Supreme Court of India
M.P. OIL EXTRACTION AND ANR. ETC.versusSTATE OF MADHYA PRADESH AND ORS.
- Citation
- 1997 INSC 557
- Decided
- 9 July 1997
- Disposal
- Dismissed
- Bench
- G N RAY
Holding
The 1979 industrial policy, its revisions, the special treatment of selected units, the renewal clauses, and the royalty fixation are not arbitrary or violative of Article 14, and the High Court's order is affirmed.
Summary
The appellants challenged the Madhya Pradesh Government's 1979 industrial policy and subsequent agreements that gave special treatment, assured supply of sal seeds and concessional royalty rates to selected new industrial units (Bastar Oil Mills and Sal Udyog) while denying similar benefits to older units. The High Court had upheld the policy, finding the classification between new and old units based on objective criteria and not violative of Article 14. The appellants argued that the policy was arbitrary, discriminatory, and that the royalty rates were unrealistically low, constituting hostile discrimination. The Supreme Court held that the policy and its revisions were not capricious, that the classification based on geographical and developmental considerations was rational, and that the renewal clauses and royalty fixation using a weighted average formula were reasonable. Consequently, the Court found no ground to interfere with the High Court's decision and dismissed the appeals.
Issues considered
- The validity of the 1979 industrial policy and its subsequent revisions under Article 14 of the Constitution.
- Whether the special treatment and assured supply of sal seeds to selected new industrial units constitute arbitrary discrimination.
- The legality of the renewal clauses in the agreements with the respondents.
- The reasonableness of the royalty rates fixed for sal seeds and whether they reflect favoritism.
Subjects
Industrial policySal seed allocationArticle 14DiscriminationRenewal clauseRoyalty fixationLegitimate expectationState largessePublic policy
Judgment
M.P. OIL EXTRACTION AND ANR. ETC. A
v.
STATE OF MADHYA PRADESH AND ORS.
- JULY 9, 1997
[G.N. RAY AND G.T. NANAVATI, JJ.]
B
Industrial Policy 1979-Supply of Sal seeds to Industrial units-Special
treatment to certain class of industries set up at the instance of State Govt.
in backward and tribal areas-Agreement by State Govt. with respondent in- C
dustries for reservation and supply of sal seeds on payment of detem1ined
royalty-Renewal of lease in favour of respondent-industries-Validity
- of-Held, industrial policy of 1979 not arbitrary-No illegality or arbitrariness
in the agreement giving special treatment to certain class of in-
dustries-Renewal clause and [1.Xation of royalty just and proper-Constitution
of India: Article 14. D
The appellants filed writ petitions in the High Court challenging the
agreement entered into by the State Government with Baster Oil Mills and
Sal Udyog (Pvt.) Ltd. for distribution of specified amount of sat seeds
annually. The said writ petitions were dismissed. Special Leave Petitions E
were filed before this Co1,1rt and by way of interim order, this Court
direi:tcrl the State to supply 5000 M.T. of sal seeds in favour of each of the
appellants. The said appeals stood disposed of and the order of High
Court became final.
The appellants under two separate agreements with the Govt. got F
reservation of 13 to 17 units of sal seeds producing forest in their favour.
Such reservation of forest was challenged before the High Court and the
agreement for reservation of forest was set aside. In the year 1983, the
appellants again managed to get reservation and allotment of 7500 M.T.
of sat seeds per annum under two separate agreements from the State
Govt. On challenge, the High Court quashed the said agreements. Special G
Leave Petitions were filed by the appellants against the above order. This
Court disposed of the petitions upholding the allotment and reservation
of sal seeds iii favour of Baster Oil Mills and M/s. Sal Udyog (Pvt.) Ltd.
and two other units selected by the State Govt. under the 1979 Industrial
Policy. The appellants again filed two separate but identical writ petitions H
671
672 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A challenging the reservation and allotment of 10,000 M.T. of sat seeds in
favour of M/s. M.P. Glychem Industries. The said writ petitions were also
dismissed by the High Court. Thereafter, writ petitions were filed by
-
B
appellants challenging the renewal of lease in favour of respondents and
also challenging the determination of royalty to he paid. The writ petitions
were again dismissed. Hence the present appeals.
-
The contention of the appellants inter a/ia was that the action of
State Govt. treating only a few of the industrial units of the State in a very
favoured manner by entering into fresh agreements for supply of sat seeds
has amounted to deliberate discrimination against them which was
C violative of Articles 14 and 19 of the Constitution; the royalty paid by the
respondents for supply of sat seeds under the impugned agreements was
-
absolutely minimal and much less than the auction price for sat seeds and
thus they were facing unjust competition from the favoured child of the
State Government.
D The contention of the respondents was that there was a fundamental
difference between the two categories of industries operating in the State
using sal seeds for production i.e. those new units with specific agreements
with State Govt. under the industrial policy and those units existing prior
E
to the policy not selected by the Government. The Courts having upheld
the said agreement for reservation of sat see~s in favour of respondents ..
the renewal clause being part of the agreement to give protection cannot
be held to be arbitrary and violative of Article 14 of the Constitution.
Dismissing the appeals, this Court
F HELD : 1.1. The industrial policy of 1979 which was subsequently
revised from time to time cannot he held arbitrary and based on no reason
whatsoever hut founded on mere ipsi dixit of the State Government of M.P.
The executive authority of the State must he within its competence to frame
policy for the administration of the State. Unless the policy framed is
G absolutely capricious and, not being informed by any reason whatsoever,
can he clearly held to he arbitrary and founded on mere ipsi dixit of the
executive functionaries thereby offending Article 14 of the Constitution or
any other constitutional provision or comes in conflict with any statutory
provision, the Court cannot and should not outstep its limit and tinker with
the policy decision of the executive functionary of the State. This Court, in
H no uncertain terms, has sounded a note of caution by indicating that policy
M.P. OIL EXTRACTION v. STATE 673
decision is in the domain of the executive authority of the State and the A
Court should not embark on the unchartered ocean of public policy and
should not question the efficacy or otherwise of such policy so long as the
same does not offend any provision of the statute or the Constitution of
India. [692,H; 693-A-D]
1.2. The State Government framed industrrial policy in 1979 and B
thereafter revised the same from time to time according to felt need. There
is no material on record from which it can he reasonably found that the
same was not informrd by any reason whatsoever. That apart such policy
. has been taken into consideration by the High Court and also by this Court
in the earlier proceedings and the industrial policy has not been found to C
be arbitrary or capricious. On the contrary, the agreement made in favour
of the appellants was struck down by the High Court by indicating that
unlike other class of industrial units like the respondents Bastar Oil Mills
and Sal Udyog (Pvt.) Ltd. which were entitled to special treatment under
the industrial policy, the appellants were not entitled to any special treat-
ment which was not given to other existing old industrial units in the State, D
similarly circumstanced. [693-F-H; 694-A]
2. The special treatment given to Baster Oil Mill by assuring supply
of 20,000 M.T. of sal seeds under the impugned agreement cannot be held
to be per se illegal and arbitrary. The distinctive features between the E
industrial units set up at the instance of the State Government and old
existing units are based 011 objective criteria. Therefore, the said two
.J
classes of industries are not similarly circumstanced. Article 14 prohibits
discrimination amongst the equals but it should be appreciated that
Article 14 has inbuilt flexibility and it also permits different treatment to
unequals. The Bastar Oil Mills is situated at Jagdalpur which is F
admittedly a backward and tribal area. Classification on the basis of
geographical situation has a rational basis and has been recognised by this
Court. (694-B-D]
3. The renewal clause in the impugned agreements executed in favour G
of the respondents does not also appear to be unjust or improper. Whether
protection by way of supply of sal seeds under the terms of agreement
requires to be continued for a further period, is a matter for decision by
the State Government and unless such decision is patently arbitrary, inter-
ference by the Court is not called for. In the facts of the case, the decision
of the State Government to extend the protection for a further period H
674 SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A cannot be held to be per se irrational, arbitrary or capricious warranting .
judicial review of such policy decision. Therefore, the High Court has
rightly rejected the appellants contention about the invalidity of the
renewal clause. [694-H; 695-A-B]
B 4. It cannot be held that the fixation of royalty in the impugned
agreements is without any basis and wholly arbitrary and designed only to
ensure favouritism, as alleged. If there is an objective and rational founda·
tion for the fixation of royalty, the Court will not interfere with the exercise
of governmental decision by itself undertaking an exercise to find out as to
whether better fixation was possible or not. The fixation of rate of royalty
C on the basis of weighted average formula has a rational basis and is also a
known method and modality for determing market price. It also appears
that the price per M.T. of sal seed has different components of which
collection charges is the principal factor. [696-D; Al c
D M.P. Oil Extraction Pvt. Ltd., Raipur andAnr. v.State of M.P. and Ors.,
AIR (1982) M.P. 1; M/s. K N. Oil Industries etc. v. Secretary to Ministry of
Forest, Bhopal and Ors., AIR (1986) SC 1927; Mis. KN. Oil Industries and
Anr. etc. v. State of M.P. and Ors. etc., AIR (1986) SC 1929; Smt. Somawanti
& Ors. etc. v. State of Punjab and Ors. etc., AIR (1963) SC 151; State of U.P.
v. Nawab Hussain, AIR (1977) SC 1680; Mohd. Ayub Khan v. Commissioner
E of Police, Madras & Ors., AIR (1965) SC 1623; Narayanrao v. State, AIR
(1981) Born. 271 = (1973) SC 973; Bw1um Chemicals Ltd. and Anr. v.
Company Law Board and Ors., AIR (1967) SC 295; C.l. T. Bombay v.
Mahindra and Mahindra, AIR (1984) SC 1182; State of U.P. v. Renu Sagar,
AIR (1988) SC 1737; Kasturi Lal v. J.K, AIR (1980) SC 1992; State of M.P.
F and Ors. v. Nandlal Jaiswal & Ors., [1986) 4 SCC 566; Sachindanand Pandey
and Anr. v. State of West Bengal & Ors., [1987) 2 SCC 295; Brij Bhushan v.
JK, [1986) 2 SCC 354; G.B. Mahajan v. Jalgaon, [1991) 3 SCC 91; FCI v.
Kwnadhenu, JT (1992) Vol. 6 SC 259; Nav Jyoti Cooperative Society, JT
(1992) 5 SC 621; Union of India v. Hindustan Development Corporation, JT
(1993) Vol. 3 SC 15; State of M.P. v. Vijay Bahadur Singh, [1982) 2 SCC
G 365; India Cement v. Union of India, [1990) 4 SCC 356; Sitaram Sugar
Company Ltd. and Anr. v. Union of India and Ors., [1990) 3 SCC 223;
Budhan Choudhary and Ors. v. State of Bihar, AIR (1955) SC 191; Video
Electronics Pvt. Ltd. v. State of Punjab, AIR (1990) SC 820 and Goodwill
Paint and Chemical Industry v. Union of India and Anr., [1992) Suppl. 1
H sec 16, cited.
M.P. OIL EXTRACTION v. STATE (G.N. RAY, J.] 675
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4312, A
4314 of 1997 Etc.
From the Judgment and Order dated 9.5.95 of the Madhya Pradesh
High Court in M.P. No. 1371/92 and 1980 of 1992.
G.L. Sanghi, N.S. Kale and K.J. John for the Appellants. B
Dr. A.M. Singhvi, C. Mukhopadhayaya, Manish Kumar, A.N. Ray
and Rakesh K. Sharma for the Respondents.
S.K. Agnihotri and S. Bishwajit for the State of M.P.
c
Ashok K. Gupta for Impleading Party.
The Judgment of the Court was delivered by
G.N. RAY, J, Leave granted. Heard learned counsel for the parties.
D
All the three special leave petitions namely S.L.P. (Civil) No. 19729
of 1995, S.L.P. (Civil) No. 20137 of 1995 and S.L.P. (Civil) No. 19796 of
1995 are directed against common judgment datC<d 9.5.1995 passed by the
Madhya Pradesh High Court respectively in Misc. Petitions No. 1371 of
1992, M.P. No. 1980 of 1992 and M.P. No. 2315 of 1992. All the said Misc. E
Petitions were filed before the Madhya Pradesh High Court under Article
226 of the Constitution challenging the legality and validity of agreements
made by the State Government of Madhya Pradesh with M/s. Bastar Oil
Mills and Industiries Ltd. and M/s. Sal Udyog (Pvt.) Ltd. for supply of sal
seeds grown in the State of Madhya Pradesh on payment of determined F
royalty by alleging inter alia that the writ petitioners namely K.N. Oil
Industries and M.P. Oil Extraction Ltd. have been subjected to hostile
discrimination in the matter of grant of largesse so far as sal distribution
of sa! seeds is concerned by favourably treating the said Baster Oil Mills
and Industries Ltd. and M/s. Sal Udyog (Pvt.) Ltd. thereby affecting the
economic viability of the writ petitioners. It may be indicated here that G
before the said wric petitions were filed in the Madhya Pradesh High Court,
a series of litigations were fought between the parties to these appeals both
in the Madhya Pradesh High Court and in this Court. In 1981, the
appellants M.P. Oil Extraction Limited and K.N. Oil Industries filed writ
petitions numbered as M.P. No. 559 and 1404 of 1981, in the Madhya H
676 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A Pradesh High Court challenging the agreements between Bastar Oil Mills
and Industries Ltd. and Sal Udyog (Pvt.) Ltd. and State government of .·
Madhya Pradesh for distribution of specified amount of Sal seeds to the
said concerns annually by alleging hostile discri!Ilination against the said
writ petitioners in the matter of distribution of sal seeds. Such writ petitions
B were dismissed by the Division Bench of the High Court by order dated
21.8.1981. The said decision has been reported in AIR 1982 M .P. 1. Against
the said decision, both the writ petitoners filed special leave petitions
before this Court in which leave was granted in C.A. No. 2994 and 2295 of
1982. In terms of the interim orders dated 5.5.1982 and 6.5.1983, the State
C of Madhya Pradesh had to supply 5000 M.T. of sal seeds in favour of each
of the said appellants namely M.P. Oil Extraction Limited and K.N. Oil
Industries in 1982 and 1983. M/s. Bastar Oil Mills and Sal Udyog (Pvt.)
Ltd. did not receive the contractual quality. of sal seeds in the said years.
It, however, appears that after obtaining the said interim orders on two
D occasions, both the appellants withdraw C.A. Nos. 2994 and 2995 of 1982
and thi.; said appeals stood disposed of and the imugned judgment of the
High Court became final. It may be stated here that under two separate
agreements by the M.P. State Government, both the appellants namely
M.P. Oil Extraction and K.N. Oil Industries got reservation of 13 to 17 sal
E seeds producing forest units in their favour. Such reservation of forests was
challenged before the High Court in M.P. No. 261 and 266 of 1980 and by
judgment dated 25.9.1980 the Division Bench of M.P. High Court allowed
the writ petitions and set aside the said agre.ement for reservation of forests
in favour of the appellants. During the year 1983, both the appellants again
managed to get reservation and allotment of 7500 M.T. of sa~ seeds per
F annum under two separate but identical agreements dated 12.12.1983 from
the State Government for a term of 12 years. Such agreements were
challenged by M/s. General Foods Private Limited in M.P. No. 1364 of
1964 before the M.P. High Court. A Division Bench of the High Court by
order dated 11.6.1985 quashed the said agreements executed in favour of .
G both the appellants. It may be indicated here that before the said
agreements were annulled by the High Court, the appellants got 7500 M.T.
of Sal seeds per annum for the years 1984 and 1985 in terms of the said
invalid agreements. The respondents Bastar Oil Mills and M/s. Sal Udyog
(Pvt.) Ltd. had to receive much lesser quantity of sal seeds which were due
H to them in terms of the agreements made in their favour.
M.P. OIL EXTRACTION v. STATE(G.N. RAY,J.] 677
Both the appellants moved special leave petitions before this Court A
assailing the said judgment dated 11.6.1985 of the High Court. Such leave
petitions were disposed of by this Court by order dated 10.4.1986 reported
in AIR (1986) SC 1927. By the said order, this Court upheld allotment and
reservation of sal seeds in favour of Bastar Oil Mills and M/s. Sal Udyog
(Pvt.) Ltd. and M/s. Allied Oil Industries (Pvt.) Ltd. and M/s. M.P.
Glychem Industries being the four units selected by the State Government B
of Madhya Pradesh under the 1977 Industrial Policy. It appears that after
all such futile attempts, the appellants did not give up their pursuits to get
allotment of sal seeds from the Government. In 1986; both the appellants
filed two separate but identical writ petitions being M.P. No. 645 and 644
of 1996 challenging the reservation and allotment of 10,000 M.T. of sal C
seeds in favour of M/s. M.P. Glychem Industries which was also selected
unde1 1977 Industrial Policy. Such writ petitions were also dismissed by the
High Court by order dated 6.5.1986. Thereafter, the writ petitions were
again filed by both the appellants challenging the renewal of lease in
favour of the respondents M/s. Bastar Oil Mills and M/s. Sal Udyog Pvt.
Ltd. by treating such renewals as new leases and also challenging the D
determination of royalty to be paid for the sal seeds to be supplied to the
respondents. Such writ petitions have also been dismissed by the Division
Bench of Madhya Pradesh High Court and the present appeals are
directed against the decision of the High Court passed in the said writ
petitions.
E
Mr. Sanghi, the learned Senior counsel appearing for the appellants
K.N. Oil Industries has submitted that the appellant had set up their first
solvent extraction plant in 1966 using bran rice as raw material. The
appellant made suitable modification in their plant for processing of sal
seeds and also set up a new plant for extraction of sal seeds on the basis F
of an assurance of availability of sal seeds vide letter dated 24.1.1970 of the
State Government to the effect :
"Since sal seeds are available in huge quantity in nearby area, spare
capacity of your plant, if any, be utilised after modification in the existing G
plant."
The appeallants have been using sal seeds and rice bran as raw
material, alternatively in their solvent extration plant from 1973 onwards.
As the availability of sal seeds was seasonal and limited, no solvent plant
could exclusively depend on sal seed for running its business. H
678 SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A Mr. Sanghi has contended that the Industrial Policy laid down by the
M.P. Government in 1977 envisaged supply of sal seeds to the new units
as welJ as to the existing old units. Such position has been noticed by the
High Court in its decision reported in AIR (1982) MP 1 at page 3. The
said Industrial Policy also laid down that new units should be encouraged
B to set up their plants with concessions during the initial period for a period
of 5 to 10 years. Such fact has also been noticed by the High Court in its
decision reported in AIR (1982) MP 1 page 2. Mr. Sanghi has submitted
that the said Industrial Policy was framed on the basis of expert
committee's finding that the estimated annual sal seed potential is over 10
C lacs M.T. The said Industrial Policy was modified in 1981 by making
reservation for sal U dyog and Bastar Oil Mills as new units and the surplus
to be sold in auction.
Mr. Sanghi has further contended that the agreements in favour of
Baster Oil and Sal Udyog for supply of 10,000 M.T. of Sal Seeds were
D entered in the year 1979 on the premise of the expert committee's findings
as already indicated. Both the agreements were to subsist for a period of
12 years. Mr. Sanghi has submitted that average yield per year as per the
State Government's estimate is around 60,000 M.T. After meeting the
commitments of the State Government, the available surplus was only in
E the region of 37,000 M.T. of sal seeds. Inspite of the fact that annual yield
of sal seeds in the State of M.P. for the year 1990 and 1991 was 4768 M.T.
and 190809 M.T. respectively, the State Government treated Bastar Oil
Mills and Sal Udyog (Pvt.) Limited as most favoured industrial concerns
and executed fresh agreements for a further period of 12 years with effect
F from 1991. The agreements contain provisions for further renewal. In the
case of Baster Oil Mills the quantity was increased to 20,000 M.T. while in
the case of Sal Udyog (Pvt.) Ltd. the quantity was fixed at 10,000 M.T.
Mr. Sanghi has contended that as a result of such fresh agreements
with Bastar Oil Mills and Sal Udyog, the State Government is now
G committed to supply annually sal seeds grown in the State of M.P. in the
folJowing manner :
(i) Baster Oil Mills 20,000 M.T.
H (ii) Sal Udyog 10,000 M.T.'
M.P. OIL EXTRACTION v. STATE [G.N. RAY, J.) 679
(iii) Allied Oil Mills 10,000 M.T. A
(iv) M.P. Glychem 10,000 M.T.
Total 50,000 M.T.
B
Mr. Sanghi has contended that the State Government being fully
aware of the availability of sal seeds in 1991 which was a meagre 19809
M.T. acted malafide in treating only few of the industrial units of the State
in a very favoured manner by entering into fresh agreements for supply of
50,000 M.T. of sal seeds to the new units. Such action has amounted to
deliberate hostile action in ensuring non availability of sal seeds for c
distribution, to other units operating in the State of Madhya Pradesh
including the appellants. Such hostile discrimination is clearly violative of
Articles 14 and 19 of the Constitution of India.
Mr. Sanghi has further contended that there is no earthly reason to D
be completely oblivious of the needs of other industrial units operating in
the State which also require sal seeds for their units. The need of old units
was recognised by this Hon'ble Court when it directed the State
Government to allot 5000 MT to both the appellants by interim order dated
6.5.1982. The appeals were disposed of by this Court on 10.4.1986 and the E
matters were remanded to M.P. High Court for determining the basis of
distribution of sal seeds among the old units. On remand, the High Court
by order dated 18.10.89 held that the surplus would be distributed among
old units on the basis of their capacity. In order to perpetuate the hostile
discrimination, the State Government entered into fresh agreements
thereby ensuring that there would be no surplus to be distributed to old
F
units like the appellants.
Mr. Sanghi has also contended that the State Government was fully
aware of the need of sal seeds for thi:: old units like the appellants. As a
matter of fact, considering the hardship of the appellants in not getting G
·regular supply of sal seeds from the Government, the State Government
entered into agreement.s \vith the appellants in 1983 for supply of 7500 M.T.
of sal seeds per year for 12 years. Unfortunately such agreements were
.cancelled by the High Court on a finding that there was no justification for
any concessions to the old units. H
680 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A Mr. Sanghi has submitted that even in the Industrial Policy of 1977,
the State Government recognised the need of sal seeds by the old units like --
the appellants and it was clearly stipulated in the Industrial Policy that sal
seeds should be made available to both old and new units. Even in 1981
when the old policy of 1981 was revised it was indicated that after meeting
the annual allotments of 10,000 M.T. of sal seeds to Bastar Oil Mills and
B
Sal Udyog (Pvt.) Ltd., the surplus should be allotted to the old units. On
the face of actual availability of sal seeds in the State, and after recognition
of the need of sal seeds by old units and accepting such need in the
industrial policy of 1981, fresh agreements in favour of Bastar Oil Mills and
Sal Udyog (P) Ltd. in 1991 are wholly unjustified and ma/a fide and illegal
c being vitiated with arbitrariness and abuse of power by discriminatory
action in the matter of distribution of sal seeds to other industrial units
operating in the State.
Mr. Sanghi has further submitted that Bastar Oil Mills and Sal Udyog
D (P) Ltd. got preferential treatment ever since 1979 onwards for a period
of 12 years by way of assured supply of sal seeds by the State Government
on the footing that the said concerns were new units and deserved special
protection by the State for some time. But after 12 years, both the said
units can no longer be treated as new units for the purpose of receiving
E preferential treatment. Hence, at the present moment, all the units in the
State must be treated at par and the agreements in 1991 in favour of the
said units must be held as wholly unjustified and illegal and should be
struck down.
F Mr. Sanghi has contended that the agreements in 1979 with the said
units for 12 years had a clause for renewal. In the new agreements of 1991
there is also clause for renewal. The result is that there has been assured
supply of sal seeds in favour of the said units in perpetuity to the total
exclusion of the other units. Mr. Sanghi has submitted that the State
Goverment cannot be permitted to treat some units in the State more
G favourably than others in the absence of any strong and valid reason for
such discriminatory treatment. Law is well settled that in the matter of
distribution of largesse, the State Government is bound to act fairly and
reasonably and cannot resort to hostile discrimination against some units
and treat some other units with undue favour when all the units must be
{
H treated as old units and therefore similarly circumstanced.
M.P. OIL EXTRACTION v. STATE [G.N. RAY,J.] 681
Mr. Sanghi has also contended that even in the matter of royalty to A,
be paid by the said respondents, there has been naked favouritism. The
royalty to be paid by the said respondents for the sal seeds to be supplied
by the State government under the impugned agreement is absolutely
minimal and much less than the auction price for sal seeds. In view of such
paltry royalty payable by the said respondents, the respondents are not only
getting assured supply of sal seeds from the State Government but they are B
getting such supply almost at a throw away price. As a result, the appellants
are facing unjust competition from the said favoured child of the State
Government. Mr. Sanghi has, therefore, submitted that the appeals should
- be allowed and the impugned agreements in favour of the said respondents
should be set aside. This Court should also direct the State Government
of Madhya Pradesh to distribute sal seeds to all the existing units which
require sal seeds for their units on the pro rata basis with reference to their
productive capacity and actual annual requirement.
C
Mr. Kale, the learned senior counsel appearing for the appellant
M.P. Oil Extraction Limited has supported Mr. Sanghi in his submissions. D
Mr. Kale, has contended that by the impugned agreements, the State
Government has given largesse to the said respondents without inviting any
tender and excluding the appellant from obtaining any allotment of sal
seeds from the government even though the appellant badly requires sal
seeds for its productive activity and it had set up extraction plant long back
after examining economic viability with reference to availability of sal seeds E
in the State of Madhya Pradesh as assured by the State Government. Mr.
Kale has submitted that the appellant has been using sal seeds ever since
the extraction plant of the appellant was commissioned in 1974.
Mr. Kale has submitted that sal seeds is a seasonal natural forest F
produce grown in the Government forests in M.P. The production of sal
. seeds varies from year to year. According to the Government's calculation,
the average yield of sal seeds for the last seven years from 1985 to 1991 is
36950 M.T.
If the average production of sal seeds from 1974 to 1990 i.e. a period G
of 18 years is taken into consideration, it works out to be 40600 M.T. Sal
seeds as a forest produce was brought under the monopoly of the State
Government with effect from May 5, 1975 udner M.P. Vanopaj (Vyapar
Viniyaman) Adhiniyam;1969. After 1.975, the plant of the appellant and
other existing plants were totally dependent on the State Government of H
682 SUPREME COURT REPORTS [1997) SUPP. 1 S.C.R.
A M.P. for supply for sal seeds as a raw material. Sal seeds used to be sold
by auction or by invitation of tenders. The oil content of sal seeds was being
'. used as a raw material for extraction of oil. The collection of sal seeds is
made by tribals residing in forest area and collection season is from 3rd
week of May upto onslaught of monsoon.
E Mr. Kale has also submitted that the State Government of M.P.
formulated a detailed policy in 1978 known as "Raw material policy for
forest based industries". The basic object of inoustrial policy was to provide
for assured supply of raw material to such industries as are employment
oriented. The said policy envisaged asssured supply to the industrial units
c established within the State and to prevent its drain outside the State. The
policy of 1978 wa~ made for the maximum utilisation of the forest resources
within the State and did not speak of industrialisation of any particular area
whether backward or otherwise.
Mr. Kale has further contended that the State Government invited
D applications for setting up extraction plants on the assurance for supply of
10000 M.Ts. of sal seeds annually for a period of 12 years. Pursuant to such
invitation, the following two agreements were executed in 1979:
(i) Agreement in favour of M/s Bastar Oil Industries Ltd. whose
plant is situated in Jagdalpur on 5.10.1979.
E
(ii) Agreement dated August 30, 1979 in favour bf M/s Sal Udyog
Pvt. Ltd. Its plant was situated in the Industrial Estate,
Raipur.
The rate of royalty was fixed at Rs. 300 and the rate was fixed Rs. 312.50
F per mt. respectively.
The State Government invited appiications from entrepreneurs for
establishing three extraction plants on the basis of similar assurance for
supply of 10000 MTs. of sal seeds annually for a period of 12 years.
G Mr. Kale has contended that the two agreements with the M/s. Sal
Seeds Udyog Pvt. Ltd. and Bastar Oil Mills were challenged by contending
that the two agreements had resulted in discrimination against the
appellant because no sal seeds would be left for the existing plants "
including that of the appellant as the average annual yield of sal seeds was
H only 54000 M.T. Such Writ Petitions were, however, dismissed by the High
M.P. OIL EXTRACTION v. STATE [G.N. RAY, J.] 683
Court inter alia on the finding that classification between the old plants A
(existing plants) and the new plants was justified. The contention of the
appellant that no sal seeds would be left for allotment to the other existing
plants was repelled on the ground that the estimated production of sal
seeds in the State was to the tune of one lac M.T. according to the report
of the committee on the Industrial Policy. The appellant filed special leave B
petition against the said decision of the High Court before this Court and
obtained interim orders from this Court to get supply of 5000 M.Ts. of
~al seeds in May, 1982 at the royalty rate of Rs. 630 per mt. During the
pendency of the proceedings, the State Government of M.P. formulated
another policy on May 9, 1983. Under the said policy, the estimated surplus
of 20000 M.T. of sal seeds was to be distributed among the existing plants C
in proportion of their consumption of sal seeds during the last five years.
In accordance with the said policy, an agreement was entered between the
State Government and the appellant in December, 1983 for supply of 7500
M.T. of sal seeds to the appellant at the royalty rate of Rs. 750 per M.T.
for a period of 12 years. Such agreement was, however, challenged by M/s. D
General Foods Pvt. Ltd. of Indore on the ground of discrimination between
the existing plants. The High Court quashed the said agreement. The High
Court gave the direction for distribution of surplus quantity of sal seeds to
the existing units in proportion to their capacity. The High Court also held
that the rate of royalty of Rs. 750 per M.T. was a concessional rate. Such
decision of the High Court was challenged by the appellant before this E
Court and the matter was remanded to the High Court and was finally
disposed of by the High Court on October 18, 1989. The High Court
directed for making equal distribution of sal seeds to the existing plants. It
was noted by the High Court that the tremendous increase in demand of
sal seeds coupled with short supply and non-availability in the open market F
due to the State monopoly, had resulted in heated rivalry among the
industrial units.
Mr. Kale has submitted that the market price of sal seeds has two
components, namely, royalty and collection charges. In 1979, royalty rate G
was Rs. 300 per M.T. and such rate was concessional. In 1983, the rate of
royalty was Rs. 750 per M.T. and in the agreement dated September 12,
1983 in favour of the appellant, the rate of royalty was fixed at Rs. 750 per
M.T. In the agreement in favour of the appellant Allied Oil Industries in
1983, the rate of royalty was fixed by the State Government at Rs. 1030 for
the block period of two years from November, 1987 and November, 1989. H
684 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A Such fixation, however, was set aside because the price was not fixed in
accordance with the clause 7 of the agreement in favour of Mis. Allied Oil
Industries by the High Court in Misc. Petition No. 1653 of 1988. The
appellant had offered to purchase sal seeds in 1988 on August 27, 1988 at
the total rate of Rs. 2250 per M.T. The rate of royalty works out to be Rs.
B 700 per M.T. For the year 1991 the appellant offered to purchase sal seeds
at the royal rate of Rs. 1200 per M.T. The appellant also offered to
purchase sal seeds at a royalty of Rs. 1225 per M.T. Mr. Kale has submitted
that fixation of the rate of royalty in favour of M/s. Bastar Oil Industries
at a ridiculously low rate of Rs. 400 for the period of two years and with
a stipulation for increase at the rate of 5% thereafter is wholly arbitrary,
C unjustified and discriminatory. Such agreement is also against the interest
of the revenue of the State. Mr. Kale has contended that by fixing such a ·
low rate of royalty, the State Exchequer has incurred a loss of crores of
rupees .. Such fixation of rate of royalty itself is arbitrary as the rate of
royalty will depend on the rate of demand and supply in the market of sal
D seeds. Mr. Kale has also submitted that the impugned agreement dated
September 7, 1991 has resulted in a hostile discrimination against the
existing plants. The State Government has raised the quantity of sal seeds
from 10000 M.T. to 20000 M.T. in favour of Bastar Oil Mills and by similar
agreement the State Government has agreed to supply sal seeds of 10000
M.T. to Sal Udyog. The said Sal Udyog is .not situated in any backward
E area. It is situated in the industri'al estate at Raipur and the unit of the
appellant is also situated very close to that of Sal U dyog.
Mr. Kale has supported the contention made by Mr. Sanghi that after
meeting the demands ii;t favour of Baster Oil Industries, M/s. Allied Oil
F Industries, M/s. M.P. Glychem, no sal seeds would be left for being sold
to the existing plants. Mr. Kale has submitted that therefore the impugned
agreements have resulted in monopoly of getting sal seeds by the said
respondents. Mr. Kale has contended that the executive action in 1991 in
entering into fresh agreements after being fully aware of the supply position
of sal seeds, in favour of the respondents with a further renewal clause, is
G patently unjust and has resulted in monopoly without any just cause and
reasonable basis. Mr. Kale has contended that the appellant and other
existing units in the State have a right to be considered fairly and
reasonably for the distribution of sal seeds by the State Government in a
reasonable and unbiased manner. He has, therefore, submitted that the
H . impugned agreements should be cancelled by this Court and the State
M.P. OIL EXTRACTION v. STATE (G.N. RAY, J.) 685
Government should be directed to distribute sal seeds to all the existing A
units on a pro rata basis.
Dr. A.M. Singhvi, learned senior counsel appearing for the
respondent M/s. Sal Udyog Pvt. Ltd., has disputed the contentions of the
appellants. Dr. Singhvi has contended that there is a fundamental B
difference between the two categories of industries operating in the State
of Madhya Pradesh using sal seeds for production i.e. those which have a
specific agreement with the State of Madhya Pradesh entered into under
the mandate of the specific policy inviting new entrepreneurs to the State
and execution of special agreement with them after selection as opposed
to the second category which consists of together units existing prior to the C
policy not selected by the government of Madhya Pradesh and having no
privity of agreement or contract with the State of M.P. Such specific dual
classification of users of sal seed for productive activity has been repeatedly
recognised and judicially upheld as valid in a number of decisions rendered
between the same parties. In support of this contention, Dr. Singhvi has D
drawn the attention of this Court to the decisions in M.P. Oil Extractio11
Pvt. Ltd. Raipur a11dA11r. v. State of M.P. a11d Ors., AIR (1982) M.P. 1; M/s.
KN. Oil llldustlies Etc. v. Secretary to Mi11istry of Forest, Bhopal a11d Ors.,.
AIR (1986) SC 1927 para 4 and Mis. KN. Oil I11dustlies a11d A11r. Etc. v.
State of M.P. a11d Ors. Etc., AIR (1986) SC 1929. The said judicial E
pronouncements categorically upheld the classification of users of sal seed
into two categories. The Courts have also upheld the agreement in favour
of the respondents as well as the reservation of specific quantity of sal seeds
in favour of those units having agreements and the provision of
concessional rate for such units during the first four years of agreement.
F
Dr. Singhvi has also contended that since such agreements in question in
the present case were also the subject matter of challenge in the earlier
proceedings and fell for scrutiny and adjudication by the Courts in the
earlier proceedings which ultimately upheld the entire contract including
the renewal clauses, there is no occasion for the appellants to challenge
the said contract and the renewal clauses collaterally. By the impugned G
decision, such challenge has been rightly rejected by the High Court.
Dr. Singhvi has also contended that all contentions regarding the
impugned agreement and the clauses in the agreement have been upheld. •
Therefore repeated challenges to different clauses of the agreement are H
686 SUPREME COURT REPORTS [1997] SUPP. l S.C.R.
A precluded. Dr. Singhvi has also submitted that even if it is assumed that
particular argument regarding the validity of any clause of the agreement
was not specifically raised or specifically considered, such a plea at a
subsequent stage is precluded and barred by principles akin to res judicata
and constructive res judicata. In support of such contention, reliance has
B been placed on the decisions of this Court in Smt. Somawanti & Ors. Etc.
v. State of Punjab and Ors. Etc., AIR (1963) SC 151 para 22; State of U.P.
v. Nawab Hussain, AIR (1977) SC 1680 para 8; Mohd. Ayub Khan v.
Commissioner of Police, Madras & Ors., AIR (1965) SC 1623 and Narayan-
rco v. State, AIR (1981) Bombay 271 para 13, 15 = (1973) SC 973 para 10.
C Dr. Singhvi has also submitted that since the renewal clause was 'f'
necessarily upheld being part of the agreement and the agreement was L
upheld in successive proceedings, the present case does not per se raise any
issue of Article 14 relating to the validity of the renewal clause. Dr. Singhvi
has submitted that at the highest, the case of the appellants cannot be said
D to be higher than a challenge under Article 14 or under common law
principles of judicial review of administrative action, namely, to the actual
discretionary act of renewal in September, 1991.
Dr. Singhvi has submitted that such challenge should be considered
in the context of fundamental difference in the two categories of units
E consuming sal seed in their plants and the differences haye already been
recognised. Since the validity-of the contract including the renewal clause
itself is upheld as binding by judicial verdict, the actual exercise of power
of renewal cannot be held to be arbitrary because such renewal clause was
essentially necessary and inevitable to give effect to the protection for
F which agreement has been made. Dr. Singhvi has contended that unless
significance and material facts and circumstances demonstrating the
violation of administrative discretion by recourse to irrelevant
considerations or on perverse or unreasonable criteria are established by
the appellants, such exercise of administrative discretion cannot be
invalidated. Dr. Singhvi has submitted that the appellants have failed to
G demonstrate any such fact, even remotely, as vitiating the exercise of the
actual power of renewal. Dr. Singhvi has submitted that principles of
administrative discretion and judicial review have been clearly indicated in
the decisions of this Court in Barium Chemicals Ltd. and Anr. v. Company
Law Board and Others, AIR (1967) SC 295; C.l. T. Bombay v. Mahindra and
H Mahindra, AIR (1984) SC 1182 para 11 and State of U.P. v. Renu Sagar,
M.P. OIL EX1RACTION v. STAIB [G.N. RAY, J.] 687
AIR {1988) SC 1737 para 83. Dr. Singhvi has also submitted that the A
renewal clause is divisible and severable into (i) the act of renewal itself
and (ii) the actual terms and conditions upon which the renewal is granted.
The latter follows only upon the prior and threshold decision regarding the
former.
Dr. Singhvi has contended that not only the agreements in favour of
B
the four units including the respondents M/s. Sal Udyog Pvt. Ltd. and M/s.
Bastar Oil Mills under the Industrial Policy of the State have been upheld
in the earlier proceedings but equally the agreements dated November 16,
1983 and December 12, 1983 purported to be entered into by the State of
M.P. with both the appellant namely K.N. Oil and M.P. Oil Extraction Ltd. C
respectively have been struck down and held to be constitutionally invalid.
The decision of the Division Bench in M.P. No. 1364 of 1984 has been
upheld by this Court in Mis KN. Oil Industries and Anr. v. State of M.P. &
Ors., AIR {1986) SC 1929. Dr. Singhvi has also submitted that it is sig-
nificant to note that the agreement with the appellants since struck down D
contained an identical renewal clause and the appellants gladly accepted
such renewal clause in the agreement in their favour though such agree-
ments being illegal for different reasons were struck down by the court. Dr.
Singhvi has further submitted that· the renewal clause must give some kind
of protectable right, interest or claim to the grantee, additional to the right
available to a person without any renewal clause at all. The renewal clause E
has to be given some meaning, effect and scope and cannot be rendered
superfluous, otiose or redundant.
Dr. Singhvi has also submitted that the existence of the renewal
clause in the context of the classification of two categories of the industrial F
units as already explained must itself and necessarily lead to the exclusion
of all the other forms of public dealing like tender, auction etc. As long as
the Glassification and the reservation made in favour of units invited under
the industrial policy along with the agreement with renewal clause arc
upheld, the act of renewal cannot be invalidated on the ground of absence
of invitation of tender or holding auction. Dr. Singhvi has submitted that G
in the present case, the power of negotiation stood conferred and
tender/auction stood automatically and necessarily excluded from the very
date of the two contracts in 1979 which contained the renewal clause. Dr.
Singhvi has further submitted that in any event, it is well established that
tender/auction is not the only or sole method of distribution of State H
688 SUPREME COURT REPORTS [1997) SUPP. 1 S.C.R.
A largesse. Even in the absence of specific contract or agreements, State
largesse may be dealt with by negotiation and not 'through tender or
auction. In support of the contention that in appropriate case, by negotia-
tion, State largesse can be dispensed with, Dr. Singhvi has relied on the
decisions of this Court in Kasturi Lal v. J.K, AIR (1980) SC 1992 para 19,
B 22; State of M.P. and Ors. v. Nandlal Jaiswal & Ors., [1986) 4 SCC 566 para
38; Sachidanand Pandey and Anr. v. State of West Bengal & Ors., [1987) 2
SCC 295 para 34, 40; Brij Bhushan v. J.K,[1986) 2 SCC 354 para 7 and
G.B. Mahajan v. Jalgaon, [1991) 3 SCC 91 para 26, 43.
Dr. Sil)ghvi has submitted that any act or omission of the State of
C M.P. leading to non renewal of the agreements of the respondents would
itself stand vitiated on grounds of illegal, arbitrary and unsustainable
exercise of discretionary administrative power unless the State of M.P. is
able to establish specific misconduct or any serious or material lapse or
act or omission by the respondents disentitling the respondents from the
benefit of renewal. Dr. Singhvi has further submitted that non renewal by
D the State of M.P. should fully justify and sustain an action by the respon-
dents for mandamus to effectuate renewal of agreements. The "legitimate
expectations" of the respondents as persons having agreement with specific
renewal clauses which constitute both a representation and established
past practice by the State of M.P. cannot be denied or thwarted unless
E overwhelming and specific higher public interest is shown to override those
legitimate expectations. According to. Dr. .Singhvi, this doctrine of
'legitimate expectations' operates in the domain of public law, and is not
merely a procedural right subsumed within the requirement of natural
justice or elementary cannons of fair play. It constitutes a substantive,
enforceable and protectible interest as a facet of Article 14 itself. The
F doctrine applies a fortiori and proprio vigore to cases of contract and
renewals thereof. Dr. Singhvi has submitted that this doctrine has been
specifically recognised, asserted and reiterated by this Court in the
decision PC! v. Karnadhenu, JT (1992) Vol. 6 SC 259; Nav Jyoti Cooperqtive
Society, JT (1992) 5 SC 621 and Union of India v. Hindustan Development
G Corporation JT (1993) Vol. 3 SC 15. Dr. Singhvi has submitted that as a
matter of interpretation, the expression "may" under the renewal clause two
of the agreement should necessarily be read as "shall". Dr. Singhvi has
submitted that the renewal clause in the instant case, confers a contrac- •
tual/administrative power coupled with a duty upon· the authority con-
cerned whose exercise must necessarily be fair, reasonable and non
H arbitrary.
M.P. OILEXTRACTJONv. STATE [G.N. RAY,J.] 689
•
Dr. Singhvi has also submitted that the issue of low rate of royalty A
raised by the appellants is a red herring and should be rejected. Dr. Singhvi
has submitted that none of the three revisions of royalty by the State of
M.P. at Rs. 750 per M.T. for the 1983-85 block or Rs. 1030 M.T. for 1985-87
block or Rs. 1030 per M.T. for 1987-89 block have ever been upheld by
any Court. These revisions of royalty had been challenged and the same B
were scrutinised, adjudicated and struck down by the Court which has
directed re-determination of the rate of royalty as per the established
weighted average formula. 'rhe arbitration as to rate of royalty in terms of
- the court's order has been held for determining the royalty on the principle
of established weighted average formula and the royalty has been refixed
al Rs. 300 per M.T. in place of Rs. 750, Rs. 300 per M.T. in place of Rs.
C
1030 and Rs. 294 in place of Rs. 1030 for the three blocks of 1983-85,
1985-87 and 1987-89 respectively.
Dr. Singhvi has contended that the appellants are making attempts
to mislead this Court by suggesting and arguing as if the weighted average D
price formula is a magical formula which is different in nature or content
from the market price. There is no substance in such contention. The
weighted average formula is a known method and modality of arriving at
and determining the market price itself. The weighted average formula is
nothing except the taking of prices received for the sale of sal seeds at E
different occasions in different parts of M.P. for the preceding 12 months'
period and averaging them on the basis of quantum of seeds sold at those
occasions to arrive at the true market price.
Dr. Singhvi has also contended that the use of word "price" for sal F
seeds produce would be highly misleading unless it is clarified to the court
that the total price per M.T. of sal seeds comprises the following significant
components:
(i) The collection charges payable which are notified by the State G
and which are intended to be paid to and realised by the poor
tribals. Collection charges form an overwhelming and
predominant component of the total price as is evident from
the. chart of collection charges, for example, when the royalty
in !991 was Rs. 386.25, collection charges were as high as Rs.
1675 to 1775. H
690 SUPREME COURT REPORTS (1997) SUPP. 1 S.C.R.
A (ii) Royalty which is the amount of money realised by the State,
apaft from collection charges. This has normally upon ap-
plication of weighted average varied around Rs.300 per M.T.
and is now fixed for 1993 season at Rs. 400 per M.T.
(iii) Other expenses and taxes like transportation etc.
B
Dr. Singhvi has further 'submitted that this Court is not required to
determine the true price of sal seeds in the present proceedings. This Court
should not be converted either into an appellate forum or a price fixation
agency by the appellants. Once the Court is broadly satisfied with the
C fixation of prices for 1993 season in the conteXt of the royalty of Rs. 300
and Rs. 294 and Rs. 386 for the earlier years and finds that this is broadly
reasonable, fair and based upon valid considerations, the Court would not
interfere in the exercise of governmental discretion in µiatters relating to
price fixation or any economic matters involving the application of a diverse
D mix of economic policy factors. Dr. Singhvi has submitted that the scope
of judicial review of the Court in writ jurisdiction under Article 226 in
matters of economic policy and price fixation is minimal and highly
circumscribed. In support of such contention, Dr. Singhvi has relied on the
decision of this Court in State of M.P. v. Vijay Bahadur Singh, (1982] 2 SCC
365, Kasturilal v. J.K., AIR (1990) SC 1992, India Cement v. Union of India,
E (1990) 4 SCC 356, Sitaram Sugar Company Ltd. and Anr. v. Union of India
and others, (1990) 3 sec 223.
Dr. Singhvi has also submitted that so far as M/s Sal Udyog Pvt. Ltd.
is concerned, the State Government purported to terminate the original
F agreement dated 3.8.1979. A dispute was raised on the question of validity
of such termination of the agreement and the matter was referred to
arbitration initially before a retired Judge of this Court and later on to the
District Judge. While the arbitration dispute was pending before the
District Judge, Raipur, M/s Sal Udyog's term of original agreement
G expired. However, during the pendency of the said proceedings, the State
Government of M.P. took up a policy decision that the agreement of all
the four units selected under the 1979 Industrial Policy would be renewed
on the same terms and conditions on which the original agreement dated
5.10.1979 had been directed to be renewed. After the said policy decision
dated 13th August, 1991 negotiations were held between Sal Udyog and
H the State Government for the amicable settlement of the said old and long
M.P. OIL EXTRACTION v. STATE [G.N. RAY,J.] 691
pending arbitration dispute with the consent of parties. The State A
Government referred all the matters in dispute arising out of the said
termination to the Nationalised Forest Produce Inter Department
Committee. The said high powered committee, after thoroughly examining
the matter, found the action of termination illegal and recommended to
the State Government to recall the termination order dated 17.11.1983 and B
to -renew the agreement of Mis Sal Udyog. The State Government
accepting the recommendations of the said committee, renewed the
original agreement of Sal U dyog for a fresh term of 12 years. The impugned
agreement dated 30.4.1992 executed by the State Government in favour of
M/s Sal Udyog is essentially not a new or fresh agreement. It is only a
renewal of the original agreement. c
Dr. Singhvi has, therefore, submitted that there is no substance in the
contention sought to be raised by the appellants and the appeals should,
therefore, be dismissed with exemplary costs. .
D
Mr. Anil Diwan, learned Senior counsel appearing for other respon-
dent, namely, M/s Bastar Oil Mills, has supported the submissions made
by Dr. Singhvi. Mr. Diwan has also submitted that Bastar Oil Mills In-
dustries has been established in a backward tribal area of M.P. at Jag-
dalapur. The said industrial. unit has opened the employment potentiality
for the backward tribal people residing in the area. The State Government E
invited industrial units to be set up in such backward area and had assured
supply of sal seeds for the plant to be operated in such backward area at
concessional rate. It has been held by the High Court and by this Court in
the earlier proceedings that the respondent, namely, the Bastar Oil Mills
had been rightly treated on a separate footing on the basis of industrial
policy of the government and there was nothing illegal in such industrial F
policy. Mr. Diwan has submitted that classification, on the basis of
geographical considerations, docs not offend Article 14 of the Constitution.
For such contention, reliance has been made to the decisions of this Court
in Budhan Chaudhary and Others v. State of Bihar, AIR 1955 SC 191 para
4, 5, 7, Video Electronics Pvt. Ltd. and Anr. v. State of Punjab, AIR 1990 G
SC 820 para 1, 36, 38, Goodwill Paint and Chemical Industry v. Union of
India and Anr., [1992] Suppl. 1 SCC 16. Mr. Diwan has, therefore, sub-
mitted that the appeal should be dismissed with cost.
The learned counsel appearing for the State of Madhya Pradesh has
also disputed the contentions made by the learned counsel for the H
692 SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A appellants and it has been submitted by the learned counsel for the State
that the industrial policy was framed by the State Government after taking
into consideration the relevant facts and there was no arbitrariness in such
policy. Such policy was also taken into consideration by the High Court
and by this Court and the same was not found to be unreason,able or
B arbitrary. It has also been contended by the learned counsel for ih,e State
that production of sal seeds varies from year to year. Initially it was
expected that the production of sal seeds would be increased considerably
so that the demands of the industrial units in their State would be easily
met. But the estimated target, however, had not been achieved. The State
C Government even now reasonably expect that the production ofsal seed
will go up. The learned counsel has also submitted that even after meeting
the commitments of the State Government for supply of sal seeds in terms
of the agreements in force to the selected units, there will be some surplus
of sal seeds for distribution to other units.
D The learned counsel for the State has submitted that for the year
1996 total sal seeds available to the State is estimated to be 79359 M.T. A
high level committee i.e. Inter Departmental Coordination Committee
formulated policy for the distribution of sal seed. Such decision, however,
has been finalised in a meeting presided over by the Chief Minister of the
E State. It has been decided in the said meeting that the surplus sal seeds
after meeting the commitments to the contracted industries for the current
year as well as backlog of past years of 1992, will be disposed of in open
auction by inviting tenders from all the industries. The learned counsel for
the State has submitted that even after meeting such obligation, some
amount of sal seeds will be placed for auction and the appellants can
F
participate in such auction. The learned counsel for the State has also
submitted that the State Government expects that in coming years, the
position may further improve and the old industries are expected to get
larger quantity of sal seeds from the State Government by participating in
the auction to be held for the surplus quantity. The learned counsel for the
G State has, therefore, submitted that there is no merit in these appeals and
the same should be dismissed with costs.
After giving our careful consideration to the facts and circumstances
of the case and to the submissions made by the learned counsel for the
c
H parties, it appears to us that the industrial policy of 1979 which was
M.P. OILEXTRACTIONv. STATE [G.N. RAY,J.] 693
. subsequently revised from time to time cannot be held arbitrary and based A
on no reason whatsoever but founded on mere ipsi dixit of the State
Government of M.P. The executive authority of the State must be held to
be within its competence to frame policy for the administration of the State.
Unless the policy framed is absolutely capricious and, not being informed
by any reason whatsoever, can be clearly held to be arbitrary and founded B
on mere ipsi dixit of the executive functionaries thereby offending Article
14 of the Constitution or such policy offends other constitutional provisions
or comes in conflict with any statutory provision, the Court cannot and
should not outstep its limit and tinker with the policy decision of the
executive functionary of the State. This Court, in no uncertain term, has C
sounded a note of caution by indicating that policy decision is in the
domain of the executive authority of the State and the Court should not
embark on the unchartered ocean of public policy and should not question
the efficacy or otherwise of such policy so long the same does not offend
any provision of the statute or the Constitution of India. The supremacy of
each of three organs of the State i.e. legislature, executive and judiciary in D
their respective field of operation needs to be emphasised. The power of
judicial review of the executive and legislative action must be kept within
the bounds of constitutional scheme so that there may not be any occasion
to entertain misgivings about the role of judiciary in outstepping its limit
by unwarranted judicial activism being very often talked of 'in these days. E
The democratic set up to which the polity is so deeply committed can not
function properly unless each of the three organs appreciate the need for
mutual respect and supremacy in their respective field.
In the instant case, the State Government of M.P. framed industrial F
policy in 1979 and thereafter revised the same from time to time according
to felt need. There is no material on record from which it can be reasonably
found that the same was not informed by any reason whatsoever. That
apart, such policy has been taken into consideration by the High Court of
M.P. and also by this Court in the earlier proceedings and the industrial G
policy has not been found to be arbitrary or capricious. On the contrary,
the agreement made in favour of the appellants was struck down by the
High Court by indicating that unlike other class of industrial units like the
respondents Bastar Oil Mills and Sal U dyog Pvt. Ltd. which were entitled
to special treatment under the industrial policy, the appellants were not
entitled to any special treatment which was not given to other existing old H
694 SUPREME COURT REPORTS [1997) SUPP. 1 S.C.R.
A industrial units in the State, similarly circumstanced.
It has been held by the High Court that the industrial units which
were commissioned on the invitation of the State to undertake oil
extraction operation on the assurance of supply of sal seeds by the State,
stand on a separate footing. Such decision of the High Court though
B
challenged b~fore this Court, has not been upset. The distinctive features
between the industrial units set up at the instance of the State Government
and old existing units are based on objective criteria. Therefore, the said
two classes of industries are not similarly circumstanced. Article 14
prohibits discrimination amongst the equals but it should be appreciated
C that Article 14 has inbuilt flexibility and it also permits different treatment
to unequals. It may also be noted here that Bastar Oil Mills is situated at
-
J agdalpur which is admittedly a backward and tribal area. The special
treatment given to Bastar Oil Mill by assuring supply of 20,000 M.T. of sal
seeds under the impugned agreement cannot be held to be per se illegal
D and arbitrary. Classification on the basis of geographical situation has a
rational basis and has been recognised by this Court as indicated in the
decisions referred to hereinbefore. It may also be noted that the agreement
of Mis Sal Udyog was terminated by the State Government for which
reference to arbitration was made in terms of the agreement between the
E parties. Initially, the dispute was referred to the arbitration of a retired
Judge of this Court but since the same could not be completed within the
time frame, the arbitration was later on referred to a District Judge. During
the pendency of arbitration proceedings, the industrial policy of the State
Government was reviewed by a high power committee formed by the State
Government. Such committee considered the question of continuance of
F protection measures to the selected industries by assuring supply of sal
seeds by the State Government. The case of Mis Sal Udyog was also
considered by such high power committee and the committee
recommended in favour of Mis Sal Udyog. Thereafter, the State
Government renewed the agreement with the usual renewel clause. Such
G action of the State Government cannot be held to be illegal or arbitrary.
The renewal clause in the impugned agreements executed in favour
of the respondents does not also appear to be unjust or improper. Whether
protection by way of supply of sal seeds under the terms of agreement
H requires to be continued for a further period, is a matter for decision by
M.P. OILEXTRACTJONv. STATE[G.N.RAY,J.] 695
the State Government and unless such decision is patently arbitrary, A
interference by the Court is not called for. In the facts of the case, the
decision of the State Government to extend the protection for further
period cannot be held to be per se irrational, arbitrary or capricious
warranting judicial review of such policy decision. Therefore, the High
Court has rightly rejected the appellant's contention about the invalidity of B
the renewal clause. The appellants failed in earlier attempts to challenge
the validity of the agreement including the renewal clause. The subsequent
challenge of the renewal clause, therefore, should not be entertained unless
it can be clearly demonstrated that the fact situation has undergone such
changes that the discretion in the matter of renewal of agreement should C
not be exercised by the State. It has been rightly contended by Dr. Singhvi
that the respondents legitimately expect that the renewal clause should be
given effect to in usual manner and according to past practice unless there
is any special reason not to adhere to such practice. The doctrine of
'legitimate expectation' has been judicially recognised by this Court in a
number of decisions. The doctrine of "legitimate expectation" operates in D
the domain of public law and in appropriate case, constitutes a substanti.ve
and enforceable right.
Although to ensure fair play and transparency in the State action,
distribution of largesse by inviting open tenders or by public auction is E
desirable, it cannot be held that in no case distribution of such largesse by
negotiation is permissible. In the instant case, as a policy decision
protective measure by entering into agreements with selected industrial
units for assured supply of sal seeds at concessional rate has been taken
by the government. The rate of royalty has also been fixed on some
F
accepted principle of pricing formula as will be indicated hereafter. Hence,
distribution or allotment of sal seed at the determined royalty to the
respondents and other units covered by the agreements cannot be assailed.
It is to be appreciated that in this case, distribution by public auction or
by open tender may not achieve the purpose of the policy of protective
measure by way of supply of sal seeds at concessional rate of royalty to the G
industrial units covered by the agreements on being selected on valid and
objective considerations.
So far as the contention that royalty for the sal seed to be supplied
to the respondents has been fixed unreasonably in order to ensure naked H
696 SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A favouritism to the said respondents is concerned, the appellants have failed
to demonstrate such naked favouritism. The fixation of rate of royalty on
the basis of weighted average formula has a rational basis and is also a
known method and modality for determining market price. It also appears
to us that the price per M.T. of sal seed has different components of which
B collection charges is the principal factor. It may also be noted here that
the revisions of royalty by the State Government at Rs. 750, Rs. 1030 and
Rs. 1030 per M.T. respectively for 83-85, 85-87 and 87-89 blocks had been
challenged and such revisions were struck down by the High Court of M.P.
and the High Court directed redetermination of the rates of royalty as per
C the established weighted average formula. Arbitration was held for
determining the appropriate royalty and the royalty thereafter was refixed
at Rs. 300 per M.T. in place of Rs. 750, Rs. 300 per M.T. in place of Rs.
1030 and Rs. 294 per M.T. in place of Rs. 1030 for the said three blocks.
In the aforesaid facts, it cannot be held that the fixation of royalty in the ·
impugned agreenients is without any basis and wholly arbitrary and
D designed only to ensure favouritism, as alleged. If there is an objective and
rational foundation for the fixation of royalty, the Court will not interfere
with the exercise of governmental decision by itself undertaking an exercise
to find out as to whether better fixation was possible or not. It needs to be
noted that in matters of economic rights and policy decision, the scope of
E judicial review is limited and circumscribed. It may also be indicated here
that within the ambit of protective measure of assured supply of sal seeds,
such supply at concessional price is also a relevant consideration. The State
Government may not be dictated by the only consideration of more
revenue.
F
The anxiety of the appellants to also get allotments of reasonable
quantity of sal seeds from the State Government can be appreciated but
the policy decision of the State Government and consequential State action
in entering into agreements with the respondents cannot be struck down
on the vice of irrationality and arbitrariness. It has been submitted by the
G learned counsel for the State that the State Government is not oblivious of
such need and also not averse to old industrial units which also use sal
seeds for their plants. We reasonably expect that the government will be
alive to the need of sal seeds by the industrial units operating in the State
of M.P. and in future when the policy will be reviewed by the State
H Government, it will take into consideration the felt need of proper
M.P.OILEXTRACTIONv. STATE(G.N.RAY,J.] 697
distribution of sal seeds to different classes of industrial units with A
appropriate pragmatism.
We, therefore, find no reason to interfere with the impugned decision
of the High Court. These appeals, therefore, fail and are dismissed. There
will be, however, no order as to costs.
B
S.V.K.I. Appeals dismissed.
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