹ 67,000 per bogie 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 discriminatory. 4) If the price that to be fixed by the Tender Committee as directed by us happens to be more than ₹ 67,000 than that would be applicable to the smaller manufacturers only and not to M/s H.D.C., Mukand and Bharatiya who on their own commitment have to supply at the rate of ₹ 67,000. (5) The price thus fixed by the Tender Committee which applies only to the smaller manufacturers shall he deemed to be final and the respective contracts shall be deemed to be concluded so for the price is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Union of India, however, contended that it is a matter of policy decision by the Government and that where the Government realises that the lowest ,)rice offered is not reasonable and realistic, it may for a variety of good and sufficient reasons reject the same. It is true, as it is today, that the Government in a welfare State has the wide powers in regulating and dispensing of special services like leases, licences. and contracts etc. The magnitude and range of such Governmental function is great. The Government while entering into contracts or issuing quotas is expected not to act like private individual but should act in conformity with certain healthy standards and norms. Such actions should not be-arbitrary, irrational or irrelevant. In the matter of awarding contracts inviting tenders is considered to be one of the fair ways. If there are any reservations or restrictions then they should not be arbitrary and must be justifiable on the basis of some policy or valid principles which by themselves are reasonable and not discriminatory. In the instant case the Railways every year used to enter into contracts with the established manufacturers for the supply of cast s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for short). Thereafter a three-men Tender Committee comprising the officers of the rank of Joint Secretary designated as Executive Directors in the Railways Board considered the offers. Since the three big suppliers namely M/s H.D.C., Mukand and Bharatiya quoted an identical price of ₹ 77,666 which was lower than the updated price of the previous contract, the base date of which was 1.9,91, the Tender Committee formed an opinion that they have formed law carte 1. The offers made by the two new firms, however, were not accepted. The Tender Committee made their own recommendations and fixed ₹ 76,000 as a reasonable price at which counter offer could be made. Then as already mentioned there was post-tender correspondence and ultimately a dual price was fixed. In this regard the submission is that having entertained post-tender correspondence, the Government either should have accepted the same or rejected the same and in any event the lowest offer should have been accepted. From a perusal of the proceedings of the Tender Committee as well as the opinion expressed by the Financial Commissioner and the other members of the Board, it is clear that ₹ 76,000 per bogie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cences etc. must be con- fined and structured by rational, relevant and nondiscriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can he shown by the Government that the departure %%,as not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory. ln Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir and Anr. [1980] 3 SCR 1338 an order awarding contract by the Government to a party was questioned on the ground that it was arbitrary, malafide and not in public interest and the same created monopoly in favour of that party and that the contract was awarded without affording an opportunity to others to compete and the same is not based on any rational or relevant principle and therefore was violative of Article 14 of the Constitution and also the rule of administrative law which inhibits the arbitrary action by the State. A Bench of this Court while approving the principles laid down in the above cases further observed thus: Though ordinarily a private individual would be gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also the concept of public interest must as far as possible receive its orientation from the Directive Principles. What according to the founding fathers constitutes the plainest requirement of public interest is set out in the Directive Principles and they embody par excellence the constitutional concept of public interest. If, therefore, any governmental action is calculated to implement or give effect to a Directive Principle, it would ordinarily, subject to any other overriding considerations be informed with public interest. Where any government action fails to satisfy the test of reasonableness and public interest discussed above and is found to be wanting in the quality of reasonableness or lacking in the element of public interest, it would be liable to be struck down as invalid. It must follow as a necessary corollary from this proposition that the Government cannot act in a manner which would benefit a private party at the cost of the State; such an action would be both unreasonable and contrary to public interest. The Government therefore, cannot, for example give a contract or sell or lease out its property for a consideration less than the highest that can be obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that: The second limitation on the discretion of the Government in grant of largess is in regard to the persons to whom such largess may be granted. It is now well settled as a result of the decision of this Court in Ramanad Shetty v.International Airport Authority of India Ors. (supra) that the Government is not free like an ordinary individual, in selecting the recipients for its largess and it cannot choose to deal with any person it pleases in its absolute and unfettered discretion. The law is now well established that the Government need not deal with anyone, but if it does so, it must do so fairly without discrimination and without unfair procedure. where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or granting other forms of largess, the Government cannot act arbitrarily at its sweet will and, like a private individual, deal with any person it pleases, but its action must be in conformity with some standard or norm which is not arbitrary, irrational or irrelevant. The governmental action must not be arbitrary or capricious, but must be based on some principle which meets the test of reason and relevance. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e public interest. If the government has the power to accept or not to accept the highest hid and if the Government has also the power to change its policy from time to time. it must follow that a change or revision of policy subsequent to the provisional acceptance of the bid but before its final acceptance is a sound enough reason for the Government's refusal to accept the highest bid at an auction. that is precisely what has happened here. (emphasis supplied) In State of Orissa and Ors. v. Harinarayan Jaiswal and Ors. [1972] 3 SCR 784 it was observed as under: It is for the Government to decide whether the pi-ice offered in an auction sale is adequate. While accepting or rejecting a bid, it is merely performed and executive function. The correctness of its conclusion is not open 'to judicial review. We fail to see how the plea of contravention of Art. 19 (1) (g) or Art. 14 can arise in these cases. The Government's power to sell the exclusive privileges set out in s. 22 was not denied. It was also not disputed that those privileges could be sold by public auction. Public auctions are held to get the best possible price. Once these aspects are recognised, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the back-round of these observations and keeping the mind that we must now proceed to deal with the contention of the petitioners based on article 14 of the Constitution. In India Cement Ltd. and others v. Union of India and others[1990] 4SCC 356 a question arose whether the fixation of ₹ 100 per tonne of cement as the uniform retention price for the entire industry with the exception of M/s Travancore Cement Ltd. was rational and reasonable. This Court held as under: It is. therefore, clear that fixation of ₹ 100 per tonne as die uniform retention price for the entire industry with the solitary exception of M/s. Travancore Cement Ltd. Kottayam for which justification has been shown. was on a rational basis taking into account all relevant data and factors including the cement industry's acceptance of the principle of a uniform retention price for the entire industry. the only difference being in die price actually fixed it ₹ 100 per tonne instead of ₹ 104 per tonne claimed by the cement industry. It is obvious that the fixation of ₹ 100 per tonne being shown to be made on a principle which has not been faulted. the actual fixation of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for treating. Travancore Cement Limited differently has been clearly stated. It has been stated that it is a sub- standard unit with a capacity of 50,000 tonnes `per annum only without any scope for expansion while the standard capacity for a unit is two lakh tonnes per annum; so that this unit is not capable of expanding the capacity and it is on the whole an uneconomic unit deserving a special consideration. No material has been produced by the appellant. M/s Chettinad Cement Corporation Limited. to show that it is a similar substandard uni t without any capacity for expansion. so that it too must continue to be an uneconomic unit like M/s Travancore Cement Limited, Kottayam deserving, a similar treatment. The counter affidavit. therefore. shows a rational basis for classifying M/s Travancore Cement Limited, Kottayam differently as a sub-standard and an uneconomic unit without any scope for improvement in comparison to other units. This argument also is untenable. In R.K. Garg v. Union of India, [1981]4 SCC 675, a Constitution Bench of this Court observed as under: Another rule of equal importance is that laws relating to economic activities should be viewed with grea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts. It was further observed thus: The function of the Court is not to advise in matters relating to financial and economic policies for which bodies like Reserve Bank are fully competent. The Court can only strike some or entire directions issued by the Reserve Bank in case the Court is satisfied that the directions were wholly unreasonable or violative of any Provisions of the Constitution or any statute. It would be hazardous and risky for the courts to tread an unknown path and should leave such task to the expert bodies. This Court has repeatedly said that matters of economic policy ought to be left to the government. At this juncture it is also necessary to consider whether the policy of the Government in the matter of fixation of price and in allotment of the largess from the point of' view of prohibiting monopolistic tendencies and encouraging healthy competition among the units, is in any manner unreasonable or arbitrary. As submitted by the learned counsel, the policy of the Government is to promote efficiency in the administration and to provide an incentive to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuance, after its enactment, of a contract made previously subject it to attack as ex post facto legislation. In England, the Competition Act, 1980 controls anti- competitive practices and if a person in the course of his business pursues a course of conduct which has or is intended to have or it likely to have the effect of restricting, distorting or preventing competition in connection with the production, supply or acquisition of goods is deemed to engage in anti-competition practices, which is illegal. Therefore, the avowed policy of the Government particularly from the point of view of public interest is to prohibit concentration of economic power and to control monopolies so that the ownership and control of the material resources of the Community are so distributed as best to subserve the common good and to ensure that while promoting industrial growth there is reduction in concentration of wealth and that the economic power is brought about to secure social and economic justice. Bearing the above principles in mind, we shall now proceed to examine the action taken by the Railways in the matter of fixation of the price and distribution of quantities and see whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the distribution of quantities the Tender committee recommended that the same may be distributed among the various manufacturers as shown in (he annexure to their recommenda- tions. In recommending such distribution to various manufacturers the Tender committee has taken into consideration the fact that the four wagon builders namely M/s H.D.C. Texmaco, Cimmco and Burn should be given weightage. The Tender Committee ultimately recommended that a counter-offer at the price of ₹ 76,000 for 20.3 T bogies can be made and the quantities can be distributed as indicated in the be annexure. This was done on 4. 2. 92 and then the post- tender correspondence was there %%,hereby two of the three big manufacturers offered to reduce their price if negotiations be held. Then the file went to the Railway Board. Advisor (Finance) particularly indicated that a view has to be taken whether a large number of manufacturers should be continued manufacturing these bogies in small quantities as at present or to permit a small number of manufacturers to expand their production at the cost of other prices and that the policy which has been followed by the Railways so far is to encourage a large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufficient order so that they are able to rehabilitate themselves and repay the loans. In this view of the matter, he ordered redistribution of the balance quantities as follows: Bum 500 Cimmco 1200 Texmaco 1200 Sri Ranga 1560 Anup 1136 Orient 1050 TSL 1400 Himmat 1150 BECO 1600 The Minister also ordered that straight away 30% option should be exercised. The further noted that as a result of this policy, the Railways would be effecting a saving of about ₹ 11 crores. Then the file with this order went back to the Member (Mechanical) and others for being implemented. he, however. noted that the Minister for Railways may consider whether the lower price could be counter offered to all the companies. The Financial Commissioner again noted that dual pricing would be in the national interest and finally the Minister ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es formed to monopolize production and distribution of a product or service, control prices etc.------------------------ In Webster Comprehensive Dictionary, International Edition, the meaning of the word Cartel is given thus: cartel ------------------------- xx----------- 3. An international combination of independent enterprises in the same branch of production, aiming at a monopolistic control of the market by means of weaking or eliminating competition.-------- xx---------- In Chambers' English Dictionary the word Cartel is defined thus: Cartel-A combination of firms for certain purposes especially to keep up prices and kill competition------------XX--------------- In Black's Law Dictionary, fifth edition the meaning of the word Cartel is given thus: Cartel-A combination of producers of any product joined together to control its production, sale, and price, and to obtain a monopoly in any particular industry or commodity.Also, an association by agreement of companies or sections of companies having common interests, designed,, to prevent extreme or unfair competition and allocate markets, and to promote the interchange of knowledge resulting fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Contractors Association etal Federal Reporter 2d Series, 678 page 492 it was observed as under: We know of no better statement of the rule than that of this court in United States v. Society, of Ind. Gasoline Marketers, 624 F. 2d 461, 465 (4th Cir. 1979) cert. den. 101 S.Ct. 859,449, U.S. 1078, 66 L.Ed. 2d 801, where stated: Since in a price-fixing conspiracy the conduct is illegal per se further inquiry on the issues of intent or the anti-competitive effect is not required. The mere existence of a price-fixing agreement establishes the defendants' illegal purpose since the aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. It was also observed that: The critical analysis in determining whether a particular activity constitutes a per se violation is whether the activity on its face seems to be such that it would always or almost always restrict competition and decrease output instead of being designed to increase economic efficiency and make the market more rather than less competitive. Matsushita Electric Industrial Co., Ltd. et al v. Zenith Radio Corporation et al 89 L.Ed. 2d 538 is a case where Amer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors weighs more heavily as the time needed to recoup losses grows. If the losses have been substantial as would likely be necessary (475 US 593) in order to drive out the competition- petitioners would most likely have to sustain their cartel for years simply to break even. (emphasis supplied) In this context, one of the submissions is that the price of ₹ 67,000 offered by these manufacturers during the post- tender stage was not predatory and that the view taken by the authorities that such an offer of lower price was predatory one confirming the formation of a cartel, is also unwarranted. In Matsushita's case (supra) it was observed that predatory pricing conspiracies are by nature speculative and that the agreement to price below the competition level requires the conspirators to forgo profits that free competition would offer them. It was also held therein as under: To survive a motion for a summary judgment, a plaintiff seeking damages for a violation of S 1 of the Sherman Act must present evidence that tends to exclude the possibility that the alleged conspirators acted independently. Thus, respondents here must show that the inference of a conspiracy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e essential factors. In American jurisprudence. 2d Volume 54, a passage at page 695 reads thus: The Sherman Act does not out law price uniformity. An accidental or incidental price uniformity or even pure conscious price parallelism, is not itself unlawful. Moreover, a competitor's sole decision to follow price leadership- is not a violation of 15 USC S 1. On the other hand, a price- fixing conspiracy does not necessarily involve an express agreement, oral or written. It is sufficient that a concert of action is contemplated and that the defendants conform to the arrangement. The fixing of prices by one member of a group pursuant to express delegation,acquiescence, or under standing is just as illegal as the fixing of prices by direct joint action. A price-fixing combination is illegal even though the prices are fixed only by one member and without consultation with the others. (emphasisd supplied) A mere offer of a lower price by itself does not manifest the requisite intent to gain monopoly and in the absence of a specific agreement by way of a concerted action suggesting conspiracy, the formation of a cartel among the producers who offered such lower price can not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itude of these three big manufacturers gave rise to a suspicion that they formed a cartel but there is not enough of material to conclude that in fact there was such formation of a cartel. However, such an opinion entertained by the concerned authorities including the Minister was not malicious nor was actuated by any extraneous considerations. They entertained a reasonable suspicion based on the record and other surrounding circumstances and only acted in a bonafide manner in taking the stand that the three big manufacturers formed a cartel. S/Shri Nariman, Venugopal and Shanti Bhushan, learned counsel appearing for M/s Mukand, H.D.C. and Bharatiya respectively. contended that the Railways were bound to follow the rules and standards pertaining to the tender system and on the basis of these provisions and the course of conduct followed by the Railways in the matter of fixation of price and allotment of quota in the past let the manufacturers believe that the same course of conduct would be followed and the manufacturers legitimately expected that they would be treated equally and in a non-arbitrary manner and such legitimate expectation is a right guaranteed under Article 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. A bonafide decision of the public authority reached in this manner would satisfy the requirement of non-arbitrariness and withstand judicial scrutiny. The doctrine of legitimate expectation gets assimilated in the rule of law and operates in. our legal system in this manner and to this extent. (emphasis supplied) In Navjoti coo-Group Housing Society etc. v. Union of India Others (1992) 2 SCALE 548,justice G.N. Ray speaking for the Bench observed as under: In the aforesaid facts, the Group Housing Societies were entitled to legitimate expectation of following consistent past practice in the matter of allotment, even though they may not have any legal right in private law to receive such treatment. The existence of legitimate expectation' may have a number of different consequences and one of such consequences is that the authority ought not to act to defeat the 'legitimate expectation without some overriding reason of public policy to justify its doing so. In a case of 'legitimate expectation' if the authority proposes to defeat a person's 'legitimate expectation' it should afford him an opportunity to make representations in the matter. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered quantity in more than one form, we find some guidelines in Annexure 50 which reads as under: 3.0. Where warranted, the tendered quantity may be split and tender decided in favour of one or more firms on merits of each case, in consultation with Associate Finance and with the approval of the authority competent to accept the tender having due regard to the following factors:- (i) Vital/Critical nature of the items; (ii)Quantity to be procured; (iii)Delivery requirements; (iv)Capacity of the firms in the zone of consideration; (v) Past performance of firms. xxxxxxx xxxxxxxx xxxxxxxxx 5.0 Splitting should not be done merely with a view to utilising developed capacity of the different sources but should be for valid reasons to be recorded in writing for splitting the tendered quantity. Annexure 213 contains the Railway Board letter dated 19.4.90 addressed to General Managers, All Indian Railways and others dealing with the subject of Non-acceptance of late/delayed/post/ Tender-offers. The relevant portion reads thus: 2. Instances have come to notice of the Board where on a strict application of the above instructions even late Tenders submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legally fixed procedure regarding fixation of price and particularly regarding allotment giving scope to a legitimate expectation. However, with this facture background, we shall consider the contention regarding 'legitimate expectation'. In Halsbury's Laws of England, Fourth Edition, Volume 1(1) 151 a passage explaining the scope of legitimate expectations runs thus: 81. Legitimate expectations. A person may have a legitimate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation, or from consistent past prac- tice. The existence of a legitimate expectation may have a number of different consequences'; it may give locus standi to seek leave to apply for `judicial review; it may mean that the authority ought not to act so as to defeat the expectation without some overriding reason of public policy to justify its doing so; or it may mean that, if the authority proposes to defeat a person's legitimate expectations, it must afford him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legitimately expect to be permitted to continue to enjoy either until he was given reasons for its withdrawal and the opportunity to comment on those reasons or because he had received an assurance that it would not be withdrawn before he had been given the opportunity of making representations against the withdrawal. The appellants legitimate expectation arising from the existence of a regular practice of consultation appellants could reasonably expect to continue gave rise to an implied limitation on the Minister's exercise of the power contained in Art. 4 of the 1982 order, namely an obligation to act fairly by consulting the GCHQ staff before withdrawing the benefit of trade union membership. xxxxxxxx xxxxxxx xxxxxxxx Once the Minister produced evidence that her decision not to consult the staff before withdrawing the right to trade union membership was taken for reasons, of national security, that overrode any right to judicial review which the appellants had arising out of the denial of their legitimate expectation of consultation. The appeal would therefore be dismissed. xxxxxxxx xxxxxxxx xxxxxxxx Administrative action is subject to control by judicial review ..... X X X X Extracts X X X X X X X X Extracts X X X X
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