Holding

ASIDC, as a statutory agency, is liable to pay the respondent the price of the supplies, the State is not a necessary party, and the 1993 Act applies only to post‑23 Sept 1992 transactions with interest at 23.5% compound, while pre‑Act transactions attract simple interest at 9% per annum.

Summary

The Assam Small Scale Industries Development Corporation (ASIDC) placed orders for medicines with J.D. Pharmaceuticals under the Assam Preferential Stores Purchase Act, 1989, but failed to pay the price despite receiving the goods. J.D. sued for the outstanding amount and interest under the Interest on Delayed Payment Act, 1993. The Supreme Court held that ASIDC, as a statutory agency, was liable to pay the respondent the price (including the 90% advance) and that the State of Assam was not a necessary party to the suit. It further ruled that the 1993 Act could not be applied to transactions occurring before its commencement on 23 September 1992, directing simple interest at 9% for those periods, while compound interest at 23.5% applied to post‑Act transactions. The trial and High Court judgments directing a uniform 23% interest were set aside, and the appeal was partly allowed.

Issues considered

The State of Assam's status as a necessary party to the suit
The nature of the relationship between ASIDC and the respondent – agent or purchaser – and ASIDC's liability for payment
Whether the Interest on Delayed Payment Act, 1993 applies to transactions entered into before its commencement
The appropriate rate and type of interest for pre‑1993 and post‑1993 transactions
Interpretation of the 1989 Act, its scheme and the parties' contractual obligations

Legislation cited

Code of Civil Procedures. 34

Subjects

small scale industrypreferential purchasestatutory agencynecessary partyinterest on delayed paymentAssam Preferential Stores Purchase ActInterest on Delayed Payment Act 1993contract interpretationstatutory duty

Judgment

A ASSAM SMALL SCALE IND. DEV. CORPN. LTD. AND ORS.
V.

MIS J.D. PHARMACEUTICALS AND ANR.

OCTOBER 7, 2005

B [S.B. SINHA AND R.V. RA VEENDRAN, JJ.]

Assam Preferential Stores Purchase Act 1989, sections 2, 3,7 and 8-
lnterest on Delayed Payment of Small Scale and Ancillary Industrial
C Undertakings Act 1993, sections 2,3,4 and 5.

Small Scale Industries-Preferential stores purchase by Government-
Failure to pay the price-Respondent a small scale industry-Appel/ant, a
State Corporation making purchases from the respondent as the agent of the
State departments in terms of 1989 Act-Corporation failing to make payment
D for the purchases made during 1991-1993-Trial Court decreeing the
respondent's suit for purchase price with interest under 1993 Ac/-
Corporation's plea that only purchasing departments of State liable to pay the
price of the supplies-Held, Corporation had to take 90% of the cost price as
advance from the purchasing departments as per the Scheme and owed a duty
to release that to the respondent on supply-Rest of 10% to be paid on
E receiving payment from purchasing departments.

Small Scale Industry-Preferential purchase-Interest on price money-
Appellant corporation making purchases from the respondent as agent of the
state departments in terms of 1989 Act-Failure to make payment for purchases
made during June 1991- June 1993-Total price of medicine supplied Rs.
F 20,56,654 out of which only a sum of Rs. 46,512.80 paid-Respondent's claim
for balance with interest under 1993 Act decreed by Trial Court-High Court
dismissing appeal-Held, interest as per the 1993 Act could not be paid to the
transactions made prior to coming into force of the said Act-Trial Court and
High Court therefore manifestly erred in directing payment of interest at the
G rate of 23%.
Necessary Party-Appellant corporation placing order for making
purchases from the respondent for various state departments-Corporation
failing to make payment for the purchases-Respondent filing suit claiming ·
purchase money against Corporation-Corporation plea that state departments
II 232
ASSAM SMALL SCALE IND. DEV. CORPN. LTD.''· J.D. PHARMACEUTICALS 23 J

being the buyers and beneficiaries of the supply, State is a Necessary party- A
Held, as there was no privity of contract between State and respondent, state
not a necessary party.

To patronize the products of small scale and cottage industries on
preferential basis and to rationalize the procedure for purchase of stores
required by the State Government companies and State Government B
undertakings, the Assam Preferential Stores Purchase Act 1989 was
enacted. The State also issued guidelines which were to be strictly adhered
to by the state authorities. Said guidelines required that purchasing
authorities shall pay advance to the extent of 90% of the value of the order
placed with the corporation and pay to the corporation up to 5% as C
commission over the price fixed by the corporation. The marketing
assistance scheme appended as Annexure- A to the guidelines provided
for quality control, pricing, registration of units as also indenting by the
Corporation. Parliament enacted Interest on Delayed Payment to Small
Scale and ancillary Industrial Undertaking Act 1993 which come into force
on 23.09.1992. D
Respondent was a SSI unit registered with the Corporation and
fulfilled all the criteria laid down in the 1989 Act and the Scheme framed
there under. Corporation placed orders for supply of medicines
manufactured by Respondent for the period June 1991 to June 1993. Total
~ ' . price of medicines supplied by respondent in pursuance of supply orders E
of the corporation were Rs. 20,56,654 out of which only a sum of Rs.
46,112.80 was paid to Respondent. Respondent filed a suit claiming the
amount together with the interest payable there on in terms of the 1993
Act. Corporation, inter alia pleaded nonjoi_nder of purchasing authorities
as necessary party. Trial Court passed a decree in favour of respondent p
for Rs.20,10,141.33 with interest @ 23%. Appeal preferred by the
corporation to the High Court was dismissed. Hence the present appeal.
Partly allowing the appeal, the Court

HELD: 1.1. The 1989 Act indisputably is a beneficient legislation.
There was a purpose behind enacting it. It was primarily enacted so as to G
enable the State to effectively perform a sovereign function namely health
care. The Marketing Assistance Scheme being appended to the provisions
of the Act and marked as Annexure -A there to forms a part of the Act.
The scheme envisages pervasive control over the manufactures including
: quality control of the production. Guidelines which were to be strictly H
234 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A adhered to by the authorities had also been issued by the State. Such
guidelines having fulfilled the requirements of Article 166 of the
Constitution of India were required to be the Corporation. (245-C, DJ

1.2. The order for supply of stores, the provisions of the agreement
and the terms and conditions of supply, therefore, can not be read in
B isolatton. They must be read in conjunction with the provisions of the Act,
the scheme and the guidelines issued there under. The provjsions in the
scheme relating to indenting envisages that the purchasing authorities will
issue indent to the Corporation for the required products with 90%
advance where upon the Corporation would immediately allot the work
C to the most suitable unit or units to complete supply with in the stipulated
time. In the event, such supplies are not made with in the specified time,
the supplier would be subjected to penalty. In view of the fact that the
purchasing authority will have to send advance of 90%, the Corporation
owes a duty to release payment up to 90% on completion of supply. If the
Corporation had not taken the advance in terms of the provisions of the
.D scheme, it acted at its own peril. The scheme, guidelines, the agree1J1ent
as also the terms and conditions for supply of stores, if read as a whole,
the only meaning which can be attributed thereto would be in relation to
the 10% of the amount which the Corporation was to realize from the ·
purchasing authorities upon submission of bill by the manufacturer. The
E said term has nothing to do with payment of 90% advance in accordance
with the provision of the Scheme. (245-E, F; 246-A, BJ ..
;'I::

2. The Corporation was created for the purpose of giving effect .to
the provisions of the Act and the scheme framed there under. It is a
:Statutory body and is a 'State' with in the meaning of article 12 of the
p constitution of India. The contract by and between the parties being a
statutory one, the Corporation was required to act fairly and reasonably.
The principal purpose of the A<:t was to give encouragement to the growth
of industries in the State of Assam and patronizing the products of small
scale and cottage industries on preferential basis. The 1989 Act
contemplates acts which would be for the betterment of the SSI Units and
G not acts which would be detrimental to their interest. The terms used in
the agreement must, therefore, be understood in that perspective. The
expressions principal and agent used in a document are not decisive. The
nature of transaction is required to be determined on the basis of the
substance there and not by the nomenclature used. In certain
H circumstances, even an agent can become a purchaser where an agent pays
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. v. J.D. PHARMACEUTICALS 235
to the principal on its own responsibility. (246-E, F, G; 248-81 A
Chairman Life Insurance Corporation v. Rajiv Kymar, AIR (2005) SC
3636; Bhopal Sugar Industries Ltd. v. Sales Tax Officer, Bhopal, (19771 3
SCC 1947; Shri Tirumala Venkateswara Timber and Bamboo Firm v.
Commercial Tax Officer, Rajahmundry, (19681 2 SCR 476 and Gordan
Woodroffe and Co. Madras Ltd. v. Shaik MA.Majid and Co., AIR 1967 SC B
181, referred to.

3.1. The 1989 Act makes a statutory provision beyond the concept
of the agency as contained in the Contract Act. It is a special Statute. In
terms thereof the respondent was not required to pay any commission to C
the corporation, though the corporation was described as agent of the
respondent uuder the agreement. 5% commission was to be paid to the
corporation by the purchasing authorities. The status o( the parties must
not be determined as to how they have described themselves, but having
regard to the substance of the transaction as envisaged under the Act and
the Scheme framed. (248-D, EJ D
3.2. As a statutory agency .came in.to being by and between the
purchasing authorities and the corporation in terms whereof the
corporation not only exercise the control in relation to the entire supply
of materials, as a part of the statutory scheme, it also undertook to collect
the price of the goods supplied from the purchasing authorities and pay E
the same to the manufacturers subject to the payment of its commission
which would be a substantial amount. It was obligated having regard to
the statutory scheme on the part of the corporation to realize the price
for the consideration of the goods supplied. It was not constituted merely
to act as a conduit pipe. If was bound to perform its statutory duties F
envisaged under the 1989 Act. [248-G, H; 249-A)

4. In terms of .the agreement between the parties thereto the State
of Assam would not be a necessary party but merely be a proper party.
(249-EI
G
Balvant N. Viswamiira v. Yadav Sadashiv Mule, (2004] 8 SCC 706;
referred to.

5. The 1993 Act will have no application in relation to the
transactions entered into between June 1991 and 23.09.1992. The Trial
Court as also the High Court, therefore, committed a manifest error in H
236 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A directing payment of interest @ 23% upto June 1991 and 23.5%
thereafter. (251-H(

Assam State Electricity Board v. Shanti Conductors Pvt. Ltd., (2002) 1
GLT 547, distinguished.

B CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6324 of2005.

From the Judgment and Order dated 19.1.2005 of the Gauhati High
Court at Assam in F.A. No. 79 of 1998.

R.F. Nariman, Arunabh Chowdhury, Parthiv Goswami, Pragya Singh
Baghel and Mrs. Manik Karanjawala for the Appellants.
c
Pravir Choudhary, S.P. Roy and Ms. Babita Sani for, the Respondents.

The Judgment of the Court was delivered by

S.B. SINHA, J. Leave granted.

D The Legislature of State of Assam and the Parliament took legislative
measures to allay the difficulties faced by the small scale industries .. The
State of Assam made rules known as The Assam Preferential Stores Purchase
Rules in the year 1972. The said rules having not served its purpose, the
Assam Preferential Stores Purchase Act, 1989 (for short "the 1989 Act") was
E enacted which received the assent of the Governor on 14th July, 1989. The
said Act was enacted for encouraging growth of industries in the State of
Assam specially small scale and cottage industries and for taking measures
ancillary thereto. The State intended to patronize the products of the small
scale and cottage industries on preferential basis and to rationalize the
procedure for purchase of stores required by the State Government Institutions,
F Government companies and State Government undertakings, as would appear
from the preamble thereof.

Section 2( d) of the 1989 Act defines "State Board" to mean the Assam
State Stores Purchase Board constituted under Section 3 of the 1989 Act.
"Small Scale Industry" has been defined in Section 2(f) to mean 'an industrial
G unit in which the capital investment for plant and machinery does not exceed
thirty five lakhs of rupees or any other amount as may be decided by the
Central Government from time to time and located in the State of Assam'.
"Registered Industry" has been defined in Section 2(1) to mean an industrial
unit registered under the Directorate of Industries in accordance with provisions
H thereof. "Requiring Authority" has been defined in Section 2(r) to mean the
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. 1•. J.D. PHARMACEUTICALS [SINHA, J.] 23 7

State Governments Departments and their subordinate authorities, State A
Government Undertaking/ Corporation/ Statutory Bodies/Autonomous Bodies.
Section 2(s) defines "ASIDC" to mean the Assam Small Industries
Development Corporation Limited (for short "the Corporation", the Appellant
herein).

Section 3 of the 1989 Act provides for constitution of the State Store B
Purchase Board on such term as may be specified in Schedule- I. Preference
to the small scale industries is provided in Section 7. Clause (c) of sub-
section (I) of Section 7 reads as under:

"(c) Items of stores mentioned in Schedule III shall be purchased by
requiring authorities from ASIDC. ASIDC shall follow the guideline C
regarding fixation of price, commission, etc. as laid down in office
memorandum issued by Notification No. PE-61/88/1, dated 28th
March, 1988 as in Schedule IV."

The Purchase Committee is required to be constituted in terms of D
Section 8 of the 1989 Act consisting of the Head of Department, Director of
Industries, a representative of the Department not below the rank of Under
Secretary, Financial Adviser of the Department and Finance and Accounts
Officer of the concerned Directorate.

Section 9 postulates that the Purchase Committee shall include two E
representatives from the State Government, one of which shall be the Director
of Industries or his representative not below the rank of Deputy Director and
the other representative of the Finance Department in respect of each
Government Corporation, Government Undertaking, Assam Electricity Board.

Jn the State Board, amongst others, the Managing Director of the F
Appellant Corporation is a member. Schedule-lll provides for the preferences
to be given as required under Section 7( c ). Item 4 of the said Schedule is
'drugs and pharmaceuticals and clinical equipments'.

An office memorandum dated 28th March, 1988 referred to in Section
7(l)(c) of the 1989 Act is based on a cabinet decision and issued in the name G
of the Governor of Assam laid down guidelines for strict adherence thereof
by all government departments, their subordinate authorities, governments
organizations and public sector undertakings while making their purchases of
any SSI products which are dealt in or manufactured by the Corporation. The
said office memorandum satisfies the requirements of Article 166 of the H
238 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A Constitution of India and has been made a part of the 1989 Act. In terms of
the said guidelines, the Corporation is required to publish a list of items/
materials/products to be dealt in or manufactured by it as detailed in Annexure-
1 thereof. The price of such SS! products is to be fixed by any Technical
Committee constituted by the Corporation with members from neutral
B organization and concerned departments. As per the said OM, purchasing
authorities shall pay to the Corporation upto 5% as commission over the
price fixed by the Corporation. The purchasing authorities shall pay advance
to the extent of 90% of the value of the orders placed with the Corporation.
Annexure-A to the said guidelines is the marketing assistance scheme wherein
'drugs and pharmaceuticals and clinical equipments' had been identified as
C one of the items, supply of which to the Government departments is to be
taken over by the Corporation. The said scheme provides for quality control,
pricing, registration of units as also indenting by the Corporation. The clause
relating to indenting of the goods reads as under:

"The purchasing authorities will issue indent to the Corporation for
D the required products with 90% advance. The Corporation will
immediately allot the work to the most suitable unit or units to complete
supply within stipulated time. If the supply could not be completed
in due to time by the Corporation, the purchasing authorities will
deduct l V, p.m. from bills.

E The stores will be dispatched by the units only after they are
given dispatch instruction by the ASIDC. Normally the dispatch will
have to commence within the third day from the date of dispatch
instruction, failing which the unit may be penalized the extent of
bank interest on the amount. The stores will be received by the
purchasing authority and the ac'ceptance or rejection notes will be
F
issued on the challans.

The Corporation will release payment upto 90% of the bills to
the units on completion of supply. Any advance or advances will be
deducted fully. The remaining 10% will be released on receipt of full
G payment of the bills from the purchasing authority."

Only ifthe Corporation is unable to supply some items and such inability
is communicated to it in writing, the purchasing authority can purchase them
from alternative sources.

H It is not in dispute that the plaintiff is a SS! unit registered with the
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. v. J.D. PHARMACEUTICALS [SINHA, J.] 239

Corporation and fulfills all the criteria laid down in the 1989 Act and the A
Scheme framed thereunder. It entered into an agreement with the Corporation
on or about 19th October, 1990 wherein the plaintiff (Respondent herein)
was termed as a principal and the Corporation as an agent. The said agreement
was entered into in terms of the marketing support scheme formulated by the
Corporation under the 1989 Act. Para 3 of the preamble and Clauses l, 4, 6, B
7 and 8 of the said agreement read as under:

"And whereas the Corporation has agreed to act as an Agent to market
the goods manufactured by the Principal as specified in the schedule
appended to this agreement, under the marketing support scheme
formulated by the Corporation under the AP SP Act, 1989. The C
principal hereby covenants with the Corporation as hereinafter
provided :

"I. The Principal shall quote lowest rates in respect of "Scheduled
Goods" to the Corporation and shall not quote to any party mentioned
above directly or indirectly, rate lower than those quoted to the D
Corporation in respect of the goods for which competitive rates are
being quoted by them. The rates so quoted to the Corporation by the
Principal shall be valid for a period of one year from the date of
submission of the quotation.

4. The Principal shall, when advised to do so, supply the goods E
wherever required within the stipulated time at his cost. In event of
failure to comply with aforesaid clause, if any penalty is imposed by
the actual buyer of the goods in the event of the Principal failing to
comply the above provision of conditions, or if any losses are otherwise
incurred, the said penalty or loss is to be borne by the Principal by
reimbursing the said amount to the Corporation within 15 days from F
the date of demand. The Principal shall also be responsible for losses
by way of breakages, theft or pilferage etc. during the transit of
goods.

6. The Principal authorizes the Corporation to raise j>itt( ;[sale on
their behalf, disclosing or without disclosing th9£e of the principal, G
and to collect payment thereon from the buyer(s). On collection of
payment from the buyer(s). Payment to the principal will be effected
by the Corporation deduction the service charges. Penalty due to
delayed supplies, or other dues/advance, if any. The Corporation may
release 90% value of the materials on delivery and acceptance of the H
240 SUPREME COURT REPORTS (2005) SUPP. 4 S.C.R.

A material by the buyer after deduction of dues/advance payment if any · ·
subject to receipt of payment from buyer(s). The balance 10% less
penalty due to the delayed supplies etc. or any other dues will be paid
to the Principal on receipt of full payment from the Purchasing
Department.

B 7. The Principal hereby agrees to the terms and condition in the
Marketing Support Scheme of the Corporation as amended from time
to time and agrees to comply with general specific instructions as
might be issued by the Corporation regarding the Marketing of
"Scheduled goods".

C 8. That in case of any shortage, leakage, damage, breakage, late
supplies, late submission of R/R/Motor Transport Receipt, delivery
challans, inadequate packing etc. or any losses in transit for whatever
circumstance or reasons, it shall be on the accoun\ of the principal
and the amount thus involved, shall be deducted from his bills."

D A specimen copy of the orders placed by the Corporation on the
Rt!ipondent from time to time is extracted below :

"DATED 16.6.1992

To
E
Mis. J.D. Pharmaceuticals Limited
M.C. Road
Guwahati-3
SUB: ORDER FOR SUPPLY OF STORES:

F Dear Sir,

With reference to above, we have the pleasure to order with you for
supply of the under noted articles to the Sub Divisional Medical and
Health Officer, I/C. D.M.S. Dibrugarh, as per terms and conditions
shown over overlead.
G
S.No. Name of Item Quantity Price
I. Tab Trimetoprim 80 mg 75,000 Rs. 559.35
.'
with sulphamethoxagole thousand tab
400 mg.
1 H Delivery period: within 30.6.1992"
ASSAM SMALL SCALE IND. DEV. CORPN. LID. r. JD. PHARMACEUTICALS [SINHA,J] 24 J

Some of the tenns and conditions attached to the supply orders are as A
under:

"4. The Stores must be supplied through your challan issued in favour
of indenting department and should be properly a/c Assam Small
Industries Development Corporation Limited, marketing Division and
will be submitted to this office after duly receipted by the department B
and stamped.

5. The above prices are inclusive of packing/ forwarding/ transportation
charge, but exclusive of 5% commission and tax as admissible.

8. After execution of the order your bill should be submitted for C
payment. Payment will be made subject to receipt of the fund from
the indenting department. No interest/ compensation can be claimed
for delay in payment.

I 0. Tenns and conditions other than the above, will be as per the
deed of agreement executed by you, read with other tenders/ D
quotations."

The Parliament also enacted 'Interest on Delayed payments to Small
Scale and Ancillary Industrial Undertakings Act, 1993' (for short "the 1993
Act") being Act No. 32 of 1993 which came into force with effect from 23rd
September, 1992. "Appointed day" has been defined in Section 2(b) to mean E
the day following immediately after the expiry of the period of thirty days
from the day of acceptance or the day of deemed acceptance of any goods
or any services by a buyer from a supplier. Section 3 provides for the liability
of buyer to make payment. Sections 4 and 5 thereof read as under:

"4. Date from which and rate at which interest is payable.-Where F
any buyer fails to make payment of the amount to the supplier, as
required under section 3, the buyer shall, notwithstanding anything
contained in any agreement between the buyer and the supplier or in
any law for the/ time being in force, be liable to pay interest to the
supplier on that amount from the appointed day or, as the case may G
be, from the date immediately following the date agreed upon, at
such rate which is five per cent points above the floor rate for
comparable lending.

5. Liability of buyer to pay compound interest-Notwithstanding
anything contained in any agreement between a supplier and a buyer H
242 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A . or in any law for the lime being in force, the buyer shall be liable to
pay compound interest (with monthly rests) at the rate mentioned in
section 4 on the amount due to the supplier."

It is not in dispute that pursuant to the said agreement, the Corporation
placed orders for supply of medicines manufactured by the Respondent herein
B for the period June, 1991 to June, I993. The total price of the medicines
supplied by the Respondent in pursuance of the supply orders of the
Corporation stood at Rs. 20,56,654.13 out of which only a sum of Rs.
46,512.80 was paid to the Respondent.

It stands admitted that the payments have not been made in relation to
C the. supplies made for the said indents. A suit was filed by the Respondent
herein on 7.9.1993 claiming the aforementioned amount (Rs.20,56,654.13)
together with the interest payable thereon in terms of the 1993 Act (Rs.675,881/
45). In the said suit, the Corporation in its written statement inter a/ia raised
the following plea:
D "4. That the suit is bad for non-joinder of necessary party and on the
score alone the suit is liable to be dismissed.

I 0. That with regard the statements made in Para 16 to 46 of the
plaint, the defendants do not admit anything contrary to the relevant
records of the case. The defendants submit that the supply order
E
placed by the defendants does not relate to a single transaction and
as such, the plaintiffs cannot claim for recovery of its dues, if any,
in one suit. The defendants have placed orders with the plaintiff firm
as per the APSP Act, 1989 and as per the indent of the Govt.
department. It was agreed in the terms and conditions of the order
F that the payment of the bills would be released to the plaintiffs on
receipt of payment by the defendants from the concerned Government
Department. This condition of payment has also been agreed to by
the plaintiff and as per the terms and conditions of the agreement
executed by the parties. The defendants submit that it has not received
payment agairist the value of the medicines supplied by the plaintiff
G to the Government department and as such, the bill amount could not
be released due to the aforesaid factor. The Drug Association, Assam
where the plaintiff firm is also a Member, has informed the defendants
by letter that the finn registered under them, are agreeable to accept
orders without 90 percent advance payment at the time of placement
H of the order and accordingly orders were placed and as per the terms
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. v. JD. PHARMACEUTICALS [SINHA,!.] 243

and conditions of the agreement, the defendants were to release A
payment on receipt of the same from the concerned Government
department. As stated earlier since the defendants has not received
any payment from the Government Department against the value of
the medicines supplied by the plaintiff firm, the required payment
could not be released to the plaintiff finn."
B
The Trial Judge by a judgment dated 1st August, 1998 passed a decree
in favour of the Respondent herein in the following tenns:

"Jn the light of the above discussion and the decisions made therein,
the plaintiffs suit is decreed for Rs. 2010141.33 on contest with cost.
The plaintiffs shall be entitled to realize compound interest @ 23% C
with monthly rest in respect of the concerned bill amounts till the
month of June, 1991 and at the rate of Rs. 23.5% with monthly rest
w.e.f. 1.7 .1991 till filing of the suit. The plaintiff shall be entitled to
realize compound interest at the rate of Rs. 23.5% at monthly rest on
the decretal amount from the date of filing the suit till the date of the D
decree and further interest at the said rate from the date of decree till
realization."

An appeal preferred thereagainst, by the Corporation before the High
Court was dismissed. The Corporation is, thus, in appeal before us.
E
Mr. R.F. Nariman, learned senior counsel appearing on behalf of the
Corporation would raise the following contentions in support of the said
appeal:

(i) Having regard to the terms and conditions of supply, the
Corporation was to pay unto the Respondent the price for the F
goods supplied only as and when the same was received from
the respective departments of the State Government. The
Corporation is an agent of the Respondent and not the buyer of
the goods; and as per clause 6 of the agreement until payments
are received from the buyers (Departments of the State), no
liability could have been fastened upon the Corporation to pay G
the said amount. Clause 8 of the terms and conditions of the
orders for supply also make it clear that payment will be made
subject only to receipt of funds from the indenting department.
(ii) The different departments of the State and other government
corporations and undertakings being the buyers and the H
244 SUPREME COURT REPORTS (2005] SUPP. 4 S.C.R.

. -A beneficiaries of the supplies only, they were liable to pay the
'price of the goods supplied over which the Corporation had no
control and in that view of the matter the State of Assam was a
necessary party. In any event, the recipient of goods, namely, the
buyer being disclosed principal of the Corporation, the Respondent
as a principal of the Corporation could maintain a suit as against
B the actual buyer only.
(iii) Th_e provisions of the 1993 Act for payment of interest, are not
applicable in view of the fact that the same applies only to a
buyer of any goods or recipient of a service from a supplier for
a consideration. Further clause 8 of the terms and conditions of
c the orders for supply provide that no interest can be claimed for
delay in payment
(iv) In the entire plaint, the Respondent has admitted that it is bound
by the terms and conditions of supply and in particular clause 8 •
therof and, thus, it does not lie in its inouth now to contend, as
D has been done in the counter-affidavit filed before this Court,
that the said clause is illegal and of no effect being opposed to
public policy.

Mr. J>r!ivir Choudhary, learned counsel appearing on behalf of the ,
Respondent, on the other hand, would submit that both the 1989 Act and the
E 1993 Act are beneficial legislations. The 1989 Act having been enacted by
the State of Assam for granting certain reliefs to the SS! units as a part of
its industrial policy, the terms ~d conditions of the agreement as also the
conditions of supply shall be subservient thereto and, thus, to the extent the
- same .is inconsistent with the Scheme, the later will prevail. In view of the
F provisions contained in the 1989 Act and the scheme, it will appear that the
Corporation exercises a total control - from quality to pricing to indenting
and, thus, the expressions used in the agreement as principal and agent will
have no bearing. An agent as is commonly understood cannot have a control
over the principal. As its agreement was with the Corporation, and the orders
were all placed by the Corporation and as it had no privily with the departments
G of the State who received delivery of the goods, the Corporation is liable to
pay the price with interest.

In view of the fact that the Respondent had no privily of contract with
different departments of the government, they were not necessary parties.
H Reliance in this behalf has been placed on Balvant N. Viswamitra and Ors.
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. r. J.D. PHARMACEUTICALS [SINHA. J.I 245

v. Yadav Sadashiv Mule (Dead) Through LRS. And Ors (2004] 8 SCC 706. A
In view of the statute and the scheme as also the guidelines issued, the
question of the Respondent waiving its right thereunder does not arise. The
1993 Act, it was submitted, being also a beneficient statute, the same should
be construed liberally. The Act, Mr. Choudhary would argue, will thus, have
a retrospective effect.
B
THE EFFECT OF THE 1989 ACT

The 1989 Act indisputably is a beneficient legislation. There was a
purpose behind enacting it. It was primarily enacted so as to enable the State
to effectively perform a sovereign function namely health care. The Marketing C
Assistance Scheme being appended to the provisions of the Act and marked
as Annexure-A thereto forms a part of the Act. The scheme envisages
pervasive control over the manufacturers including quality control of the
production. Guidelines which were to be strictly adhered to by the authorities,
as no.ticed hereinbefore, had also been issued by the State. Such guidelines
having fulfilled the requirements of Article 166 of the Constitution of India D
were required to be followed by the Corporation.

The order for supply of stores, the provisions of the agreement and the
terms and conditions of supply, therefore, cannot be read in isolation. They
must be read in conjunction with the provisions of the Act, the scheme and
the guidelines issued thereunder. The provision in the scheme relating to E
indenting envisages that the purchasing authorities will issue indent to the
Corporation for the required products with 90% advance whereupon the
Corporation would immediately allot the work to the most suitable unit or
units to complete supply within the stipulated time. In the event, such supplies
are not made within the specified time, the supplier would be subjected to F
penalty. In view of the fact that the supplying authority will have to send
advance of 90%, the Corporation owes a duty to release payment upto 90%
on completion of supply. If the Corporation had not taken the advance in
terms of the provisions of the scheme, it acted at its own peri I.

It is not disputed that the Respondent did not commit any breach or G
any irregularity in regard to the supplies. Once the supply of the goods was
completed, having regard to the clause aforementioned, the Corporation was
bound to release the payment upto 90% in view of the fact that the purchasing
authorities were also obligated to issue indent to the Corporation with 90%
advance. If such advance had not been given, the Corporation in terms of the
scheme should not have issued the indent. It may be true that the terms and H
246 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A conditions appended with each order of supply stipulate that payment would
be made subject to receipt of the fund from the indenting department. But,
the scheme, guidelines, the agreement as also the terms and conditions for
supply of stores, ifread a5 a whole, the only meaning which can be attributed
thereto would be in relation to the I0% of the amount which the Corporation
B was to realize from the purchasing authorities upon submission of bill by the
manufacturer. The said term has nothing to do with payment of 90% advance
in accordance with the provision of the Scheme.

Clause 8 of the terms and conditions of order of supply refers to a stage
when after execution of the order a bill is submitted and payment thereof,
C i.e., 10% of the balance amount only would be subject to the receipt of the
fund from the indenting department.

So read, Clause 8 may not be held to be opposed to public policy but
it cannot be read in isolation. It cannot be read in such a manner so as to
destroy or defeat the very purpose for which the Act or the Scheme was
D enacted. It cannot be read as laying down a term which would run contrary
to the guidelines.

The expressions 'principal' and 'agent' used in a document are not
decisive. The nature of transaction is required to be determined on the basis
of the substance there and not by the nomenclature used. Documents are to
E be construed having regard to the contexts thereofwherefor 'labels' may not
be of much relevance. The 1989 Act, the scheme and the guidelines postulate
constitution of a State Board for the purpose of monitoring supplies to various
departments of the State, the government corporations and the companies.
The Managing Director of the Corporation is a member of the board in terms
F of the provisions of the 1989 Act. The Corporation was created for the
purpose of giving effect to the provisions of the Act and the scheme framed
thereunder. It is a statutory body and is a 'State' within the meaning of
Article I2 of the Constitution of India. The contract by and between the
parties being a statutory one, the Corporation was required to act fairly and
reasonably. The principal purpose of the Act was to give encouragement to
G the growth of industries in the State of Assam and patronizing the products
of small scale and cottage industries on preferential basis. The 1989 Act
contemplates acts which would be for the betterment of the SSI units and not
acts which would be detrimental to their interest. The terms used in the
agreement must, therefore, be understood in that perspective.

H In Chairman, Life Insurance Corporation and Ors v. Raj iv· Kumar
ASSAM SMALL SCALE fND. DEV. CORPN. LTD."· J.D. PHARMACEUTICALS (SINHA_ J.] 24 7
::
, J}hasker, (2005) AIR SCW 3636, a bench of this Court opined: A
"39. Agency as is well-settled, is a legal concept which is employed
by the Court when it becomes necessary to explain and resolve the
problems created by certain fact situation. In other words, when the
existence of an agency relationship would help to decide an individual
problem, and the facts permits a court to conclude that such a B
relationship existed at a material time, then whether or not any express
or implied consent to the creation of an agency may have been given
by one party to another, the court is entitled to conclude that such
relationship was in existence at the time, and for the purpose in
question. [See "Establishing Agency" by GHL Fridman -· 1968 (84) C
Law Quarterly Review 224 at p 231 ]."

It is no longer in doubt or dispute that while interpreting the terms of
agreement, it is necessary to look to the substance of the matter rather than
its form. Use of a terminology may not be sufficient to lead to a conclusion
that the parties to the contract in fact intended that the said status would be D
conferred.

In The Bhopal Sugar Industries Ltd v. Sales Tax Officer, Bhopal. [1977]
3 SCC 14 7], a 3-Judge Bench of this Court referred to the dicta laid down
by this Court in Sri Tirumala Venkateswara Timber and Bamboo Firm v.
Commercial Tax Officer, Rajahmundry, (1968] 2 SCR 476 wherein the law E
has been laid down in the following terms:

"As a matter of law there is a distinction between a contract of sale
and a contract of agency by which the agent is authorised to sell or
buy on behalf of the principal. The essence of a contract of sale is the
transfer of title to the goods for a price paid or promised to be paid.
The transferee in such a case is liable to the transferor as a debtor for
the price to be paid and not as agent for the proceeds of the sale. The
essence of agency to sell is the delivery of the goods to a person who
is to sell them, not as his own property but as the property of the
principal who continues to be the owner of the goods and will therefore G
be liable to account for the sale proceeds."

It was opined:

"It is clear from the observations made by this Court that the true
relationship of the parties in such a case has to be gathered from the H
248 SUPREME COURT REPORTS (2005] SUPP. 4 S.C.R.

A nature of the contract, its terms and conditions, and the terminology
vsed by the parties is not decisive of the said relationship. This Court
relied on a decision in WT. lamb and Sons v. Goring Brick Company
ltd where despite the fact that the buyer was designated as sole
selling agent, the Court held that it was a contract of sale."

B In certain circumstances, even an agent can become a purchaser where
an agent pays to the principal on its own responsibility. [See Gordon Woodrojfe
and Co. (Madras) ltd. v. Shaik MA. Majid and Co., AIR (1967) SC 181]

Law contemplates different types of agency. Under the Contract Act,
the concept of de! credere agent is well-known. A de! credere agent assumes
C responsibility for the solvency and performance of their contract by the vendees
and, thus, indemnifies his employer against loss. He gives an additional security
to the seller. [See Bowstead & Reynolds on Agency, 17th Edition, para 1-
038]. However, it is not necessary to dilate thereupon as the status of the
parties herein must be determined in terms of the provisons of the 1989 Act.
D
The 1989 Act makes a statutory provision beyond the concept of agency
as contained in the Contract Act. It is a special statute. In terms thereof the
Respondent was not required to pay any commission to the Corporation,
though the Corporation was described as 'agent' of the Respondent under the
agreement. 5% commission was to be paid to the Corporation by the purchasing
E authorities.· The provisions of the 1989 Act, thus, should be given full effect.
The status of the parties must not, thus, be determined as to how they have
described themselves but having regard to the substance of the transaction as
envisaged under the Act and the scheme framed, which as noticed hereinbefore,
is as a part of the Act.

F As a statutory agency came into being by and between the purchasing
authorities and the Corporation in terms whereof the Corporation not only
exercised the control in relation to the entire supply of materials, as a part of
the statutory scheme, it also undertook to collect the price of the goods
supplied from the purchasing authorities and pay the same to the manufacturers
G subject, of course, to the payment of its commission which would be a
substantial amount. Under the scheme, the purchasing authorities had a duty
to pay 90% of the price before the Corporation makes an indent and, thus,
the latter had a statutory duty to realize the same before an indent is made,
as also the remaining I0% when supplies are completed. If the payment was
to be made by the Corporation to the Respondent both under the contract as
H also in terms of the statutory provision, it cannot now tum round and contend
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. v. J.D. PHARMACEUTICALS [SINHA,J.l 249

that it was not part of its duty and leave the matter at that. It was obligated A
having regard to the statutory scheme on the part of the Corporation to
realize the price for the consideration of the goods supplied. It was not
constituted merely to act as a conduit pipe. It was bound to perform its
statutory duties envisaged under the l 989 Act.

Furthermore, it is one thing to say that the Respondent delivered goods B
without receiving 90% of the indented amount but it is another thing to say
that it has waived its right. No case of waiver of statutory duty has been made
out. Nothing has been pointed before us that the Respondent gave up its
claim to receive the amount directly from the Corporation. Its conduct suggests
contra. The Respondent for a period of about two years made those supplies C
and had been asking the Corporation to make its payment and, as noticed
hereinbefore, the Respondent filed a suit at the earliest possible opportunity.
Even during last 12 years, the Corporation made no effort to realize the
amount from the State and pay the same to a small scale industry for whose
benefit the 1989 Act was enacted. It had shown utter despondency and behaved
in a cavalier manner taking umbrage under specious plea that the State was D
a necessary party. There was no privity of contract between the Corporation
and the purchasing authorities. All payment of the purchasing authorities
were to be channelised through the Corporation. Having regard to the
transactions between the parties as also the Scheme and the Act, we are of
the opinion that the State of Assam was not a necessary party.
E
In terms of the agreement between the parties hereto, the State of
Assam would not be a necessary party but merely be a proper party.

In Salvant N Viswamitra (supra) a distinction has been made between
a proper party and a necessary party in the following terms: F
"25. It was contended by learned counsel for the respondents that the
respondents were not made the party-defendants in the suit and hence
no decree could have been passed nor could be executed against
them. We are afraid we cannot uphold the contention. It is the case
of the plaintiffs that the property was let to Papamiya. It is not even G
the case of the respondents that they were the tenants of the plaintiffs.
They are claiming through Papamiya. At the most, therefore, they

•-
can be said to be sub-tenants i.e. tenants of Papamiya. There was no
privily of contract between the landlord and the respondents. In our
opinion, therefore, it was not necessary for the plaintiffs to join the
respondents as defendants in the suit nor to give notice to them before H
250 SUPREME COURT REPORTS [2005] SUPP. 4 S.C.R.

A initiation of the proceedings. The respondents cannot be said to be
''necessary party" to the proceedings.

26. As held by this Court in Udit Narain Singh Malpaharia v.
Addi. Member, Board of Revenue, Bihar 8 there is a distinction between
"necessary party" and "proper party". In that case, the Court said:
B (SCR p. 681)

"The law on the subject is well settled: it is enough if we state the
principle. A necessary party is one without whom no order can be
made effectively; a proper party is one in whose absence an effective
order can be made but whose presence is necessary for a complete
C and final decision on the question involved in the proceeding."
(emphasis supplied)"

We respectfully adopt the same.

The Corporation for all intent and purport having undertaken the liability
D of the purchasing authorities would also be liable for all consequences arising
from non-payment of the price of the goods supplied.

We may summarise the effect of the l 989 Act, the marketing support
scheme of the Corporation, the O.M. dated 28.3.1988 referred to in Section
?(!)(iii) of the 1989 Act, and the agreement between the Corporation and the
E respondent,. as follows :

(i) The Corporation had to collect 90% of the value of the orders
placed by the purchasing departments, in advance, and release
the said 90% to the respondent on supply. This obligation is a
statutory obligation having regard to the provisions of Section
F 7(1)(c) of the 1989 Act read with Clause 4 of the O.M. dated
28.3.1988 and the clause relating to 'indenting' contained in the
Marketing Assistance Scheme. This would mean that if the
Corporation accepts indents from Government departments
without 90% advance and chooses to place corresponding supply
G orders on the respondent, it (the Corporation) is liable to pay the
said 90% to the respondent on supply whether the Corporation
chose to receive payment from the indenting departments or not.
(ii) Though the respondent is described as the 'principal' and the
Corporation is described as the 'agent' in the agreement dated
H 19. I0.1990 between the respondent and the Corporation, the
ASSAM SMALL SCALE IND. DEV. CORPN. LTD. r. J.D. PHARMACEUTICALS [SINHA,!.] 25 J

Corporation was not entitled to receive any commission or A
remuneration or consideration from the respondent for the orders
procured/placed. It is entitled to receive the commission (at the
rate of 5% of the. price) only from the indenting departments.
The Corporation, thus, acted as the 'agent' of both the respondent-
supplier and the Indenting Government departments and took the
responsibility of paying the price to the respondent. In fact, under B
clause 6 of the agreement, the respondent specifically authorized
the Corporation to raise bills of sale on behalf of the respondent,
either disclosing or without disclosing the name of the respondent,
and collect the payment from the buyer department. The said
clause also specifically contemplates the Corporation releasing C
90% of the value of the material on delivery and acceptance, and
payment of balance of I 0% after receipt of full payment from
the purchasing department. As noticed above, the statutory scheme
and the O.M. required the Corporation to receive the 90% payment
in advance along with the indents from the purchasing departments
and any relaxation by the Corporation of that provision was done D
at its own risk.

APPLICABILITY OF THE 1993 ACT:

We have held hereinbefore that Clause 8 of the terms and conditions
relate to the payments of balance 10%. It is not in dispute that the plaintiff E
had demanded both the principal amount as also the interest from the
Corporation. Section 3 of the 1993 Act imposes a statutory liability upon the
buyer to make payment for the supplies of any goods either on or before the
agreed date or where there is no agreement before the appointed day. Only
when payments are not made in terms of Section 3, Section 4 would apply. F
The 1993 Act came into effect with effect from 23~9.1992 and will not apply
to transactions which took place prior to that date. We find that out of the 71
suit transactions, sl. Nos. I to 26 (referred to in penultimate para of the Trial
Court Judgment), that is supply orders between 5.6.1991to28.7.1992, were
prior to the date of 1993 Act coming into force. Only the transactions at sl.
no. 27 to 71 (that is supply orders between 22.10.1992 to 19.6.1993). will G
attract the provisions of the 1993 Act.

The 1993 Act, thus, will have no application in relation to the transactions
entered into between June, 1991 and 23.9.1992. The Trial Court as also the
High Court, therefore, committed a manifest error in directing payment of
interest at the rate of 23% upto June, 1991 and 23 .5% thereafter. H
252 SUPREME COURT REPORTS [2005) SUPP. 4 S.C.R.

A Mr. Choudhary has placed reliance upon a Full Bench decision of
Guwahati High Court in Assam State Electricity Board and Ors. v. Mis.
Shanti Conductors (P) Ltd. and Anr., (2002) I GLT 547 which having regard
to the non-obstane clause contained in Sections 4, 5 and I0 of the 1993 Act
opined that interest payable thereunder shall embrace within its fold even the
contracts which might have been entered into prior to the enforcement of the
B Act stating:

"However, in such a case interest on the delayed payment which is
made after the coming into force of the Act of 1993 would be
calculated under the Act from the date of the enforcement of the Act
and not from the date of payment prescribed under the agreement."
c
With respect, we do not subscribe to the said view as payment of
interest at an enhanced rate cannot be made in relation to the transactions
where Section 3 will have no role to play.

D We, therefore, are of the opinion that in relation to the transactions
made prior to coming into force of the said Act, simple interest at the rate
of 9% per annum, which was the bank rate at the relevant time, shall be
payable both prior to date of filing of the suit and pendente lite and as future
interest in terms of Section 34 of the Code of Civil Procedure. Interest,
however, will be payable in terms of the provisions of the 1993 Act (compound
E interest at the rate of 23.5.% per annum) in relation to the transactions made
after coming into force of the Act, both in respect of interest payable upto
the date of institution of the suit and pendente lite and till realisation. The
judgment and decree to that extent requires to be modified. It is directed
accordingly.

F The appeal is, therefore, allowed in part in regard to interest and to the
extent mentioned hereinbefore. The Corporation shall bear the costs of the
Respondent in this appeal. Counsel's fee is assessed at Rs. 25,000.

K.G. Appeal partly allowed.